This is a guest post from our friends at 8fig.co.
Maintaining a healthy cash flow is vital to the success of your eCommerce business. In fact, poor cash flow is one of the top reasons that businesses fail.
According to a study conducted by Jessie Hagen of US Bank, 82% of small businesses fail due to poor cash management.
Cash flow is one of the most important indicators of the financial viability of your business. It is defined as the amount of money that flows in and out of your business at any given time.
Since your eCommerce business always needs money in order to cover basic expenses including rent, inventory, shipping, marketing and more, it’s vital that you have adequate cash flowing into your business.
In order to calculate your company’s basic operational cash flow, or liquid cash on hand for a given accounting period, simply subtract the sum of the cash outflows from the sum of the cash inflows.
Of course, this calculation does not take into account any resources that are tied up in investments or any other non-liquid assets. It does, however, give businesses a good idea of the amount of liquid cash available.
When a business has more money flowing in than outgoing expenses, the cash flow is positive. If a business’ expenses overpower the money coming in, the cash flow is negative. In order for a business to be successful, it must have a positive cash flow.
This gives the business the financial freedom to order inventory, invest in new opportunities, market their product, and cover any additional expenses that arise.
Setbacks To Healthy Cash Flow
While it’s easy to recognize the benefits of achieving a positive cash flow, it’s often easier said than done.
This is particularly true for young eCommerce businesses. One of the unique challenges faced by eCommerce sellers is the delay that often occurs between payments and profit.
eCommerce sellers constantly need to pay to purchase more inventory, and it can take time before a customer makes a purchase and the profit reaches the business.
There is also an ongoing need to invest even larger sums of money if sellers want to make a bigger profit. As the saying goes, it takes money to make money.
When eCommerce sellers have too many expenses without enough money coming in, it can lead to a cash flow crunch, or a sustained negative cash flow that impacts business.
How to improve your cash flow
Proper cash flow management is key if you want to sustain positive cash flow.
There are a number of things that eCommerce sellers can do in order to optimize their cash flow management and avoid a cash flow crunch.
1. Cut costs
One of the simplest ways to increase your cash flow is to minimize outgoing expenses.
Businesses frequently pay more than needed for supply chain transactions, logistics, legal fees, business management, and marketing.
In order to increase your business’ efficiency, it’s a good idea to take a closer look at your expenses and identify areas where you can cut costs.
Optimizing your supply chain is a good way to trim excess expenses, as is negotiating better deals with partners.
You may be paying loads of money to rent out a space larger than you need, or paying workers for a job that can be automated for a fraction of the cost.
Try to identify any nonessential expenses, and narrow or cut them.
2. Stay on top of supply and demand
When an eCommerce seller purchases too much inventory, they invest more money than they can make back in a reasonable amount of time.
If inventory is sitting on the shelf of a warehouse, the cash used to purchase it is tied up and unavailable for business needs.
The best way to make sure cash isn’t tied up in excess inventory is to constantly reassess your inventory needs and coordinate your orders with demand forecasts.
Maintaining an ideal level of inventory means that you have just the right amount to sell without going out of stock.
If you have too much inventory in stock, it’s a good idea to sell it off so you can free up funds.
While eCommerce is an unpredictable industry, there are seasonal trends and data analysis software that can help you predict demand for your product.
Stay flexible and nimble, and adjust your inventory to the realities of the market.
3. Align spending with revenue
One of the largest challenges for eCommerce sellers trying to maintain a positive cash flow is the lag between a business’ expenses and the collection of revenue.
Since businesses need to have stock on hand so they can fill orders, they must always reinvest money into inventory.
In order to minimize the delay between making payments and receiving revenue, eCommerce sellers can align their spending with their revenue schedule.
Try to set payments for periods when revenue is expected to be highest, so that you have cash on hand when bills are due.
For example, if you sell swimsuits, you can expect sales to be highest leading up to the summer months.
If you schedule your biggest expenses for those months, you’ll have more cash flowing in, which you can use to cover your expenses.
Negotiate payment terms with suppliers so that you can make your payments when it best suits your business cycle.
4. Optimize customer payments and increase average order value
If it takes too long for customers’ payments to reach your bank account, you’ll likely struggle with your cash flow.
You want that money to make its way from the customer to your pocket as quickly as possible so you can reinvest it in your business.
One way to decrease the time it takes between your expenses and getting paid is to make sure customers pay right away.
You can offer a discount for customers who pay at the moment they make the order, instead of 30 or 90 days later.
It’s also wise to make paying easy for customers. Streamline the payment process so that there aren’t any delays.
In addition, do your best to increase average order value, or AOV. This can help you in a number of ways. It brings you more cash more quickly and can save money on shipping costs.
It also helps you clear out your inventory faster. Once your AOV increases, you’ll need fewer customers to hit your sales targets.
ECommerce sellers can increase their AOV by offering deals on multiple items purchased, providing free shipping once a customer hits a minimum value, or by including additional product recommendations based on a customer’s shopping cart.
5. Automate data entry and invoice management
It’s important to accurately keep track of expenses and invoices. Errors in data entry and invoice management can lead to inconsistencies such as missed or late payments.
This hinders cash inflow and can harm your business significantly over time.
Automating these processes can rid you of human error and ensure that they happen quickly and efficiently.
It can also save you money as you won’t have to pay a worker to tackle these time-consuming and tedious tasks.
6. Build a Cash Flow Forecast
Building a detailed cash flow forecast can help you plan ahead and ensure that you have sufficient funds for your business needs.
In order to do this, add up all expected expenses and outflows of cash during a given period of time.
Then, estimate your sales and revenue during this same time period. When forecasting your cash flow, make sure to account only for cash that is actually rolling into your business.
If customers are making payments on a delayed schedule, for example, only count the money once it’s actually paid.
Make sure that you have enough cash inflow to cover all of your expenses.
If not, see where you can cut costs, negotiate to adjust your payment schedule or try to find an external funding solution.
7. Find a Reliable Funding Partner
Due to the nature of eCommerce, it can be hard to make enough revenue to grow your business without descending into negative cash flow.
This is because eCommerce sellers consistently need to pay supply chain costs from inventory to marketing in order to sell goods before revenue comes in from sales.
It’s a vicious cycle that makes eCommerce a particularly difficult space in which to grow past a certain point.
A reliable funding partner can provide businesses with the funding they need to avoid a cash flow crunch and grow their businesses.
If sellers have more cash on hand when expenses come up, they won’t need to worry as much about the delay in receiving revenue.
It boosts their ability to purchase inventory and expand while allowing them to maintain a positive cash flow.
There are many funding options out there, from the traditional bank loan to the more modern eCommerce funding company.
Each option has its pros and cons, so it can take a bit of research to find the one that’s a good fit for your business.
Maintain a Positive Cash Flow For Success
Staying on top of your cash flow is crucial for the success of your eCommerce business. The good news is that there are plenty of ways you can take control of your cash flow and push it in the right direction.
Cash flow problems can happen to any business, at any stage in its growth. Therefore, it’s best to make cash flow management a central part of your business plan as soon as possible.