Cash flow vs revenue can be a tricky distinction to the uninitiated. Thankfully, we’re here to make sure that isn’t you!
We’re going to dive into the intricacies of both and how to consider them both as you operate your business.
What is Cash Flow?
Definition of Cash Flow
Cash flow refers to the money that moves or flows into or out of your business. You can organize cash flow into three types of activities: operating, investing, and financing.
Operating Cash Flow
This is the cash you spend or gain from your business’ main operating activities. This includes the sale of goods and services and any costs associated with production or COGS.
Investing Cash Flow
This refers to cash gained or spent through investment activities. These activities include capital expenditures or expenses made to purchase fixed assets like machinery, buildings, etc. It also includes acquisitions and investments in securities.
Financing Cash Flow
This is cash flow related to acquiring funding for the business, like loans. This also includes activities like payments for dividends, equity issuance activities, repayments, and reissuance, etc.
Types of Cash Flow in Ecommerce
Incoming Cash
Also known as cash inflows, this refers to the movement of money into the business across all activities.
Incoming cash includes:
- Revenue generated through sales
- Revenue generated through sponsorships
- Business and bank loans
- Interest earned through investments
- Other non-core income-generating activities
Outgoing cash
Also known as cash outflows, this refers to all money that moves out of the business.
Outgoing cash includes:
- Operational expenses, COGS, and others
- Repayments of debt and liabilities
- Dividend payments
- Inventory payments
- Payroll and benefits
- Other spending activities
Why Cash Flow is Crucial for Ecommerce Operations
It’s important to understand and master your cash flow for a couple of reasons.
First is maintaining liquidity. Liquidity is the amount of actual cash you have.
Analysts and investors look at liquidity to gauge a number of things. This includes your ability to reinvest back into the business and the amount you have as cash reserves for emergencies.
Second, is managing day-to-day operations and meeting your short-term obligations. Positive cash flow indicates you have more money coming in vs going out. This means you can cover all expenses to keep the operations going and have some left over for other things.
What is Cash Flow vs Revenue?
Definition of Revenue
Revenue refers to the amount of income a business generates through its various activities.
Gross revenue refers to the total amount of revenue from the sale of goods or services. Net revenue refers to revenue after deducting expenses related to discounts, refunds and returns.
Revenue Sources for Ecommerce Businesses
A business can have multiple streams of revenue or income from both core and non-core operations.
Operating revenue is all income generated by ecommerce businesses through their core operating activities. This would be in the form of product sales or over-the-web services.
Non-operating revenue includes income from non-core activities. This includes affiliate commissions, selling ad space on websites, licensing, and more.
Revenue vs. Profit
Revenue usually refers to the amount of money generated before expenses. Profit is the money left over after deducting your expenses. Revenue is the top line on an income statement and net profit is the bottom line.
Cash Flow vs Revenue: Key Differences
Timing of Recognition
You usually record revenue using the accrual method or when you make a sale. Whereas, you would only recognize cash once you receive it.
This means that a company might have good sales but not necessarily good cash flow.
Impact on Business Growth
Cash flow focuses on meeting your short term obligations. It’s all about liquidity and sustaining business from day to day.
Revenue shows a business’ profitability potential for long-term growth and expansion.
Examples
Say an ecommerce business has great revenue numbers but negative cash flow.
What could be the reason?
Well, it’s possible that they have poor Accounts Receivable management.
They may be making sales, but they don’t have a good system in place for payment terms. This delay in payment can lead to negative cash flow because while they are paying out (for bills etc.) before they are getting paid.
Another possibility is that they have chosen to reinvest back into the business.
They might see their long-term growth potential and choose to invest in larger warehouses to store more inventory.
This would show up as negative cash flow in the short-term.
How Cash Flow and Revenue Affect Ecommerce Financial Health
Cash Flow Impact on Operations
As an ecommerce business, you have several short-term obligations that you must meet within a year to keep your business running.
These come from your day-to-day needs such as
- Inventory costs
- Shipping and handling fees
- Website hosting and marketplace fees
- Marketing and advertising costs
A negative cash flow means you aren’t making enough money to meet these needs.
Alternatively, positive cash flow allows you to cover your expenses while also reinvesting more money into the business.
Reinvesting can look like purchasing a larger warehouse for more inventory, expanding product/ service offerings, hiring more people, etc.
Revenue Impact on Growth
Revenue is your main source of cash inflows. The higher your revenue (and the lower your costs) the better your profit margins and liquidity.
Investors look at certain cash flow ratios like the cash-flow-to-net revenue ratio to track how efficiently your business can turn sales into liquid assets.
Your ability to reinvest back into the business also affects your top-line growth. This is another important metric for tracking growth related to sales and market share.
Importance of Balancing Both Metrics
A startup ecommerce business looks at their high revenue numbers and decides to purchase more inventory.
However, they didn’t anticipate seasonality and demand went down leading to overstocking.
Because of that decision, they had to pay late storage fees. Their suppliers were also requesting payment for the latest shipment, but because sales were low, they couldn’t pay on time.
They didn’t have a lot in cash reserves so they had to go into debt.
This scenario is an example of why you need to balance cash flow vs revenue. You need to make decisions that benefit long term growth without sacrificing short-term survivability and vice versa.
How to Track and Manage Cash Flow and Revenue in Your Ecommerce Business
Tools for Tracking Cash Flow
Accounting software like QuickBooks and Xero make it easier to track the movement of cash to and from your ecommerce business. They can also integrate with WooCommerce, Etsy, eBay, and other platforms.
You can also use them to generate cash flow statements and use automation features for monitoring transactions.
Other tools include Cash Flow Frog and Pulse (mobile).
Tools for Tracking Revenue
There are several ecommerce tools for tracking sales revenue and conversions. Google Analytics is a popular one that can also help you generate revenue reports.
Ecommerce platforms like Shopify and WooCommerce also offer the services for free to their users. They provide insights to performance and customer behavior among other things.
Creating a Cash Flow Forecast
A cash flow forecast allows you to estimate your cash inflows and outflows over a specific period. Accurate forecasting means you can better plan for future objectives, goals, investments etc.
Setting Revenue Goals
Revenue goals are targets that a company aims for within a span of time. These are usually informed by revenue projections which take historical data and make predictions for future revenue.
Cash Flow Management Strategies for Ecommerce
1. Optimize Inventory Management
Ecommerce businesses tend to have cash tied up in inventory. If you can prevent over or under-stocking and improve inventory turnaround, it will mean wonders for your cash flow.
Consider ways you can reduce inventory-related costs through supplier negotiation and smart warehousing solutions.
2. Control Payment Terms and Accounts Receivable
An important part of cash flow management involves organizing your payment schedules. Having clear payment terms provides a level of predictability when it comes to cash inflows. It also allows you to organize payments to suppliers, workers, and bills payments.
3. Use Financing Wisely
Financing can be a crucial piece to growing your business. It can help kickstart your business, tide you over during slow seasons, and expand your growth potential. While it does generate cash inflows, you still have to be strategic about it.
Make sure to grasp payment terms clearly beforehand and then invest where you’ll get the highest return. Carefully find the balance between managing your debt and growing your revenue.
4. Monitor Expenses and Reduce Costs
Expense management and tracking is crucial. Monitoring your cash outflows is an important step to knowing where you can cut on spending.
Track spending on every level and identify problem areas where you might be spending unnecessarily.
Implement cost-cutting strategies and perform cost analysis to weigh your options.
5. Create a Cash Reserve for Emergencies
This is one of the main bookkeeping tips for managing seasonal cash flow fluctuations.
The more liquid you are, the better. Cash reserves are a contingency plan for situations where you encounter issues with cash flow. These issues can arise from internal factors like poor management or external factors like economic fluctuations.
Revenue Growth Strategies for Ecommerce
1. Increase Sales Volume
You can do this through sales promotions like limited time offers bundles and discounts.
You can also encourage customers to purchase through upselling or cross-selling strategies.
2. Expand Product Offerings
Introducing new products or services. Pay special attention to how they build upon or compliment your current line up.
3. Improve Customer Retention
Customer retention basically means keeping customers purchasing from you and not your competitors.
You can improve your customer retention rate by offering things like loyalty programs and benefits. Make use of personalized email marketing to target offers and promotions more effectively.
4. Diversify Sales Channels
Last but not least is multichannel selling. Reach more people by selling on more than one platform like Amazon, Etsy, eBay, Walmart com, etc.
Frequently Asked Questions
How do refunds and returns affect cash flow vs. revenue?
In terms of revenue, it reverses the sale which also means reversing the increase in revenue recorded. It also reduces your net revenue by increasing costs associated with the return and refund.
In terms of cash flow, a return or refund directly affects inflows because that cash is no longer available. Refunds also delay your return on your inventory investment.
Can a business have positive revenue but negative cash flow? What does it mean?
Yes, and this can point to several possibilities. A business could have made a large one-time expense or invested in future growth. There could also be a delay in Accounts Receivable. It could also point to poor expense management.
How does a subscription-based ecommerce model impact cash flow differently from a traditional sales model?
In a service-centered business model, you would not have COGS, but cost of sales. This usually means less inventory cost and risk and more predictable revenue. This leads to better cash flow visibility and financial planning.
What role does cash flow forecasting play in long-term ecommerce planning?
If you can accurately predict your cash flow this can lead to
- Better decision making regarding investments
- Better allocation of resources
- Improved budgeting and debt management
- Improved inventory management
Are there any cash flow management tools specifically designed for small ecommerce businesses?
Accounting software for SMBs like Xero and Quickbooks have cash flow management features and integrations with ecommerce platforms. Cash Flow Frog is one third party ecommerce tool that integrates with both of these.
What Is EcomBalance?
EcomBalance is a monthly bookkeeping service specialized for eCommerce companies selling on Amazon, Shopify, Ebay, Etsy, WooCommerce, & other eCommerce channels.
We take monthly bookkeeping off your plate and deliver you your financial statements by the 15th or 20th of each month.
You’ll have your Profit and Loss Statement, Balance Sheet, and Cash Flow Statement ready for analysis each month so you and your business partners can make better business decisions.
Interested in learning more? Schedule a call with our CEO, Nathan Hirsch.
And here’s some free resources:
- Monthly Finance Meeting Agenda
- 9 Steps to Master Your Ecommerce Bookkeeping Checklist
- The Ultimate Guide on Finding an Ecommerce Virtual Bookkeeping Service
- What Is a Profit and Loss Statement?
- How to Read & Interpret a Cash Flow Statement
- How to Read a Balance Sheet & Truly Understand It
