Feel the Heartbeat of Your Business
Cash flow is described as the lifeblood of a business, yet many e-commerce business owners struggle to understand it. Among the many challenges they face, stabilizing and increasing their cash flow is vital to their long-term success.
What is Cash Flow and Why is it Important?
Cash flow refers to the cash you are receiving (inflows) and the cash that is being spent (outflows). In the simplest terms, positive cash flow means you have more money coming in than going out, while negative cash flow means more money is being spent than received.
Profitability, however, does not necessarily indicate positive cash flow. Here is why: cash flow includes inventory and equipment purchases, debt payments, and other money spent that does not directly correlate to monthly profit or loss.
Suppose you have to pay your supplier a bill of $100 on the 15th day of the month. A customer will be paying a $200 invoice, but it is scheduled for the 30th. Although you were profitable on that sale, you do not yet have the cash needed to cover the expense. This creates negative cash flow, based on the timing of the cash received.
Awareness of the cash flowing into and out of your business is crucial to managing your cash. When you understand your cash flow, you can identify potential solutions including costs and savings, manage the timing of payments, and make informed decisions for growth strategies including the effective use of debt or equity. It keeps your finger on the pulse of your business’s financial success.
You are Not Alone
If you are experiencing cash flow struggles, you are not alone! According to the 2021 QuickBooks Payment and Cash Flow Survey, 60% of small business owners express that cash flow management is a challenge.
The good news is, it does not have to be complicated. Simple steps can be taken to keep the cash flowing while continuing to grow your business. Let’s explore 5 ways you can manage and improve your cash flow!
- Plan Your Cash Flow
The first step of any endeavor is to form a plan. Creating a cash flow plan will help you gauge the health of your cash flow today and plan for the future. To create a simple cash flow plan, you will need to determine two things:
- Your expected cash inflows. Sales, loans and investments, and tax refunds are a few examples.
- Your monthly payments. This includes (but is not limited to) rent, payroll, taxes, debt payments, equipment purchases, and the cost of goods sold.
Reports from previous months will help you account for your cash inflows and outflows. To calculate your cash flow, subtract your payments to be made from your incoming money. If the value is negative, do not panic. Now that you have your plan, you can determine what needs to be done to manage and improve your cash flow!
- Manage Your Inventory Levels
Inventory management is a delicate balance. If you have too much inventory sitting around for too long, cash flow will suffer because it is tied up in stock. However, if you do not have enough inventory, you might miss out on sales. Determining the ideal amount of inventory to hold will maximize both cash flow and sales. Effective inventory management will keep cash flow circulating and allow you to put that money toward other areas of your business that need it.
To streamline inventory management, consider using inventory management tracking software. It automatically updates your stock as orders are placed. Many programs generate financial reports, provide insights as to when you should purchase more inventory, and integrate with top shopping apps (such as Amazon and Shopify) to increase sales.
Accounting software such as QuickBooks Online and Xero also offers inventory management tools. An experienced, online bookkeeper can keep your books and your inventory up to date so you can focus on closing sales. More on that later. There are countless options available, so you can be certain the unique needs of your business will be met.
- Reduce Expenses and Cost of Goods Sold
The biggest outflow of cash may be expenses such as payroll, rent, or the cost of goods sold if you are not using or tracking inventory yet.
Take a look at your budget to see where you can reduce expenses, even for a limited time. For example, if you rent an office space, but do not use it enough to justify keeping it, work from home for a while. A professional bookkeeper will identify every possible savings opportunity for your eCommerce business!
Xendoo Online Bookkeeping accurately categorizes and reconciles your monthly business transactions with a tax savings lens. Start your free trial today!
Next, you can reduce your cost of goods sold (COGS). Your supplier may offer a bulk purchase discount, but this is only recommended if you are certain that the final product will sell quickly. Otherwise, your inventory may stagnate and your cash flow could be negatively affected. On the other hand, you can look for cost-effective alternatives to your materials to ensure optimal pricing and efficient cash flow.
Finally, compare your pricing against costs. Have you accounted for all your costs when defining your pricing? Evaluate your product cost, shipping and freight costs, and stocking costs. You may be underpricing, which will not only affect your profit but most definitely will be a major factor in your cash flow!
- Negotiate Payment Terms
If you find that bills are always due before you have the cash to cover them, you can negotiate the terms of your contract with your suppliers. You may be able to arrange a payment date that lines up with the timing of your cash flowing in. Some suppliers offer a discount for early payments, and B2B sellers can do the same with their customers to improve the timing of cash flow. By managing your payment terms for both cash flowing out and cash coming in, you have more control over timing.
- Partner with a Bookkeeper
If you are looking for a way to simplify your finances and make more time for your business, a professional bookkeeper is a worthwhile investment. Not only do they save you time and stress, but bookkeepers are also uniquely equipped to help you manage cash flow. Because they input and review each inflow and outflow of cash in your business, they are able to estimate how cash flow may change over time. They can advise you on the ideal times to make large purchases for your business, invest in inventory, and timing of payments so that they coordinate with your cash flow.
Many eCommerce business owners find that online bookkeeping is a convenient and accessible solution to their financial needs. Xendoo Online Bookkeeping will match you with a dedicated bookkeeper who understands your business and delivers powerful financial reporting so you can focus on what you love!
Take Your Time Back
Cash flow is dynamic, but so are eCommerce business owners! Each challenge you face is just another hurdle you are sure to leap. But you are not in this alone. Xendoo Online Bookkeeping strives to help small business owners take their time back by providing multi-channel e-commerce accounting. Whether you sell on Shopify, Amazon, Walmart, Etsy, WooCommerce, BigCommerce, or any combination of them, Xendoo will do your accounting and bookkeeping, so you can focus on what matters – running your business.
Need funding to grow your business? Check out all of the ways SellersFunding can help.