All You Need To Know About Ecommerce Cash Flow
Cash flow is always a concern for your business, no matter what kind of business you own, whether offline or online.
It is essential to learn how to manage your money effectively to make the most informed decisions financially when investing in new products and services for your e-store.
An excellent way to get started is to read about intelligent moves that can improve your ecommerce cash flow.
Given the rising business costs, cash flow is more critical than ever. While it can seem like money comes and goes, there are ways to develop a sustainable model that allows you to focus less on working hard for sales and more on growing your store.
What is cash flow for ecommerce?
Cash flow is the lifeblood of any ecommerce business. Determining if you have enough money coming in and going out is essential to spend wisely on crucial things like payroll or inventory purchases.
The equation for evaluating ecommerce cash flow is as follows:
Cash flow = sales – (rent + payroll + inventory purchases + utilities) – marketing+ taxes-insurance-interest
Many small business owners starting up online stores do not realize the importance of managing their cash flow effectively.
This can lead to losing money unnecessarily or even facing bankruptcy if growth is too rapid and there’s not enough capital to sustain the business after expansion.
Consider it like personal finances. On payday, you get your check and pay your bills; but then your automobile breaks down, and you must pay for repairs.
But you don’t have any money right now. It doesn’t imply that you won’t be able to cover the expenses when you get your next check, but because of delays, the bills are due, and you’re short.
The same goes for ecommerce.
You can’t utilize your entire cash supply to acquire inventory if it’s all invested in a bank deposit. You’ve got money, but you don’t have enough cash on hand.
How Cash flow and Profitability differ
Cash flow is more critical than Profitability because it determines how much cash your business has in the bank at any given time.
Conversely, profitability refers to your net income after tax and expenses have been subtracted from revenue.
A profitable business may not generate enough cash. Hence, it requires outside funding from an investor, which can be a dangerous move as it may jeopardize your business’s future.
Profitability is not as crucial as cash flow because nobody pays for net profits; they pay for items and services.
If you make huge profits but don’t have enough cash to cover expenses, you will likely fail at some point.
Why it’s important to manage cash flow effectively?
Managing your cash flow will help you focus more on sales and less on worrying about how you will cover costs.
When cash flow is out of balance, it takes away from the time spent expanding the business or investing in future growth.
You can be both successful and cash-flow hostile at times. This is often the case when you make a significant equipment purchase or follow payroll. It’s only a one-time picture.
The cash flow of VC-backed firms is rarely positive initially, but this does not indicate their dire financial situation. They may continue to operate for years with VC money, paying staff, materials, taxes, and other expenses without making a capital gain.
When they spend too much on items that don’t immediately produce more income – such as a new warehouse or a fleet of delivery trucks – they can get stuck with negative cash flow until business revenues increase to compensate for the new investments.
For further reading:
- The Complete Guide To Ecommerce Accounting In 2022
- Ecommerce Inventory Management: 16 Best Practices
- Valuing Inventory – 6 Inventory Costing Methods
- Why You Should Invest In Bookkeeping In 2022 (Forecasting Provided)
How to forecast your cash flow
A good cash flow requires a lot of forecasting. To avoid money flow difficulties, you must estimate when funds will arrive and when you must pay your costs.
Of course, projections may go wrong; but at the very least, you’ll have a better sense of how to handle your money and when and what you can afford.
It also aids long-term financial planning by showing investors a solid financial position.
Here are some things to consider while predicting cash flow:
Look at monthly averages and seasonality to see if you’re over- or under-forecasting. Examine month-to-month variations and the seasonal trend.
Consider including days like BFCM, as well as campaigns that you intend to run. Planning for growth but being realistic about gaining new consumers is essential.
Don’t forget about other sources of income or funds that can support you if things do not go as planned. For example, if your business does not meet the revenue forecasted, are you backed up by investor funding?
Create a calendar of your planned payments; there’s usually no way to cancel them once charged.
So make a list of all expenses and their due dates, including:
- Google AdWords, Facebook Ads, and any SaaS you use.
- Your ecommerce platform fees, and so on.
At the very least, most expenses will be recurring, so they should be easily predicted.
If you depend on outside funding or loans – for example, you’ve taken a loan from an investor and need to pay them back next month – include that as well.
The process of developing your cash flow plan is now underway. If it wasn’t apparent before, you’ll notice when you require money. You can tell if you have a bad cash flow situation.
Benefits Of Managing Cash Flow
Starting today, You may create a program to protect the health of your e-Commerce business with a more sustainable e-commerce revenue flow. Cash flow management has several advantages.
Good cash flow gives you more control over your store and personal financial future.
I’m sure you’ve heard stories about famous athletes who lost a lot of money after making a lot of money in their field and retiring.
Behind such instances, you’ll frequently find an athlete unaware of their cash flow or what it meant for the long term.
I’m also sure you do not want to be responsible for this happening with your business!
With the help of a good cash flow manager, you’ll have more money on hand to fund growth and save some for taxes.
A healthy ecommerce cash flow position is the key to success for any business. This means that you can grow your company and pay employees on time without overspending or dipping into other sources of income like receivables which would leave a sour taste in their mouths when it came down to them getting paid!
How to Boost Your Operating Cash Flow
The best technique to boost operational cash flow varies from business to business.
We at Free Cash Flow are glad to assist you in evaluating and identifying the finest path to enhance your ecommerce cash flow.
Not every approach is appropriate for everyone. Some procedures to consider include inventory planning based on previous sales. This helps you avoid overstocking or running out of stock and the problem of having too much inventory and losing sales.
How do ecommerce businesses manage cash flow effectively?
- It’s critical to keep adequate records.
- In one accounting platform, integrate all of your payment processors.
- Automate recurring payments from clients.
- Keep track of your finances using software like Quickbooks.
- Check to see whether your customers pay on time.
- Prepare financial reports regularly.
- Organize your business expenses ahead of time.
- Match expenses to the revenue pattern.
- Forecast Your Cash Flow.
- Clear out your Inventory.
Ecommerce Cash Flow Statements
Cash flow statements in accounting differ into two categories:
- Direct Method: This technique compares the money brought in by sales with the money spent on expenses.
- Indirect Method: This technique includes an overall company impact and the financial impact of all operational activities (such as depreciation, accounts receivable, inventory, supplies, wages, taxes, etc.).
While the Direct Method is more straightforward, it may be more challenging to implement in certain situations since it depends on your accounting systems’ complexity. As a result, we recommend using the Indirect Approach over the Direct Technique because:
- This is the default structure used in QuickBooks.
- It displays all the components needed to assess your net income, another critical data point in making sound business judgments.
Why do we use an ecommerce Cash flow Statement?
Your Cash Flow Statement is essential for ecommerce store owners to know when to purchase new goods.
You don’t want too much or too little stock, just the right amount. To save money and maximize revenue, you must strike a balance. Timing is also crucial.
For example, seeing the statement may help you decide when to purchase more inventory.
Why Ecommerce Startups Fail At Cash Flow
There are a couple of reasons why startups fail at cash flow management:
Innovation is being stifled by CEOs and their teams
It’s typical for an eCommerce shop to start as a solo project: someone experimenting with sales in their spare time discovers a fascinating niche or a hot product and uses their first earnings to expand.
In online sales, which is both complex and rich with promotional possibilities, business deals, and changing consumer demand, going alone doesn’t work.
When one person controls everything, it soon becomes a business-wide jam, delaying innovation and missing out on new revenue streams.
ecommerce requires adaptability, bringing in hot items (like fidget spinners) or adopting new marketing channels. Money is lost when progress stalls and failure is imminent.
The ones that last for any time have modest goals, such as selling inexpensive goods in small niches or marketing specialized items at low costs.
You don’t fit into either of those categories if you want someone to handle everything from client service to product development — not to mention long-term store design and functionality.
They Don’t Plan for Emergencies
You won’t be able to sell your products if you run out of inventory, and you’ll undoubtedly lose sales if your shipping takes too long.
It’s unwise to rely solely on stock purchases since it may take weeks or months to arrive, depending on where the vendor is located and how fast they ship.
When you sell goods online, your customers have a wide selection of options – so if yours takes too long to arrive, they’ll go elsewhere.
Some sellers do understand cash flow well and spend time tracking it sensibly, yet they still fail because they don’t consider allowing safeguarding margins into their calculations. Even though things are going well now and have been for weeks or months, they may go wrong tomorrow.
Unearned optimism in your figures might lead to a chain reaction that destroys your firm.
They Focus too Heavily on Being Profitable.
Even though cash flow is such an essential aspect of business, one of the most prevalent reasons ecommerce companies fail to manage it is because they don’t understand they need to.
They think profit is everything and nothing else matters when you start a company.
This isn’t correct, though. While being profitable is undoubtedly an advantage, it’s conceivable to succeed while failing due to a lack of liquidity.
This is frequently due to a failure to consider the period between investing in something and receiving the benefit. If you need money in your account to cover daily expenses, emptying that account regularly instead of letting it build up will influence your cash flow.
Staying Liquid is Crucial to Your Ecommerce Business’ Continuation.
Overstocking is a common scenario. Your findings reveal that a product is selling well and earning you money, so you take all your profits and fill your warehouse with products — but sales decrease slightly, forcing you to convert that investment into income before your next storage invoice arrives. Even with intelligent inventory management software, getting the correct quantity of goods is complex.
How to Maintain Healthy Finances
After you’ve defined what cash flow is and why so many ecommerce companies make mistakes, the next step is to figure out how to do it correctly.
It’s impossible to know which of your customers will purchase what you’re selling before they buy it. If you want your ecommerce store to grow, you must avoid taking any unnecessary risks. Here’s what you should do:
- Make a list of everything you must do: Forget about attempting to accomplish everything independently.
You must effectively use the staff under your direction, so get everyone involved differently. One person might look for new goods, another collects social media comments, and another negotiate supply agreements.
- Run special offers at the optimum times to increase sales: Timed sales and incentives are essential to the ecommerce strategy, allowing you to reverse your fortune temporarily.
- Arrange your payments in chronological sequence as much as possible: When supplier costs are spread out over several time frames, keeping track of them all might be difficult.
Keeping track of your cash flow (if possible, try to arrange each obligation as far ahead as feasible without jeopardizing the relationship with your vendor.
- Don’t go for quantity over quality: Focusing on your bottom line is essential. You should offer great products at an affordable price instead of catering to customers willing to spend.
- Make the most of all the resources to your advantage: There are also other valuable resources, like Accounting tools, comprehensive guides, free business courses, helpful communities, and more.
Here’s a community that might assist you. Make the best of everything since doing otherwise is equivalent to passing up wealth.
- Consider the most severe case: Expect the best, but plan for the worst. ecommerce is consumer-driven, and consumer interest may shift at a moment’s notice.
Managing cash flow effectively is essential for any business, but it’s especially crucial in ecommerce.
Even the most careful businessperson can find themselves out of money without enough liquid assets to pay for expenses.
How can you ensure your company has enough money to meet upcoming expenses?
The answer lies in forecasting and managing operating cash flow. Forecasting will help you predict when your revenues are coming in so that you know when to expect certain expenditures like payroll or inventory purchases.
Operating cash flow measures how much money comes into and goes out of your account each month after all other expenses, such as taxes and marketing costs, have been paid.
Download our free E-book, 9 Most Crucial eCOM Tax Deductions The IRS Doesn’t Want You To Know.