Cash Flow Management
Cash is essential to the everyday functioning of any eCommerce business. Cash flow is essentially the record of the cash coming into and out of your business over a given period. Ideally, cash flow should be positive, meaning your cash income is greater than your cash expenses. Positive cash flow means that your business has enough cash in-hand to cover all cash expenses such as bills, staff salaries and production costs, on time.
Positive cash flow is by no means guaranteed, especially if your business is facing challenging times. This is where effective cash flow management comes in.
Effective cash flow management is not just about increasing cash flow or decreasing cash outflows, it comes down to stock management, efficient resourcing and tracking money owed.
While buying stock is essential for completing sales for eCommerce businesses, once stock has been bought cash is then tied up in that stock until it is sold. This means that even though the stock in the inventory has monetary value, it can’t pay cash expenses until customers buy it. Because of this is it important to ensure that you do not over-stock on products and compromise your cash flow.
Similarly, you may experience a busy period and hire more employees or storage space to manage demand. However, once the busy period subsides or demand decreases, it is important to effectively manage how much cash is tied up in staff wages or storage spaces that you no longer need to utilise. This creates a similar cash flow situation.
If your business model utilises invoices to charge customers for services or wholesale goods, you can also experience cash flow problems from having money owed to your business from clients. Keeping track of when clients are due to pay you is vital to your cash flow management, as your business has already paid for the product or service that has been sold, and the cash from that sale is needed to pay for other expenses.
Effective cash flow management can be a juggling act, but staying on top of your cash inflows and outflows can be the difference between experiencing positive or negative cash flow.
The Importance of Cash Flow Management
According to the Office for National Statistics, 90% of business failures are due to cash flow problems. Additionally, according to a small business loans company, 1 in 7 small businesses in the UK have been previously unable to pay their employees on time due to cash flow issues.
While effective cash flow management does not necessarily mean always having a positive cash flow, prolonged periods of negative cash flow can be detrimental to the survival of a business. This is a particular risk for small eCommerce businesses who are more likely to experience cash flow problems and often have fewer opportunities to pay with credit.
Managing Cash Flow - Financial Ratios
Cash flow financial ratios can be used to improve and assess your cash management. Cash flow financial ratios work by comparing cash flow to other aspects of the business’ finances to determine whether there is enough cash on-hand to cover upcoming cash expenses.
Financial ratios can be useful for creating a picture of your business’ liquidity and provide a snapshot of the cash health of your company.
If your cash flow ratio is above 1, this indicates that your business is equipped with enough cash to pay upcoming expenses. If, however, your cash flow financial ratio is below 1 your business does not have enough cash to cover short term liabilities.
To calculate your cash flow ratio you can use the following formula:
Operating cash flow ratio = Operating cash flow / Current liabilities from normal business operations.
Managing Cash Flow in a Crisis
The COVID-19 pandemic created new cash flow challenges for many businesses. Due to government lockdown restrictions, and reduced disposable income from furlough schemes and unemployment, businesses saw sales, and for many their main source of cash income, drop overnight.
Although many business owners knew that sales would pick-up again once the pandemic was over, they were still seeing a significant short-term reduction in cash income, and with bills still needing to be paid in the short term, this created a cash flow problem.
Below are some strategies that any eCommerce business could employ to manage their cash flow in crises such as the COVID-19 pandemic.
Adjust stock levels in line with new demand
Consider adjusting stock levels to reduce short-term costs, only ordering enough to meet the current demand. This will avoid having too much cash tied up in unsold stock.
Review current cash outgoings
Review what expenses you are currently paying for, see what can be reduced or eliminated completely to help reduce short-term cash expenses.
Consider delaying projects
Review any projects that your business is currently undergoing and decide if any can be pushed back, paused or abandoned to reduce short-term outgoings. For example, you may be about to undergo an expensive website migration, or are undertaking a large marketing project, consider pushing these back until you are in a more stable cash flow position.
Consider reducing staff levels
While sales are down you may not need the support of your whole team. Consider reducing their hours, or placing them on furlough to reduce costs, while ensuring that you still have a reliable team on hand to help you recover after a crisis.
Prepare a cash-flow forecast for upcoming months
To help inform your decisions to cut back on certain expenditures or reduce your team, create a cash flow forecast for the upcoming months. This will allow you to see when you could start to expect business to return to normal. Keep this up to date and compare past forecasts with actual cash flow statements to make projections more reliable.
Consider diversifying your cash income
Creating multiple revenue streams can help you to not only mitigate the implications of a cash flow crisis, but also make your business more cash resilient in the face of future problems. For example, an eCommerce business selling hand-made products could diversify their income by selling at-home kits so customers can make or decorate products at home themselves. Alternatively, offering online classes or courses in your business’s area of expertise could prove another effective way to diversify your revenue. Methods such as these are also suited to cash flow crises arising as a result of a pandemic as customers may be looking for activities to do to pass the time during lockdown restrictions.
Successful online classes or home DIY kits also create a positive association with your brand during a difficult time for many people. This in turn, could boost your cash income once things return to normal.
The type of crisis that your business is facing will dictate which methods of managing cash flow are most appropriate to see you through this period.
Effective cash flow management can make all the difference, especially for small businesses. While consistent positive cash flow is not always realistic, ensuring that your business has the resources to navigate more challenging cash flow periods is essential.
Diversifying your cash revenue is one of the most effective ways to keep your business cash flow positive during a crisis. While the most effective methods of diversification will depend on the situation that you are facing, having alternative revenue sources will make it easier for your business to handle uncertain cash flow periods.
Download our other eBook chapters for more guidance on how to get started with cash flow management for your business.