To get to where you are in your e-ommerce journey, you’re bound to have had your fair share of palm-face cash flow blunders.
They range in severity from annoying to straight-up paralyzing—and can even be disastrous to the health of your business. In fact, Dun & Bradstreet found that 90% of businesses fail due to low cash flow.
We’ve all been there: you fail to order a goods inspection, resulting in thousands of dollars stuck in defective, unsellable products. Or, maybe you forget about your annual subscription renewals, and the charges wipe your account clean days before your other bills are due. 🙈
In the game of business, there are a million cash flow crunching scenarios that can catch you off guard. And while mistakes are part and parcel of the journey, too many cash flow blunders are a recipe for trouble.
If you’re left wondering how to cover your expenses each month, you’ll need a way to turn things around—and fast.
To help you dodge costly mistakes, let’s take a no-holds-barred look at some of the not-so-helpful tactics e-commerce sellers sometimes use in a bid to improve cash flow, and explore some better ways to go about it.
What we’ll cover
5 Blunders Killing Your E-Commerce Cash Flow
- Attention: Stock overload!
- Hiding from the truth (AKA your numbers)
- Widening your product selection before you’re ready
- Throwing money at customer acquisition and crossing your fingers
- Scrimping on ‘looking the part’
- Top Tips to Get Your Cash Flow on the Straight and Narrow
- Create an emergency fund
- Track. Every. Expense.
- Diversify your dinero
- A Better Road for Your E-commerce Business
5 Blunders Killing Your E-Commerce Cash Flow
#1. Attention: Stock overload!
Let’s imagine your supplier just offered you a 30% discount under the condition you buy an extra 1000 units of your product.
You’d buy these at some point anyway, so it seems like a no-brainer, right?
Unless there’s a valid business reason for buying more stock—like planning for the Q4 sales rush—purchasing more inventory than you need can dry up your cash flow and cause some pretty sticky issues.
Here are a few of the worst:
- Cash locked in stock until you sell it (and there’s no guarantee you will)
- Needing to find funds to purchase and ship additional units
- Having to fork out for more warehouse space to store extra goods
- Stock going out of style or season before you’ve sold it, forcing you to heavily discount or sell at a loss
- The unplanned purchase drains money that could be used to invest back into growing the business
With the global cost of inventory mishaps hitting $1.1 trillion, it pays to think before you commit.
Although discounts are tempting, it’s best to order inventory as precisely as possible in order to maintain liquidity in your business. Avoid “winging it” when it comes to inventory management, as overstocking can be just as tedious (and expensive!) to manage as understocking. And always remember to use smart tools to help you accurately calculate your inventory needs.
Getting the balance right can save your business money, avoid straining your cash flow and keep you in the good graces of your marketplace platform of choice.
Already committed to more stock than you can handle? Find out whether a SellersFi line of credit can help you uplevel your marketing and get back on track.
#2. Hiding from the truth (AKA your numbers)
Most e-commerce sellers always know their revenue stats and can probably reel off their conversion rates from the last 6 months at the drop of a hat.
But it’s easy to bury your head in the sand when it comes to the numbers that really matter: those that directly impact cash flow.
To get a handle on your cash flow, there’s one stand-out rule to remember: push past the urge to focus on vanity metrics.
Because it’s possible to have great revenue and even be profitable, but still fail due to a lack of cash flow.
This problem occurs because when you invest, you don’t see returns right away. Businesses can find themselves pouring all their cash into new products and equipment, only to find themselves in a cash flow crisis struggling to cover day-to-day expenses.
Let’s look at this in action.
- You run a successful e-commerce business but break only a small profit each month due to high outgoings.
- You’ve found a new product and are convinced it’s a winner.
- Your business doesn’t have any large cash payouts scheduled, you’ve just paid rent, and other bills are due soon, so it’s going to be quite the stretch to fund the new product launch.
- But you believe it’s worth the risk and will figure out the numbers later. So, you charge your credit card as your near-empty bank account looks on in despair.
- D-day arrives, and you haven’t managed to secure funding for the shortfall.
- Now you owe your service providers and your credit card company with no way out of the impending doom.
- It’s at this point things start to unravel for e-commerce sellers.
The solution: Gross Profit
The tragic part of this situation is it’s totally avoidable if you take the time to understand your gross profit.
Working out gross profit will tell you the true worth of your sales by showing the amount left over after you’ve covered direct costs. These include things like goods, freight, payment processor fees, merchant platform, and fulfillment.
Gross profit tells you how much cash you have left in your business, so you can reduce the guesswork and make informed decisions about your growth plans.
Calculate your gross profit using the following equation:
Total Sales – Total Direct Costs = Gross Profit
Let’s see how this works in action, based on $80K Total Sales and $35K Total Direct Costs:
$80,000 – $35,000 = $45,000
Note: Gross profit can also be calculated on a per-unit basis.
Once you have your gross profit laid out, assess your performance compared to the industry’s norms to ensure you’re on the right track.
#3. Widening your product selection before you’re ready
Like most businesses, you’ll feel immense pressure to innovate to get ahead of the competition.
But beware of branching out into new product lines just because everyone else is. If you attempt to fund product launches with capital from your business when you’re already cash-strapped, you could land yourself in financial hot water.
Here are some top tips to avoid biting off more than you can chew in your product offering:
- Don’t spread yourself too thin. Run numbers, like your cost of production, freight, and marketing, as well as the gross profit we just covered.
- Commit to only launching new products once you can comfortably afford them. This way, cash flow won’t be at the mercy of spontaneous whims.
- Don’t be afraid to put some ideas on the back burner. If you’re not financially ready to create a product, then you’re not ready to market and sell it either.
#4. Throwing money at customer acquisition and crossing your fingers
We get it. You’re determined to grow your business and will do what it takes to win.
But taking a “spray and pray” approach to marketing is risky business.
It’s true: marketing is essential. But there’s a huge difference between impactful campaigns that drive sales at a profit and dead-weight campaigns that don’t convert and burn through cash.
Here’s how to ace a cash-flow-friendly marketing campaign:
- Learn the difference between campaigns that work and those that don’t, and cut underperformers loose to optimize top-performing campaigns for even better ROI across the board.
- Ensure you’re performing at the optimal level by figuring out your industry and marketing vehicle’s average conversion rates, i.e. influencer marketing, email campaigns, Google PPC, or Facebook ads. Then benchmark your results against these figures.
- Calculate your Break Even Return on Ad Spend (Breakeven ROAS). This equation helps you analyze how much you can expect back from advertising costs and whether the figure is profitable. Check out this excellent breakdown by Nozzle to learn how to calculate your Breakeven ROAS).
- Remember: ‘Not all that glitters is gold.’ If a campaign is profitable but returns are minimal, it may not be worth the effort and capital sacrifice.
- Take an analytical approach toward customer acquisition campaigns to assess whether the marketing avenue is feasible for your brand’s cash flow situation.
#5. Scrimping on ‘looking the part’
As the saying goes, “You don’t get a second chance to make a first impression”—and the same applies to your e-commerce store.
An 8ways study found that people make a judgment about your website in the first 0.05 seconds they see it. (Yes, you read that right!)
Weak branding damages trust and can have negative knock-on effects on the entire business. A lack of trust can also stifle sales, leaving you with minimal income to maintain cash flow each month.
To help dodge this bullet, these branding tips will build client trust and make your visitors do a double-take:
- Invest in high-quality branding: This includes creating dazzling photos, a website, copy, logo, and design to wow your prospects at the door and convince them you’re worth their time and money.
- Ensure packaging matches your brand ethos and vibe: For example, if you’re an eco-conscious brand invest in 100% biodegradable packaging and reduce the amount of packaging you use.
- Show up on your target customers’ social platforms: Add consistent value to build rapport with them and hone your brand’s reputation as a thought leader.
Get these right and you’ll create the secret sauce needed to drive solid sales: Trust!
Top Tips to Get Your Cash Flow on the Straight and Narrow
Create an emergency fund
Every finance guru insists everyone should have an emergency fund—and that means businesses too.
Yet, according to LendingTree, almost 80% of small business owners don’t have a six-month emergency cash reserve, 70% have a maximum of three months’ worth of cash available, and 21% don’t have even one month’s expenses saved. 😲
Here’s how to avoid becoming one of those stats:
- To give you some security, aim to save at least 6 months’ worth of expenses.
- Calculate your business burn rate for essential expenses, multiply this figure by six, and you’ve got a savings target!
- Each month, tuck away a portion of your profits. Once you’ve reached the goal, celebrate and carry on. 🙌
Track. Every. Expense.
As your business grows, it’s natural for its bills to expand too. But each expense siphons money away from your company, and too many could cause your cash flow to suffer.
Here’s how to avoid costly mishaps with your expenses:
- Ensure each expense has a business purpose and that each cost stands alone. For example, confirm you don’t have more than one paid tool to track your SEO.
- Operate with a ‘calculate first, buy later’ mentality. If you feel your business needs something you haven’t accounted for in your budget, pull out your business figures and triple-check whether you can afford it.
- Get busy batching those bills! Calculate your available capital and then group expense payments to suppliers, i.e. utilities, stock, and warehousing. This will ensure you have specific points when cash leaves your account, so you can better prepare for them.
- Be prepared to say ‘no’. Not all opportunities or strategies are worth pursuing, even when you’re just starting out.
This proactive practice of discipline will help you avoid dangerous impulse buys, which can add up fast and rugby-tackle your cash flow. Give it a try!
Diversify your dinero
Done right, e-commerce can be a huge money-making playground.
From eBay Outlet stores that help turn over stock faster or Instagram Shops that capitalize on your following, the opportunities to expand your horizons are endless.
Provided you keep your expenses low, having more sources of capital can improve your cash flow, diversify your payout times, and boost your saving capacity so you can increase your customer base.
To give you some inspiration, here are a few stats that highlight the power of multichannel e-commerce:
- Research by Digital E-commerce 360 found that 65% of people feel comfortable purchasing from retailers they’ve never heard of before.
- According to Statista, Amazon had a market share of 37.9% in 2020.
- More than half of Amazon sales are from third-party sellers.
In short, taking a multichannel approach to your e-commerce business can lead to some serious cash that you can re-inject back into your business.
A Better Road for Your E-commerce Business
For some e-commerce sellers, managing cash flow is a path filled with anxiety and near misses. This pressure leads them to make risky moves in an attempt to resolve the issue.
But there’s a better way.
Master your cash flow by becoming familiar with your incomings and outgoings and trimming away non-essential expenses. Then expand your horizons by selling on other platforms and marketplaces. Finally, don’t forget to dress, walk and talk like an e-commerce store worth attention and sales by investing in high-quality branding and inventory mastery.
Following this route will improve your financial stability so you can take on more opportunities and grow a resilient e-commerce business that lasts.