Exploring the Challenges and Strategies for E-Commerce Cash Flow

What is Cash Flow Management?

Cash flow is the money that comes into and out of your business, and cash flow management is the means of tracking these funds.

When it is done well, it will provide a complete picture of your cost vs revenue, ensuring positive cash flow.

Understanding a Cash Flow Statement

Cash flow statements are financial documents showing the net income and expenditure of cash over a given accounting period. There are three main sections of this statement: operating cash flow, investing cash flow, and financing cash flow.

A cash flow statement offers insight into the financial health of a business, showing whether the business has healthy cash flow or cash flow problems. Understanding this document is vital for any e-commerce business to effectively manage cash flow and create cash flow forecasts.

The Direct Method for Cash Flow Statements

The direct method for calculating cash flow statements involves tracking income and expenses directly. In simple terms, you add up all your cash payments and total all funds paid to your suppliers.

If you have more income than expenses, you have positive cash flow and sufficient operating cash flow to continue building your business. On the other hand, if your expenses outweigh your income, you may lack the operating cash flow needed to sustain your business.

You can prepare your e-commerce cash flow statement by entering your financial data manually into a basic spreadsheet program, but balance sheet software uses cash flow forecasts to streamline this reporting.

Why is Cash Flow Management Important for E-Commerce Businesses?

While cash flow management is important for any enterprise, it is particularly crucial for e-commerce businesses as it has a direct impact on the ability to operate and thrive.

Although there are large-scale e-commerce businesses, SMEs tend to rely on e-commerce to drive their operation. In fact, according to a survey conducted by PYMNTS Intelligence, 80% of small businesses use e-commerce to drive sales and develop customer relationships.

Unfortunately, since small businesses tend to lack the net cash to weather financial storms, improper cash flow can have a devastating financial effect. To survive, these businesses need to improve cash flow and maintain positive cash flow.

Common Cash Flow Problems of E-Commerce Businesses

There are a number of cash flow issues that e-commerce businesses usually face. These include:

Late Payments

When customers pay late, it creates a gap in the cash flow and a lack of net cash, which makes it challenging to manage cash flow and ensure sufficient funds to cover bills and business expenses.

Sales Fluctuations

Unpredictable sales or seasonal trends can make it harder to generate net cash, forecast income, and plan for expenses.

Managing Inventory

There is a fine balance for businesses to effectively manage their inventory. Insufficient stock can lead to lost sales and unhappy customers while overstocking will tie up cash. If inventory is not properly managed, it can lead to negative cash flow.

Underestimating Operational Expenses

One of the common mistakes in managing cash flow is failing to accurately account for operational expenses. From simple expenses on a business account to marketing expenses and fees for international payments, these costs can quickly add up.

Uncontrolled Growth

The overall aim of any business is to grow, which suggests that growth would automatically trigger positive cash flow. However, when there is rapid growth without proper cash flow management, it can lead to strained resources and money issues.

In fact, uncontrolled growth can create negative cash flow, where the business lacks the funds to continue operating at higher volumes.

Cash Flow Management Strategies for E-Commerce Businesses

There are several strategies to effectively improve cash flow for your e-commerce business.

Managing Accounts Receivable

Waiting for customers to settle bills can be a massive problem for cash flow. However, there are ways to effectively manage your accounts receivable.

1. Due Diligence

If your e-commerce business extends credit to B2B customers, performing due diligence can help identify clients likely to pay on time and flag potential financial risks. For businesses that primarily deal with direct consumer payments, consider offering secure, upfront payment options to avoid delays altogether. This will help you establish which clients are likely to pay on time or pose a financial risk.

If you are not certain about a customer's cash position, you may need to consider payment in advance or other techniques to reduce your risk.

2. Clarify Payment Terms

Ensure that your payment terms are clear to your customers and that they support your cash flow requirements. Set out when you expect to be paid, the amount to be paid, and the consequences of missed or late payments.

This provides an opportunity to improve your cash flow and build customer relationships. For example, you could offer discounts for early payment, flexible payment plans, or other incentives.

You should always send out invoices on time and provide a variety of easy ways for customers to pay.

Negotiate Payment Terms with Suppliers

Accounts payable is an important part of proper cash management, so streamlining this process will help you avoid late payments, maintain strong supplier relationships, and even take advantage of early payment discounts.

Securing better payment terms—such as extending payment windows to 30 or 60 days—gives your business more time to generate revenue before settling bills, easing cash flow pressure. If your suppliers don’t currently offer advantageous terms, it is time to negotiate with them to help you better manage your cash flow. 

Controlling Expenses

It is always a good idea to keep records of all your expenses, but when was the last time you reviewed your spending?

You may be able to find costs that are excessive or ways that you can trim your expenses to streamline your overall spending. This will help you to save money, free up extra cash for operational costs, and improve your cash flow projections.

Take a little time to periodically review your spending to find where you can boost cash flow. This could be as simple as switching suppliers or negotiating preferential terms with your existing supplier.

Every business is unique, with unique requirements and finances, so check for areas where you’re comfortable making cuts.

Control Inventory

There is a fine line in inventory management. If you have too little stock, you risk selling out and annoying customers; if you have too much stock, you will be tying up valuable capital, leaving you struggling to find cash to cover operating expenses. Good inventory control is crucial for steady cash flow.

It is a good idea to implement an accurate forecast model, and accounting software can help with this, analysing past sales performance and creating stock requirement predictions.

You can also perform an inventory audit to see if the 80/20 rule applies to your business. This rule states that 20% of stock generates 80% of profits. You can gain more control of your inventory by ensuring your most profitable items are prioritised when restocking, thus improving your overall cash flow cycle.

How Aspire Can Help Improve Your E-Commerce Cash Flow

Aspire offers a Business Account that can help you improve your e-commerce business cash flow from day one.

With Aspire, you can create multi-currency collection accounts, allowing you to receive payments from customers without the need for immediate currency conversion. You can also send money internationally in over 30 currencies with low, transparent fees and competitive FX rates—streamlining payments to your suppliers. Most importantly, you can open an Aspire Business Account with no account opening fees, initial deposit, or minimum balance requirements.

Sign up with Aspire and take your e-commerce business to new heights.

Frequently Asked Questions

What are the types of cash flow?

There are three types of business cash flow:

• Operating Cash Flow: Operating cash flow relates to your accounts receivable and accounts payable and discovers whether you have sufficient money to cover your operating expenses. If you don't have sufficient funds, you need to prioritise ways to improve operating cash flow to get into a better cash position.
• Investing Cash Flow: The cash reserves needed for investing in the business’s long-term future, such as research and development or capital expenditure.
• Financing Cash Flow: This is linked to the funding of your business and can include money coming from investors and bank loans or the money going out to cover business loan payments or other interest payments. If you have a positive finance cash flow, it could indicate you’re investing in your business, but you may be overly reliant on financing methods.

How do you know if a company has a healthy cash flow?

The cash flow margin ratio is used to compare cash from operations to sales revenue during a particular period. If you have a positive cash flow figure, it will show the company is converting sales into cash, indicating solid profit potential.

Are cash flow and profit the same?

No, there are crucial differences. Cash flow refers to the money flowing in and out of your business, but profit is the remaining amount after costs are deducted from your revenue.

What is a business’s cash flow statement?

In simple terms, a cash flow statement is a financial document showing the amount of money entering and exiting the company during the accounting period.

Cash flow statements are used to record, track, and report transactions and expenses.

Which is more important, cash flow or profit?

Both are crucial for a successful e-commerce business, but in different ways. Cash flow is important in the short term, ensuring the company has the cash generated to fund normal business operations.

Profits are essential for long-term success, creating the potential to scale core business operations.