When it comes to post-mortems of failing eCommerce enterprises, one lesson to be learned is to start paying attention to your cash flow. One of the essential eCommerce variables to track is conversion rate, which may make or break your performance as a company owner that operates online.
Cash flow is the foundation of your e-Commerce firm, and as an entrepreneur or manager, you must understand how to handle it effectively. If you don't grasp what it is and how it operates, it will severely hinder the development of your business and can even mean your downfall.
The phrase "cash flow" refers to the amount of accessible cash created by your company during a business's operation. Cash flow is often measured every month to have an understanding of the financial health of your firm.
You may use the "operational cash flow" of a company to evaluate the financial success of your shop since it is a more precise measure of cash flow. Your company's cash flow measures the amount of money it generates through its usual business activities. Selling products in your shop is the most common and essential source of cash flow for e-Commerce businesses.
Cash Flow Formula
To determine the operational cash flow for your company, use the following formula:
Net cash from operations = the difference between cash receipts from operations and cash outflows for operations.
Cash Receipts from Operations includes cash receipts from operations. That is money generated by your primary business activity. For eCommerce businesses, this refers to the selling of cash-based products via your website. Typical cash outflows for eCommerce activities include payments to suppliers, all wage and benefit payments, interest and income tax payments, and other similar expenditures.
Meaning of Operating Cash Flow and Profit
Entrepreneurs in the eCommerce industry often make the mistake of conflating cash flow with profit. Some business people believe that the cash in their bank account represents earnings from which they may benefit immediately. On the other hand, other entrepreneurs believe that since they show a profit on their financial statements, they have cash accessible to address the demands of their businesses.
Unfortunately, cash flow only shows how much liquid money you have on-hand. While it links to revenue and profit, a positive cash flow does not necessarily mean you are turning a profit.
Operating Cash Flow
Operating cash flow varies significantly from net profit in several ways. It is simply the amount of money earned from the sale of things in your e-Commerce site minus the amount of money paid out to pay operating expenditures. Though you postpone payments to suppliers and use loans to cover expenditures, it is possible to have positive cash flow even if your firm is experiencing a loss.
Profit after Taxes
On the other hand, net profit is the money that remains after subtracting all costs of goods sold (COGS), company expenditures, and taxes from revenues. Notably, just because you have a net profit does not imply that you have that net profit accessible as cash at this time. In the case of a net profit, you may lock it up in new goods that you have just bought, leaving you in a neutral financial situation or even a cash shortfall.
Realistically, both of these points of view are hazardous since operational cash flow and profit are not the same things. It is not necessary to be profitable to have cash in the company, and it is also unnecessary to be profitable to have enough cash to operate the firm. Both are critical variables in the success of your e-Commerce business, and each requires specific attention.
The Significance of Operating Cash Flow
Almost one in every three unsuccessful companies attribute lack of cash as the reason for their failure. To put it another way, failing to manage and prepare ahead of cash flow difficulties appropriately is a crucial cause of company failure and bankruptcy. It comes with one of the most common reasons for business failure, along with a lack of demand for the product being sold.
eCommerce enterprises must prepare ahead of time, particularly regarding cash flow in the online marketplace. Having enough continuous cash flow might make the difference between a small business’s survival and failure.
If you are looking for a reliable eCommerce accountant around Australia for your cash flow needs, you can always rely on us at Ecommerce Accountant. Our professional accountants and bookkeepers will guide you to limit expenses while increasing profit to make your business a success. Book a free strategy consultation today!