Running an ecommerce business can be extremely profitable, but it’s important to make sure you manage your money correctly. If you don’t have a good understanding of cash flow, you could find yourself in a difficult situation.
In this blog post, we will discuss some tips for managing and growing your cash. By following these tips, you will be able to keep your business running smoothly and ensure that you are making the most of your profits!
What is Cash Flow?
Cash flow is the movement of money in and out of a business. This is measured over a specific period of time, typically a month or a year.
In the context of ecommerce businesses, cash is especially important because it can be used to finance inventory, pay for shipping and other operational costs, and support marketing initiatives.
In short, having a positive cash flow is essential for keeping an online store up and running. Poor cash flow can lead to liquidity problems, while healthy cash flow can help you grow your business.
There are a few different types of cash flow:
Operating
Operating cash flow (OCF) is the amount of cash generated by a company’s regular business operations, minus the amount of cash used in those operations.
This metric is important for ecommerce businesses because it measures how much cash they have available to reinvest in the business, pay down debt, or distribute to shareholders.
Generally speaking, a healthy OCF indicates that a company is doing well and generating enough cash from its core operations to cover its day-to-day expenses. However, several factors can affect a company’s OCF, so it’s important to look at this metric in conjunction with other indicators such as revenue and net income.
Investing
Investing cash flow (ICF) is the amount of cash generated or used by a company’s investing activities. This can include things like purchasing new equipment, investing in real estate, or buying shares of another company.
For ecommerce businesses, ICF is important because it tracks how much cash is being reinvested into their business.
Financing
Financing cash flow (FCF) is the amount of cash generated or used by a company’s financing activities. This can include things like issuing new shares, taking out loans, or repaying shareholders.
For ecommerce businesses, FCF is important because it tracks how much cash they have available to reinvest in their business or pay down debt.
You can generate FCF by issuing new equity, taking out loans, or selling assets. Your ecommerce business might also use FCF to pay down debt or repurchase shares.
While FCF is a key metric for all businesses, it’s especially important for ecommerce businesses because they often have more debt than other types of businesses.
To get a better understanding of your business’s cash flow, it’s important to look at all three types: operating, investing, and financing. By doing so, you will be able to get a clear picture of where your business is generating and using cash.
Why is cash flow important to ecommerce businesses?
Ecommerce businesses are especially vulnerable to fluctuations in cash, since they typically have more variable expenses than traditional businesses. This makes it important for ecommerce entrepreneurs to carefully track their cash flow and make sure they have enough money on hand to cover their expenses. It can be worth it to hire an ecommerce accountant if the needs get complex enough.
Here are just a few reasons why cash flow is important to ecommerce businesses:
It can affect your ability to make purchases
If you have poor cash flow, you may not have the money available to make the necessary inventory purchases. This can limit the growth of your business.
It can help you manage your expenses
By understanding where your money is coming from and going, you can better control your spending. This can help you save money and improve your bottom line.
It can affect your ability to pay taxes
Ecommerce businesses are required to pay sales tax on their transactions. If you have poor cash flow management, you may not have the money available to pay your taxes. This can lead to penalties and interest charges.
It can help you grow your business
By reinvesting profits back into the business, you can finance growth and expansion. This can help you take your business to the next level.
It can affect your ability to pay bills
If you have poor cash flow, you may not be able to pay your bills on time. This can lead to late fees and damage your credit score, as well as soured vendor relationships.
It can help you weather tough times
By having cash on hand, you can keep your business afloat during tough economic times. This can help you avoid layoffs and other cost-cutting measures.
These are just a few of the reasons why cash is important to ecommerce entrepreneurs. If you want to be successful, you must understand and manage your cash effectively!
Ecommerce Accounting: Cash flow Tips
Now that we’ve discussed why cash flow is important, let’s talk about how to manage it effectively. These tips will help you keep your ecommerce business running smoothly and ensure that you are making the most of your profits!
- Make sure your prices are aligned with your costs
- Factor in seasonality
- Utilize automated payment platforms
- Sign up for a dedicated business bank account
- Take advantage of early payment discounts from suppliers
- Stay on top of your accounts receivable
- Keep accurate bookkeeping records
- Utilize ecommerce accounting software
- Keep a close eye on your inventory levels
- Create a budget and stick to it
Make sure your prices are aligned with your costs
There are a few different benefits to pricing your products in line with your costs.
First, it can help improve your company’s cash flow by ensuring that you’re selling products at a price that covers the cost of making and selling them. This helps to ensure that you’re not losing money on each sale, which can be crucial for businesses that are just starting or those with tight margins.
And understanding how your marginal revenues and marginal costs work can give you an even more accurate view of things.
Second, accurately pricing your products also helps to build trust with customers. When they know that you’re not trying to profiteer by marking up prices excessively, they’re more likely to be loyal customers who are more likely to return in the future. Finally, pricing your products according to costs can also help you stay competitive in your industry by ensuring that your prices are in line with those of your competitors.
Factor in seasonality
Ecommerce stores have to be nimble to adjust to the changing landscape of shopping habits brought on by the seasons. As shoppers are inundated with Christmas advertising and promotions beginning in October, sales for many businesses begin to increase.
Depending on the product mix, seasonal inventory needs will differ. Some items may sell well throughout the year while others may only have a few months of popularity. By factoring seasonality into financial projections, businesses can better anticipate when they will need extra working capital to restock shelves and maintain inventory levels.
Seasonality can also help businesses predict customer behaviour patterns and tailor marketing strategies accordingly. For example, if a particular product is popular during the summer months, ecommerce businesses can stock up on inventory and run promotions leading up to peak season.
By understanding how seasonality affects cash flow, an ecommerce business owner can be better prepared for the ebb and flow of customer demand.
Utilize automated payment platforms
An automated payment platform can help the cash flow for ecommerce stores by linking the store’s bank account with the platform. This way, payments for orders placed through the store’s website will be automatically transferred to the store’s bank account. This can help businesses avoid the hassle and expense of manually processing payments.
In addition, automated payment platforms typically offer a variety of features designed to help small businesses manage their finances, such as invoicing, accounting, and reporting tools.
By utilizing an automated payment platform, ecommerce store owners can take some of the guesswork out of managing their cash flow. In addition, they can take advantage of features that can help them run their business more efficiently and effectively.
Sign up for a dedicated business bank account
There are many benefits of having a business bank account for ecommerce stores. Perhaps the most important benefit is that it can help with cash flow management. Having a dedicated account for your business finances gives you a clear picture of where your money is coming in and going out. This can help you make more informed decisions about how to allocate your resources.
Another benefit of having a bank account is that it can help you build credit for your business. This can be useful if you need to take out a loan or line of credit down the road.
Payments made from a business account are often seen as more reliable than those made from a personal account, which can give lenders confidence when considering lending money to your business.
Take advantage of early payment discounts from suppliers
Many businesses rely on inventory to keep their doors open and their cash registers ringing. As a result, ecommerce store owners need to have a good relationship with their suppliers. One way to strengthen this relationship is by taking advantage of early payment discounts.
Paying your bills early can help improve your business’s cash flow in two ways. First, it can help you avoid late fees and interest charges. Second, many suppliers offer discounts for early payment, which can save you money on your inventory costs.
Discounts for early payment are typically a percentage of the invoice total and vary from supplier to supplier. However, even a small discount can make a big difference in your bottom line.
By taking advantage of early payment discounts, ecommerce store owners can improve their cash flow and save money on their inventory costs. This is a win-win for both the business and its suppliers.
Stay on top of your accounts receivable
Another important tip for managing your cash is to stay on top of your accounts receivable. This means sending invoices as soon as possible and following up with customers who are delinquent on payments.
One way to stay on top of your accounts receivable is to set up automatic payments. With this method, customers can authorize their credit card or bank account to be charged automatically for the amount owed on their invoice. This can take some of the hassles out of collections for ecommerce store owners.
Fortunately for most ecommerce businesses this isn’t as much of an issue because payments are processed at the time of sale. But if you’re also selling wholesale then this is something that should be kept in mind.
Keep accurate bookkeeping records
One of the most important things you can do to manage your cash flow is to keep accurate bookkeeping records. This will help you track where your money is coming from and going, so you can identify any potential problems. Accurate bookkeeping records can also help you make more informed business decisions since you’ll have a better understanding of your financial situation.
You can keep accurate bookkeeping records by using accounting software or hiring an accountant. Accounting software can be a good option for businesses that have a lot of transactions. Hiring an accountant can be a good option for businesses that need help staying organized.
By keeping accurate bookkeeping records, ecommerce store owners can track where their money is coming from and going. This can help them identify potential problems and make more informed business decisions. Additionally, accurate bookkeeping records can help you prepare your taxes more precisely, which can save you money.
If you ever need to apply for a loan or line of credit, your lender will require accurate financial statements. Therefore, keeping ecommerce bookkeeping records is essential for managing your cash effectively!
Utilize ecommerce accounting software
Cloud accounting software can help businesses track expenses and income more closely, so they have a better understanding of where their money is going. This insight can help businesses make smarter decisions about where to allocate their resources, such as investing in new inventory or reducing costs.
Additionally, ecommerce accounting software can automate certain tasks such as invoicing and bill payments, which can free up time for business owners to focus on other important tasks. Good ecommerce accounting software will provide detailed financial reports on all aspects of a company’s financial health, arming business owners with the information they need to make sound decisions about the future of their business.
Another way in which ecommerce accounting software can improve cash flow is by providing better visibility over costs. By tracking all expenditures in one place, it becomes much easier to see where money is being spent and to identify areas where fixed costs could be reduced. This can help businesses to slash their overheads and boost margins.
Lastly, ecommerce accounting software can help ecommerce businesses stay on top of their taxes, which can save them money in the long run.
Choosing the right ecommerce software can vary based on your ecommerce activities, for example if you’re looking for accounting software for Shopify or for Amazon, or both.
Keep a close eye on your inventory levels
If you’re not careful, inventory can quickly drain your cash flow. This is because ecommerce businesses have to pay for their inventory upfront, and they won’t see any profits from that inventory until it’s sold.
To avoid this, ecommerce store owners should keep a close eye on their inventory levels and make sure that they’re not overstocking items. You can do this by regularly reviewing your sales data and making adjustments to your order quantities accordingly. Additionally, you can stagger the ordering of different items so that you’re not buying too much of one thing at once.
It’s also important to remember that not all products are created equal. Some products sell better than others and will generate more revenue for your business. Therefore you should keep a healthy inventory level for your top-selling items, while keeping a close eye on your less popular items. This will help you strike a balance between keeping enough stock of popular items and not overstocking products that aren’t selling as well.
Create a budget and stick to it
Creating and sticking to a budget is one of the best ways to improve your cash flow. By knowing exactly how much money you have available each month, you can plan out your spending accordingly.
There are a number of different ecommerce budget templates online that can help get you started. Or, if you prefer, you can create your own template based on your specific business needs.
Especially if you’re in a high growth phase, knowing how to create a marketing budget is crucial.
If you’re not careful, you can easily find yourself struggling to make ends meet. This is because ecommerce businesses typically have to pay for their inventory and other expenses upfront, which can quickly deplete their cash flow.
To avoid this, ecommerce store owners should prioritize their payments. This means paying for the most important expenses first and then working down the list.
You can do this by creating a payment schedule and sticking to it religiously. Make sure to always have a buffer of cash available in case of unexpected expenses.
Prioritize CASH for your eCommerce Business!
Cash is king! This phrase is often heard in the business world, and it’s just as true for ecommerce stores as it is for any other type of business.
To ensure a healthy cash flow, ecommerce store owners need to have a clear understanding of their business’s finances. This means knowing where your money is coming in and going out.
By following these tips, ecommerce entrepreneurs can keep their business’s cash flow healthy and avoid any potential financial problems down the road.
After all, cash is king! Thanks for reading!