Your online store is up and running. You have got customers, and prospects for the future are generally looking good. Projections for the year show that revenue generated from your sales is going to be enough to cover all your costs and even leave you with some profit. It all sounds good. Right? But what about your cashflow?
Cashflow is simply the net amount of cash flowing in and out of your business. However, the timing of the inflow and outflow of funds is unlikely to coincide. A common situation is that you owe your supplier money today, while you yourself are going to be paid a week later. This is a common problem and if you don’t manage it well, it can put you into difficult situations.
A good cashflow is crucial to the success of any business. Basically one needs to be on top of information like how much cash has been paid, which customers have paid, and which bills you need to pay – every single day. Understanding your financial position provides you with valuable insights to help you make the best decisions for your business.
Although managing Cashflow can be a tricky issue when you are running an online small business,, the good news is that most cash flow problems can be prevented with a little bit of preparation and the right strategy. Read on to learn more…..
What Is A Cash flow Problem?
Having a cash crunch does not necessarily mean that business is bad or not profitable. It could just be that you are growing too fast! A happy problem of sorts you can say! However, a growing business soaks up cash when you create online store website because as sales grow you will have to get the inventory to grow too. This means greater cash requirements which can lead to a cash crunch and you have to be prepared for such situations.
Movement of cash in any business is cyclical with the length of the cycle varying according to the market you are in. Having a good cashflow in ecommerce basically boils down to reducing the length of time you have to wait between making payments and actually getting paid. If the gap is too long you are in for problems in cash flow management.
Sometimes a cash crunch can also be indicative of the fact that the business is perhaps spending more money than it is earning.
What Is Causing The Problem And How To Avoid It?
As your business grows, cash gets sucked up. The need is to stock up on inventories to satisfy the growing demand. The payments due to you will perhaps take some time to come. Inability to stock up and supply your goods on time will slow down your growth- and that’s hardly what you want!
One way to bridge this gap is by financing using short term loans from the bank. Your suppliers can also be of help here. Sometimes you can get favorable trade terms from your suppliers who give you 30/60 days to pay them and this is mostly interest-free. Read more about choosing a supplier wisely.
Another way is what is called the negative cash conversion cycle, where you’re able to sell the stuff first before you have to pay the supplier you bought it from. This helps in managing cashflow.
At the other extreme, is the problem of having an Excess inventory which basically means that your funds are also tied up in the short term. The way out of this would be to monitor and finetune inventory levels carefully.
When you open shop online, a common cause for cash flow problem is Slow paying invoices. The 30/60 day payment terms that you give to your clients can sometimes create problems for small organizations. The best way to avoid this is to provide clients an incentive to pay faster.
Sometimes cashflow problems occur due to poorly managed Accounts Receivables. You have shipped out the stuff to the customer and waiting to be paid but don’t know when? When a client does not pay up, it can harm your cash flow and profitability The need here is to review the commercial credit of your clients and provide extended terms only to clients who have good credit and payment record. Please do your due diligence and make sure to follow up on your collections regularly.
Your own cost structure
High overhead costs of running the business like rent, utilities etc can also sometimes hurt your cashflow. Continue to audit your expenses and cut back where you can.
Look closely into your marketing budget and spendings. Have you been hiring ahead of growth? Are you sure that you can afford it?
Perhaps you have been targeting volume sales and have been selling your product at low prices. This could be leading to low or even negative gross margins. In such a situation, it makes sense to raise the prices of products that have weak margin and give a boost to your cash flow.
Some Ways To Tide Over Short Term Cash Crunch
It is important to develop a good relationship with your supplier and get the best payment deal. They can agree to give you 30/60 days to pay them and this is mostly interest-free. Adopting the negative cash conversion cycle can also help you to manage cash flow issues better.
An easy way to bridge a gap in your finances for your everyday business is by getting a line of credit. Here the bank loans you a certain sum of money that you can draw on periodically and pay interest on only what you use.
Borrowing from banks is another option but most banks will be looking for collateral and credit history.
Using credit cards can be used as an option. You can get the points and it still kind of gives you 45 days to pay up on average but interest rates can be very high if you don’t pay up in time.
How To Be On Top Of Your Cashflow
Cashflow management is one of the trickiest parts of running a business. It is important that Cashflow metrics like accounts payable, accounts receivable etc are properly understood and monitored. Being in the know about your cash levels is the only way to succeed.
It is always advisable to keep a certain amount of buffer in your bank account as working capital, at least a month of expenses in the bank if not more.
Also, plan in advance for your taxes and try to be creative while growing your business. It is crucial to be able to strike the right balance between funds competing for inventory, taxes and free cash flow.
Try to increase your average order value (AOV). Knowing your niche, understanding your customers and being creative in your marketing is the key. The goal is to improve the customer’s shopping experience on your site and thereby the order value.
Figure out when to pay suppliers based on your situation, not theirs. Try your best to coordinate invoices according to your obligations to optimize payments each month. Make cashflow projections to avoid the mismatch in the time you owe your supplier and yourself getting paid. Once you are aware of the situation, you can negotiate at both ends of your cash flow so that the bottleneck can be avoided.
Diversifying the revenue stream will also help in keeping up the flow of revenue which will in turn can boost cash flow. Provide opportunities to your customers to go for complementary products or even re-sale-ability. Ideas like buying new with old exchange can help increase the revenue share.
By integrating a proper payment model with the e-commerce business model, you can ensure greater customization and hence business growth at your store. Allow the customers to pay through whichever mode they prefer most to ensure the smooth flow of funds.
These days there are many cash flow management software solutions available in the market that can help you to keep organized records of all your receipts and invoices.
Not only do this software help to regulate and update your inventory, it allows you to streamline processes, increase visibility and ultimately create a more dependable cash flow. The ERP (Enterprise Resource Planning) solutions in the market can greatly help to improve the overall health of a small business and is one of the most efficient ways around.
While a profitable business does not a guarantee a positive cash flow, a negative cash flow is not necessarily indicative of a failing business! It’s all a matter of timing! In order to keep your e-commerce business active and functional always, funds are needed. So use the tips above to avoid potential bottlenecks and keep a close watch on your cash flow as your business grows.