Payment Cycles

I devoted my last column to

discussing the role of distribution in e-commerce ventures. I now intend to

carry out a similar analysis with respect to payments and collections. Many

prospective B2C e-capitalists think that the only issues related to payments

are those concerned with credit card security and authentication. They are

wrong. The fundamental issue is whether their venture will lower or raise

costs for the consumer.

Most B2C ventures blindly

assume that their venture will lower costs to the consumer. It’s obvious

that they have never seen situations like:

(1) Large wholesalers

refusing to accept credit cards and insisting on cash. The reason is simple,

they operate on wafer thin two-to-three percent margins and credit cards

threaten to reduce this further.

(2) Large traders selling

part of their goods at cost price. What does the trader get? Answer: A float

equivalent to the month’s credit that he gets from the manufacturer.

(3) Large corporates cracking

down on inter-dealer trade. Dealers take advantage of volume slabs to buy in

bulk and then offer the same goods to other dealers at a discount.

Why do most B2C promoters

feel that costs will be cut? The stock answer is: "We’ll buy in bulk

and pass on the lower cost to the consumer". How nice. The problem is

that nobody knows exactly what to buy in bulk. Goods move with various

speeds, and chances are that your slow-moving items will drag down the

profits of your fast-moving items. Experienced traders know what will move

fast, but I can’t say the same thing for 90 percent of the B2C ventures

being floated.

The equation is more complex

than most people realize. On one side is the fact that all businesses strive

to reduce what’s called the cash-to-cash cycle. The cash-to-cash cycle

starts when a business pays for raw materials. It ends when the business

recovers this money by selling finished products. It’s obvious that it

would prove very costly for a business to wait for money till every item

produced is sold to a consumer. Most manufacturers spread this cost by

involving wholesalers and retailers in the process. The manufacturer lowers

his cash-to-cash cycle by selling to the wholesaler. The wholesaler repeats

the process with the retailer. The margins of intermediaries such as

wholesalers depend upon the length of their cash-to-cash cycles.

The other side of the

equation has to do with predicting demand. The profits of businesses depend

on closely predicting demand. Produce too much and you’ll be sitting on a

pile of inventory, leading to high interest costs. Produce too little and

you’ll be turning away good customers. Incidentally, one needs to not only

predict demand but also the geographical breakup of the demand. You often

have situations where your warehouses in one state are overflowing with

stock, while stock-outs occur in another state. What most businesses would

like is to produce to order, that is, start production only when they have

confirmed orders in hand. Unfortunately, no consumer would like to wait that

long.

We can now tie both sides of

the equation together. Web-based B2C businesses could help lower costs if

they can enable the manufacturer to project demand patterns better. They

will lower costs if they help cut down cash-to-cash cycles. In addition,

they could help reduce costs by linking the consumer to the manufacturer and

cutting down intermediaries. The last step would require that the savings on

distributor margins be large enough to offset potential increases in

cash-to-cash cycle times.

Most B2C ventures will be

unable to reduce these costs and will probably fail. Those that survive will

have to deal with a different set of questions. The surviving ventures may

soon realize that 80 percent of their profits are coming from 20 percent of

their products, with some fast-moving items contributing the bulk of their

profits and other items tying up valuable cash. This is something that every

trader knows and seeks to rectify by proper product selection. B2C ventures,

on the other hand, are aiming at universal coverage with all types of

products being available. Reconciling these divergent facts would take up a

lot of energy.

Let me end by reiterating

what I have been saying for some time now–the real winners in e-commerce

are probably going to be existing FMCG giants and not hot shot startups. 

The bottom line

One can’t take for granted the fact that B2C ventures will automatically

lower costs to the consumer. Companies will have to work at it. 

A contributing editor of PC

Quest, Gautama Ahuja, runs a

turnkey software development company, AHC Infotek, in Delhi