Cash Flow Management for E-commerce Businesses: Key Considerations

Cash flow management is one of the smartest ways to increase the efficiency of your business. If you want to buy more inventory during the busy season or negotiate bulk purchases, you’ll need free cash flow to leverage.

If you’re not cash flow planning and run an e-commerce store, we’re going to help you understand why you need to begin managing cash flow now.

Why Cash Flow Management Matters for E-commerce Businesses

Cash flow planning is important in every business. Did you know that 90% of e-commerce businesses fail within four months of opening? Some of these companies didn’t understand their market or have a competitive advantage to make them a success.

However, nearly all of them had one thing going against them: poor cash flow.

If you don’t have free cash flow, you won’t be able to:

• Market
• Buy products
• Pay vendors
• Run customer service
• Pay your overhead

Taking out a loan or line of credit may be an option. Many businesses seek loans to cover short-term cash flow needs, but you will need to:

• Repay the loan
• Pay interest on the loan

If you need to take on debt, the costs to run your business will rise, and you’ll have lower profit margins as a result.

In all cases, it’s better to manage your cash flow, no matter how challenging it may be.

Common Challenges in E-commerce Cash Flow Management

Cash flow management is a problem in every industry, but the difficulties that you face will vary from one industry to another. Some of the problems that you’ll face in the industry are:

• Delayed payments. If you allow buyers to pay later or in increments, you’ll need to extend credit to them, which can leave you with a lack of free cash flow.
• Chargebacks. Most companies maintain a chargeback rate of 0.6% or less, but there’s also a rise in chargeback fraud. You risk sending out products or selling items that are inevitably refunded to the customer.
• Inventory management. How much inventory should you hold? If you don’t have an inventory forecasting system in place, you may have a warehouse filled with items that aren’t selling. You also risk running out of inventory that is selling. Storage is also expensive, and if you’re sitting on inventory, you have cash flow tied up in it.
• Operating expense tracking. If an e-commerce shop is your first business, it can be easy to lose track of your expenses. As your company begins to expand, keeping a strict budget and managing your outflows can be a real problem.
• Fluctuations. You may sell 1,000 widgets in your first month of operation due to seasonal trends and then have 10% of the sales over the next quarter. Inventory management and forecasting your cash flow while accounting for seasonal trends can help you overcome this challenge.

If the economic outlook changes or your product doesn’t sell well, it will immediately impact cash flow. One of the biggest challenges with cash flow management is that you can only do so much to budget for the future.

You need to make on-the-go changes to your budget and approach to better manage your cash flow.

Strategies for Improving Cash Flow in E-commerce

Ecommerce cash flow improvements are possible if you follow the appropriate strategies, including:

1. Demand faster payments if extending credit.
2. Offer discounts to generate more sales.
3. Utilize forecasting tools to better manage inventory.
4. List and reduce any unnecessary expenses that you may have.
5. Increase your prices if they’re significantly lower than the competition.
6. Request new, longer payment terms from suppliers.
7. Consider drop shipping options from long-term suppliers.

Cash flow is simple: maintain more inflows than outflows. If you can find strategic ways to get paid faster and reduce your expenses, you’ll have a healthy cash flow that can be used to invest more in your business.

Cash Flow Forecasting for E-commerce Businesses

Business cash flow management should incorporate forecasting.

Why?

You can use historical data to better understand how your cash flow will fluctuate over the reporting period and even if sales will decline due to recent trends. Forecasting should also consider:

• Seasonal trends
• Scenarios, such as what selling X product in X volume will do
• Etc.

Cash Flow Frog makes it fast and simple for anyone who wants to manage their cash flow because it integrates with the leading accounting software. You can import data from your accounting software and start running forecasts in minutes.

Real-time cash flow balances and forecasts will help you make smarter business decisions for your e-commerce store.

Funding Options to Bridge Cash Flow Gaps

Cash flow management doesn’t mean that there won’t be a time when you’re spending more money than you’re generating.

Unfortunately, your cash flow will have gaps where you may not know how you’ll:

• Purchase new inventory
• Market products
• Pay suppliers
• Pay shipping costs
• Cover storage and warehouse costs
• Etc.

Taking on debt may be your only option. Even the largest businesses in the world leverage debt because they either have their cash flow in investments or do not want to use their own money for acquisitions or major expenses.

You can bridge cash flow gaps in quite a few ways:

• Ask suppliers for a line of credit, which they may extend if you’re a long-term customer
• Secure a line of credit from the bank
• Take out a loan
• Use business credit cards
• Secure outside investments
• Use your own money to fund operations

Even P2P lending may be an option to help you better fund your business and keep cash flow at healthy levels.

The Role of Technology in Cash Flow Management

Technology can help your accounting team with cash flow management immediately. You can use technology, including cloud-based solutions, that will help you:

• Gain customer insights to know who pays on time and who doesn’t
• Predict future sales and better manage inventory
• Forecast when cash flow may struggle

You can use real-time forecasting software that provides highly accurate data that is extremely difficult to replicate using manual methods. If you want to manage your cash flow, you can run forecasting tools, but also, don’t overlook automating your processes.

For example, you can automate payment reminders, allowing you to waste fewer resources on reminders and improve payment times.

If you want to be paid on time, you may have to send out reminders – it's a part of doing business.

Expert Insights: Tips from E-commerce Entrepreneurs

If you don’t know how to manage cash flow in business, you can listen to these insights to better control your free cash flow:

1. Run cash flow forecasts using daily, weekly and even 13-week intervals
2. Negotiate deals with suppliers to save money on inventory
3. Avoid stocking too much of items that may not sell
4. Consider seasonal trends when making large inventory investments
5. Maintain a low-interest line of credit
6. Secure financing strategically when you know you’ll be able to repay it
7. Run a LEAN business and reduce all of the additional expenses that aren’t 100% necessary

Conclusion: Mastering Cash Flow for E-commerce Success

Mastering your cash flow allows you to maximize your e-commerce store’s revenue and profitability. If you run an online store and you’re struggling to keep afloat, your success may rely on your ability to manage cash flow properly.

You can use Cash Flow Frog to help you forecast and manage cash flow.