While the pandemic has undoubtedly changed people’s consumption patterns, particularly when purchasing goods and services, it’s no secret that online businesses have skyrocketed in popularity over the last few years. The comfort of browsing an endless number of catalogues to find what you want from your couch is too convenient to pass up, especially since you can get everything you need with a few taps or clicks.
Running an eCommerce business has never been more profitable than it is now, although there are many things that online entrepreneurs don’t know. For instance, a startling more than 80 per cent of eCommerce businesses fail despite the low start-up expenses and the ability to reach customers worldwide. What should be a recipe for instant success turns out to appear much harder than it seems. However, the common cause of failure boils down to one crucial factor: cash flow.
Why Cash Flow in an eCommerce Business Matters
Cash flow is the movement of money in and out of your business, encompassing all transactions. It includes your expenses, payroll, and invoices. It also decides your financial position since it tells you how much money you have on hand and what you can afford to spend on, giving you an insightful view into your business’ health. For this reason, managing your cash flow is crucial to your success.
Common Cash Flow Mistakes
The first step to managing your cash flow properly is to know the most common mistakes businesses make with it. For instance, many entrepreneurs choose to be optimistic about their financial position instead of being realistic, causing them to overestimate their liquidity and make ambitious sales projections. As a result, when they fail to reach these estimates, they’re left with a deficit or much less money than they had hoped to make. It’s essential to plan for success, but it’s equally important to prepare for trouble.
Failing to plan is also planning to fail. When businesses don’t forecast their cash flow correctly, they fail to have a strategic view of their finances. Doing this may cause them to overspend for conveniences that they actually cannot afford in their current position.
Ways to Forecast Cash Flow
Luckily, forecasting your cash flow doesn’t have to be complicated. Here are four ways to predict your cash flow:
Set Your Timeline
All businesses should decide on how long they should plan for when managing their finances. The farther ahead, the better, but accuracy will always reign supreme. If you’re not sure of what your timeline should be like, it may help to consult with an eCommerce accounting firm.
Take Note of Your Income
After nailing down your timeline, you must note your income and record it. Start writing down your sales, then account for grants, investment, royalties, and any tax refunds you get. Once you total this, you’ll arrive at your net income.
Write Your Outgoing Expenses
Now that you have your income, you must also take note of your outgoing expenses. Having a clear picture of the money going in and out of your business will give you a more accurate view of your financial state. In line with this, meticulously record all your spending, including rent, marketing, tax bills, and payroll. Adding all these expenses will give you your net outgoing. However, if this is too tedious, it’s best to hire an eCommerce accountant to make sure you arrive at accurate numbers.
Calculate the Numbers
Lastly, take your calculator or open up Excel to start calculating the numbers. Subtract your outgoing expenses from your income, and you’ll have your cash flow. Take note of the amount every month, whether the figure is positive or negative, and you’ll have a better picture of what your cash flow forecast is over a certain period. This practice will help you have a more accurate assessment of your position, determine if you are growing, and give you enough warning for potential financial hazards ahead.
Succeeding in the online marketplace is every business’s dream, but for your operations to stay afloat, you’ll need to pay extra attention to your cash flow. By hiring eCommerce accounting services and following our guide, you’ll enjoy increased chances of staying in business for the long term.
The Ecommerce Accountant is an eCommerce accounting firm that helps online stores and influencers stay on top of their finances, minimise tax, and increase profit. We give you tailor-made advice to help you grow and protect your business. Book a free strategy session now!