If you’re running an e-commerce business, you might have found that your company’s financial health will fluctuate. You could have very busy periods, for example, over the holidays, followed by lulls where your customers don’t appear to be spending much.
This is normal in most businesses but is the reason why it’s so important to understand cash flow and get an effective management system in place.
Now, we understand that looking at financial statements can feel overwhelming and confusing, especially if you’re new to this side of the business.
That’s where we come in.
We’ve put together this guide to help build your basic understanding of cash flow for your e-commerce business, so you can look after your bottom line all year round.
What is cash flow and how does it work?
In a nutshell, cash flow is the amount of money that comes in and goes out of your e-commerce business (almost as if it were flowing in and out) over a particular period of time.
If you have more money coming in than going out over that set period, this is a positive cash flow. However, if there is more money going out of your business than coming into it, this is a negative cash flow which could lead to problems further down the line.
E-commerce cash flow can be broken down into three categories, and it may appear as such on your income statements. These include:
1. Operating
Your company’s operating cash flow is the amount generated by your company as a result of its typical day-to-day operating activities, such as income from sales, vendor fees, taxes, interest payments, etc.
2. Investing
Next, you have investing cash flow. As the name suggests, this is the amount of cash generated or linked to long-term investments, such as equipment or property. This can be negative to start with as you make an initial investment, but it should result in positive cash flow over time.
3. Financing
Finally, you have financing cash flow. This refers to any cash linked to financial activities like shared ownership, selling bonds, or paying dividends. Financing cash flow may play a bigger role in startups or those trying to find investors or lenders.
Why is cash flow so important for e-commerce businesses?
If you don’t have any cash coming in, or if you have far more going out, your e-commerce business might be forced to close, and you could find yourself bankrupt. Having a steady and positive cash flow is the key to staying afloat and also giving your e-commerce business a competitive market edge.
What’s more, you need enough cash coming in to replenish inventory or to pay for the subscriptions and equipment you need to offer your goods or services to customers. You must also be able to pay your staff on time and grow your business for the future.
This is why it is so important to have a consistent flow of money coming in and also to understand each stage of the process and the potential challenges you could face if you’re in a negative cash flow.
Common problems e-commerce businesses face
There are several common problems that businesses face, particularly e-commerce businesses, that can lead to poor cash flow management and even negative cash flow. Some of the biggest challenges businesses face include the following:
- Buying too much inventory in the first place
- Not being able to keep up with inventory demand for a growing business
- Unpaid invoices or delays from fragmented payment process
- Overspending or making impulse purchases
- Lofty sales projects
- Growing your team too quickly (or slowly)
- Delays in company payouts from marketplaces if you use these to sell your goods
- Not having a cash flow forecast in the first place
If your e-commerce business suffers from just one of these challenges, you could face cash flow problems down the line. If you come up against more than one of these common issues, things could get even tougher.
Cash flow Vs. profit
It’s important to understand that a positive cash flow does not immediately equal profit and that these two terms cannot be used interchangeably. As we mentioned above, cash flow is money coming into your business, but also any costs that are going out.
On the other hand, profit refers to your e-commerce company’s revenue when you minus all operating costs. So essentially, it is the money left over once all the books are balanced. If you do not make a profit, you cannot continue to operate your business.
What is a cash flow statement and what does it show you?
A cash flow statement for your e-commerce business is a financial summary of all the money going in and out during a specific period. It is a breakdown of all your operating, investing, and financial activities, making it much easier to see where your money is coming from and where it is going.
This statement is used to get a better understanding of your current financial situation and how operations are running.
Accounting professionals might also use your cash flow statement to determine your company’s liquidity.
How to improve your e-commerce cash flow
In this final section, we’ll look at some of the top ways you can improve cash flow in your e-commerce business. These include:
- Ensuring that your bookkeeping is always as up-to-date as possible
- Planning and organising your expenses to optimise your cash flow
- Paying close attention to any payment terms set out by suppliers
- Shortening your working capital cycle. This means keeping the gap between making a payment and getting money in as short as possible
- Making it as easy as possible for customers to pay you
- Finding new ways to increase your average order value, such as offering free shipping over a certain spend
- Creating a dynamic cash flow forecast and referring to it as often as you can
By doing some, or possibly all, of these things, you can instantly improve cash flow to your business and ensure you can comfortably develop and grow in the future.