29% of online businesses fail due to a lack of cash, according to an analysis. They don’t fail because their product isn’t excellent or their sales aren’t great. Instead, they fail because they do not control their cash flow in a way that allows them to sustain their business. Wealth Management Consultation can assist you in the planning of your wealth management that will help you achieve your ideal future regardless of what life throws at you.
E-commerce is an ever-changing and dynamic business as money moves quickly and metrics shift daily. Therefore, cash flow needs to be planned and managed with care to avoid disruptions and shortages of business.
It’s plausible, according to the data. Established DTC brands receive around 60% of revenue from repeat customers. This is because they have a steady flow of cash each month.
Table of Content
- 1 What is cash flow?
- 2 What is a cash flow statement?
- 3 How cash flow statements can assist your business in its growth
- 4 How to forecast your cash flow
- 5 If you’re trying to forecast the eCommerce flow of cash, you can use the template for forecasting following the guidelines below.
- 5.1 Step 1: Calculate your net earnings.
- 5.2 Step 2: Estimate non-cash expenses
- 5.3 Step 3: Estimate the changes in working capital
- 5.4 Step 4: Calculate the amount of interest and tax payments
- 5.5 Step 5: Estimate the sale and purchase of investments and fixed assets
- 5.6 Step 6: Calculate the addition or reduction in capital
- 6 How to Improve Ecommerce Business Cash Flow
What is cash flow?
The cash flow represents the money you have to pay for current expenses and keep the business operating. The formula for cash flow for eCommerce is as follows:
Cash flow = revenue – (rent + payroll + inventory buying + utilities + equipment + marketing + taxes + insurance + interest + fees)
The amount fluctuates weekly, or even days, due to the many payments that come out and in your company. It’s the company’s cash flow at any given time. Positive cash flow indicates that more money enters the company than it goes out.
Imagine it as your financial matters: you receive your paycheck on payday and pay your bills, But then your vehicle breaks down, and you’re required to make repairs. However, you’re cash-less at the moment, to read additional posts on financial matters you can check out these additional issues. This doesn’t mean that you won’t be in a position to pay the next paycheck, but right now, you’re not financially strained (because you’ll soon be receiving money); however, you do not have enough cash to pay for the expenses as they arise. That puts brakes on life, just as it does for a business.
What is a cash flow statement?
Cash flow statements are an essential instrument used to control finances by monitoring a business’s cash flow. This is among the three crucial documents (with an income statement as well as the balance sheet) that aid in assessing the performance of a business. In addition, it’s usually useful in creating cash forecasts for short-term planning.
The cash flow statement reveals the cash source and assists in monitoring the amount of money that is withdrawn and incoming. Incoming cash to a business comes from operations and investment and financial operations. The statement also provides information about cash outflows, the number of expenses incurred for business operations, and investments at a particular moment. The information you gather in the flow report is useful for management to make educated business operations decisions.
How cash flow statements can assist your business in its growth
Here are a few benefits of having a cash flow statement:
Get deep insight into your spending habits by examining your cash flow statement; it is easy to know what major payments you must pay to creditors. Also, you can see the cash flow of inventory items that aren’t noted on the other accounting statements.
Maintain the cash balance: Having cash sitting around isn’t ideal for any company. Also, not having enough funds to cover costs is not advised. You can invest your money to make a profit in the first instance. Second, you can take out loans to help keep your business running.
Helps plan better: Better financial planning and more efficient financial outcomes. A profitable business usually has sufficient cash in order to pay off obligations, including short-term obligations that require future payments. Using your previous cash history, you can look at previous transactions to make better decisions when paying off debts or seeking additional financing should it be necessary.
Generate money: You can only improve the profit of your business when you continue to earn cash. For instance, the cost of equipment you pay less for can be a method to earn cash. The faster you are able to make money the greater impact it is on the bottom line. Once you’ve learned how to manage your cash flow statement, you’ll be able to better manage your finances and find more efficient methods to utilize your resources to ensure low-risk growth.
How to forecast your cash flow
If you’re trying to forecast the eCommerce flow of cash, you can use the template for forecasting following the guidelines below.
Step 1: Calculate your net earnings.
It is not necessary to have any experience in accounting to estimate Net Income. Take the income statements from the three or five previous years. Calculate the growth rate for the year for each year and then average it out. To calculate the rate of growth for every year:
[(Year 2 Net Income – Year 1 Net Income) / Year 1 Net Income] x 100
If you repeat this process for 5 years, you must add all the growth rates and divide by 5 to calculate the average.
Step 2: Estimate non-cash expenses
You can calculate the non-cash expense as a percentage of net income. For example, if the net income is $10,000 and the non-cash costs are at least Rs6,000 for a particular quarter, you can multiply this net amount by 60 to calculate the non-cash costs.
This is just an estimation. If you plan to purchase fixed assets in the next quarter, you’ll need to alter this percentage to reflect a growth of depreciation (net from tax). For example, if you anticipate depreciation to rise by 1,000 and the tax rates are 15%, increase the non-cash expense by approximately Rs850.
Step 3: Estimate the changes in working capital
It is also possible to extrapolate the figures from the previous quarter based on the percentage of net earnings. But, you may want to make necessary adjustments when you anticipate an alteration in your credit policy of your creditors or if you intend to keep stock in a greater amount or decrease over the next period.
Step 4: Calculate the amount of interest and tax payments
The cost of interest is related directly to debt. If you plan to use the funds to repay your loan, then you must alter the interest rate to be able to pay for the future. In the same way, tax payments are directly linked to net income. It is best to calculate these numbers manually to ensure that the spreadsheet isn’t too complicated.
Step 5: Estimate the sale and purchase of investments and fixed assets
It is best to calculate these figures by hand since there is no formula to follow in this case. Most capital expenses and cash receipts are planned; therefore, making these calculations ought to be relatively simple.
Step 6: Calculate the addition or reduction in capital
Start by making loan payments. Most of the time, it is not possible to put off the payment of a loan after it’s due. First, enter the amount you’ll have to pay. After that, take a look at the cash position (i.e., the amount of cash in your account) following repayments.
If the figure has a positive value (like in the case above), you can proceed to complete the spreadsheet for the following periods. If the result is negative, your forecast suggests that you’ll require more cash for the period, or you may be in cash-flow problems.
How to Improve Ecommerce Business Cash Flow
The most effective method to increase operating cash flow differs between businesses. We at Insight Matters are here to assist you in determining the most effective way to improve cash flow from e-commerce for your company.
Many methods are effective. A few steps to consider include planning your inventory using sales from the past. This will help you avoid stocking inventory or even the reverse issue of not having enough inventory, which means you are running out and losing sales.
1. Clear out your inventory
How can you increase the cash flow in a company with an unlimited circulation of funds? It is crucial that your inventory does not hold the capital in a significant way. Also, make sure you check your inventory and then dispose of the inventory that you don’t use. There are a variety of methods to increase cash flow faster by liquidating your stock. There are a variety of online marketplaces you can sell your goods alongside your site; one of the most popular is amazon. You can also contact liquidation firms to get rid of the surplus stock.
2. Payment terms with suppliers
It is also possible to negotiate the terms of payment with suppliers so that you pay later, even if that means you have to pay slightly more. This method is ideal for more profitable products, in which case the cost could be more costly. Another approach is to cut down on the size of your order when you purchase from your suppliers, thereby dispersing your payments over time. This could be a viable option in cases where shipping costs are minimal, and the price isn’t sensitive to the size of purchases.
3. Increase your average order value
Let’s say your company’s typical purchase amount is $60. You must determine ways to boost the amount to at least $75. The increase in the average value for physical items is simpler; you can establish an order minimum for free shipping orders.
If you sell online products, help users to purchase premium packages. You can engage dedicated professionals to do this and train marketing personnel to sell upsells.
4. Get customers to pay earlier
If you’re selling b2b products, make it easier for your clients to pay earlier by offering discounts for prepayments. For instance, you could offer a discount of 2% for customers who pay on the spot instead of the full net 30. So, your business always has cash reserves should there be a need. This method doesn’t be applicable to Shopify and fba stores that are b2c.
5. Optimize invoice management
Companies concentrating on selling and not managing invoices often have unbalanced cash flows. These issues could result from invoice mistakes; payment being received late, etc.
Here are some tips for how you can increase the flow of cash in a company to avoid invoice-related issues
- Make use of a reliable invoice management tool to avoid errors on invoices.
- Invoices are sent out when orders are placed.
- Think about charging late-payment charges to customers.
6. Expense reduction
Additionally, it is possible to increase the cash flow of your online business by cutting costs. Reduce your overhead by identifying other expenses that are not essential and can be cut easily. For instance, if you have rented premises that you don’t make use of, you could reduce those costs or shift your business to a smaller, cheaper space.
Enhancing and optimizing your online-based average order value (AOV) can also increase your flow of funds. This is because when your AOV rises, every customer you sign up for will add more money to your business, which will increase your cash flow. A more expensive average order value means you will need to find fewer customers to meet your revenue goals. In the end, you’ll experience a smaller cost of acquisition (customer purchase cost) and fewer overall marketing costs.