6 Best Practices to Maximize Cash Flow
Cash flow issues are a common problem for eCommerce businesses. According to The State of Small Business Cash Flow report by Quickbooks, cash flow is a global business problem, with 61% of the businesses worldwide struggling to maintain a healthy cash flow and 42% reporting financial hardships in previous years. This calls for much needed efficient cash flow management practices.
Whether you’re faced with supply chain complexities, a decline in sales, or are exploring opportunities for business growth, you need to have plenty of cash in hand. A stable cash flow position is critical in achieving business growth and accomplishing other business goals.
On the other hand, failing to maintain positive cash flow can restrict or limit even your daily operational activities such as ordering inventory, making payroll, issuing payments to suppliers, and so on. Even though cash flow and profitability are different, they are not totally independent of one another. A poor cash flow situation will ultimately affect your profits. Check out our simple cash flow analysis guide.
In this guide, we’ll take you through some of the best practices to maximize cash flow for your eCommerce Business.
1. Prepare a Cash Flow Budget
To stay in control of your cash, you need to proactively track how much money is coming in, going out, every single day, and how much your firm needs in the future. You also need to be fully aware of how much you owe to people and how much people owe you. All this can be achieved by preparing a cash flow budget.
Preparing a cash flow budget helps you predict the overall financial health of your business. For instance, your eCommerce business operations might be profitable today, but the existing cash flow problems can lead to losses six months from now. A cash flow budget will help you anticipate this and alert you to take necessary actions now to avoid getting insolvent or facing losses.
From using a simple spreadsheet to an accounting software solution, there are several ways to create a cash flow budget. Start by determining the timeframe for your cash flow budget such as one year. Then conduct a sales forecast to anticipate the amount of revenue you expect in each month. This can be based on the sales volumes for the past year. Moving on, you’ll need to account for your projected cash inflows, including the payments received from both your cash and credit customers.
When recording expected payments from customers, don’t forget to factor in the terms of collection you offer to them. For example, if you offer a customer a 30-day term for items sold in January, you should record the inflow for February. Plus, if that customer has a habit of delaying payments, prudently record it in March inflow.
Next, record your anticipated cash outflows, including your fixed and variable expenses for each month. If you plan to hire new staff or purchase new equipment, make sure you add these expenses too. Depending on when you plan to make the payments or payment terms with suppliers, allocate the projected outflows to the right month.
Finally, deduct your total cash outflows from total cash inflows for each month. The difference will show your cash on hand or monthly cash balance for each month. A negative net cash flow shows that you won’t have enough cash to cover your expenses for that particular month. In fact, even a positive cash flow may not be enough.
To ensure that you aren’t left in a cash flow deficit in the future, set a minimum cash flow balance based on how much cash you’ll need each month. If the projected cash flow for any of the months is below this minimum, take necessary actions now to generate more cash. Contact the digital cash flow experts at Fully Accountable.
2. Seek Short-Term Financing
If your current strategies aren’t working, you might need to revamp your eCommerce site or invest in new inventory. If your existing tactics are producing results, you’re probably looking to expand your eCommerce business. In either case, you’ll need capital. When preparing your cash flow budget, you’ll be predicting how much you expect to pay for the turnaround or finance business growth.
Based on the cash flow situation for each month, determine whether you’ll need to consider external financing or can afford to fund your plans yourself. The earlier you make this determination, the easier it will be to raise capital should you need to seek external financing. This is because raising capital is a complicated process that can’t be rushed.
On top of that, a capital campaign, if properly executed can prove to be an incredible buzz-building tool. A high-profile crowd-funding campaign can put your eCommerce business in front of hundreds of thousands of potential clients, including influencers and bloggers. This can give a strong boost to fuel your eCommerce business growth.
3. Enhance Your Average Order Value
One of the most effective ways to maximize cash flow for your eCommerce business is to increase your average order value, that is, sell more to existing customers. Before you can even think of doing this, you need to understand your niche inside out. Review past customer data and spending habits to understand the interests and preferences of your target audience.
Once you’ve understood your target market, use those insights to make changes to your eCommerce website. There are tons of things you can do to make your website more appealing and user-friendly for customers.
Among the most important considerations include your eCommerce web design. In the case of a brick and mortar store, customers can walk in and grab some products before judging the brand. Since that’s not possible with an eCommerce store, site visitors rely on the looks and design of the online shopping site. To start with, make sure that your eCommerce site has visually stunning landing pages and high-quality product images on product pages.
Likewise, the user experience of your eCommerce website plays a vital role in keeping customers loyal. Not only should your website with responsive and quick to load but it must also be easy to navigate. Visitors must be able to quickly find exactly what they’re looking for on your site. The navigation menu plays a significant role here. Organize your products into proper categories on the menu. Adding a search bar also makes it easy for visitors to find what they want.
If your existing and new customers are able to find items quickly, they’ll be more likely to order more items from you instead of ordering different products from different online stores. This way, your average order volume will increase, ultimately maximizing your cash flow. Check out our small business cash flow chart.
4. Keep Updating Your Inventory for Cash Flow Purposes
Inventory not only impacts your profitability but is also where the bulk of your cash is tied to. Not focusing on inventory control can thus lead to serious cash flow issues for your eCommerce business. To ensure high stock liquidity, you must regularly analyze which items are selling and which are not. Also, review market trends to predict what might be more popular in the future.
Based on your findings, keep updating your inventory levels to reflect the existing and projected demand and supply levels. Eliminate SKUs that don’t sell well, seem extraneous, or are expensive to produce, especially if you can’t find a cost-effective way to enhance the financial performance of these products. This way, you’ll be more likely to keep a highly liquid inventory and avoid dead stock. Any existing dead inventory can be sold at a discount. In the end, you’ll have more cash available.
Cutting out your product lineup is also a great way to reduce costs without causing long-term harm, furthering improving your cash flow position. However, if rebranding a specific product segment or line can improve its liquidity performance, adopt this approach instead of curbing them from inventory.
5. Build Supplier Relationships
Since you’ve been ordering products from certain suppliers for a while now, simply getting to know them better and building onto the relationship can put your cash flow at ease. You’ll find yourself in a much better position to negotiate on payment terms. As an end result, you’ll be able to keep money in your pocket for longer.
Imagine how relaxed your eCommerce business’s cash flow situation would be if you can negotiate credit for 90 days rather than only 30 days. It’s not just about issuing them payment when it’s more comfortable for you but cash availability for extended periods can also support your growth plans.
When planning to renegotiate payment terms, target suppliers with whom you intend to increase order volumes. Let them know that you plan to order more in the future so that they’re more willing to extend the term.
Building supplier relationships can also help you attain benefits associated with products and prices. You may have secured a reputation in their books so as to earn bulk discounts or free shipping. These small savings can improve your cash flow position.
6. Look for Alternative Revenue Streams
If there’s a lot of pressure on your existing revenue streams, adding more revenue streams or replacing less profitable revenue streams with more liquid ones can help improve the situation. Consider switching to easier, more effective revenue streams temporarily or permanently, depending on how things work out with it.
For example, you can leverage Google AdSense to earn through Google-sponsored ads on your eCommerce site. Ads from the Google Advertising network will be displayed on empty spaces on your site and each time a visitor clicks on it, you earn a few cents.
Similarly, you can turn to affiliate marketing as an additional source of revenue. If you have a blog section on your eCommerce site, you can incorporate links to not only your own products but also others that you’re promoting as an affiliate. If a visitor follows that link and goes on to purchase the product from that site, you’ll get a commission from that seller.
A simple way is to write product reviews for items that are complementary to your own products, including links to product pages on other sites.
Thus, having multiple revenue streams should help maximize cash flow for your eCommerce business without straining your supplier relationships and putting in a lot of effort in raising capital.
Managing an eCommerce business is more than just maintaining a website and shipping orders you receive on it. Behind the scenes, you must have strong control over your cash, otherwise, your online store may not stay operational for long. This is where cash flow management comes into play.
Given the fast-paced nature of the eCommerce industry and the rapidly changing tastes of millennial customers, order volumes and inventory needs are subject to constant fluctuations. Some of those fluctuations can be predicted such as a surge in orders during the year-end sales, while others can’t. Meanwhile, you have recurring expenses such as rent, employees’ salaries, internet, etc. that must be paid for on time. Consider reaching out to an outsourced accounting firm.
To ensure that you always have sufficient cash to move forward and pursue your long term business goals, you need to appropriately align all that money moving in and out of your eCommerce business. Following the above- discussed practices to maximize cash flow for your eCommerce business should help attain quick results.
However, if your eCommerce business is expanding at a rapid pace, you might lose track of your cash flow at any time during the growth phase. In a situation like this, hiring an eCommerce accounting expert is a great solution. For well-organized and efficient accounting services, contact Fully Accountable today!