Ecommerce Cash Flow: A Complete Guide
Cash flow is vital to the success of your ecommerce business
Find out about ecommerce merchant cash flow in this guide and keep your business going whatever happens.
All the information you need
Selling products online is a fantastic way to make money. It’s never been easier to start and grow an ecommerce business with platforms like Amazon and eBay offering competitive seller platforms. You can even build professional ecommerce websites from home using Shopify, WordPress or Wix, so the power really is in your hands when it comes to running an ecommerce operation.
However, experienced retailers will know that one of the biggest challenges is cash flow. Running an ecommerce business is a well-oiled machine with many moving parts, so if one area fails to run smoothly then you run the risk of running out of the necessary cash you need to pay expenses.
You may think that because customers pay online for their products, ecommerce businesses do not face the same cash flow problems as traditional businesses running 30-day payment terms. However, the cost of goods, wholesaling and stock turnaround time can all significantly impact the money you have in the bank.
A strong cash flow is vital to the success of your ecommerce business, as you will have numerous outgoings such as staff wages, warehousing, fulfilment and even domain and hosting fees. Without money coming in consistently, paying for these expenses might be challenging.
Fortunately, there are many ways to manage ecommerce merchant cash flow. It all starts with understanding your sales process, identifying any common causes of delays and finding solutions that work for you and your business. Many ecommerce businesses find great support in finance, such as inventory finance or bridging loans, to help maintain positive cash flow throughout the business even during difficult times.
The events of the last couple of years have proven that anything can happen, so make sure you are ahead of the game and keep reading to learn more about understanding and improving your ecommerce cash flow. If you’re ready to learn more about ecommerce finance, get in touch with Rangewell today and we’ll work with you to find the best funding solution for your business.
Let’s get into it.
What is ecommerce merchant cash flow?
Cash flow refers to the money generated by your business. In the case of ecommerce companies, cash flow is typically the income from product sales across the board.
You may see cash flow referred to as operating cash flow, which basically means the money earned from the operation of your business. For example, products sell and you generate cash flow, then you minus expenses such as staff wages, cost of wholesale products, taxes and other fees in order to find the net income or profit figure.
To clarify, cash flow differs from net profit as the prior covers all cash within the business and the latter solely refers to the income minus all expenses.
In an ideal world, you will have a consistent income from your ecommerce business. Many retailers look to achieve this by ensuring consistent product availability, high search rankings and widespread product placement, e.g. listing products on both Amazon and their own website.
However, 82% of small businesses fail with many citing poor cash flow management as a contributing factor. So, how can ecommerce businesses ensure they are correctly managing cash flow and learn to identify potential issues before they significantly impact business operations? Planning is integral to the success of any business, and in the fast-paced world of ecommerce, a dynamic but comprehensive plan will help you to navigate many of the potential risks that may come your way.
One of the primary concerns for any ecommerce business owner should be stock management. This is a broad field covering the acquisition, storing, fulfilment and sale of the stock in your inventory and it is ultimately critical for maintaining consistent cash flow.
While there are many different kinds of ecommerce businesses, let’s look at a couple of common stock management problems that can impact online retailers’ cash flow.
While some ecommerce businesses maintain consistent sales all year round, you’ll also find those that operate on a seasonal basis. Retailers selling Christmas or Halloween products, for example, are likely to experience cash flow issues as they must purchase goods well in advance of their peak sales periods.
Many of these seasonal retailers acquire goods from abroad and must pay upfront for inventory that they will not sell for several months. In cases such as this, ecommerce businesses may choose to take out short-term finance to bridge the gap between buying and selling the goods. Depending on your circumstances, you may qualify for a number of different finance products on varying terms to help you to keep the business running through the slower sales periods.
Inventory finance, also known as stock finance, allows experienced retailers to harness the value of their existing inventory. With inventory finance, lenders can use your inventory as security against a loan. This will then be paid back in instalments as the products are sold from your inventory.
Useful for businesses with long lead times or seasonal requirements, inventory finance relies on the sale of your products and is, therefore, only available to ecommerce businesses with a proven sales record.
To find out whether you qualify for inventory finance, get in touch with Rangewell and speak with our team of specialist advisors.
Amazon payment delays
Retailers may turn to Amazon to sell their products as it is an established, household name and you can benefit from their existing search engine presence. However, the downsides to selling on platforms like Amazon include competitiveness, fast delivery expectations and payment delays.
When you sell on Amazon, you will usually receive the payments within 1 day, however, some sellers have reported delays subject to unavailable balance and account level reserves. As a result, short-term cash flow issues may incur when selling on a third-party platform like Amazon. Even if you intend to list products on your own website, any payment solution you choose - e.g. SumUp, PayPal etc - will come with its own restrictions and waiting periods.
While waiting a few weeks for payment should not affect any profitable business, when sales mount up and multiple payments are affected, you may find yourself in need of additional funds to bridge the gap.
Short-term finance can be a saving grace for ecommerce businesses, especially small operations with small margins. If this situation sounds familiar then speak to Rangewell about your options and we’ll help you to find a short-term funding solution that keeps your business on track.
How to improve your cash flow
We’ve explored what cash flow means for ecommerce businesses and how it is particularly impacted by stock management, but what can you do to improve your cash flow?
While we may never know what’s around the corner, there are still several steps that you can take to protect your online store from running out of cash. The first step is to fully understand your finances, including cash flow vs profit. Without full oversight of your financial situation, you risk missing a warning sign, such as one too many late payments or a delayed wholesale shipment. Here are some steps we recommend you take to boost your cash flow and protect your ecommerce business.
As we’ve mentioned above, understanding your finances is vital. In particular, you should create a dynamic breakdown of your sales across each platform. For example, if you sell on Amazon, eBay and your own Shopify website, identify the most popular categories and products within each. This information is not only useful for understanding cash flow, but it will also help you to be smarter about investing in marketing and, in particular, paid advertising.
Within this breakdown, you might find that Amazon is your biggest income generator but is the slowest to pay - this means you will need to ensure consistent sales elsewhere or secure short-term funding to bridge the gap. These investigations will be time-consuming but worth it as they give you the power to make decisions around marketing, stock acquisition, staff recruitment and other key business operations that rely on consistent income.
Preempt shortages and plan appropriately
While it’s not always possible to preempt periods of economic uncertainty, it certainly pays to have a crisis strategy in place. The last quarter of 2021 saw significant shortages affecting several markets. The supply chain issues were caused by a number of factors including the coronavirus pandemic, Brexit and international worker strikes.
In the UK, a shortage of building materials including timber, cement and insulation meant that both product and service-based businesses were affected. Ecommerce retailers selling garden furniture, for example, were unable to meet the demands brought on by the scorching summer months due to the soaring prices of materials and imports. No business was too big to dodge this crisis, as the nation’s biggest supermarkets reported fewer deliveries and poorer product selection due to a national shortage of lorry drivers and delays travelling via the channel tunnel.
So, how can you prepare your business for events that may impact the availability of your products? Firstly, it’s worth working with multiple suppliers and not relying too heavily on one to deliver your products. In addition, spend time assessing the areas of your business that are struggling the most and look to invest in new products that are more readily available and you know your customers will love. In the end, you might do everything ‘right’ and still face supply chain issues that negatively impact your product availability. This is where ecommerce business finance can help.
Secure and consolidate finance
Finance can help to boost cash flow and provide confidence for ecommerce businesses. Whether this is your first time considering lending or you already have finance in place, it’s worth speaking to an independent broker like Rangewell. Our team of experts will assess your current situation and help you to find the best solution.
Debt consolidation may be an option if you already have a number of loans and are still struggling with cash flow. The last few years have brought significant economic changes that have impacted every type of business, so if you sought and secured finance before the pandemic then it’s worth speaking to an advisor now to find out your options and whether you qualify for debt consolidation.
Whatever your circumstances, be sure to speak with the experts before signing on the dotted line. Finance can relieve a lot of pressure, but the wrong product on poor terms may result in an even worse outcome.
Manage cash flow with ecommerce finance from Rangewell
Get ahead of your cash flow issues and ensure the smooth running of your business with ecommerce finance from Rangewell. In this guide, we discussed the reasons why ecommerce businesses often struggle with cash flow, as well as ways of navigating potential pitfalls and ensuring a stable income. For some businesses, finance can help to bridge gaps between incoming payments and allow retailers to continue operations, pay staff wages and purchase more stock for their inventory.
To find out what ecommerce finance is available to you and to apply for ecommerce funding, get in touch with Rangewell today.