When I speak to potential clients and ecommerce sellers, the first question I always ask is, “What is the biggest challenge your ecommerce business faces?”. The most frequent answer I get is Cash Flow, and I would guess your answer is probably the same. I find that cash flow is often the biggest obstacle because of its constant fluctuation. I explain that cash flow is just a side effect of the real issue, which is something I enjoy helping ecommerce sellers understand.
It is important that cash is managed efficiently and effectively, but the cause of cash flow problems is often pricing or margin health issues, or spending too much. Put more simply, you’re either not charging enough for your product, or spending too much to make it compared to market prices. Once you understand the problems coming from either your sales or profit levels, you can usually resolve the issue with your cash flow.
Cash flow is heavily subject to the economy, and can sometimes become an even bigger concern. Luckily, there are several ways you can be ready for the best and worst times with some tips we will discuss.
Taking a look at operating expenses is a good place to start. To do this, pull the last three months of your expense transactions, either from a tracking report or your accounting software. You can also look back on your bank and credit card statements for this information. Review each transaction, marking it as C, R, or K (Cut, Reduce, or Keep). You should review each transaction assuming you can cut it. If it was cut, how could it impact your business? If it can’t be completely cut, how can it be reduced? No transaction is an exception. Surviving with less should be a serious consideration. Keeping the funds now rather than spending the money and later wish you still had it is much easier on you. For this reason, I challenge you to make a $2,000 cut from your account. This is usually the amount that we can make work with clients.
Check Your Payroll
Are your employees as productive as you need them to be? Letting people go is never easy, but if sales suddenly drop greatly, how long can you keep up with your current payroll level? At this point, you should be more focused on the preservation of your business rather than saving all jobs, unless you have the cash reserves to afford it.
Take a Look at Margins
How can you work on increasing your margins? Can your prices be increased? I’m in no way telling you to start price gouging, but have you seriously looked at your pricing recently? If you haven’t, take a look at where you might be able to make some adjustments. Go over the costs of your product and look for changes that can be made to reduce the costs.
Consider a Line of Credit
In the case that your business has had steady operations and good margins for a few consistent years, a local bank or credit union might consider extending a line of credit for you. Keep in mind that you will have better luck with this when your business is in good financial shape. It’s important not to wait until sales have dropped and all your reserves are used up. If you take a line of credit, this should be used as a rainy-day fund. It is not to be used as an open checkbook, but rather a reserve to fall back on in case of emergency.
Grow a Reserve Fund with Profit First
If you are an ecommerce business using the Profit First methodology, your reserves should already be pulled aside. The reserve fund is important because it very well might be what keeps your business running during times when income is slow. Keep in mind that two key factors of long-term success are little to no debt and emergency funds, so use these reserves wisely.
If you aren’t yet using Profit First and are interested in making your cash flow less stressful, you can use the tips discussed above and then create your profit account. You can also find more discussion on Profit First at the bookskeep blog.
Interested in Profit First?
If your ecommerce business isn’t where you’d like it to be in terms of profitability, check out my book, Profit First for Ecommerce Sellers. It answers important questions about how to implement Profit First in an ecommerce business. Take control of your money and your business, and put Profit First to work for you!
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!