With a low barrier of entry, ecommerce is a great start for entrepreneurs. But it also has some of the more difficult bookkeeping a business can face. Learn more about how Bench can take care of it for you.
What is cash flow?
Simply put, cash flow is the money that goes in, the money that goes out, and the money that stays in your business. But cash flow is more than the net profit number you report at the end of the year. It takes into consideration other funding sources like loans, lines of credit, and owner contributions. For example, if your business was on track to show a loss of $2,000 in a month and the owners contributed $3,000 before the month’s end, the business would show a positive cash flow.
Thinking about cash flow also means changing your thought process from “What is coming into my business” to “When is it coming into my business.” Take for instance buying a bulk order of inventory that you know you will make generate a ton of revenue on. How long will it take you to generate that revenue? And if you need cash now, what options are available to generate it now?
Want more info on cash flow? No problem, you can learn everything you need to know in our complete guide (with examples).
Why is it important?
Cash is what makes your business go. Having cash available to cover your operating expenses is essential, but it can also be the key to the next stage of growth. Responsible cash flow management means weighing the present against the future to try and maximize the cash available at every step of the journey.
In ecommerce, this is especially important. Being such a highly competitive space, your cash flow isn’t just about how your business performs, but how your business performs relative to your competitors. More cash available can mean dominating the marketing space or a chance to run a promotion and undercut prices. The importance of cash flow isn’t just in having cash, but how you use it to continue the generation of income.
Let’s take a look at strategies used by small businesses to rock cash flow management in the ecommerce space.
Find ways to move idle inventory
When ecommerce businesses hit a lull and inventory has been sitting too long, it’s time to get crafty. (And if you’re looking for inventory management tips, look no further than our simple guide) The simple solution is a promotional price reduction. A sale doesn’t necessarily mean you’re looking to make up for a lack of sales, it can open up new possibilities as well.
For example, let’s say you found a new piece of equipment that can increase your margins per product. You could take out a loan to purchase it and be facing monthly payments and accumulating interest. Or maybe you have excess inventory you can liquidate at a lower price.
Both the option of the loan and the sale will inject cash into your business now affording you that opportunity. The difference? You’ve already paid for your inventory.
In the case of jewelry company Maison Miru, an expansion into new product lines was costly and resulted in high inventory holding costs. The solution was retiring old designs and selling them off. You can read more on Maison Miru’s stories and growth strategies in our small business spotlight.
Prioritize the most expensive debt
Interest feels like an inevitability when borrowing. But small businesses have more control over their interest expenses than they think. Take some time to understand the cost of debt and how to calculate it in our rundown.
Got an unexpected influx of cash? It can be tempting to spend or invest it. Allocating that money to your most expensive debt can save you money down the line. No payment towards the balance is too small to provide some benefit, even if it feels like taking an icepick to an iceberg.
Set up a game plan regarding your debts and prioritize them amongst the other spending opportunities you have. This means weighing the possibility of paying down debt against other potential costs like opening a new location, renting new equipment, or increasing marketing spend. Keep in mind that long term debt management can sometimes be more beneficial than long term growth planning.
Want a guide on how to pay off your debt as fast as possible? We’ve got a guide that’s got you covered.
Focus on minimizing fixed costs
There are two types of costs a business faces when selling goods: fixed and variable costs.
A variable cost is something that changes as you sell more. Think about selling a cup of coffee. If you want to go from selling 100 cups to 1,000 cups, your costs go up as you need more cups, more lids, and more beans to meet that sales number. In this case, cups, lids, and beans are all variable costs. But a fixed cost stays the same regardless of the sales number. In this example, the storefront that’s rented is fixed and will occur every month. You can think of fixed costs as the costs to simply stay open. For further reading on this subject, check out our dedicated blog post.
Why focus on fixed costs? Because those will likely be recurring every month. Spending $2,000 a month on rent is fine if the business is succeeding, but what if there’s a downturn? By minimizing the cost to stay open, you position yourself to weather the storm when there’s a downturn in business.
Maximizing cash in is just one aspect of cash flow. By minimizing the costs going out monthly, you pocket more of your revenue as net profit. An added bonus is giving yourself a longer runway if operations are temporarily forced to close or be reduced.
Get crafty with your assets
Have you ever sold a bike you’ve outgrown or guitar collecting dust? Your business can do the exact same with what’s not being used.
It’s easy to think of the cash in your business as what’s in the bank account, but there’s untapped cash resources within your business. Dedicate some time to evaluate your physical assets you have that can be flipped. That old copier you don’t need after becoming paperless might just be the key to funding a new product line or paying down that cumbersome debt.
Start by understanding the liquidity of these assets. Liquidity is how quickly you can access the cash value of an asset. The longer something takes to sell, the less liquid it is. By keeping track of your assets and their liquidity, you can prepare for how to create that next influx of cash when it’s needed. Review everything you need to know about liquidity in our blog post.
Line up your receivables and payables
A key to making sure you always have cash available for expenses is to time your receivables to cover future payables. For ecommerce, you’ll likely be working with credit card processors that will have a deposit schedule or you can request deposits. Check the amount that you can expect to be receiving and have a gameplan for what you’ll spend it on.
If you manage to hit a consistent cycle of receivables covering payables, you’ll put your mind at ease knowing that you always have the cash coming in before it goes out.
Communicate with your vendors to set up a payment plan or a schedule that is mutually beneficial. Once you’re comfortable with your revenue cycle, you can start working with your vendors to have payments going out lined up with your income.
Start generating cash flow statements
You’ve already got an income statement and balance sheet, so you might think you have all your financial reporting covered. A cash flow statement is not a whole new financial report, but a new way to visualize these two reports in one space and it’s used by small business owners everywhere to make informed financial decisions. Read our CPA reviewed guide on cash flow statements for more information.
A cash flow statement will be a one stop document to answer the questions of where your money is coming from and going to. It will show you what’s coming from your operations, what’s coming from investing activities, and what’s coming from your financing activities. You can download our free template today to see for yourself and start generating one today. Want to have access to a professionally made cash flow statement? No problem, we’ve got you covered. Learn more about our services and how we can provide a cash flow statement and more.
Optimizing cash flow can be daunting—after all, we’re recommending generating whole new financial reports. But these reports are essential in understanding your business beyond having money in the bank. Beginning with generating cash flow statements will also set you up to begin financial forecasting. Once you get there, you’ve untapped a whole new level of cash management.
Remember that cash flow management is not a “one solution fits all” type of problem. Start by monitoring your cash flow and see what works best for your unique situation. Once you’re equipped with the right tools, you’ll position yourself to make informed decisions that can change the trajectory of your business.
Additional resources
Learn more about business essentials
- How to Manage Your Cash Flow and Spending (With Pulse) (4 minute read time)
- Cash Basis Accounting vs. Accrual Accounting (5 minute read time)
- 6 Challenges of Ecommerce Accounting (& How to Overcome Them) (5 minute read time)
- Bad Debt Expense: Definition and How to Calculate It (5 minute read time)
Learn more about financial reports
- Financial Statements 101 (11 minute read time)
- How to Create a Financial Forecast (11 minute read time)
- Understanding Income Statements vs Balance Sheets (4 minute read time)
- How to Calculate Net Income (Formula and Examples) (4 minute read time)
