Understanding your ecommerce cash flow statement

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Nick Knuppe
Head of Product Marketing
Customer-centric marketer, fanatical about GTM.

Understanding how cash flow statements work will help you keep your business healthy and ensure you always have enough money in the bank. According to Barclays, three in five small businesses (58%) are waiting on money owed from unpaid invoices in the UK alone. These types of late payments put companies at risk

To help you stay in control of your finances, we'll explain why healthy cash flow is vital to your business, how to read a cash flow statement, and what to examine if your cash flow is currently dwindling.

What is cash flow in ecommerce?

Your cash flow is how much moneycash your business has in the bank after all your expenses have been paid. A cash flow statement typically shows this over a specific period– like monthly, quarterly, or annually. It’s one of the best ways to understand how well your business is performing and helps plan for the future. 

By having cash on hand, you can cover unexpected expenses without needing a loan, invest in new technology, secure better prices by buying in bulk, and make long-term plans to grow your ecommerce business. 

With a positive cash balance, you're better equipped to react to unforeseen circumstances and take advantage of new opportunities.

How do you read your cash flow statement? 

All accounting programs can compile a cash flow statement, this is especially useful if you do your own books. If you have an accountant, ask them to go over your cash flow statement with you. You'll benefit greatly from understanding how they read and interpret it. 

Anatomy of a cash flow statement

Here’s what you can expect to see on your ecommerce cash flow statement.

  • Opening balance: This is the cash balance at the start of the reporting period (month, quarter, year, etc.)

  • Operating activities: This is where you’ll find how much cash your business generates. In ecommerce, this would likely be from selling your products. Remember, cash is not only money that comes in— that’s revenue. Your gross profit is revenue minus expenses. For most ecommerce businesses, this will be where you’ll find the bulk of the information.

  • Investing activities: In this section, you’ll find information about your company's investments. This includes any changes to equipment, assets, or investments. For example, equipment purchases or sales, or any real estate holdings or stock market investments. Again, the cash amount here is money in minus money out. 

  • Financing activities: This section won’t apply to many ecommerce businesses. But, if applicable to your company, this is where you’ll include any cash from investors or banks, dividends paid to shareholders, and repayment of debt principal. (Interest payments go under operating expenses).

  • Closing balance: This is the final cash balance after assessing all of the activities listed in the cash flow statement.

How do you interpret a cash flow statement?

At the end of a reporting period, you want to make sure your cash balance is more than when you started.

There are some exceptions to this rule. The most common of which is if you’ve recently expanded your business. Buying inventory for a new product line or when moving into a new market could increase your capital outlay and lower your closing balance. But this doesn’t necessarily mean your business is in trouble. It’s just a sign that you had to increase expenses temporarily. As long as these costs are offset by an increase in purchases from your client base, then there is no need for concern.

But, if your closing balance isn’t enough to cover the operating activities and the imbalance can’t be explained by business-related expenses, then your cash flow statement could be cause for concern. If you don’t correct the issue by boosting sales, it gives an early indication that you might struggle to pay your suppliers, marketing costs, and employees.

How to improve your ecommerce cash flow

If you have a service business, managing cash flows is reasonably straightforward. You sell a service, deliver it, and deduct the expenses incurred on the project. 

Cash flow management for ecommerce is a little more complicated. In addition to selling your product, you have to make sure you account for inventory, delivery costs, defective or broken products, and returns. All of these can make a serious dent in your cash reserves.

Control your payments

The quickest way to improve your cash flow is to speed up your payment cycle. Wherever possible, ask customers to use recurring payments and try to transform any Net-60 or Net-90 customers to Net-30. In this instance, Net refers to the amount of time a customer has to pay off an invoice, with Net-60 and Net-90 representing 60 or 90 days, respectively. If you switch to Net-30 for invoice payments, then you would get your money faster.

Do the same for your suppliers. Many businesses try to delay paying as long as possible to keep as much cash in their account. The downside of this system is that the money is already allocated to pay an invoice, so it’s not available for other business uses. Pay your suppliers within a faster time frame to ensure your cash flow statement is as accurate as possible.

Control your inventory

Controlling inventory is crucial for maintaining an ecommerce cash flow. If your business is currently low on cash, it might be better to sell some items at a discount rate to generate cash from your inventory. When it’s time to re-stock, work out if it makes more sense to pay slightly less per unit to make a smaller order.

It can be tempting to stockpile inventory to be ready for when you receive orders. If you don’t always want your products to be out of stock, make sure you carefully plan your stock levels to make sure you have enough products to fulfil orders without tying up all your cash in inventory.

There is a reason that most large companies have moved to just-in-time inventory models. Just-in-time inventory management (or JIT) refers to the practice of working closely with suppliers to ensure all necessary materials arrive at the same time production is scheduled to begin. This allows businesses to reduce waste as well as costs by only ordering what they need when they need it.

Take control of your cash flow

There’s plenty to keep track of when running a business, but understanding your business’s cash flow is vital to delivering success. It can also help you plan for the future and make effective decisions about expansion and other activities. By taking the time to learn more about your cash flow, or by partnering with companies that can help make your financial management effortless, your business can shine for years to come. 

Grow your way with Mollie

At Mollie, we want to help all businesses grow. With our effortless payments solution, you can make advance payments, set up recurring payments, and instantly access all the information you need to maintain a healthy cash flow. 

Learn more about payments with Mollie.

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