What does that mean?
Cash flow is the term for money going in and out of your business. From expenses to invoices, stock to payroll, your cash flow determines your financial position, providing an honest and objective view of your business’ health.
Cash flow management is essential for success in your ecommerce business. Here are the most common mistakes that are made, and how you can avoid them.
Optimism trumping realism
What do we mean by this? Well, sure, you want to be optimistic in your planning, but it needs to stay in the scope of what’s realistic with your current financial position. When considering sales projections, be ambitious but make sure you’ve got the financial stability behind you in the event that you don’t progress as much as you hoped. Preparing for growth is great, but planning for trouble is wise.
Lack of planning
Fail to plan? Plan to fail. A favourite warning given by teachers across the world, this phrase is as true for revision as it is for business. One of the key elements of cash flow management is forecasting. Mapping out where you’re going by looking at where you’ve been. Here are the steps for effective forecasting:
1. Choose how long to plan for. This should be as far ahead as you can accurately predict.
2. List your income. For each week or month, keep a note of your income. Start with sales, and then remember to add any tax refunds, grants, investment, and royalties. Add this up and you’ll get your net income.
3. List your outgoings. So, we know what’s going in. But what’s coming out? For each month, be sure to record all your spending, such as rent, materials, marketing, tax bills and salaries. Add this up to get your net outgoings.
4. Do the maths. These numbers don’t lie. Whip out your calculator (or get busy on those excel shortcuts), and take away your outgoings from your income.
Keep a note each month, whether it’s positive or negative, and you’ll get a picture of your cash flow forecast over time. This is essential in order to recognise when you’re heading towards a growth period, and provide warning for any financial trouble.
This is a big one for ecommerce businesses. Do you tie up your capital in inventory? What if you don’t manage to get the sales? Have you factored for storage costs? What’s your plan to shift stock if sales fail? Has this endless questioning caused mild-extreme sweating? But seriously, inventory turnover is tricky when it comes to Ecommerce, so you need to make sure you have answers to all the above questions we just threw at you - otherwise it can lead to serious cash flow issues!
Keep those books in order!
Bookkeeping is your friend, or atleast, your ally. Whether you’re a sole trader or limited company, you need to be on it with your books, tracking your expenses, invoices and more. If you don’t, you’ll find yourself in trouble when it comes to tax time, and you may face fines that your current financial situation can’t meet. Not good!