Cash Flow is a handy metric to understand for running an eCommerce business. Essentially, cash flow refers to the movement of money in and out of your business over a given period of time, usually each month. Cash ‘flows’ in from the sale of your products or services, and ‘flows’ out in the form of expenses such as tax, loan repayments, insurance or production cost.
To work out your business’s cash flow, simply use the following formula:
Cash Flow = Monthly Income - Monthly Expenses
There are several different methods of calculating cash flow, that include or exclude certain types of income or expenses, each producing a different view of your business’s overall financial situation. The structure of your ecommerce business will often determine which method of calculation gives the best picture of your financial position.
Effective cash flow management is vitally important. Extended periods of negative cash flow can be fatal for the survival of your business. In fact, one of the largest contributing factors to the failure of small businesses is lack of cash.
The first few months of setting up your business are a particularly crucial time for monitoring cash flow. While more established businesses can often claim credit from suppliers with whom they have built a good relationship. This can help to mitigate the impact of negative cash flow in the short term.
Failing to stay on top of your cash flow and experiencing prolonged periods of negative cash flow can create strain on your finances. Here are some of the issues that your eCommerce business might face;
Unable to pay suppliers.
Unable to pay bills or taxes on time, which could force your business to take out loans, increasing expenses for the near future.
Unable to restock products once they have sold out, reducing your potential income.
Poorer credit ratings as a result of delayed payments.
Potential threat to the survival of your business.
Effective cash flow management can help your business to predict and mitigate future cash flow concerns. The best way to keep track of your cash flow is to use cash flow modelling.
Cash flow modelling simply refers to the process of planning and forecasting future cash flow over the coming periods. Cash flow modelling allows businesses to predict and plan for periods of potential negative cash flow, and better mitigate the potential implications.
There are several different types of cash flow models. Some of the most commonly used are;
Operating cash flow
This is a cash flow model based on the company’s core business activities, and does not include any income or expenses as a result of investment activities.
Discounted cash flow
The discounted modelling method is used to understand the value of an investment based on cash flow forecast for future periods.
Free cash flow
Free cash flow calculates a business’s available cash after reinvestments have been made back into the business.
To learn more about different cash flow modelling methods and which method is best suited for your business, download our chapter on Cash Flow Modelling.
No matter how meticulously your business plans out its cash flow forecasts and manages expected income and expenses, crises and unforeseen events can quickly create cash flow problems. Whether your store is unable to restock due to extreme weather conditions, or your business must remain closed due to a pandemic, managing cash flow in a crisis can present unique challenges for any business.
One of the best ways to help your company overcome the challenges of a local or global crisis is to consider diversifying your income and business model.
For example, during a pandemic lockdown a restaurant business would be forced to close its doors, cutting off its primary stream of revenue and leaving the management with produce and meals they cannot sell. To overcome this, the restaurant could consider offering take-away meals, allowing them to continue to reach their customers. This could also quickly become integrated into the restaurant’s business model. Maintaining a take-away service after lockdown restrictions have lifted could allow them to reach more customers than they can seat in their restaurant at any one time.
Ecommerce businesses can also diversify their income in a similar way. While they may not have a physical storefront that must remain closed, crises such as extreme weather or a pandemic can cause supply delays, reducing stock levels and potentially impacting your company’s revenue. Additionally, as we saw with the COVID-19 pandemic, if unemployment rates start to rise, many people may not have the income to shop at your eCommerce store. eCommerce businesses selling handmade items such as ceramics or art, for example, could consider offering online pottery or art classes. This could be a particularly effective strategy during a pandemic lockdown when many people are confined to their homes and are looking for ways to pass their time. Successful online classes could also contribute to creating positive associations with your brand, and encourage more product purchases once everyday activities resume.
While the nature of a crisis will dictate the best route your business should take to adapt, sustaining a business model that incorporates multiple revenue streams can help your business remain more cash-resilient in the face of future crises.
Understanding and managing cash flow is integral to the success and survival of any business. Remaining aware of periods of potential negative cash flow and understanding the implications this could have can help you to manage them more effectively. Get started using a cash flow modelling method from the moment you conceptualise your business idea, and consider identifying ways to diversify your income to stay one step ahead of cash flow concerns.
For more information on getting started with cash flow modelling, and understanding the differences between your businesses profit and cash flow, download the rest of our eBook. Or for help getting started accepting online payments for your eCommerce business, contact us about our range of online payment solutions today.