7 Tips To Improve Your eCommerce Cash Flow

Positive cash flow for your eCommerce business will allow you to grow faster. Here are 7 tips to improve the cash flow of your business.

1. Conduct a cash flow analysis and forecast

The first step to improving your eCommerce cash flow is to make an accurate forecast of your liquidity. In other words, forecast the cash inflows and outflows your business will have in the coming months, depending on your orders, from your accounts receivables and accounts payable, and other revenues and expenses expected in a specific time frame.

In general, the forecast is done on a monthly basis, although it can also be done on a weekly, quarterly or annual basis, depending on the needs of each business. This analysis will allow you to know how much money your eCommerce will have in the next months and what actions can be taken to improve your cash flow.

However, you should keep in mind that cash forecasting is based on an estimate of future cash inflows and outflows, so you should adjust it periodically for real utility, following your historical data and basing it on present and future needs.

When the time to make the analysis and forecast for the coming month, take into account whether your business is highly seasonal. For example, an eCommerce specialising in Christmas decorations or if you are expecting a sales peak in the next months, with Black Friday for example.

2. Negotiate Better Payment Terms with Your Suppliers and Clients

One of the best ways to improve the cash flow of your eCommerce is to negotiate better terms with your business partners, particularly with suppliers and clients, at least with the payment periods. The goal is to agree on a payment period for the suppliers which is longer than that of your clients. To put it in another way, your clients should pay you in a shorter period (in cash, if it is possible) than you will need to pay your suppliers.

In the case of the clients, it is important to speed up their collection period as much as possible, offering even discounts for early payment, fostering partial payments to generate some cash and imposing penalties on those clients that don’t make the payments when the bills are already due, with previous notice. Businesses can also use pre-launch campaigns to get clients to pay a part before they actually have the product.

However, with the suppliers, the goal is to have very long payment periods. By doing this, the suppliers will be better financed in the form of trade credit. This is of course not an easy task, as your suppliers will demand shorter payment periods, so you need to reach a balance.

3. Automate Your Payments

Manual processes take up a lot of time and resources, lead to many human errors and on top of it all, delay the collection of payments. That’s why it is important to automate as much as possible the entire collection and payment flow so that invoices are always paid on time.

An Enterprise Resource Planning (ERP) system that generates invoices at the time the service is provided or the commercial operation is carried out and automates payments ensures faster collections and improves relations with your suppliers, with whom you will have greater negotiating power, thus improving cash flow.

In fact, it is important that any aspect that has an impact on collections should be automated to be as effective as possible. For example, having the invoice sent once the service is provided or the product is delivered or sending automatic reminders to your customers if invoices have reached the due date.

4. Improve your working capital cycle

Working capital is a concept that refers to the difference between current assets and current liabilities. It is a key indicator to understand the financial health of your eCommerce, in the sense that if the current assets of a business are not enough to meet the current liabilities (a negative working capital), the company will have a suspension of payments.

Improving your working capital is, in the end, improving your business’s cash flow. And this is achieved either by increasing your current assets, obtaining higher liquidity for your business, or by reducing your current liabilities through long-term financing of short-term debt.

In the specific case of eCommerce companies, inventory and accounts receivable represent most of the current assets. Cash levels are relatively low due to the cost structure of these businesses - in order to sell, you must first spend. For this reason, many eCommerce businesses experience cash strains and are unable to meet the upfront payments that suppliers require to purchase inventory, which can lead to stock-outs.

Relying on external financing and invoice financing services like the ones RITMO offers can help sellers to optimise their working capital cycle.

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6. Optimize your inventory

The inventory represents an essential element in every business, but it is particularly critical in the case of eCommerce, which must always have enough stock to meet demand without stock-outs. In fact, proper inventory management will have a direct impact on your cash flow health.

In general, experts recommend doing an initial forecast of inventory to have an optimal quantity of stock (with its pertinent safety margin) so most of the stock is transformed into cash.

Having too much inventory can take up too much space in the warehouse, which can increase storage costs. At the same time, stock can end up as dead stock, and provisions end up turning into losses. However, working with just the right amount of stock can lead to stock-outs in the face of unexpected peaks in demand, which can worsen customer relations.

In these cases, the goal is to optimize your inventory through analysis and good management so you can improve your cash flow.

8. Find alternative sources of financing

Due to the eCommerce business model, making upfront investments and not being able to recover the funds until the goods arrive, are sold and the money is returned to the account, many entrepreneurs turn to external financing in order to grow.

However, the more traditional sources of financing, such as banks, are subject to conditions, interest rates and timescales that are not always compatible with the needs of eCommerce entrepreneurs. For this reason, in recent years different alternatives have emerged that specialise in financing and optimising the cash flow of eCommerce companies, such as RITMO.

Options like inventory financing or revenue-based financing can help you optimize your eCommerce cash flow and grow faster.

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