How to Prepare Your Amazon Business for a Recession

As US economic growth slowed significantly in the past few years, many experts warn of an impending recession. Cyndi Thomason, best-selling author and President of bookskeep, shares some advice for how to prepare your Amazon business for a recession.

Many of our clients are reporting great Black Friday and Cyber Monday sales numbers. In most years, we'd take that success and sail into the new year expecting business as usual. However, the last three years have been so UN-usual, that we must prepare for more uncertainty. This may take the form of a recession, high inflation, supply interruptions, or some other challenge we haven't come across just yet.

A strong cash position is the best way to survive and even thrive in times of uncertainty. If your Q4 sales were strong, and you have extra cash, it can be tempting to pay off loans or invest in new equipment to cut down on your tax burden. Instead, I suggest you hold onto that cash for the moment so you can see how things start to play out in the next few months. While that cash is waiting in the wings, here are a few other levers you can pull to improve your business's cash position.

Examine Your Past Sales

Let's start with the sales side. While it's tempting to launch new products right away, realize that this can be uncharted territory and not all products are going to be winners. A better use of your time and energy might be to double down on your proven products. Look for innovative ways to sell those products, such as a subscription model like Subscribe & Save. This is a win for both the buyer from a convenience factor and the seller by reducing the cost of sales and building recurring revenues.

Evaluate Your Price Points

What about your pricing? A recent study I read indicated that 85% of the retailers in the study had experienced price increases from their suppliers, but only 71% had increased prices for their customers. So, be sure you’re testing prices in this new environment.

Analyze Your Product Portfolio

Next, consider how each product in your portfolio is performing until now. With the goal of improving your cash position, you want to minimize the cash tied up in products that move slowly.

Consider your reorder strategy for each product with preserving cash in mind. A best practice would be to evaluate the profitability of every single product. You want your gross margin to be above 30 percent. This analysis, along with pricing changes and minimum order quantities, can help you determine your product mix for the coming months.

Drill Down Into Your Ad Costs

One last component of your product analysis is your advertising costs. Robyn Johnson, CEO of Marketplace Blueprint, an Amazon advertising agency, recommends "looking at TACoS (total ad cost of sales) by product as sponsored products. TACoS looks at how your ad spend applies to your overall sales, including organic sales. Within our agency, we’ve developed a dashboard to help review TACoS for a specific product, helping us better understand how each product is performing individually rather than looking at the overall ad account.”

With advertising, from the big-picture dashboard level, you want to track your media efficiency ratio. To calculate this ratio, you will divide your total revenue by your total advertising spend. Calculate this month by month and watch for trends. It is easy to overspend on advertising and all your extra cash leaves your business for little return.

Advertising is a lever that you will want to monitor closely and adjust as your inventory stock levels and margins dictate. It's not a one-size-fits-all or a set-it-and-forget-it activity. Monitor and adjust frequently as your situation changes.

If you need more help managing your FBA inventory and staying in stock, check out RestockPro by eComEngine.

Check Your Inventory Costs and Other Expenses

Now you should turn your attention to the expense side of the equation. First look at your inventory costs. Is there room to negotiate to improve your costs? Can you find a supplier closer to the US to improve your shipping costs and perhaps reduce your minimum order quantity and terms of payment? Your objective is to hold onto your cash as long as possible.

Review the last 2 or 3 months of bank and credit card statements. Make a list of items you can cut out or reduce. Then take the necessary steps to remove those expenses from your business. Every dollar you save stays in your business to help you get through a rough patch.

Here are a few other items to think about: make sure your shipments are full, but with products that will sell quickly. See if there is some portion of the prep process that you can bring in-house. Look at the additional freight costs and ensure you are getting the best deals.

Think Carefully About Accepting a Loan

Finally, let's talk about loans. It's so tempting to open another card to get their deal and add points. The danger of this plan is when things don't work out as planned, you are left with expensive debt. Make sure you are considering the cost of that debt. Many businesses can't afford the interest rates and with a credit card's variable rate, the costs can quickly add up. If you're considering debt to get through the recession, make sure you have taken every other step above before you borrow money.

While not every situation can be solved, it's better to deal with a loss for the business than to ruin your personal credit as the business is failing. This is a difficult path but a courageous one in the big picture.

In Short: Be Proactive, Not Reactive

As with any recession, there are winners and those that unfortunately won't make it through. Work to maximize your cash and you will have a longer runway to make critical decisions. Planning ahead always affords you more opportunities than panic and reactionary thinking.

The best strategy I know for managing cash is Profit First and 13-week cash flow forecasting. If you need help with managing your cash, the bookskeep team is happy to help. Reach out to the team today!