Why Cash Flow is Important to E-commerce Startups?
| 3 minutes read
We all know ‘Cash is king’ because it keeps businesses going, and by utilizing cash, companies grow. It also pays your bills staff, and most importantly, it is the means to make more money. So to make things easy in the business, cash flow is important in business.
Now the question is?
How to increase cash flow in a business? In e-commerce startups, the problem of cash flow is not unusual since there is a constant need to invest in inventory. Many small businesses struggle with the limitation of emergency funds and fail when they need the funds.
Benefits Of Managing Cash Flow
As an entrepreneur, good cash flow means putting the force on acceleration, in other words, control over your business. We are sure you must have heard the stories of athletes who went broke after making a lot of money in their field then retiring. Behind this story, you often find an athlete who did not understand their cash flow, and as a result, they break.
Understanding cash flow means you can plan cash flow and forecast problems. This also allows you the potential to fix issues before they become crippling. As a result, you will have less stress while clarifying what cash you can safely keep for your business. Without a firm grip on the cash flow needs of your business, you might take a lot of time or not be able to pay yourself a respectable salary because you don’t know.
Why Keeping on Top of Your Cash Flow is So Important
1. Cash Flow Makes Better Plans and Decisions
With an accurate cash flow statement, you give an idea of how much funds you have and how much funds are available at any given moment.
This is important because any decisions you make must be supported by accurate information. For example, if you don’t manage your cash flow carefully, you could be a possibility that you could make wrong decisions that put your business at risk. Or even the situation where you were forced to shut the company might come.
You may feel that your business is in a strong position at some point in the industry, but a cash flow statement is not showing what you expected; we simply mean there isn’t money coming into your business in that particular month.
Therefore, with an updated cash flow statement, you’ll know not to make any significant purchases at that time.
2. Recognize Where You’re Spending Money
Manage your cash flow activity, and you’ll develop a better understanding of where you’re spending your money, something that’s not on a profit and loss statement. It’s important to know exactly where the money you spend is going and why.
It isn’t always easy to see expenditures in black and white, which is why it’s so important to manage your cash flow effectively. You might be able to identify business areas where you can minimize costs.
3. Shield Your Business Relationships
If you have limited or facing a cash flow problem crunch, you may not have the funds available to pay your suppliers. This can destroy/spoil the business relationship you have with them and damage your overall reputation.
Set automatic payment schedules to ensure you have the finances available to pay suppliers. It would be best to do advanced planning so you don’t face multiple invoices simultaneously without the funds to deal with them.
4. Expand at the Right Time
Growing and expanding your business is exciting. It means entering new markets, appointing new staff members, and more revenue. But, a word of caution. Expand at the wrong time or in the wrong way, and you’re more likely to have issues in the long term.
Growth requires a lot of cash/funding. Purchasing stock, hiring employees, renting buildings, and acquiring computers all take place before the money starts coming in. If you don’t have the funds available to match your growth, then you’re going to run into problems. Manage your cash flow effectively, and you’ll know when the time is right.
Cash flow is crucial for companies of all sizes, tiny e-commerce businesses. A study found around 82% of the companies that fail do so because they have cash flow issues. Make sure you’re not one of them by taking action with the right tools.
5. Reduce Expense
More generally, you can also improve your e-commerce cash flow by reducing expenses. Reduce your overhead by finding non-essential expenses that can be safely cut. For instance, renting premises, you hardly use could cut that or move your operations into a smaller, less expensive space.
Optimizing, and increasing, your e-Commerce average order value (AOV) can also enhance your cash flow. This is because, as your AOV increases, each customer you acquire will tend to bring more cash into your business, boosting your cash position. However, a higher average order value also means that you must acquire fewer customers to hit your revenue targets.