Cash-flow management is essential to running a successful organization, but few merchants get into the commerce game because they love balancing spreadsheets.  They’re motivated by an idea for a new project, a passion for maximizing the customer experience, or a knack for driving top-line revenue.

Nevertheless, healthy cash flow is essential to establishing strong vendor relationships, seizing growth opportunities and maintaining financial stability. In short, cash flow is a strong indicator of overall business health.

Cash flow should be top of mind for merchants right now for two key reasons. First, the supply chain issues of the past few years have had a compounding effect on capital on hand. In the frenzy to overcome shortages and delays, many brands over-invested in inventory that never sold. Now they have a glut of inventory on their hands and a shortage of warehouse capacity.

Second, the current economic climate has led to decreased funding, increased borrowing costs and depressed consumer spending. All those factors mean tighter cash flow for most businesses. Decision-makers should be looking for every way possible to divest themselves of hard assets, and free up as much capital as possible.

The primary opportunity for fast-growing businesses looking to optimize cash flow is the adoption of an asset-light fulfillment model. Traditional supply chain and fulfillment setups commonly include company-owned and operated warehouses. Warehousing and fulfillment are hugely capital intensive, and this traditional model leads to substantial fixed expenses that can impede cash flow.

Recent merchant survey data indicates that 89% of merchants maintain at least one owned warehouse. With rising warehousing costs and a complex labor market, this traditional fixed-cost approach to order fulfillment can restrict cash flow. By contrast, a shift toward a variable cost model can help decrease capital expenditure, improve cash flow and future-proof a business.

By outsourcing fulfillment to a third-party co-warehousing partner, fast-growing brands can optimize cash-flow management. Co-warehousing allows businesses to tap into shared warehousing and fulfillment centers, reducing the burden of fixed expenses. 

In a co-warehousing model, brands share the cost of maintaining and operating the facility, labor management, equipment, and the like. They may also be on a pay-as-you go contract, paying only for the space and services they use. Not only are these businesses eliminating the need for significant upfront investments in infrastructure, they can also scale their costs up or down depending on demand. This flexible, variable cost structure enables better alignment between revenue and expenses, and ensures that cash flow remains steady and predictable.

The benefits of a variable cost model include:

Scalability. Merchants can easily adjust their storage and fulfillment needs based on demand fluctuations, seasonal peaks or business growth. This agility allows them to quickly respond to changing market conditions, without being burdened by excess capacity during slower seasons.

Reduced risk. With fixed costs, businesses bear the risk of underutilized warehouse space and idle labor during lean periods. By adopting a variable cost model, they only pay for the resources they use. This approach allows them to align expenses directly with revenue generation.

Access to advanced capabilities. To keep up with growing demand and the high expectations of today’s consumers, brands must have some level of automation within their fulfillment networks. Yet warehouse robotics and advanced fulfillment technology are prohibitively expensive to build and maintain. Those capabilities are usually reserved for large enterprise brands. However, many large retailers have recently seen an opportunity to commercialize excess capacity, and are opening their state-of-the-art fulfillment centers to outside brands. This is a huge opportunity for merchants to cash in on all of the benefits of warehouse automation, without making the investment in building the capabilities themselves.

Competitive advantage. By implementing a variable cost model, businesses can redirect capital and resources toward other strategic initiatives such as marketing, product development or expanding their market presence.

Today’s merchants face unique challenges when it comes to managing cash flow effectively. However, by reevaluating their fulfillment strategies and adopting a variable-cost model through outsourced co-warehousing fulfillment partners, they can increase cash flow and position themselves for sustainable growth. By prioritizing the right fulfillment strategy, businesses can lay a solid foundation for financial stability, strong vendor relationships and continued expansion.

Ron Dover is chief administrative officer and chief financial officer of Ware2Go.