eCommerce business owners know that a healthy cash flow means having more leeway with where you want your company to go in the future. The tales of famous athletes and celebrities who went bankrupt after earning a lot of money in their area and then retiring are probably familiar to all of us. While the fact that you can have a million dollars one day and be bankrupt the next may seem impossible, it is unfortunately a reality that could befall your business if you aren’t careful.
Understanding cash flow allows you to prepare for it and identify any difficulties ahead of time. As a result, you'll have the freedom to address issues before they become life-threatening. You will experience less tension and worry while gaining more clarity on how much cash you may safely maintain or take from your company operations. If you don't have a good understanding of your company's cash flow requirements, you might end up taking out too much money or not being able to pay yourself a sufficient wage because you don't know what you're doing.
Methods for Increasing Your Operating Cash Flow
Every firm is different, and the best approach for enhancing operational cash flow will differ as well. Not every strategy is equally appropriate for every situation. Inventory planning based on prior sales is one of the measures you should take into consideration. That helps you avoid spending too much money on inventory and the opposite issue of having too little inventory, which causes you to run out of stock and lose sales.
Find the Best Payment Terms with Suppliers
Work out payment arrangements with suppliers that allow you to pay later, even if it means paying a little more money upfront. This strategy is particularly effective with higher-margin items, where the price may be more significant. Another strategy is to minimize the order amount when placing orders with your suppliers, which will allow you to stretch your payments over a more extended period. This strategy may be successful if delivery costs are modest and the pricing is not sensitive to the number of sales made.
Encourage Customers to Pay Their Bills on Time
If you are selling B2B, you might encourage your consumers to pay sooner by offering them incentives for paying in advance. For example, you may give a 2 percent discount if consumers pay in total upfront instead of 100 percent net 30 days later. As a result, your company will always have financial reserves to fall back on in the event of a crisis due to the nature of B2C shops such as Shopify and Amazon FBA.
Gather Ways to Reduce Expenses
One way to improve your eCommerce cash flow is to cut unnecessary expenditures. Reduce your overhead costs by identifying non-essential items that you may safely eliminate from your budget. For example, if you are paying rent on space that isn't being used, you may reduce your rental payments or relocate your activities to a smaller, less expensive area.
Increasing and optimizing your eCommerce average order value (AOV) might also help you improve your cash flow situation. That is because, as your AOV improves, each new client you gain will have a greater tendency to bring in more cash, hence improving your cash position.
A higher average order value also means that you will need to recruit fewer consumers to achieve your revenue goals. Consequently, your client acquisition cost will be decreased, and you will reduce your total marketing expenditures.
Final Thoughts
Cash flow challenges in eCommerce emerge either because things are going wrong, like not enough income, or because things are going well, like continuous pressure to invest in new inventory, making it vital to manage cash flow effectively. When you have cash flow issues, you face the risk of running out of money and losing control over your firm. You may be compelled to close your company or sell it at a loss at fire-sale rates. Planning ahead of time can be accomplished by avoiding a catastrophic cash flow constraint, which may strike at the most inopportune moments for your company.
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!