Your business is booming and sales are up. Your bank accounts are looking good. Your shelves are stocked with inventory. You’re living your dream, right? Hold on. As an ecommerce seller, you have most likely already experienced the other side of that upswing, so you know that this too, shall pass.
Because of the general nature of ecommerce business, there are high times when money is flowing, and low times every dollar is stretched to its limit. Am I striking a chord, here? I bet you’re nodding your head right now.
If you ride this proverbial roller coaster in your business and you’re ready to jump off, then you’re ready to create a cash strategy that works year-round to keep your business on an even plane.
Why is a cash strategy as important during the good times as it is during the not-so-good times?
The underlying “why” ties back to Parkinson’s Law. Simply put, Parkinson’s Law says “we use what we got.” It applies to all types of resources, including money, personnel and time. When there’s more money available, we as human beings tend to spend more. If there are more people available to do the work, it usually takes more people to get the work done. And if we have more time, tasks and projects will usually end up taking longer to accomplish. It’s human nature.
A favorite analogy in Profit First is toothpaste. If you have a brand-new tube of toothpaste, you don’t think much about how much you use each day. But when the toothpaste is running low and you’re down to the end of the tube, you stretch out this resource by just using a dab each day. Doesn’t that sound familiar? Parkinson’s Law is one of the primary tenants of the Profit First cash flow management approach.
Now let’s apply Parkinson’s Law to your cash. Typically, Q4 is the time of year you hope to find yourself with more cash than normal. If that cash sits in your bank account, you will always find ways to spend it. You might buy that new computer, launch that new product, take a cruise. Just as Parkinson states, we use what we got. This is why you need a cash strategy in place all year, not just during the lean times.
How can you build a cash strategy that works for your business?
Step # 1. Determine how much you need in order to cover operating expenses for a normal month. Take a look at your P&L for the year. I recommend looking at the year-to-date P&L printed by month. You can quickly see what you’re averaging per month in operating expenses.
Step #2. Determine how much you owe for inventory. If you’re tracking accounts payable on your books, you can find that number easily on your balance sheet. If you’re paying by credit cards, you can look at the accounts and determine what is attributable to inventory. Also think about what inventory expenses you will have in the next month or so. When you are using the complete approach to Profit First, we recommend having a separate bank account and separate credit cards designated solely for inventory or inventory-related items, such as fulfillment and shipping. This makes it easy to separate inventory or Cost of Goods Sold from your operating costs.
Step #3. As you receive your payouts, leave the projected operating expenses and the anticipated inventory costs in your normal checking account. Any amount above these expenses, move to your savings account. If you are receiving payouts biweekly, consider setting aside the funds in the first payout from the month, then your second payout can be moved to savings. It’s a great feeling to realize your expenses are covered for the month!
Step #4. Don’t touch the savings account until you’ve gone through a few cycles of ups and downs, ideally after the first of the year. Once the dust settles, you can think about the best use of those funds. Check in with your accountant and get an estimate of upcoming taxes and designate those funds for that purpose. Next, consider the goals for your business in the coming year. Will you be launching new products? Will you need to set aside funds to get compliant on sales tax? Will the tariffs erode your margins, causing you to need a cushion for operating expenses until you can adjust? After you have determined your goals and the costs to achieve them, then designate funds for those initiatives.
Step #5. Reward yourself! In a true Profit First scenario, you would take a percentage of profits from every payout. This year-round strategy is a way to set yourself up for success, in the absence of the Profit First approach. One Profit First element is to reward your positive behaviors around your money. So when you complete Step #4, be sure to set aside some funds to reward yourself.
Your decision to become an entrepreneur as an ecommerce business brought with it long hours and hard work. That’s a given. But it should be rewarding. You and your family deserve to benefit from your efforts. Implementing a solid cash management system can set up your business to serve you instead of the other way around. It’s time to get off that roller coaster!
Interested in Profit First?
You can also sign up for the Profit First for Ecommerce Sellers Online Course. As a Mastery Level, Certified Profit First Professional, I will teach you why Profit First works so well for ecommerce businesses and the particular challenges for businesses that have physical products requiring inventory management. You will learn how your behavior drives your money management habits for your business and how you can set up your business bank accounts to work with your habits.
Check out all our ecommerce accounting and profit advising services here!
Want to get FREE Ebook? Download now!
Leave a Comment