5 Tips to Maximize eCommerce Cash Flow

What is Cash Flow?

You’re probably keen to learn how you can optimize your business’s financial health. Well, cash flow is the first weapon in your arsenal—and the most powerful one.

So, what is cash flow?

If you don’t have an accounting background, it’s easy to assume that profit equals cash flow. However, profit and cash are not the same.

Profit is counted when you earn money, not when you actually receive it (this is known as accrual basis accounting). Cash, on the other hand, is counted when your business has cold, hard cash in hand (this is known as cash basis accounting).

Here’s an example:

Imagine you sell pens. You buy the pens for $0.50 and sell them for $1. You sold a pen to your friend, but he says he will pay you later since he doesn’t have any change. When you open your income statement the next morning, you will see a $0.50 profit on the pen you sold to your friend, but no cash.

Now imagine that a competitor is going out of business and wants to sell all assets at 20% of the original cost. This is an excellent deal. Unfortunately, despite having profits, you don’t have any cash, so you’re not able to take advantage of the opportunity.

This is why profit and cash are not the same thing—and why cash flow is so important.

Cash flow as a concept isn’t complicated, but optimizing it can be tricky. It’s always worth seeking professional help because cash flow is critical to your business’s growth. As many as 82% of small businesses fail due to cash flow problems!

Common Cash Flow Problems

Poorly managed cash flow can cause trouble for your business in more than one way. Here are some common problems caused by inefficient cash flow management in eCommerce businesses:

• Missed opportunities: If a lucrative opportunity comes knocking and you don’t have enough cash to jump on it, you may lose out.

• Supplier attrition: Nobody likes clients that don’t pay on time. If your relationship with your suppliers turns sour, the service you receive may suffer. Consistently late payments could even result in them terminating your relationship altogether.

• Expensive financing: Lenders don’t like lending to cash-strapped businesses. If you approach a lender with a negative cash flow statement, they’ll either charge a much higher interest rate or deny the funds entirely.

• Inconsistent growth: Cash fuels growth. If a lack of cash means you don’t have enough inventory or personnel to fulfill large orders, there’s little point in trying to increase your sales.

You don’t want these problems in your eCommerce business, but how do you avoid them? Fret not! We’ve put together some tips so you can tackle your cash flow woes with confidence. 

Tips for Maximizing Cash Flow

Following are some methods you can use to manage and maximize cash flow. You’ll need to forecast your cash flow and consider how implementing these tips will impact your cash position.
 
 

1. Focus on Average Order Value

It’s easy to get overly focused on customer acquisition metrics like conversion rates and traffic. While they are important, your Average Order Value (AOV) deserves equal attention. 

AOV= Total Revenue / Total Orders

Raising your AOV is one way to increase cash flow, and you can do it by encouraging customers to buy more with each order. For example, you could increase your AOV by offering free shipping on a certain minimum order value or introduce a loyalty program that rewards customers who spend an extra $20 or $30 while ordering.

2. Assess Net Margins and CLV

We try to predict what your eCommerce business’s future cash position will look like by estimating your revenues, margins, and other key metrics.

Two metrics, in particular, claim the spotlight when we forecast cash flows for eCommerce businesses: net margin and customer lifetime value (CLV).

Net margin helps us identify cash cows that can provide a broad, steady stream of cash to your business. CLV underpins this analysis. While your margins may appear small for a single purchase, studies show that 40% of eCommerce revenue comes from return customers. Your acquisition cost for these repeat customers is minimal, which translates to higher margins.

3. Analyze Your Inventory Turnover

Inventory is the heart of your eCommerce business. Running out of stock can cost your business money, customers, and reputation. On the other hand, having too much inventory increases both opportunity costs and obsolescence costs.

With inventory, eCommerce businesses need to hit the sweet spot. You want enough to be able to deliver on time, but not so much that you miss out on other opportunities. If the cash that you’ve tied up in inventory could be earning interest, used to take advantage of bargains, or invested in services that make your business more efficient, you’re effectively losing money.

We use stock-keeping units (SKUs) to look at turnover for each item in your inventory. If the inventory turnover for an item is too low (i.e., inventory sits in your warehouse for too long), you’re holding too much of it. You could hold less of that item and invest that cash into a different product with a higher inventory turnover rate.

4. Renegotiate a Better Credit Policy

On the flip side of the cash management equation, you want your money to stay in your account for as long as possible. It’s not unusual for eCommerce business owners to want to pay off their suppliers as quickly as possible. But while this might make the supplier happy, it’s often not in your best interest.

If you’ve been consistently buying a large quantity of inventory from your supplier and paying on time, you may be in a position to negotiate better payment terms, like moving to a 60- or even 90-day payment cycle from your current 30-day cycle.

This is the equivalent of a short-term loan that lets you free up your cash while you continue to collect revenue.

5. Pay off Debt

Too much cash is a problem we’d all like to have. If you have excess cash sitting in the bank, paying off any interest-bearing loans should be a priority.

It’s unlikely that the cash in your bank account is earning a rate higher than the interest accruing on the loan. The money you’ll save on interest will increase your yearly net cash flow as well as your bottom line.

Feel Confident about Cash Flow?

These tips will help eCommerce business owners optimize and maximize their cash flow. You might even be able to start putting them into practice today!

While it's always in your best interest to proactively optimize cash flow, you do have another option if you’re in a cash crunch—financing your business needs with a loan. This can be a fast and easy way to inject much-needed cash into your business, but whether it’s the right move depends on a host of factors.

If you’re ready to get serious about cash flow—or any aspect of your accounting—get in touch with us today. Our accountants specialize in eCommerce and can help you identify the most cost-effective ways to improve your bottom line.