Updated: Sep 5
Whether you are just starting out with your online business or have been established for years, efficient cash flow management is something you can never compromise with at any stage.
Cash flow management, in simple terms, refers to the process of monitoring, analyzing, and optimizing the inflow and outflow of cash within your eCommerce business.
While maintaining a healthy cash flow may seem like a walk-at-the-park kind of task, it’s essential to keep in mind that even walking in the park consistently for years is easier said than done.
Many businesses struggle with balancing their financials and ensuring a steady cash flow. That's why we're here to share some valuable eCommerce cash flow management tips to help you stay on top of your finances and grow your business.
In this blog post, we'll dive into practical cash flow management tips that will empower you to manage your eCommerce cash flow better.
Let’s dive right in!
Why is cash flow management important for eCommerce businesses?
Almost 70% of small business owners face difficulty sleeping because they are worried about the cash flow of their business. So you’re not alone.
And a majority of business owners worried about cash flow management also suggest that they understand how crucial it is for the success of their brand.
Here are some of the reasons why they are right to think about it:
The profit-loss statement paints a partial picture of how your business spends money. On the other hand, understanding cash flow allows you to comprehend better where your money is going and which areas generate a healthy return on investment (ROI).
82% of small businesses fail due to poor cash flow management, making it the second biggest reason businesses generally fail. When you don’t manage your cash flow effectively, it can lead to insolvency, forcing you to shut down your operations.
Having a healthy cash flow enables you to pay your suppliers and vendors on time, fostering strong relationships with them and resulting in a more reliable and efficient supply chain.
Efficient cash flow management allows you to navigate seasonal fluctuations better, ensuring you have enough cash reserves to cover expenses and manage inventory during lean periods.
A healthy cash flow gives you the financial flexibility to invest in time-sensitive opportunities. It allows you to seize opportunities, allowing you to stay a step ahead of your competitors.
Long story short, you can’t compromise with eCommerce cash flow management.
7 cash flow management tips for eCommerce businesses
There are plenty of ways to improve your eCommerce cash flow. But they all round up to one basic fact — for good eCommerce cash flow management, you must bring in more cash and send out less.
So here are some cash flow management tips for setting your eCommerce brand for success:
1. Increase the inflow and decrease the outflow of cash
A strong cash flow enables you to cover operational expenses, invest in growth opportunities, and build a financial safety net.
For instance, let's say your business has a monthly cash inflow of $10,000 and a cash outflow of $8,000. This positive cash flow of $2,000 allows you to invest in marketing campaigns, expand your product offerings, or hire additional staff to scale your operations.
So, your first step for good cash flow management has to be controlling the inflow and outflow of cash. Here's how you can accomplish this:
To boost your cash inflow
Diversify your product portfolio: For example, if your business specializes in winter wear, consider adding summer-appropriate products to maintain revenue during warmer months.
Offer packaged products: Combine complementary products to increase average order values and bring in more cash.
Expand payment options: In addition to common methods like digital wallets and credit cards, consider adding Buy Now Pay Later (BNPL) or Cash on Delivery (COD) options to cater to a wider audience.
Shorten time between business expenses and getting paid: Reducing the time between incurring a business expense and receiving payment from customers can significantly improve your cash flow. You can do this by offering early payment discounts, streamlining your invoicing process, and utilizing efficient payment gateways to encourage faster payments from customers.
Conduct a cash flow forecast: This involves projecting your business's cash inflows and outflows over a specific period based on factors such as orders, accounts receivables, accounts payable, and other expected revenues and expenses. Cash flow forecasting relies on estimates of future cash movements, so it's essential to adjust your projections periodically based on historical data and your current and future needs. You may also need to consider seasonal fluctuations, such as a spike in sales during the holiday season or major events like Black Friday.
Align expenses with revenue pattern: Do you receive most of your customer payments at the month's beginning, middle, or end? Ensure that your most significant expenses are aligned with your highest cash inflows to avoid dipping into negative territory. Additionally, keep in mind that some suppliers may allow payments within 60 or 90 days. Don't hesitate to take advantage of this extended payment period!
To reduce your cash outflows
Utilize operating leverage: As your sales volume increases, consider hiring in-house staff to handle multiple responsibilities instead of outsourcing individual tasks to third parties.
Cut unnecessary expenses: Eliminate or reduce non-essential costs, such as thank you cards or premium packaging materials, that do not directly impact your product quality or sales volume.
Delay capital expenditure: As a last resort, postpone major investments like purchasing a new warehouse to ensure your business maintains a healthy cash flow. However, use this strategy with caution, as it may slow down your business's growth trajectory.
2. Increase AOV (average order value)
Average Order Value (AOV) is the average amount spent by customers per transaction on your eCommerce store. By increasing AOV, you can boost your revenue without necessarily increasing the number of transactions or customers.
Higher AOV directly impacts your cash flow by bringing in more cash per sale, which can be used to cover operational expenses, invest in growth opportunities, and maintain a healthy financial buffer.
In fact, a 10% increase in AOV can lead to a 50% increase in revenue for eCommerce businesses. This highlights the significant impact that increasing AOV can have on your overall cash flow.
For example, if your average customer spends $35, you could explore strategies to increase that amount to $50.
This includes using strategies like offering free shipping for orders above a certain threshold, which can encourage customers to add more items to their cart.
When you increase your AOV, you not only improve your eCommerce cash flow management but also create a more sustainable and profitable business.
3. Improve CLV and repeat order rate
Customer Lifetime Value (CLV) represents the total revenue a business can expect from a single customer throughout their entire relationship.
By increasing CLV and the repeat order rate, you can generate more revenue from existing customers, which ultimately enhances your eCommerce cash flow. This approach is not only cost-effective but also helps build long-lasting relationships with your customer base.
To improve CLV and repeat orders, focus on providing excellent customer service and support, as this plays a vital role in customer satisfaction and retention. Ensure you have a responsive and knowledgeable team ready to assist customers with their questions and concerns. Moreover, create loyalty programs that reward customers for their continued patronage, offering incentives like discounts, points, or exclusive offers for repeat purchases.
By improving CLV and increasing repeat order rates, you can create a stable and predictable revenue stream that contributes to better cash flow management.
4. Go for marketing channels with better and immediate ROI
You can significantly improve your cash flow management by focusing on channels with a higher ROI. And when you focus on channels that provide immediate results, you quickly generate more revenue while minimizing marketing expenses.
So, you must evaluate the performance of your current marketing channels and allocate more resources to the ones that yield the best results, such as social media advertising, email marketing, or influencer partnerships.
5. Improve your working capital cycle
A shorter working capital cycle enables you to convert inventory and accounts receivable into cash more quickly, which improves your cash flow.
To optimize your working capital cycle, consider renegotiating payment terms with suppliers, offering early payment discounts to customers, and efficiently managing your inventory, which brings us to our next point.
6. Manage your inventory effectively
Effective inventory management — balancing between peak and lean seasons — is crucial for maintaining a healthy cash flow in your eCommerce business. Overstocking can lead to increased storage costs and potential obsolescence while understocking can result in lost sales and dissatisfied customers.
Implement inventory management techniques such as just-in-time (JIT) or dropshipping to minimize holding costs and ensure the right balance between supply and demand.
7. Keep a cash reserve
It's essential to have a cash reserve in your eCommerce business as a safety net to weather unforeseen challenges and keep your operations running smoothly. Aim to keep at least ten weeks' worth of cash on hand to stay resilient in the face of market fluctuations or unexpected expenses.
As per Amazon’s research, holding 4-5 weeks of inventory can help you meet customer demand without any disruptions.
By maintaining a healthy cash reserve and an adequate inventory level, you'll be better positioned to navigate the ups and downs of the eCommerce landscape and ensure the long-term success of your business.
Streamline eCommerce cash flow management with Graas Accelerator Program
In the ever-evolving and highly competitive eCommerce industry, cash flow management becomes even more critical for success. Not only do your strategies play a significant role, but the technology and partners you work with can also contribute significantly to your growth.
One such partnership is the Graas Accelerator Program, an invite-only, revenue-sharing model that helps keep your cash flow positive.
By working with Graas, you gain access to our AI capabilities and marketing expertise to optimize your business and growth.
This partnership ensures that you only have to focus on your core strengths, such as product development, while we take care of sales and growth. This unique program eliminates the need for you to bear the cost of ads and marketing campaigns, allowing you to maintain a positive cash flow while working towards accelerated growth.
Ready to take your eCommerce business to new heights? Apply for the Graas eCommerce Accelerator Program today!