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Cash flow gaps in dropshipping businesses
Cash flow gaps are one of the most common - yet least accurately understood - problems in e-commerce. They do not arise from a weak business model or a lack of demand. The cause lies in the structure of cash flows. In e-commerce, money almost always leaves the business before it comes back.
Dropshipping is often described in a one-sided manner, emphasising that it is a zero-risk business where no warehouse or stockpiling of goods is required. However, the pitfalls are glossed over and the difficulties are not discussed, note managers at TON OP company. This includes cash flow gaps. And whilst in traditional e-commerce money can be ‘tied up’ in stock, in dropshipping it is locked in digital gateways and advertising platforms.
Dropshipping is often described in a one-sided manner, emphasising that it is a zero-risk business where no warehouse or stockpiling of goods is required. However, the pitfalls are glossed over and the difficulties are not discussed, note managers at TON OP company. This includes cash flow gaps. And whilst in traditional e-commerce money can be ‘tied up’ in stock, in dropshipping it is locked in digital gateways and advertising platforms.
Integrating the TON OP Bulgaria digital product helps dropshippers optimise their sales process. The TONOP programme is a demand planning tool that enables a shift from intuitive decisions to calculations: assessing the profitability of a deal before it goes live, understanding working capital requirements, and planning revenue in advance.
A business may be profitable on paper, but effectively bankrupt. And during a crisis week, the entrepreneur will be unable to pay the supplier for goods already sold, top up advertising accounts, or pay for logistics, services, software and taxes. This is exactly what a cash flow gap looks like. TON OP Bulgaria explains this aspect of dropshipping in detail.
A business may be profitable on paper, but effectively bankrupt. And during a crisis week, the entrepreneur will be unable to pay the supplier for goods already sold, top up advertising accounts, or pay for logistics, services, software and taxes. This is exactly what a cash flow gap looks like. TON OP Bulgaria explains this aspect of dropshipping in detail.
The nature of the cash flow gap: the trap of asynchrony
- Funds held by payment gateways (Stripe, PayPal, Adyen). This is the main problem - money does not reach the seller’s account instantly. After the sale and payment of the order by the buyer, the payment gateway holds a portion of the revenue (10–30%) for up to 90 days, or freezes the entire amount for 7–14 days.
- Costs of advertising, returns and fulfilment. Dropshipping almost always generates demand through advertising. Advertising platforms deduct the budget daily, and marketing costs grow exponentially. The phrase ‘business without investment’ usually implies the absence of warehousing costs. But it does not take into account the actual costs of advertising, returns, packaging and courier services. The advertising budget often requires significant upfront investment, creating an additional cash flow gap. And money has to be refunded to the customer only after it has been used for purchasing and advertising.
- Cost of Goods Sold (COGS). Deliveries are financed using ‘own’ funds before revenue is received. For the supplier to send the goods to the customer, the dropshipper must pay for them immediately.
Dropshipping is, above all, about having a systematic approach. In practice, it is important to structure your business so that every order, every payment and every delay is accounted for in advance. Below is a set of tools to help you avoid cash flow gaps.
Reserve capital (‘safety buffer’)
TON OP company often has to deal with irresponsible promoters of dropshipping who peddle the myth of a ‘business with no investment’. If you are serious about making money from the dropshipping business model, you must always have a certain amount set aside to avoid a cash flow gap - at least 20% of your expected turnover.
Reserve capital (‘safety buffer’)
TON OP company often has to deal with irresponsible promoters of dropshipping who peddle the myth of a ‘business with no investment’. If you are serious about making money from the dropshipping business model, you must always have a certain amount set aside to avoid a cash flow gap - at least 20% of your expected turnover.
How to avoid going out of business in the first month: a survival strategy
A financial reserve covers the main triggers of a cash flow gap:
An important point: contingency capital is not a fixed sum ‘just in case’; it must be linked to turnover and potential risk (sales channel, geography, delivery times)
Leverage
Experienced dropshippers use credit cards with an interest-free period (50–60 days) to pay for stock and advertising, but only after clearly determining:
Adjusting unit economics to the cash cycle
Dropshippers often calculate margin ‘as a percentage’, ignoring the question: ‘how much working capital is required to achieve this margin’.
If the cash cycle is long, the model must compensate for this:
Risk mitigation
Upload parcel tracking numbers to Stripe and PayPal immediately after customers start making payments. This will help reduce the hold period.
Diversify payment gateways
Do not ‘tie’ all funds to a single payment account. Distributing payment flows across 2–3 acquirers helps maintain liquidity if one of them goes into review, recommend the specialists at TON OP company.
- product returns and the need to refund the customer immediately
- delays in payments from payment systems
- currency fluctuations due to exchange rate differences between the time of customer payment and settlement with the supplier
An important point: contingency capital is not a fixed sum ‘just in case’; it must be linked to turnover and potential risk (sales channel, geography, delivery times)
Leverage
Experienced dropshippers use credit cards with an interest-free period (50–60 days) to pay for stock and advertising, but only after clearly determining:
- how many days the cash cycle lasts
- exactly where the delays occur (payments, supplier, advertising, returns)
Adjusting unit economics to the cash cycle
Dropshippers often calculate margin ‘as a percentage’, ignoring the question: ‘how much working capital is required to achieve this margin’.
If the cash cycle is long, the model must compensate for this:
- with a margin that can withstand returns and disputes;
- restrictions on advertising scaling when liquidity is low;
- terms with suppliers (discounts for prepayment only make sense if liquidity does not become a bottleneck).
Risk mitigation
Upload parcel tracking numbers to Stripe and PayPal immediately after customers start making payments. This will help reduce the hold period.
Diversify payment gateways
Do not ‘tie’ all funds to a single payment account. Distributing payment flows across 2–3 acquirers helps maintain liquidity if one of them goes into review, recommend the specialists at TON OP company.
Growth funded solely by profits
A common mistake made by entrepreneurs is to test hypotheses using cash from the operating cycle – in other words, investing money that hasn’t yet been earned into the business idea. Do not withdraw profits for personal use during the first 3–4 months.
Currency and cross-border fees
When purchases from suppliers and receipts from customers are in different currencies, liquidity becomes dependent on exchange rates. Even with a stable margin in percentage terms, the need for working capital can fluctuate sharply from week to week.
Currency and cross-border fees
When purchases from suppliers and receipts from customers are in different currencies, liquidity becomes dependent on exchange rates. Even with a stable margin in percentage terms, the need for working capital can fluctuate sharply from week to week.
TONOP optimises the process
Financial planning, contingency funds and sound supply chain management—these are the factors that distinguish a successful dropshipper from those who go bankrupt as sales grow. Cash flow gaps in dropshipping arise before the proceeds from sales reach the account.
The TONOP platform is a powerful tool for effective demand planning, helping manufacturers, retailers and distributors calculate their actual net profit, taking into account gateway fees, logistics costs and projected holding costs.
The TONOP platform is a powerful tool for effective demand planning, helping manufacturers, retailers and distributors calculate their actual net profit, taking into account gateway fees, logistics costs and projected holding costs.
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TON OP DOO LTD
Address: 8 BORBA STR., PLOVDIV, BULGARIA, 4021
Mail: info@tonop.bg
Address: 8 BORBA STR., PLOVDIV, BULGARIA, 4021
Mail: info@tonop.bg