As a business owner, you should pay close attention to your cash flow management, hence the phrase “cash is king.” It's a critical aspect of running a successful e-commerce business.
Every enterprise must generate enough money from its operations to meet all expenses. But without the right mechanisms, one may struggle to purchase inventory, invest in growth opportunities, or pay bills. That's the main reason why many businesses find themselves taking on debts regularly.
The good news is that you can avoid such scenarios by effectively managing your e-commerce cash flow. Keep reading to learn more.
What is cash flow?
You must make sales and, at the same time, purchase products and services to sustain your e-commerce business. This money movement in and out of your enterprise is cash flow; a periodic statement shows how you've managed it.
It's worth noting that cash flow statements have the following three main sections:
- Cash flow from investing (CFI)
The cash flow from investing activities section tracks how much your company has spent or generated through investments. It reflects the cash flow impact of capital expenditures (capex), divestitures or acquisitions, and other long-term assets.
The CFI section helps you evaluate your enterprise's financial health and investment strategy. Positive CFI indicates that the company is spending less and generating more cash from investments. It's a good signal for potential growth opportunities and long-term sustainability.
Conversely, a negative CFI shows that you aren't investing wisely, and the company could face liquidity challenges. Therefore, you may need to readjust your strategies accordingly.
The sources of revenue here are proceeds from the sale of investments, property, plant, equipment, or business units. Other inflows are returns on investments (ROIs) such as interest, dividends, and other income.
Expenses include the purchase of property, investment in securities, and acquisition of or investment in other businesses.
- Cash flow from operations (CFO)
As routine activities of your business run, they generate and consume part of it. CFO is the financial metric that measures the impact of this cash movement on the company over a specific period.
Cash flow from operations is calculated by adding the company's income and non-cash expenses. The resulting figure is the sum of the money circulating through the company's operations during the period in question.
You'll get a positive CFO if your business activities generate more cash than they consume. This result indicates that your company is moving in the right direction. However, a negative CFO suggests potential financial inefficiencies in your business model.
Investors use CFO to evaluate an enterprise's ability to meet its financial obligations without external funding. It's also a key variable in various financial ratios that provides further insights into a company's financial performance.
The income comes primarily from revenue generated through sales of products or services and interest from investments. Other sources include the sale of assets such as plants, equipment, or property and collections from accounts receivable from customers.
The expenses in this section are those related to the company's core business activities. They include payments to suppliers, salaries and wages, taxes, interest on loans, rent and occupancy expenses, and capital expenditures for assets.
- Cash flow from financing (CFF)
CFF reflects the net cash inflows and outflows from a company's financing activities. It involves all cash flows related to the issuance and repayment of the debt, equity securities, and payment of dividends.
To calculate CFF, you'll subtract the sum of outflows from the total inflows of these financing activities. A positive result shows that your company benefits, while a negative figure indicates that you spend more cash on debt, dividends, or equity securities.
Analysts use this metric to assess how your business is funding its growth. So, to win the trust of potential investors, it's important to maintain a positive cash flow from financing.
The main sources are external funding for ecommerce business and proceeds from equity securities, the sale of treasury stock, and leaseback transactions.
On the other hand, cash outflows include repayment of loans, repurchase of stock, and payment of dividends to stakeholders.
Managing your e-commerce cash flow
Understanding the money flow in the business is one thing, but its management can be tricky. The success of any e-commerce business depends on how effectively you manage the cash flow. Unfortunately, many people struggle with this aspect.
Here are some important tips that can help you in the process:
1. Maintain accurate financial records
Record every financial transaction, including revenue, investments, and expenses, and store the reports safely. Also, reconcile bank and credit card statements for accuracy.
But why is this necessary?
- Filing of tax returns
Accurate financial records also ensure tax compliance as they help you determine the taxes owed to the government. They make your work and that of your tax handler easier.
- Business analysis
These records will help you keep track of your business cash flow, which provides valuable insights into your business performance. They help you identify your strengths and weaknesses and make informed decisions based on the information.
- Financial planning
It's always important to budget, forecast, and set financial goals as your business grows. Accurate statements enhance this financial planning by clearly showing the company's performance. You can easily evaluate your revenue strategy and plan for future investments or expenses.
- Investor relations
If you're planning to bring in more investors in the future, then your financial information will be crucial in that project. Accurate records build investor confidence by demonstrating your business's financial stability and growth potential. With such transparency, more people will be ready to invest their money in your company.
- Legal compliance
Like any other company, every e-commerce business must adhere to legal requirements like financial reporting, record-keeping, and auditing. Therefore, storing accurate financial records will make you safer and reduce the risk of unnecessary legal penalties.
2. Monitor cash flow regularly
Review cash flow statements every week or month to track the inflows and outflows of cash. While at it, identify any notable trends within a given period. For instance, check those days with the highest inflows and see if there’s a pattern.
Regularly monitoring your records allows you to adjust your strategies to reduce spending and increase profits. It also enables you to manage your inventory and pricing plans effectively.
3. Set realistic goals and benchmarks
Being ambitious is good, but you must be reasonable in your missions. Start by developing a financial forecast that outlines future inflows and outflows. Ask yourself if the projected revenue will sustain your goals without affecting your finances.
Of course, you can still stay on track with your long-term targets by adjusting short-term goals. Consider increasing sales by focusing on the customers' needs and streamlining your marketing strategies. Collecting customer feedback and adjusting your operations accordingly will make your products sell more.
Another short-term goal that can help you stay on track is reducing expenses. Get rid of any unnecessary operating costs. But as you do that, monitor the rate of productivity and the quality of your finished products and services.
These are plans that can work for any e-commerce business. You need to try them out and see if they fit your current and long-term business goals.
4. Create a cash reserve
Financial emergencies occur in any business, and you need to be ready. The best way to prepare for such is by having a cash reserve. The money you set aside will offer your business the much-needed security, hence preventing you from unnecessary debts when things go south.
Experts recommend building a cash reserve to sustain your business for at least three months. Estimate your monthly expenses, including operation costs, salaries, and mandatory bills.
Multiply this value by three and start saving towards it every month. Don't forget to account for the inflation rates in your annual savings. Also, after withdrawing from your cash reserve account, pay it back as soon as possible to keep your fallback plan active.
5. Hire a financial professional if needed
Many business owners need more expert skills to keep their finances on track. As such, most of them hire financial professionals to help them make sense of their monthly or annual records.
Working with an accountant will enhance your cash flow management and make you more competitive in the industry. These advisors provide guidance based on your recent financial performance. They can help identify areas for improvement and provide insights into financial planning and forecasting.
Remember, choosing your financial partner wisely is the only way to enjoy these benefits. Consider their industry experience, skills, and reputation based on previous clients' feedback.
The success of your e-commerce business hinges on your cash flow management skills. It involves understanding your cash flow statement, choosing the right funding sources, and adopting best practices accordingly.
Maintain accurate financial records, monitor cash flow, and create a cash reserve for your business. This way, you'll manage your revenue and avoid borrowing unnecessary loans, which can drag your growth.