The Guide to Cash Flow for eCommerce and Online Businesses

by Chris Giorgio | Nov 20, 2018 | Accounting, DIY Accounting, Money Management, Scaling & Business Growth, Small Business, Uncategorized

According to a U.S. Bank study, 82% of businesses fail due to poor cash flow management skills or poor understanding of cash flow. These small businesses don’t make it to their fifth year because they don’t even know they have cash flow problems. Most business owners don’t understand how to properly manage cash flow, so how could they know the difference. That is a sobering statistic for any business owner.

In this article, we cover the importance of cash flow management for eCommerce and digital businesses, common mistakes, and how you can avoid these dangers with proper accounting practices.

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?  As a business owner, you must understand your cash flow and be aware of the warning signs that your business could be in danger.

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 in the most healthy way.  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 of 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 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 really need, certainly not right away. You don’t have enough cash flow coming in to offset expenses and you don’t conduct 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 eCommerce business, the customer acquisition costs trying to increase the customer base causes 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 eCommerce companies with inventory problems, is the business has too many products and/or SKUs to support and maintain in inventory.

Unpaid invoices from clients

For eCommerce companies, most of them 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 eCommerce company, adding staff is critical but often a business has too many people on the team.  Excess labor is one of the main issues with poor cash flow ultimately leading 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 eCommerce 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 eCommerce 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 eCommerce 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 eCommerce business is critical to survival and growth.  

Having an accounting department dedicated to your company internally can be extremely expensive.  Here at Fully Accountable, we would recommend outsourced accounting for your eCommerce company.  This will allow you to immediately have an expert team at a fraction of the cost operating an internal accounting department.

You are already working with partners, team members and vendors remotely, 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 eCommerce business. Download it here for free or the image below, it’s our gift to you! Act today! Get a dedicated team member truly managing your cash flow, so that you can win at growing and scaling your eCommerce business.

About Fully Accountable

Fully Accountable is an outsourced accounting and finance firm.  We specialize in outsourced accounting services for eCommerce and online businesses.  We offer a full range of services from master bookkeeping to CFO advisory services.  The key to our model is, we assume the role of operating your accounting department on a daily, weekly and monthly basis.  You can learn more about Fully Accountable here.

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Chris Giorgio is the President of Fully Accountable. Fully Accountable is an outsourced accounting firm specializing in eCommerce and digital businesses. Chris has served as a CPA, CFO and has over 14 years of experience in the accounting and finance industry. Chris has dedicated his career towards helping entrepreneurs and high-level business owners achieve greater profitability through specialized outsource accounting functions.


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