Going broke is every ecommerce store owner s worst fear.
No matter how much traffic you’re getting or how good your products are. If you’re completely out of cash to pay your suppliers, reorder inventory and pay day to day expenses… your store will eventually shut down.
Cash flow problems can strike any ecommerce business.
Big or small. Seasoned entrepreneurs and first time store owners.
When it happens most people don’t know where to turn.
Luckily there are ways to keep your online store afloat even when it feels like your bank account is bottomless.
Here’s what we’ll cover…
- What are cash flow problems and why do ecommerce stores suffer from them?
- Funding options to consider when running low on cash
- Tips to increase cash flow
- How to build up cash reserves for your online store
What are Cash Flow Problems and Why do Ecommerce Stores Suffer from Them?
Cash flow issues affect businesses differently than a brick and mortar storefront.
For example. Let’s say you run a small service business. You get paid after the work is completed. Simple.
An online store must purchase products before they even have the opportunity to make one single sale. Which creates a huge delay between outgoing expenses and incoming revenue.
A PYMNTS report found that over 22% of small businesses struggle to pay for basic operational expenses due to cash flow problems. Yikes. And get this. Nearly 1 in 5 businesses could go out of business due to cash crunches.
Ecommerce shops are hit particularly hard because:
- Inventory expenses must be paid upfront before sales revenue is earned
- Marketing expenses come before the return on ad spend
- Expenses can quickly rise during seasonal peaks
- Supplier payment terms do not align with customer payment terms
The faster your store grows the more problems will compound.
Exponential growth means spending more money on inventory. Increasing marketing budgets. Paying for shipping costs. All while waiting to get paid from customers.
Everything we mentioned requires cash flowing into your account immediately.
Funding Options to Consider when Running Low on Cash
If you’re struggling to meet your business’s basic financial requirements you need options. Quick.
The smart store owner knows there’s a funding solution for every business scenario. Not all funding options work the same or have the same qualification process.
Here’s a quick look at your choices:
Traditional Bank Loans
One of the lowest interest rate options. Banks are unfortunately not very lenient on who qualifies. Most ecommerce stores don’t have great credit, years of financial history or heavy collateral. Not to mention the application process takes forever.
Business Lines of Credit
A business line of credit acts as a financial safety net. You pay the money back that you borrow and it becomes available again. This is great for seasonal lulls or covering unexpected costs.
Installment Loans
Installment loans for business are perfect for ecommerce owners who want predictable monthly payments and fast funding. You receive the loan amount in full upfront and make the same payment every month for a fixed period of time.
Installment loans in Ohio are growing increasingly popular with ecommerce entrepreneurs. They offer structured payments that make budgeting easy while keeping healthy cash flow.
Revenue-Based Funding
New to the funding world but growing quickly. Repayment is based on your sales. The higher your revenue the higher your payment amount will be. When your sales slow down so does your repayment amount.
It’s ideal for ecommerce businesses that have inconsistent monthly sales. Just don’t forget about the additional fees that accumulate when revenue is high.
Tips to Increase Cash Flow
Don’t forget about quick fixes to help your business’s cash flow problem.
While funding can help prevent your business from going under gathering every dollar you can will make things much easier on you.
Here are some ways to improve your cashflow by tightening things up inside your business.
Negotiate Payment Terms with Suppliers
Believe it or not most suppliers will negotiate payment terms with you. If you can stretch the terms out from 30 days to 45 or even 60 days. That’s more cash staying in your business.
Here are some tips to negotiate better terms:
- First you’ll need to have a history of paying on time
- Time your negotiations when you reorder not when you NEED them to ship
- Don’t be afraid to give something back in return. Promise more volume, ship faster, etc.
- Negotiate with your best suppliers first. The ones that you know will be willing.
One or two extra days can make a huge difference.
Optimize Inventory Management
This one hurts but its important. Any cash tied up in dead inventory is cash that CAN’T be used to pay expenses.
Analyze which products are not moving and sell them off. Have a weekend sale. Offer discounts to free up cash. Look into JIT (just-in-time) ordering to reduce how much inventory you have on hand.
Align your inventory levels with actual demand. No more… and no less.
Get Paid Faster
The quicker you can get paid the better your cashflow will be.
Offer a small discount to customers who pay immediately. Invoices should be sent out as soon as possible. And if your store allows for late payments follow up. Require custom orders or large purchases to be paid as a deposit up front.
Intuit reports that 61% of small business owners say that they experience cash flow problems. A huge reason why is late paying customers.
Trim Expenses
Look into every expense your business has and cut whatever you can.
How often are you paying for subscriptions that you don’t use? Can software costs be reduced? Are there any fees you didn’t realize you were paying?
Sell Unused Equipment
Do you have equipment just collecting dust? Computers? Tools? Equipment.
Sell it all. Yes that fancy new iPad you bought to run your business but never got around to using.
How to Build Up Cash Reserves
The goal should always be to prepare for the next cash-flow crisis before it happens.
The easiest way to give yourself a safety net is to build up a sufficient cash reserve.
Most financial advisors recommend enough cash on hand to cover at least 3 months worth of expenses.
You can do this by:
- Automatically setting aside a percentage of every sale.
- Thinking of this as an emergency fund. One that you shouldn’t tap into unless it’s a real emergency.
- Start small by allocating just 5% of sales to your fund. As you grow move that percentage up.
Building a cash reserve takes time. But once you have it you’ll be able to weather delayed payments from suppliers. Slow seasons. Unexpected bills.
Use Cash Flow Forecasting Tools
Being able to spot an issue before it becomes a serious problem is key.
Cash flow forecasting allows you to predict where your financial situation will be in the future. By using accounting software you can see weeks in advanced if you’ll have a shortfall.
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
Wrapping Up
Running out of cash doesn’t mean you have to shut your online store down.
The difference between store owners who weather the storm and those who don’t are the ones who take immediate action.
Familiarize yourself with funding options that suit your business. Implement some changes inside of your company and start building that cash reserve.
- Know why cash flow is such a huge issue for ecommerce stores
- Research all funding options available to you
- Take matters into your own hands by freeing up cash internally
- Build up a cash reserve to help prevent the next cash-flow issue.
