August 30, 2023

How Gift Cards Can Help You Achieve a Negative Cash Conversion Cycle for your Shopify Store

Gift cards can significantly optimize e-commerce financials. They provide immediate cash inflow, deferred expenses, and potential pure profit from unused cards. This can lead to a negative Cash Conversion Cycle (CCC). In this post we discuss what a negative CCC, why you want one and how you can achieve it leveraging gift cards

E-commerce is a hard business. Simply coming up with a good product is not enough to be successful. You must have a deep understanding of financial metrics as well. One of the most important metrics is Cash Conversion Cycle (CCC).

Understanding the Cash Conversion Cycle

The easiest way to explain this metric is, it is the time it takes between paying for inventory and getting paid by customers. The best case scenario is when you get paid by customers before you have to pay for inventory. That is considered a negative cash conversion cycle (CCC)

Let me explain, CCC is an equation that is made up of a three key components:

For this reason, the goal is to reduce DIO and DSO as much as possible and increase DPO as much as possible. Together this leads to a lower CCC.

The lower the CCC the better people regard a company at managing its finances. This includes cash flow and its available resources for day-to-day operations.

Amazon was always known as one of the best at this. Below is a graph of their CCC vs Walmat and Costco from 2014:

Harvard Business Review

The Importance of a Negative Cash Conversion Cycle 

A negative cash conversion cycle (CCC) is when a business receives payments for sales even before they have to pay for the products. This was Amazon’s reality in the graph above . This gave them and other companies that can achieve a negative CCC:

  • Cash Flow Consistency: Having a negative CCC ensures you always have enough cash on hand. This is very important if you ever have unexpected expenses.
  • Rapid Reinvestment Ability: Businesses with consistent positive cash flows can invest in growth more effectively. This enable companies to fuel faster expansion and often creates even more free cash flow
  • Streamlined Operations: A negative CCC shows efficient inventory management, speedy collections, and strategic payment agreements. Investors love to see this and often is a part of the discussion when someone is buying equity in a company.

Having a negative CCC is like scoring a financial hat trick for e-commerce businesses. It ensures cash on hand, enables rapid reinvestment, and is a sign of operational efficiency. Together this makes it a lot easier to run a business or makes it an attractive business for investors.

Matt Rickard

How Gift Cards Improve Your Cash Conversion Cycle

Gift cards are a game changer for a businesses' Cash Conversion Cycle (CCC). When most people think of gift cards they just think they are something to give their friends. That is one benefit of course but gift cards also improve your CCC because they provide:

  • Immediate Cash Inflow: You get paid upon the sale of a gift card without having to provide any goods or services.
  • Deferred Expense: You only have to pay for the products that people buy with a gift card when they use the gift card. This lag can be significant and can allow your businesses to essentially receive a 0% interest loan.
  • Potential for 100% Profit: Some gift cards never get used. When they expire or remain unused, they are straight profit.

This makes gift cards more than just a convenient gift option, they are a tool for achieving a negative CCC. They offer immediate cash, deferred expenses, and even present an opportunity for pure profit.

Additional Financial Benefits of Selling Gift Cards

Beyond the cash conversion cycle (ccc) benefits listed above, gift cards offer other financial perks. Below are a few ways they help improve a company's economic outlook.

They help:

  • Increase in Average Order Value (AOV): Often people feel they're spending 'extra' money when using a gift card. This leads to them typically spending more than the original value of the card.
  • Reduced Returns: Gift cards empower recipients to select their desired product. Given this choice typically lowers the chances of gift returns significantly.
  • Decrease Tax Liability: Outstanding gift cards allow you to delay the recognition of their revenue. This means until the gift cards is used it is a liability. For this reason, depending on your location and tax practices gift cards can help you reduce your tax bill.*
  • Improve Customer LTV: Gift cards lay the groundwork for repeat purchases. Once someone has one they are more likely to shop at your business agin. This allows you to see a boost in your customer’s lifetime value (LTV) and overtime your profit.

So next time you think of gift cards realize they are not just a tool for improving your cash conversion cycle remember, gift cards offer a lot more.

Strategic Ways to Increase Gift Card Sales to Improve CCC

There are many ways to increase the amount of gift cards you sell. It is similar to they way you would increase sales for any other item. Below are few examples:

  • Create Bundles: This helps increase gift card sales because it makes them easier to buy. Instead of people having to find reasons to buy gift cards this gives them a reason.
  • Discounts: For people this is essentially free money. The benefit to you is they still will take time to use the gift cards. This time between them purchasing and using is a 0% interest loan for you.
  • Upsells: This works for a similar reason as bundles. Instead of waiting for people to think to buy gift cards this gives them thought to buy a gift card.
  • Make it easy: Add a 'Send as a Gift'  option on your product page. Most people are buying gift cards for others. Don’t make it hard for them to do what they want to do.
  • Make it obvious: Nine out of ten Shopify stores make you search for gift cards if you want to buy them. This means people only buy gift cards if they think to buy them. Put the gift card option in your menu, this will make it so you can get people to buy just because you made it obvious.
  • Email Campaigns: Regularly promote gift cards to your mailing list. Similar to the idea of making it obvious, this will help people know that you sell gift cards. The more they know, the more they buy. You can combine this with any of the above tactics as well to make it even more powerful.

Using these tactics can have a big impact on your gift card sales. Combined with the fact that gift cards can help improve the cash conversion cycle (ccc) of your business this can truly change your business.

Starbucks is a great real world example of how to implement a gift card strategy to improve your financial position.

As of October 2022, their strategy has led to ~$1.6B in unused gift card funds in their bank account. Which is essentially a 0% interest loan that they can use until people redeem them. They also reported in October 2022, ~$213M in gift card breakage which is money that they can count as pure profit to their business.

This gives Starbucks a clear financial advantage in the way they can build their business. It's also a great reward to their customers because of the rewards they are able to receive.

The best part is this is not something that only Starbucks and their customers can benefit from. Gift cards are something every business can and should sell. They don’t just serve as perfect gifts but can have a large impact on a company's cash flows and financial health. For e-commerce companies that want to improve their operations, a well-thought-out gift card strategy may be the missing link.

If you fit into the description of someone looking to implement a better gift card strategy, we would love to help. iziGift is a Shopify app built to help brands do just that. We can help you implement many of the strategies mentioned above and take control of your business's financial health.

Click here to get started now!

*Not financial advice, please consult a tax professional.