According to a U.S. Bank study, 82% of businesses fail because of poor cash flow management skills or a misunderstanding of how cash flow works. Many of these small businesses don’t make it to their fifth year because aren’t even aware they have e-commerce cash flow problems. Most business owners don’t understand how to manage cash flow properly, so how could they know the difference? That is a sobering statistic for any business owner.
Cash is king, and when you don’t have access to ready cash, it can lead to unpaid bills, running late payroll for your staff, and, ultimately, the inability to continue production work. The road to business success is a tricky path to take. Even businesses that are profitable and growing can suffer the negative impact of poor cash flow. About two-thirds of companies survive 2 years in business and less than 10% will be open in 10 years. The core issue is running out of cash.
How do you even know if you have a cash flow problem? How do you keep a close eye on your cash, and become more proactive about ensuring you have your cash flow properly managed to get beyond the first five years? In this article, we cover the importance of cash flow management for e-commerce and digital businesses to improve e-commerce cash flow, common cash flow problems for e-commerce businesses, and how you can avoid these dangers with proper e-commerce cash flow tips.
Managing Cash Flow
Cash flow is the money that’s flowing through your company. The management of cash flow is the process of keeping the business’s heart beating. Cash is the lifeblood of your business. It is important to note that cash flow is not a static number. It is an ongoing and fluctuating process in the business.
Inflow cash is an increase of cash that comes from many types of transactions, including product sales, repayments of loans, or any non-sales income streams you have in your business. While, outflow cash happens when there is a decrease in cash due to your cost of sales, utilities, paying your staff and suppliers, making loan payments, or subscription services. As you can tell from just this simple explanation, managing cash flow in a business is important, as it allows you to keep track of all the expenses inside the company and its business life.
Naturally, there are problems you might face in analyzing your business’s cash flows. As a business owner, you need to perform a cash flow analysis on a regular basis and use e-commerce cash flow forecasting so you can take the steps necessary to head off cash flow problems.
Here are seven common cash flow problems that business owners face and sometimes create that can hurt their business and may lead to business failure.
Overspending or Impulse Spending
This can happen at any time and can be particularly problematic when starting or expanding a business. You buy things you may not need when you don’t have enough cash flow coming in to offset expenses, foregoing a critical cost-benefit analysis of your purchase.
Lofty sales projections
You dream about future growth and success. You believe your ideas, talents, and services will generate a lot of new business. Potential customers may not feel as strongly about what you have to offer or may defer decisions to buy your offerings or outside forces may impede your ability to sell your products and services. Regardless of how you get there, not adding the additional flow of money may hamper your ability to pay for your overhead and other additional expenses. In an e-commerce business, the customer acquisition costs trying to increase the customer base cause this problem as the cost to acquire increases.
Too much inventory
This is an offshoot of the first two problems. You tie up your capital in inventory. You may face storage costs as well. If you don’t sell your inventory quickly, you may need to discount the sales price or worse yet, write it off. Starting a business and knowing how much inventory you need to order is difficult. Holding too much inventory can crush your cash, so being able to manage the flow of sales and inventory turnover is critical. Another critical issue for e-commerce companies with inventory problems is the business has too many products and/or SKUs to support and maintain in inventory.
Unpaid invoices from clients
Regarding e-commerce business finances, most companies use credit card processing and do not have a payment receivables issue. But here at Fully Accountable we also represent digital e-learning and marketing agencies. Service companies often have delayed billing practices. You may be slow in billing customers and collecting receivables. You may not be tough enough about payment policies, terms, and penalties. It is key to communicate effectively with customers upfront about paying you for products and services. You may not have tested policies and procedures in place to manage your customers’ credit.
Inadequate cash on hand
Any business can hit some bumps along the road. It’s not unusual for any business to have revenues that aren’t steady all year round. A slow period may mean that there isn’t enough cash to cover the overhead. If you don’t have a cushion of cash to cover your expenses, your business may suffer very quickly.
Too Many Team Members
With any growing e-commerce company, adding staff is critical, but often, a business has too many people on the team. Excess labor is one of the main issues, and poor cash flow ultimately leads to the closure of the company. As you improve your systems, your staff size and proper labor size need to fall in line with each other. You can put together a formula for an e-commerce company of your size and proportion to check the numbers.
No Cash Flow Forecast
Money goes in, and money goes out. You just don’t know when or how much at any given time. There’s no tracking system or forecast model of cash to help you anticipate growth or when tough times may come. A cash flow forecast can help you deal with irregular flows of revenue and unusual expenses. This can also help you determine whether you have the cash and coverage to support your growth plan.
Are You Making Any of These Same Mistakes in Your Business?
Do you know how to put the proper system in place to stop these problems from coming to fruition?
Improving cash flow can be a huge advantage for online and e-commerce businesses. Most business owners see growth as the solution to a cash-flow problem. That’s why they often achieve their goal of growing the business only to find they haven’t fixed the problem. In fact, they have only increased their cash-flow problems in the process. You need to plan for growth and the related cash outlays in advance so they do not surprise you.
A proven method for avoiding cash flow nightmares is to regularly perform a cash flow forecast. Sadly, most business owners, and accounting professionals for that matter, do not know how to properly forecast cash flow in a growing e-commerce business. The assumptions are usually overly aggressive on sales and grossly underestimated on expenses and time to initiate plans which results in burning more cash than expected.
We would recommend establishing a cash flow forecast in your business. If you need one or advice on how to build it, reach out to our team for expert advice.
Managing Cash Flow in an E-Commerce Business Is Critical to Survival and Growth
Having an internal accounting department dedicated to your company can be extremely expensive. Here at Fully Accountable, we would recommend outsourced accounting for your e-commerce company. This will allow you to immediately have an expert team at a fraction of the cost of operating an internal accounting department.
You are already working with partners, team members, and vendors remotely, so why not also do so with the critical function of your accounting and finance department?
This department is the one that will successfully track and manage your cash flow. While you may be thinking that there is no room in the budget to hire an outsourced accountant, I would like to challenge you that this department will probably be one of the most profitable departments in your company.
Want more information about winning at cash flow management? We have a complete guide laying out the critical steps to managing cash flow in a growing e-commerce business. Download it here for free or the image below; it’s our gift to you! Act today! Get a dedicated team member who truly manages your cash flow so that you can win at growing and scaling your e-commerce business.
About Fully Accountable
Fully Accountable is an outsourced accounting and finance firm. We specialize in outsourced e-commerce accounting services for e-commerce and online businesses. We offer a full range of services, from master bookkeeping to CFO advisory services. The key to our model is that we assume the role of operating your accounting department on a daily, weekly, and monthly basis. You can learn more about Fully Accountable and our e-commerce financial management services here.
