11 dos and don’ts for efficient eCommerce cash flow management
January 29, 2024
While it appears that generating profit is enough to keep an eCommerce business afloat, this is far from the truth. There have been countless online stores that generated sales but ended up going out of business due to poor cash flow management anyway. In order to stay ahead, you need to make sure your finances are organized. Managing cash flow well can be just as important as selling products. Keep on reading to find out what to do, and what to avoid, for healthy cash flow management.
Table of contents
- What is eCommerce cash flow?
- Why is eCommerce cash flow important?
- 8 Dos for eCommerce cash flow
- 1. Understand and forecast your cash flow
- 2. Increase your eCommerce cash inflow
- 3. Automate payments
- 4. Efficient order fulfillment
- 5. Offer different payment options to customers
- 6. Improve customer retention
- 7. Maintain cash reserves and seek alternate financing options
- 8. Utilize cutting-edge tools and technologies
- 3 Don’ts for eCommerce cash flow
- 1. Overburdening yourself with expenses
- 2. Neglecting Supplier Relationships
- 3. Spend on futile marketing
- Wrapping up
Investopedia puts it like this: “Cash flow is the net cash and cash equivalents transferred in and out of a company.”
Cash flow defines the movement of money into and out of your business. Positive cash flow means your store is generating more money than the expenses involved in running it. Negative cash flow means your expenses are higher than your income.
Good eCommerce cash flow management means ensuring that your business consistently has reserves of capital available to cover planned expenses, as well as unforeseen costs.
Cash flow is central to the growth, and survival of any business, not just in eCommerce. Lack thereof has been documented as one of the biggest causes of small businesses failing. Good cash flow is so essential because it helps you:
- Cover your operating costs
- Invest in inventory to ensure sufficient supply
- Launch new products to diversify your business
- Pay creditors on time to reduce debt
- Cover unexpected costs
- Stay ahead of the competition
Go over all your transactions in detail to build a thorough understanding of your cash flow situation. Calculate marketplace fees, storage costs, interest payments, taxes, and other expenses. Having good oversight of these will help you predict future cash flow, thus allowing you to make investments and long-term business plans.
An accountant can significantly help with this process, but if you lack the resources to hire one, you can use financial forecasting tools like Netstock to understand your business’s health. One eCommerce brand that uses online tools for cash flow forecasting is Bird Eyewear. It was founded by two techies who didn’t have any financial knowledge. Using forecasting models helped them gain clarity in their business operations. The data they gathered also helped them raise more money from investors.
Launching new products is a great way to open up additional revenue streams and diversify your portfolio. Paying close attention to trends and investing in seasonal products are great ways to boost short-term income. However, they are unlikely to generate profits year-round, so make sure you plan your operations accordingly.
Another way of increasing cash inflow is increasing your Average Order Value (AOV). Average Order Value represents the average amount of money a customer spends when making a purchase.
You can drive up your AOV by offering products that complement each other as packages. Consider offering discounts, limited-time deals, and special offers to increase revenue when sales are low. For example, offer free shipping when customers spend above a certain amount to entice them to purchase more.
Another simple way to increase cash inflow is to have dedicated loyalty programs. The concept is simple: you encourage customers to buy more items and, in turn, offer loyalty benefits. More transactions, even at a discount, will increase your revenue.
A great example of this is Newegg’s EggPoints program. The online electronic hardware retailer rewards users for purchasing certain eligible items. Users accumulate points and redeem them on future purchases, and the cycle continues.
The last thing you want is to pay extra fees for late payments. That’s why it is important to set up automatic payments. It also means you don’t have to worry about invoices and bills.
Automation allows for timely and consistent billing, ensuring that payments are received on schedule. This can significantly improve cash flow management for your eCommerce businesses, helping you meet financial obligations and invest in growth initiatives.
Efficient order fulfillment will improve customer satisfaction and raise the likelihood of them returning. Utilize data analytics in order fulfillment processes to make informed decisions regarding inventory levels, reorder points, and customer demand forecasting. This data-driven approach can prevent overstocking, reducing the risk of obsolete inventory and preserving cash.
Some shoppers prefer alternative payment methods besides classic credit and debit cards. Allowing customers to pay through an app, digital wallet, or use a ‘buy now, pay later’ program is a great way to encourage more purchases. It also helps build trust, as some shoppers might prefer a payment solution they use frequently.
Increasing your ability to retain customers helps cash flow in several ways. Doing so raises the rate of repeat orders and saves on marketing costs. It is hard to get new shoppers to build trust in your brand, previous customers already know your products are reliable. Discounts for repeat orders are a great way to improve customer retention. You can also provide special rates for advance orders.
If you sell products that need to be reordered after a short period, like skin creams, you should encourage customers to join a subscription model. This will increase the cash inflow and Customer Lifetime Value (CLV). CLV is the total revenue earned from an individual customer from their first to their last order from your store.
Similarly, leveraging customer feedback is an excellent way to increase CLV. Carefully read their reviews and suggestions and use them to make product improvements when feasible. In either case, respond to their feedback. Shoppers appreciate brands that value what they have to say. Engaging with them this way can make them feel more connected to your business, which can boost return rates.
Putting money aside is paramount to good eCommerce cash flow. It can act as insurance against demand and revenue fluctuations, which are common in this space. Strong cash reserves can help you weather rainy days caused by reduced sales or delayed shipments.
You should also consider alternate financing options, such as external funding. 8fig gives eCommerce companies the capital they need to cover their expenses and invest in growth opportunities. This also means a better ability to respond to disruptions to your sales or supply chain and prevent stockouts.
There are many tools on the market that can help you oversee your operations and manage your cash flow better. Similarly, a sales forecasting tool can help you with future sales estimates, which makes planning your upcoming expenses easier. There are many helpful tools for efficient shipping (Easyship, ShipBob), payment reminders (Imprezz, Zoho), and eCommerce marketing (Sender, Omnisend).
8fig’s cash flow planner can help you oversee your cash movements as well as make long-term forecasts. This gives sellers a better ability to judge how adding a new regular expense or cutting an old one will affect their bottom line. It uses AI CFO technology, which can help you plan your cash flow and operations more carefully to improve your overall profitability.
9. Focus on profit margins
At the end of the day, it is the profitability of a business that decides its longevity. If your sales are soaring that might feel nice, but how much profit are you actually making, once your shipping, storage, and marketing costs are paid off? A healthy business should be constantly monitoring its profit margins and working on new ways to improve them.
Profit margins can be increased by lowering your Cost of Goods Sold (COGS), raising the average order value, or increasing your focus on return customers. The latter, for example, can improve profitability since previous customers who already know and trust your brand are easier to convince to make a new purchase. That means a better bang for your buck when targeting them with your marketing efforts.
However, the central pillar of maintaining good profit margins is the ability to cut costs where possible. This can come in the form of reducing waste with more effective shipping logistics, negotiating better prices with suppliers, or discontinuing products that don’t sell as well as others. Always keep an eye on your expenses to understand where money could be spent or saved more effectively.
Keep a close eye on where your company spends its money. This becomes more important in the current inflationary environment. A study by McKinsey found that companies that actively manage and reduce costs during economic downturns often emerge stronger.
Implementing cost controls can positively impact cash flow. This means paying meticulous attention to your operational costs. Similarly, it is highly recommended to decrease unnecessary expenses. Operating costs like storage fees and marketing campaigns can significantly drain cash flow when managed poorly. Control such overhead costs wherever you can. Can you reduce packaging expenses? How about negotiating with your supplier to lower costs?
In managing eCommerce cash flow, it’s crucial not to overlook the importance of maintaining strong relationships with your suppliers. Neglecting them can lead to less favorable payment terms, which can adversely affect your cash flow. Regular communication and timely payments to suppliers can often lead to better negotiation terms, such as extended payment periods or bulk purchase discounts. Small gestures, like sending them a fruit basket for a national holiday, can go a long way in terms of building a relationship.
Leveraging good ties to your supplier can yield improved terms that enhance your cash flow. Your suppliers are key partners in your business’s success, and nurturing these relationships can lead to mutual benefits and a more stable supply chain.
Marketing is an essential part of eCommerce. However, it is easy to get bogged down with different marketing campaigns that don’t necessarily justify their cost.
If you’re using paid advertising, making every dollar spent accountable is important. Renowned small business marketing guru Dan Kennedy emphasizes the importance of direct response marketing for small businesses. It involves creating marketing messages that prompt an immediate response from the audience. This could be by making a purchase, filling out a form, or joining an email list.
Analyze your marketing metrics on different social media platforms and websites. Eliminate campaigns on platforms that aren’t actively leading to customer conversions. You want to make sure shoppers are entering your conversion funnel one way or another.
Good cash flow management requires strong oversight of your business’s financial transactions. Understanding how each of them affects your bottom line is crucial. The better you understand whether an investment in better packaging, for example, generates a profit in the long term, the better you can plan your cash flow.
Mastering this process will leave you more equipped to invest in growth opportunities, as well as handle disruptions to your cash flow. Avoiding risky expenses while doubling down on products that sell well already are surefire ways to increase profitability. In the end, remember that it’s a learning process, so focus on long-term goals.
One of the best ways to improve your cash flow management skills is to employ the right tools. 8fig’s cash flow planner is designed for this purpose. This service will give you clearer oversight of your transactions, as well as an ability to make financial forecasts and plan long-term. It is part of 8fig’s AI CFO suite of tools to help eCommerce sellers thrive. Sign up today to try them out for free.
The 8fig Team is an experienced group of eCommerce writers and experts committed to helping online sellers grow their businesses through informative content and guides. Whether you're looking to increase sales or build your brand, we have the knowledge and expertise to help you succeed.