The Pivotal Role of Cash Flow in Your eCommerce Business
Cash could very well be the most important asset in your eCommerce business.
It doesn’t take much to run an eCommerce business. You don’t need a physical store to rent or buy; you don’t need heavy machinery; you rarely need a ton of personnel. What you do need is a significant and consistent flow of cash.
eCommerce is a business heavily reliant on a healthy cash flow for financial success. You need to be able to buy inventory in advance, way before you get to sell and get paid for them. Therefore, your business’ cash flow must be able to sustain itself and allow your business to buy inventory, pay expenses, and, most importantly, grow.
Why is it important to manage cash flow?
Understanding your Statement of Cash Flow reveals your business’ cash position. It allows you to know the future needs of your business and even identifies which past decisions caused you to lose money.
Managing your cash flow produces a clear picture of just how much you are earning. It is not as deceiving as profitability reports that don’t necessarily reflect the amount of money you are making.
Keeping tabs on your cash flow will give a better picture of how your business has been growing. In the months that you made a lot of revenue, did it translate to cash or was it consumed by other payables? Relying on your income statement isn’t enough. Don’t get caught up in your profit and loss because profitability alone isn’t enough to determine financial health. Some indicators aren’t reflected in your P/L but you can find them in your cash flow.
The Cash Flow Statement enables you to trace your money’s movement. Having a detailed report to reflect where your money goes will enable you to identify unnecessary expenses and cut them when the need arrives. It can also identify which projects and products bring in the most money.
When you manage your cash flow, it yields data that can even help in making decisions for expansion.
Where does the cash come from and where does it go?
There are 3 ways your cash flows in and out of your business. They come from operating, financing, and investment activities.
Operating activities are day-to-day operations and expenses, it is revenue from business operations, and expenses that keep the operation going. Financing activities are from incurring and paying off debt. Investment activity is cash flow from the owners.
Ideally, you want most of your cash to come from your operating activities. Producing enough cash from your own operations indicates your business is self-sufficient. On the other hand, when you see that, for some time now, most of the cash comes from financing or debt, the business isn’t doing well. You might probably want to start making some changes if you want to stay in business.
How to use the data from your Cash Flow Statement
Data gathered can be used in many ways, most popularly, it can be used for forecasting. When you forecast how much money goes in and out of your business, planning will produce more accurate results.
With a forecast you can make reasonable predictions of your profits. At a glance, you’ll see if you’re going to make a substantial profit, enough to increase inventory or add new personnel. If cash flow seems low, you can plan on saving in the months that precede that period.
You can also use data from cash flow to predict inventory velocity. In eCommerce business accounts payable is usually 100% related to inventory. You need to give a separate forecast for your inventory to ensure that you have the right supply for each season. Mismanaged inventory will kill the business.
If the company has long-term debt data from the cash flow statement will allow the investor to determine the possibility of repayment for that period.
The Cash Flow Statement isn’t only forward-looking, it can also peek into the past to determine what went wrong and apply remedial measures. It not only applies information for making decisions that affect the external activities of the company, but it also helps deal with internal management.
Cash flow is one of the most important financial tools you can use to keep track of your financial health. It is essential that you have the right people helping you interpret your business-specific data. If you are interested in discussing your cash flow conditions, you can contact us for a consultation.