Cash flow for eCommerce: Tips to stay always positive on your cash flow
Ecommerce isn’t just about making sales and shipping products. Like any business, you need to manage the money behind the scenes — or else your online shop might have to close its virtual doors.
Cash flow management is key to your business success.
Because eCommerce can be unpredictable (sporadic sales, issues with supply or delivery), the financial health of your business fluctuates! And some of those fluctuations are predictable, based on the season.
Meanwhile you have overhead expenses to run your business: website, internet, and employee payroll.
So how do you align all the money coming in and going out, to make sure you always have enough cash to keep moving forward?
The cash flow for eCommerce management is one of the foundations of financial reporting. At the most basic level, cash flow is:
Money in less Money out = Cash on hand
Of course, your business has other money (or value) tied up in assets: inventory, equipment, and other tangible property. But cash flow is concerned with how much value is free to move, or liquid.
Positive cash flow means you have more money coming in; negative cash flow means you have more money going out.
How to manage cash flow for eCommerce: know where you always stand
1. Always have your bookkeeping updated on a weekly or monthly basis. This sets you up for the most accurate accounting so your cash flow calculations will be accurate.
2. Put safeguarding on your profit margins in your calculations. When calculating cash flow and reserves, you don’t want to trim all the fat. Prepare for a bad day, month, quarter.
3. Automate regular payments, coming in and going out. We’re talking invoices, bills, expenses, receipts — all the regular payments your business makes or receives can (and should) be automated.
Not only does this give you peace of mind to know money is moving in the right direction at the right time, automatic receipts and automated expenses help with online bookkeeping for you, your suppliers, and your customers.
4. Do what you can to make sure customers pay on time! Require customers to pay when the product is shipped.
5. Use balance reports or cash flow projections! Financial reporting is a must for your business, and visuals are a huge help. Use an accounting software that tracks your sales and expenses, then produces balance sheets and other reports about your finances. You can view historical patterns, identify weak seasons or products, and make smarter decisions about what’s next.
How to improve cash flow for eCommerce
1. Shorten the amount of time between a business expense and getting paid.
This is the goal of healthy cash flow for any business. But we’ll split the answer between physical and digital products.
For physical products, this means getting inventory off the shelves soon after they arrive. If you overstock an item and nobody’s buying it, then you’re losing money in two ways: lack of sales and payments to store those unsold items. Be smart about big orders!
A similar problem can crop up with digital products. If you make a big investment in advertising or in product development and it takes a while to make a sale off that investment, you could run into a problem.
2. Organize expenses at a time that works with your revenue patterns. Do you get more customer payments at the beginning, middle or end of the month? Line up your biggest expenses to be parallel with your highest inflow to make sure you don’t dip into the red.
Another tip: Some suppliers expect a payment within 60 or 90 days. There’s no shame in waiting to transfer that payment! If you have a pretty good relationship with certain suppliers, negotiate with them if you need extra time to pay.
3. With marketing and social media, stay quick on your feet! The best ways to reach your potential customers could change. Maybe your target audience isn’t on Facebook anymore; maybe they’ve moved to the next new platform. This is all about staying relevant and staying effective. What channels are best, what tactics are best, which products are most popular at this moment?
Scale back on tactics or leave channels that simply aren’t showing the Return on Investment. Don’t cut back simply to save money, though; marketing is a necessary investment! Only cut back on activities that are not worth the money you’re putting into them.
4. Run promotions to boost cash flow in the short term. This isn’t news to you and cut costs where you can. You could do a classic sale on physical products. For digital products, this could be discounts on brand-new signups: give half off the first three months or waive a registration fee.
5. Increase your AOV (Average Order Value). For example, if your average customer spends $75, figure out ways to bump that up to $100. For physical products, a simple tactic could be offering free shipping for orders above a certain amount. For digital products, try to upgrade existing customers to more premium plans.