I’m convinced that more businesses go bust due to cash flow issues than all other issues combined. Poor cash flow management means you’re always struggling to pay employees, suppliers, yourself, and weather months where sales are slow.
If you’re stuck in a cycle of not having enough cash to pay your outstanding invoices and staff, and sleep comfortably, you need to improve your cash flow management processes quickly.
In this guide, I’ll show you how to master your cash flow, so you can build a resilient brand that lasts and allows you to sleep better.
Understanding Your Cash Flow Cycle
Having to hold stock means you’re running a capital-intensive business. On paper, the situation might look great, but the lack of cash in your bank tells a different story. Optimizing your cash flow is yet another task on the already long list.
It can take a few weeks for you to turn a profitable sale into cash in the bank. So, if you’re not looking after your cash flow, you might end up with a shortfall. Thankfully, there are three figures we can monitor on a weekly or monthly basis to ensure your cash flow is healthy.
- Operating Cash Flow (OCF): The money your business makes from its normal operations.
- Free Cash Flow (FCF): The cash left over after paying for all operating expenses and capital expenditures.
- Cash Conversion Cycle (CCC): The time it takes for initial cash outlay (buying stock) to return as revenue.
How To Quickly Optimize Your Cash Inflows
The first place to look at optimizing your cash flow is how quickly you can get money into your business. You probably have stock that’s been sitting around for months, long overdue invoices that need chasing, or stalled marketing campaigns.
There are practical steps you can take today to improve your cash flow management, allowing you to have the funds to grow faster.
Faster inventory turnover
Having too much stock or too many of the wrong products can kill your business. You need that cash to keep the business running, and yet it’s tied up in dead stock.
Unfortunately, many business owners I talk with have no idea of the average number of days stock sits on their shelves. If you don’t know this figure, you can’t forecast demand or know that a particular product line isn’t moving and therefore requires attention.
Once you know the average days in stock for most items, you can then plan for the different situations you’ll encounter. For items that fly off the shelf, you can buy in greater quantities and raise the price slightly. For slow-selling items, you can bundle some together and move them that way, or do you need to discount them?
Staying on top of accounts receivable
As a small business, having people owe you money and being able to collect that cash is the difference between eating well and surviving on noodles! Let’s break it down into a few groups.
Payment providers like PayPal, Stripe, and Shopify, and marketplaces such as Amazon and Etsy are likely to be your biggest headache when it comes to accounts receivable. You can’t ask them to speed up paying you or cut off service if they decide to pay up 14 days late. They hold the cards and know it!
If you’re doing most of your sales through Amazon, you might be able to find a factoring service that will lend against accounts receivable, giving you quicker access to cash. They’ll charge you a percentage of the outstanding amount in exchange for paying you in cash today.
With wholesale accounts, push for 30-day payment terms, even if the standard they’re used to is 60 days. By halving the days they have to pay, you’ll see cash in your accounts faster!
Strategic sales and pricing
You can use targeted discounts and bundles to create an influx of cash for a specific reason, like paying a supplier or funding a new marketing campaign. It’s not something you want to do every week or month, but used strategically, these options will boost your cash reserves when they’re low.
Control Your Cash Outflows
Once you have better cash flow management for inflowing money, you can turn your attention to the cash that flows out. Controlling your cash outflows is just as important.
Supplier payments
The longer the payment terms you can secure from your suppliers, the better. You might be able to push them for 60 or 90 days’ credit terms, meaning you have longer to pay and stronger cash flow. It’s worth asking new suppliers for better terms than just accepting what they first offer you.
Operational expenses
You probably have a hundred different subscriptions. Many of which aren’t needed anymore. If you haven’t audited every single line on your bank statement in years or ever, now is the time to do so. You’ll likely find a lot of outgoing payments that are no longer required and can be cancelled.
Next, look at your bills. You probably can negotiate better rates for water, electricity, and other basic business costs.
Package and postage are two areas where there’s always an opportunity to review spend and the costs involved. As your business scales, you should be able to buy packaging in bulk and access reduced shipping rates. Again, you won’t know until you shop around.
Marketing spend
The biggest waste of resources is not understanding how marketing actually works. If you’re following your competitor’s marketing plan, you’ll be wasting 30% to 50% of your spend, easily. This is why you need a marketing strategy that is built for your business and not blindly following what’s cool or your competitors.
If you don’t have a marketing strategy, I can help you create one that will enable you to quickly grow your revenue and profit.
Tools and Technology to Simplify Cash Flow Management
You now have a better idea of how cash flow management can work in your business. Hopefully, you have applied some of the tips in this article and your spreadsheets have started to look better.
Once you get your spreadsheets into a better shape, you can graduate to accounting and business intelligence software that will enable you to continue to effectively manage your cash flow.
Accounting software
Upgrading from a spreadsheet to an accounting software like QuickBooks, Xero, or FreshBooks will improve your view into the business. You’ll want to integrate your accounting software with your ecommerce platform and bank accounts to ensure you’re using real-time data to make decisions.
Business intelligence (BI)
There are many business intelligence (BI) tools designed specifically for ecommerce brands, including Metorik and StoreHero. You can use BI tools to track your KPIs, key marketing metrics (including CAC, ROAS, and MER), sales, and returns. Having all of these data points in a single place will enable you to make better decisions and ensure you have strong cash flow.
Warehouse Management Systems (WMS)
Another essential piece of software is your Warehouse Management Systems (WMS) or Inventory Management Systems (IMS), as it’ll show you what’s in the warehouse, where the items are, and what products are running low. You should be able to integrate your IMS with your BI tools to drive even better cash flow management!
Getting Started With Better Cash Flow Management
Mastering cash flow is a continuous process. It’s not a one-time fix. You’ll always be looking for ways to improve your cash flow management controls and system.
Strong cash flow is the foundation of a resilient ecommerce business. If you’re on top of your cash flow management, you’ll feel more confident to invest in new products, hire great people, and take risks that others can’t.
Need a partner who can design your rocket-fuel ecommerce growth strategies and supervise their execution?
