What it means to be a cash flow positive eCommerce business

In the dynamic world of eCommerce, understanding and managing cash flow is paramount to the success and sustainability of your business. Mismanagement of cash flow is the biggest reason small businesses fail.

Being cash flow positive is not just a financial goal; it is a strategic imperative that ensures your business can seize opportunities, avoid running out of cash, and thrive in the long run.

In this guide, we will explore what it means to be a cash flow positive eCommerce business, how to calculate it, and strategies to ensure a healthy eCommerce cash flow.

Understanding positive cash flow for eCommerce business

In most businesses, there is a constant flow of cash. Money comes in from customers, some is forwarded to vendors/suppliers, some goes to other operational expenses, and some is reinvested into the business.

A business is cash flow positive when it routinely spends within its financial limits and avoids going into the negative while having constant access to capital. This doesn’t only mean spending less than one earns, but timing incoming and outgoing payments in a way that prevents negative cash flow.
Positive cash flow ensures good financial health. It signifies operational efficiency, ensuring the company can cover costs, invest in growth, and weather disruptions. Good cash flow allows for timely payments, supports strategic expansion, and bolsters the business’s resilience.

Cash flow and net income

You need to understand net income to clarify whether your business is making or losing money. This means the amount remaining after subtracting the cost of doing business. This includes everything from debt to marketing and shipping costs.

Cash flow, on the other hand, is the cash and cash equivalents transacted in and out of the business.

In a positive eCommerce cash flow scenario, a larger amount of capital comes in that goes out. But still, you may have a net loss, depending on how complex your business is structured. For example, when you take on a loan, you will have a larger sum of money on your hands. That means that, at least for a while, your business will have positive cash flow. However, the cost of capital will add up over time, so you need to manage your finances to maintain positive cash flow with each repayment.

Types of cash flow

Cash comes in from different sources and is used in various ways. Depending on the origin and use, there are different types of cash flows.

Operating cash flow

Operating Cash Flow, or OCF, represents the cash generated or used by a company’s core business operations. For an online retailer, operating cash flow includes cash received from customer sales minus cash paid for inventory, operating expenses, and other day-to-day operational costs.
OCF is the most commonly used cash flow type and is relevant to all online businesses. It reflects the ability of the business to generate cash from its day-to-day activities.

Investing cash flow

Investing Cash Flow (ICF) accounts for cash transactions related to investments in assets and the purchase or sale of long-term assets. If an eCommerce business invests in developing a new website or acquires additional warehouse space, the cash flow associated with these activities falls under Investing Cash Flow.

Financing cash flow

The most complex of all cash flows, Financing Cash Flow or FCF, represents cash transactions related to the company’s financing activities, such as borrowing and repaying debt. If an eCommerce business raises capital or takes out a loan to finance a new distribution center, the cash flow associated with these financing activities falls under Financing Cash Flow.

Creating a cash flow statement

To know whether your online business is cash flow positive or negative, you need to prepare a cash flow statement. This process doesn’t need to be overly complicated.
An eCommerce cash flow statement is divided into three main sections: Operating Activities, Financing Activities, and Investing Activities. This is in line with what was discussed above.

The Operating Activities capture all cash flows directly related to your core business operations. If your online store generates $100,000 in sales revenue, but you paid $60,000 for inventory and $20,000 for operating expenses, your net cash from operating activities would be $20,000.

The Investment Activities encompass cash flows related to the acquisition or sale of assets, investments in technology or infrastructure, and any other activities that impact your eCommerce business’s long-term value. If you paid $5,000 for a website, this would go under Investment Activities.

Under Financing Activities, you’ll detail cash flows related to your business’s financing. If you’ve taken a debt, list it under Financing Activities.

Maintaining good cash flow

A successful eCommerce business doesn’t just make sure that it has cash on hand at all times. This would mean it might be losing out on investment opportunities, as it has money sitting around without generating more profits. Good cash flow management means reinvesting cash reserves and organizing income and expenses in a way that the business doesn’t go into the red.

In very simple terms, if a company has $20,000 in its account that isn’t needed elsewhere, it might invest a portion of this money in growth avenues. For example, a new marketing campaign could generate more profits and strengthen the brand. Or some of this money could be spent on redoing the store’s website, to make it convert customers better.

The trick here is to make sure that such investments are planned in coordination with regular income and expenses. Investing all $20,000 would be a bad decision if a warehousing payment of $10,000 is coming up. But if the business owner knows that they will earn at least $3,000 in sales over the next week, they can spend $13,000, knowing that enough will be left to cover the warehousing expense.

Successful cash flow management involves long-term planning in coordination with a business’s operating expenses to prevent a cash shortage. That opens the door to investments that foster growth, while always ensuring the company is financially healthy.

3 tips to improve cash flow management

On the face of the global stock market crash of 1987, the former CEO of Volvo, Petr G. Gyllenhammar, allegedly said, “Revenue is vanity, profit is sanity, and cash is king.”

Here are 3 ways to improve your cash flow management:

Increase your store’s conversions

Increasing your revenue is key to maintaining a good financial performance. One way of doing this is by addressing cart abandonment. A recently concluded survey found that 8% of respondents abandoned their cart because they couldn’t find a payment option of their choice. Many straightforward additions to your store can have a noticeable impact on conversion rates and sales.

Addressing cart abandonment closely can positively affect how much income you bring in, which gives more leeway for better cash flow planning.

Good financial oversight

Few things will affect your ability to stay cash flow positive than how familiar you are with your company’s financial operations. This means developing a close understanding of your profit margins, as well as metrics like your shipping lead time and your overall profitability.

Investing extra cash on hand is only a good idea if you are sure that it won’t disrupt payments to suppliers, warehouses, and other essential expenses. Familiarity with the in- and outflow of money to and from your business will be decisive in staying cash flow positive.

Grow your business responsibly

Some businesses grow too much too soon. And this causes a lot of problems, including with cash flow. Growing requires investment. When spent irresponsibly on non-value-creating projects, the ROI (Return on Interest) suffers, which reduces cash flow.

Thus, invest in projects tentatively and track their ROI before spending large sums. Stay lean even during the growth phase and resist the urge to grow at all costs.

Conclusion

Being cash flow positive is not just about having money in the bank, it’s about having more money coming in than going out consistently.

The goal is to make sure your income is not only covering all your expenses but also leaving you with extra money to invest in growth avenues. Being cash flow positive sustainably is crucial for long-term business development. It will allow you to cover ongoing costs, make timely payments, and improve your store.

Positive cash flow acts as a safety net, providing your business with the financial resilience it needs to navigate the competitive world of eCommerce. It’s not a guarantee of continuous profitability, but it is a good indicator of financial health.