The complete guide to eCommerce cash flow forecasting

Many businesses close down due to poor cash flow management. The numbers speak for themselves. Per SCORE, a U.S. Small Business Administration initiative, “82% of small businesses fail due to cash flow problems.”

So, it’s not far-fetched to assume that minimizing cash flow problems is one of the best ways to give your business a better chance of surviving and thriving, especially in the volatile world of eCommerce.

With regular and adequate forecasts, you can avoid falling into the trap of misjudging available cash and the efficiency of your eCommerce business operations. This means a better ability to avoid underestimating your capital and going into the negative, as well as sitting on too much cash when it could be invested in growth opportunities.

Cash flow projections dive under the hood and provide a more vital marker of your business’s health than a profit and loss statement. This article will outline how to carry out eCommerce cash flow projections and what aspects of this process to pay special attention to.

Table of contents:

• Overview of cash flow forecasting
• Key components of eCommerce cash flow forecasting
• How to do eCommerce Cash Flow Forecasting
• Benefits of eCommerce cash flow forecasting
• Limitations of eCommerce cash flow forecasting
• ECommerce cash flow forecasting mistakes to avoid
• How to improve cash flow in your eCommerce business
• Takeaway

Overview of eCommerce cash flow forecasting

Cash flow forecasts show how cash moves through your business. More importantly, it helps you project the impact of certain choices on the available cash in your business. For example, you can see what effect investing in a new product in a particular month will have on your cash balance and how that cascades down to other months. This is what makes cash flow projections a valuable decision-making tool.

Key components of eCommerce cash flow forecasting

Every cash flow forecast requires existing data and information based on an accurate understanding of your business operations, as well as market trends.

The former comes from your current cash flow statement, and the latter requires projections based on how consumers and your competitors are behaving.

For instance, the projected extra income from additional investments into marketing and advertising should outweigh the increased cost. Ideally, you should reference past instances for what kind of growth you can expect.

Many companies overspend on ad campaigns. Make sure that you avoid this by keeping an eye on your profit margins to avoid excessive marketing efforts if they don’t raise sales adequately. ECommerce startup cash flow may be more challenging to forecast because there’s limited to no previous data to draw from.

Overall, there are five main components of any cash flow forecast. These are:

Cash at the beginning of the period

This is the total cash at the beginning of the forecast period. Add up all the money in your accounts (PayPal, Venmo, and bank accounts) that hold business funds.

Cash in

Refers to all cash entering your business accounts during the period. These include income from sales, money received from external funding, and other potential sources.

Cash out (expenses)

Covers all cash leaving the business. Add it to the forecast as long as you spend it on the company. Examples include insurance, owner’s salary, credit card payments, inventory costs, and loan repayments.

Net cash flow

This is the difference between total cash in and total cash out within a period.

Cash at the end of the period

Refers to the total cash the business has at the end of each period after paying for all expenses. If you’re running a monthly forecast, this will be the total available cash at the end of each month.

How to do eCommerce cash flow forecasting

If you’re using accounting software like Quickbooks, you can efficiently perform 30 and 90-day projections at any time.

There are also specialized cash flow forecasting services like Cash Flow Frog and PlanGuru that you can use to achieve the same results, albeit on a bigger scale than what Quickbooks offers.

However, for this guide, we’ll show how you can do Amazon cash flow projections with any spreadsheet tool like Excel and Google Sheets.

You’ll need a basic understanding of spreadsheets to follow this guide. You can watch this tutorial to understand the basics if you have Excel or this tutorial for Google Sheets.

Step 1: Add the building blocks to the spreadsheet

Label the cells in your spreadsheet. In this example, our forecast period is four months.

If you always want a four-month overview of your projected cash flow, you must add July at the end of March and August at the end of April.

Net cash flow is how much entered (total cash in) minus how much left (total cash out) the business, hence the “B-C.” Cash at the end is simply the addition of the cash you started the month with and the net cash flow in that month.

Step 2: Fill in your data

Enter your income and expense data in the rows following the cash-in and cash-out categories, as shown below. The list is by no means exhaustive. Feel free to add or remove rows as needed.

Now, enter the data for each row. Here’s how ours looks after entering the details for March.

Cash in

The total income for March is $7,000, obtained by adding cells B5 to B8.

Cash-out

The total expenses for March is $6,700, obtained by adding cells B12 to B22.

Step 3: Enter data for the rest of the projected period

Things get trickier in this section as you have to input data with many assumptions. However, the better you are at drafting medium to long-term plans for your business, the better you’ll be able to add projected data.

Here’s what we mean:

The business owner is just trying to create their own eCommerce website to minimize their reliance on other platforms.

This is reflected in the anticipated expenses of web hosting and website development fees. In the future, the business will also need to pay maintenance fees for the website. The website development fee is a one-time fee and would likely not be necessary again.

For the eCommerce website to gain momentum, the business owner must also increase marketing and advertising. They plan on primarily focusing on content marketing and Facebook advertising for starters.

Additionally, knowing their business, they know they sell more during the summer and usually amplify their marketing efforts in the period (April onwards) leading to the summer.

The income is also higher because they can afford to mark up the price due to demand.

More sales may potentially incur additional expenses, like higher refunds and returns.

These are some of the nuances you’ll have to figure out and include in your forecast to make it as accurate as possible.

Cash in

Cash-out

Step 4: Calculate the future cash flow for each month

For March, this will be the total cash inflow minus the total cash outflow for that month, which is cell B9 minus cell B23 on our spreadsheet.

Repeat the same for the other months, and you’ll have this:

You may also include conditional formatting to color code the months when the business experiences negative cash flow, as shown below:

Step 5: Calculate the cash at the end of the period

The cash at the end of March is the cash available at the beginning of the month plus the net cash flow during the same period. On our spreadsheet, that’s cell B2 plus B25. The net cash at the end of March is $800.

The cash at the end of March becomes the cash at the beginning of April. So, the value in cell C2 becomes the value in B27. The B2 value, the beginning cash balance in March was carried over from February.

We can also calculate the cash at the end of April, which is C2 plus C25, which is -$480. Repeat the same for the other months.

Cash at the end of each month:

Cash at the beginning of each month:

Step 6: Use as a decision-making tool

From the spreadsheet, the business was struggling for cash, considering the cash balance at the beginning of March was $500.

By current cash projections, the eCommerce business will not have enough cash to run its April operations and would have no cash in hand at all at the beginning of May.

So, the business needs cash. For April, they most likely need external capital to shore up the cash balance. May ends with a positive cash flow and cash balance, which means operations in that month depend on when cash comes in from sales and other sources.

They can check Amazon and Shopify for when their next payout date is. If the cash would come in before any expenses are due, then fantastic; if not, the business owner must explore other funding sources for that month.

It’s also worth considering the timing of some expenses. Perhaps it is better to push the website development until there’s enough cash. Decisions, decisions!

If the owner must persist with the website development, they must inject significant extra cash in March to ensure there’s enough for April operations. Ideally, you always want to have money to replace the current inventory at least twice.

Also, by moving the website development to May, the cash at the beginning of each month looks healthier, and the business may not need an external funding source for operations.

The beginning cash balance in May moved from -$480 to $2,020 because the business owner moved one essential expense to another month.

Link to Sample cash flow spreadsheet.

Benefits of eCommerce cash flow forecasting

Below are some of the reasons cash flow management is essential for eCommerce businesses:

Helps you stay proactive

By seeing beforehand which month(s) the business may be cash-strapped, you can take proactive steps to bridge the gap.

Some steps include getting funding, expediting some of your receivables like applying for express checkout on Amazon, asking your partners or suppliers for more time, or cutting some expenses.

Helps you plan better

As shown in our above example, you can play around with some expenses to see where they provide the most negligible impact on your balance sheet.

This is especially important when planning major expenses like capital-intensive growth initiatives and projects.

Facilitates better cash management

Having greater visibility into the money flowing in the business can help you manage the same better.

For example, when you have excess cash, you may remove some money from the business and put it in an emergency fund to fuel future growth initiatives.

Limitations of eCommerce cash flow forecasting

Cash flow can show the business’s health like a high temperature indicates a human is unwell. However, it doesn’t establish the underlying reasons for perpetual negative cash flows.

As such, it’ll still require additional inquiry to get the proper diagnosis for your business, which can be any number of reasons, including:

• Poor product portfolio
• Low average order value
• Unfavorable payment terms with partners
• Inadequate planning
• Inefficient marketing and advertising

Additional limitations of cash flow projections include:

• Amazon or Shopify cash flow projections do not factor in unforeseen circumstances despite your best effort to make an accurate prediction.
• Relies on many assumptions that may lead to inaccurate estimates. Past performance is not a guarantee of future performance. It’s not an exact science but a helpful tool in making strategic decisions.
• The longer the prediction, the harder it will be to make an accurate forecast.

ECommerce cash flow forecasting mistakes to avoid

Here are a few mistakes to avoid when making cash flow forecasts:

• Not accounting for extra pay periods: There are months you have to make some bi-weekly payments three times. This can significantly skew your forecast, depending on the value of the bill.
• Forecasting too far ahead: The sweet spot to aim for is six months, but you can stretch that to a year. The longer the forecast is, the less accurate it is likely to be.
• Not considering seasonal trends: Your estimates should mirror how your business ebbs and flows. Don’t predict similar revenues for months where you typically average lower sales.
• Poor bookkeeping: Inaccurate or incomplete data will lead to inaccurate forecasts. Poor data will lead to poor analysis.

How to improve cash flow in your eCommerce business

Some helpful tips to help you improve actual cash flow in your eCommerce business include:

Optimize your inventory

Optimizing your inventory is one of the best ways to improve cash flow and your net income.

Inventory optimization starts with picking products with high and consistent demand and then using tools and frameworks to ensure your inventory levels are always adjusted to expected demand, even during seasonal fluctuations.

This is the ultimate recipe for avoiding stockouts and high storage fees.

Have short, medium, and long-term goals

Having strategic goals helps with cash flow planning. When you know that you must add a new product to your portfolio in May to take advantage of summer sales traction, then you can proactively move other expenditures around to accommodate this plan in a way that optimizes cash usage.

Cut out bloat

Reduce expenses where you can. Are there tools or services you pay for that provide features available elsewhere for free, open-source alternatives? Eliminate redundant expenses to improve your cash flow situation.

Strike a better bargain with suppliers

Whether in the nominal value of the goods or the payment terms, negotiating better deals can improve your cash flow. A two-week adjustment on payment terms may be the difference between needing extra funding or not.

Create an emergency fund

Save excess cash every month in a separate account to act as a buffer for unforeseen circumstances and new growth projects.

For more tips and strategies on improving cash flow, read: The Comprehensive Guide to Cash Flow Management for eCommerce Sellers.

Takeaway: Utilize seamless and easy steps to building eCommerce cash flow forecasts with spreadsheets

Using simple spreadsheet tools like Excel or Google Sheets, you can project cash flow, identify potential shortfalls, and take proactive measures.

Such insights are valuable to the survival and growth of your eCommerce businesses.

Effective and accurate forecasting enables better planning, proactive decision-making, and improved cash management, which is essential for long-term success in the competitive eCommerce environment.

Gaining better oversight of your long-term cash flow situation will give you the confidence to invest when possible or help you make the decision to cut costs when necessary.

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