Despite its critical role in the success of eCommerce businesses, a study from 2022 found that less than half of small businesses monitor their cash flow. While other financial data points may be easier and more convenient to track, cash flow gives a far more holistic view of your business’s financial health and ensures that you have the financial power to grow.

The Foundation: Understanding Your Store’s Cash Flow

In the simplest terms, cash flow is the movement of money into and out of your business. What makes cash flow different from other financial metrics, such as profit or sales, is its fluid and dynamic nature. By taking into account both the inflows and outflows of capital at a specific moment in time cash provides a far more comprehensive picture of your business’ financial health. However, this also means that cash flow metrics are evolving with every purchase or sale.

Inflows and Outflows

Cash flow can be broken down into the sources of funds compared to uses for funds, in other words, money coming into your business and money going out.

Inflows – Money coming into your business via sources of funds. Cash inflows can come from revenue, loan proceeds, investment capital, grant money, and more. It’s important to note that cash inflows aren’t calculated until they are deposited into your business bank account or accessible for use.

Outflows – Money exiting your business via the use of funds. Cash outflows include all costs of business, such as operational expenses, inventory purchases, salary payments, asset purchases, and more.

If you have greater cash inflows than outflows, your business will be exhibiting positive cash flow. Ideally, positive cash flow will organically provide your business with the capital necessary to grow. However, it’s not uncommon for eCommerce businesses to operate on tight margins or run into hiccups that cause them to dip into cash flow negative months.

Periodic cash flow monitoring can not only help alleviate these hiccups but also provide you with the relevant data to streamline your cash flow and avoid these negative months in the future. On top of that, real-time cash flow monitoring will help you establish a solid financial foundation and eventually grow your business sustainably.

Significance of Real-Time Monitoring

The uncertain nature of eCommerce means that the financial position of your eCommerce is constantly evolving. By monitoring your cash flow in real time you’ll have an up-to-date and comprehensive view of your financial health, allowing you to make data-driven decisions for your business.

Among the things that cash flow reports provide for your business, one of the most important is an understanding of exactly how much surplus cash is available to your business at a particular moment. That surplus cash can be invested into growth efforts, such as upgrading marketing or increasing buying power for a busy season, ensuring that you’re not just letting capital sit in your bank account. Making the most of capital available is crucial for growth, especially if you’ve taken on external funding so that you don’t pay interest on unnecessary funds.

Cash Flow Forecasting for Growth

Just like other financial metrics, it’s important to forecast your business’s cash flow. A cash flow forecast helps provide a sense of how your financial health will evolve over an extended period of time, allowing you to plan for future business decisions. Cash flow forecasts can be made manually by looking through sales data and combing through spreadsheets or automatically by utilizing new tools that pull information and generate projections based on historical data.

Anticipating Seasonal Fluctuations

Seasonal fluctuations can significantly impact your cash flow due to dips in sales and profits. Accurate cash flow forecasting helps anticipate these swings, allowing you to avoid stockouts, overspending, and maintain liquidity. Whether you’re cutting back on expenses and reducing inventory during lulls or increasing storage and buying more during spikes, cash flow forecasting will ensure that you’re optimized during every season.

Acknowledging typical fluctuations like a spike in sales throughout a holiday season, is one of the key differences between a cash flow forecast and more generic financial metrics like a run rate. While projections for a cash flow forecast may take longer to put together when done manually, they provide a much more nuanced and accurate picture of what your business’ financial journey will look like.

Predicting the Impact of Growth Initiatives

Cash flow forecasting also plays a critical role in evaluating growth initiatives before implementing them in your business. By projecting the financial outcomes of various strategies, you can choose the most profitable path for your business.

Now more than ever, there are a wide variety of directions to expand your eCommerce business. There’s no one right path to ensure financial success and brand recognition anymore. As more strategies to grow your business appear it’s important to understand which serves to benefit your ecommerce business the most, especially in terms of cash flow. By comparing your business’ cash flow forecast when impacted by growth initiatives you can strategically decide which opportunities to take advantage of and when.

Emergency Fund

While streamlining cash flow is crucial for success, there’s no amount of optimization that can ensure your eCommerce business is entirely immune to changes in a volatile economy. To protect your business and improve financial agility, it’s wise to build up an emergency fund that can serve as a reserve for cash flow negative periods.

While an emergency fund should be used sparingly and wisely, it can act as a financial cushion for unexpected expenses and help you maintain peace of mind. A robust emergency fund will help ensure that unforeseen costs don’t derail your cash flow growth or create pesky cash flow hiccups.

Sleep Well at Night Numbers

After building an emergency fund, many successful eCommerce business owners also build out a “Sleep Well at Night” number. This number is another type of financial reserve that helps ensure that your eCommerce business never has to dip into a cash flow negative month, while also helping keep your emergency fund available for true emergencies.

What’s the difference between the two? Your “Sleep Well at Night” number is supposed to regularly supplement cash flow. While an emergency fund should be reserved for, well, emergencies, a “Sleep Well at Night” reserve can be tapped into any time your eCommerce business has a cash flow negative month.

Whether you’re building up an emergency fund or a “Sleep Well at Night” reserve, you can do this by:

1. Determining how big your reserve funds should be. This is a question of how much capital you need to solve a problem. The bigger your business is, the larger your reserve funds will be.
2. Begin to allocate a percentage of your monthly sales to go into the emergency fund, rather than being cycled through with the rest of your cash flow.
3. Consider taking on external funding to supplement your cash flow and help provide your business with the necessary working capital to grow.

External Funding and Cash Flow

Although many eCommerce business owners are weary of taking on external funding, it can be an incredibly useful tool in boosting your cash flow. Since cash flow includes all capital available to your business at a given point in time, supplemental funding can help ensure that you avoid cash crunches that come with asynchronous sales and payouts.

Greater positive cash flow will give you the buying power to make decisions for scaling your business, rather than struggling to purchase inventory every cycle. For many businesses, external funding, like Viably, is the difference between slow burnout and sustainable growth. In fact, external funding can even be used to help build up a “Sleep Well at Night” reserve, ensuring that your business always has a healthy amount of working capital available.

A healthy amount of intentional debt can help your business grow in the long run. For many eCommerce sellers, this is the best way to afford investments with a real payoff.

Conclusion

Strategic cash flow management is the cornerstone of eCommerce growth. To truly streamline and optimize your cash flow it’s important to generate forecasts periodically, helping you plan for the future and make the best decisions for your business. Additionally, financial buffers, like an emergency fund or a “Sleep Well at Night” reserve, can work together with external funding to ensure that your cash flow remains healthy and without any growing pains.

Many profitable businesses fail due to a lack of healthy cash flow, meaning that it’s critical for success in eCommerce. Cash flow is the lifeblood of your business, so it’s important to fully optimize it now to ensure long-term, sustainable growth and success.

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About the Author:

Viably is an all-in-one free financial tool for SMBs to run and grow their business. Viably helps eCommerce business owners extend their cash flow through funding.

PPC investments begin long before a product starts making money. Marketplaces hold sales revenue for weeks before payout.

Online sellers must overcome built-in eCommerce cash flow hurdles, and it requires intention. Here are five ways you can maintain and improve your cash flow.

Track and Forecast Your Cash Flow

Understanding your cash flow is the first step to improving it. The first thing you should know is that cash flow is different from profit.

If you sell on Amazon, you know that sales do not immediately generate money in your bank account. That means sellers often have a hard time understanding their cash flow, even if they have profitable listings.

You need to know when to expect sales to hit your account, when your expenses are due, and where any gaps could put pressure on your business. Cash flow issues can lead even profitable eCommerce businesses to suffer stockouts, late payments to suppliers, and poor performance in peak season.

The best way to prepare is to forecast cash flow as much as possible. Projecting sales and expenses will help you identify months where you may need extra cash.

This allows you to plan for growth and investments in inventory or marketing campaigns. A solid understanding of your cash flow cycle also allows you to better manage any debts or loans you may have.

Don’t Just Plan Plan Product Launches; Plan Successful Launches

Most successful sellers are pretty good at finding addressable markets where they can sell a product. They research the customers, the competition, and the price points that will make them successful. But too often, product launches are underfunded when sellers fail to budget the cash required to maintain momentum.

Again, we return to the lag time between launch, sales, and finally, payout. Whatever you budget for your first order of inventory, a successful launch means you’ll need a second order (and possibly a third) before you start collecting on your sales. Without the available cash, you risk stockouts and production delays that will kill your momentum.

Planning a successful launch means budgeting enough cash to carry momentum beyond the first month. You should be able to pay for (and market) your first three orders of a new product. By the time you need a fourth-order, you’ll have a revenue stream to support your investment.

Write a Budget and Hold Your Business Accountable

One of your most important jobs as an online seller is creating a budget. It should include fixed costs like labor, rent, and utilities as well as variable costs such as marketing expenses, inventory, or materials for product launches. When you’re just starting out, a simple spreadsheet will do the trick.

Annual and quarterly budgets can be flexible. If your business exceeds targets, you can always budget for new investments and growth opportunities. But documenting an initial budget will help you drive accountability for yourself and your business expenses.

Negotiate With Suppliers and Vendors

Negotiating expenses is another great way to improve your eCommerce cash flow. Look for ways to reduce costs without sacrificing product quality or customer service, such as negotiating better rates with suppliers or vendors.

Keep in mind that “better rates” don’t always mean “cheaper rates.” One of the primary cash flow challenges eCommerce businesses face is that expenses are often due before the business gets paid.

One solution is to extend payment terms with your suppliers and vendors. If you can get terms extended from net 30 to net 60 on a large order of inventory, you will already start selling the inventory by the time the payment is due.

This is an improvement for your cash flow, even if your bottom line hasn’t changed at all. This way, you can invest existing cash reserves in growth rather than using them to pay an invoice.

One more option: you could offer to pay your supplier upfront in exchange for a discount. Where do you get the cash to pay upfront? Secure working capital at a cost that’s less than your negotiated discount. Now, you’re saving money and improving cash flow.

Factor in Seasonality

For most businesses, revenue does not form a straight line throughout the year. Neither do expenses. The challenge for eCommerce sellers is that the high expense seasons often precede revenue spikes. The most common example is the race to stock up for the holidays.

Many sellers start ordering during the summer months, knowing they won’t see the sales revenue until December or January. Without a budget and a plan, this will create a major cash flow strain.

Have a plan for how you will maximize your ability to invest in growth when demand is high, and a few ways to do that:

Use funding to order seasonal inventory and to restock it after Black Friday, if necessary.

Communicate your needs with suppliers in advance, and negotiate for the best possible payment terms for your business.

Trim your expenses during the lean sales months as much as possible. Reduce spend on marketing campaigns, software subscriptions, and labor to be sure you have as much cash as possible for inventory when you need it.

Most sellers focus primarily on their top line. While revenue is required for growth, the true health of your eCommerce business depends on cash flow. By following these tips, you can ensure your eCommerce business has a healthy cash flow and remains profitable.

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About the Author:

Viably is an eCommerce funding software to help sellers extend their cash flow. It includes free financial management tools like business banking and cash flow forecasting.