A guide to eCommerce cash flow management

By 8fig team | September 19, 2023
A guide to eCommerce cash flow management

Cash flow is the lifeblood of any eCommerce business. Closely monitoring it and keeping it at a healthy level is vital for continued growth and long-term success.

You can avoid a lot of pain when growing your eCommerce store if you plan ahead to manage your cash flow. By closely tracking your business’ inflows and outflows, maintaining adequate reserves, building supplier relationships, and turning to external financing when necessary, you can optimize cash flow for sustainability and growth. This will help you avoid stockouts and confidently navigate the turbulence of eCommerce. Then, you’ll be able to reach your eCommerce growth goals and secure your financial future.

This guide covers the basics of eCommerce cash flow, including:

Continue reading to learn how to master cash flow for your eCommerce business.

What Is Cash Flow?

Cash flow refers to the net amount of money being transferred into and out of your eCommerce business over a given period. It’s essentially your business’s income and expenses.

There are two types of cash flow:

  • Positive cash flow occurs when the total amount of money coming into your business from revenue, sales, and customer payments exceeds the total amount flowing outward for expenses. Your inflows are greater than your outflows.
  • Negative cash flow happens when more money is being spent on operating expenses like inventory, marketing, shipping, and payroll than is being brought in through sales and revenue. Your outflows exceed your inflows.

The goal of any eCommerce company should be to maintain consistent positive cash flow. This provides financial sustainability and the capital needed for growth. Negative cash flow over an extended period can seriously jeopardize the health of your business.

The Cash Flow Crunch

All too many eCommerce sellers find themselves in a cash flow crunch due to the nature of eCommerce. In order to stock up on inventory and keep your business running smoothly, you need to pay a number of costs upfront. These payments are usually due long before revenue from sales starts rolling in.

This creates a lack of working capital, or cash on hand to be used for business expenses. Without working capital, you won’t have the money you need for inventory procurement and other necessary costs. Then, you won’t be able to stock up on enough inventory, which can lead to stockouts and other challenges.

Thin Margins and Volatility Make Cash Flow Management Essential

The eCommerce industry tends to operate on very thin profit margins. An online seller may only net a few percentage points on each sale after accounting for all costs. At the same time, substantial upfront inventory costs must be paid before a single sale is made.

This combination makes carefully managing your cash flow essential if you want your eCommerce business to survive and thrive.

The eCommerce industry is also prone to unforeseen disruptions. Demand can fluctuate without warning, and seasonal sales and events create challenges for even the most experienced sellers. Supply chain shocks can delay inventory orders. What’s more, new competitors can enter the space rapidly, and changes to advertising algorithms can throw a wrench in even the best of plans.

For example, if you rely too heavily on one large quarterly inventory order, and it gets delayed for weeks due to a supply chain disruption, you may not have the cash flow reserves to quickly place more orders with alternate suppliers.

Your products could go out of stock for an extended period, harming your ranking, damaging customer loyalty, and allowing competitors to grab market share.

When just one unpredictable event occurs, poor cash flow management can cripple your eCommerce business. That’s why staying on top of your cash flow should be a priority for any online business owner.

How to Optimize for Consistent Positive Cash Flow

Healthy cash flow is key for eCommerce success. It ensures you have the cash on hand needed to pay your regular business costs, procure inventory, grow your business, and handle surprises.

Here are some key tips to help you optimize your cash flow and ensure you have capital on hand when you need it. Following these best practices will help you keep growing even when the industry is unstable. With good cash flow management, your business can stay flexible and take advantage of new opportunities!

Here’s what you need to do to keep your business’s cash flow healthy:

  • Plan ahead: Many eCommerce sellers manage their businesses day-to-day. While this may work in the very beginning, it’s a recipe for disaster once your business starts to grow. In order to stay on top of your cash flow, it’s important to plan ahead. Take a look at the flow of capital across your supply chain for the next year or more. Identify problem areas and make changes accordingly.
  • Track your cash flow: While keeping track of your cash flow can be tedious, it’s vital for your business’s success. You can utilize specialized  software to gain a comprehensive view of your eCommerce finances, too. Accurately tracking your cash flow helps prevent oversights, ensures healthy cash flow, and allows you to forecast your future needs confidently.
  • Maintain safety stock and cash reserves: Be ready for the unexpected by keeping extra inventory and holding 3–6 months’ worth of operating expenses as cash reserves. This ensures you can navigate disruptions.
  • Cultivate relationships with suppliers: Have backup supplier relationships in place with local vendors who can provide faster fulfillment timelines if your main suppliers fall through. Even if their costs are 10–20% higher, it’s worth paying more to avoid going out of stock for long periods.
  • Consider external eCommerce funding: Sometimes, you simply need some extra capital. There are plenty of eCommerce funding solutions out there designed just for online sellers. These options range from eCommerce specific loans to merchant cash advances, and can provide sellers with the extra boost they need to thrive. Just make sure the eCommerce financing solution you choose is a good fit for your business before signing on the dotted line.

Carefully implementing these tips to optimize your cash flow will provide the financial visibility, adaptability, and sustainability your eCommerce business needs to ride industry turbulence and achieve long-term success.

The Bottom Line

Don’t leave your financial future up to chance – take control through smart cash flow management.

Carefully managing cash flow is imperative for eCommerce success. Therefore, make sure to consistently monitor all money coming in and out of your business. Plan ahead and identify weak points in your supply chain so you won’t be surprised by a lack of working capital.

Maintain adequate reserves and backup supply options to handle unpredictability. And leverage suitable eCommerce financing if required to help you hit those long-term revenue goals.

Keeping a close eye on your cash flow health allows you to stay in stock and confidently ride the ups and downs of running an eCommerce business.

If you, like many other successful eCommerce sellers, need a bit of extra capital to stock up on inventory, check out 8fig’s cash flow based funding. 8fig provides eCommerce business owners with fast, equity-free, and flexible funding to cover supply chain and marketing costs.

You’ll get continuous cash injections for steady, reliable cash flow ensuring you have the capital you need when you need it. No more stockouts or cash flow crunches.

Apply for 8fig funding today and discover how we can help you reach your full potential.

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