I’m looking forward to Mike Michalowicz’ new book coming out in late April entitled, Fix This Next. You may remember Mike is the author of Profit First, and he believes this book will be more impactful than Profit First. I’ve been using the diagnostic tool described in the book for the past several months and it’s been a great resource to help me understand what I need to focus on in my business. One of which is creating cash flow for my ecommerce business.
Cash Flow for E-commerce Businesses
What’s the Greatest Challenge in Your Ecommerce Business Bookkeeping?
I recently polled ecommerce sellers who are on our newsletter mailing list to learn what their greatest challenge is in their business. Not surprisingly, many of them responded that cash flow is an issue. I’m excited to work with clients in the future to help them understand that cash flow is really a symptom they must respond to; it is not a root cause.
While we must manage cash in an efficient and effective manner, the driver for cash flow issues typically come from pricing and margin health issues or from out-of-control spending. In other words, are you charging too little for your product or does it cost too much to make your product for the price you can expect in the market? If you understand the issues from either the sales or profit levels in the business, you can typically resolve your cash flow problem.
Cash is a magnified concern right now because of the volatile economic and health issues in the world. I’d like to give you some actionable tips to make sure you’re preparing to weather the uncertain conditions that exists and may continue for an undetermined amount of time.
First, complete the following exercise for your operating expenses.
Pull your last three months of expense transactions, either from a detailed transaction report from your accounting software, or simply review your bank and credit card statements. Look at every transaction and mark it as either C, R, or K. These initials stand for Cut, Reduce, Keep. Really look at each transaction and assume you can cut it. If you did, how would that change or impact your world? If you can’t live with that scenario, how can you reduce it? The final question is do you have to keep it? Nothing gets a pass. Seriously consider how you can survive with less. It’s better that you keep those funds now than spend that money and then three months from now, wish you still had it. We recently completed this exercise with a larger seller, and they were able to cut $55,000 from their account. I challenge you to cut $2,000 from your account. That’s a typical amount we can achieve with new clients.
Second, look at your payroll.
Are you right sized? Are you really getting the production needed from your employees? It’s a tough time to let people go, but how long can you keep payroll at current levels if sales drop off significantly? You need to be working on preserving the business, not saving every job right now unless you have months of cash reserves.
Next, look at your margins.
What can you do you increase your margins? Is there a way to increase prices? I’m not suggesting price gouging; but have you really looked at pricing lately? If not, see what you may be able to adjust. Look at your product costs and determine any changes you can implement to reduce those costs.
Next, have you taken out a line of credit?
If your business has been operating with good margins for two years, your local bank or credit union may be willing to extend a line of credit. Remember, it’s always better to ask when you’re in good shape, financially. Don’t wait until your sales numbers have dwindled and you’ve used all your reserves. Also, don’t tap into that money. Hold it as your rainy-day fund. It’s not an open checkbook; it’s there to be your life support should you need it.
Finally, if you’ve implemented Profit First, you should have reserves.
Use them judiciously. I had a client post this message on our Facebook page today: “With the help of bookskeep and the Profit First system, our business has enough cash to survive for the next six months and probably longer. Having no debt and an emergency fund is critical to long-term success, especially during uncertain times like we’re facing today. I know too many sellers who are way over-leveraged and have no margin to spare for any downturn. This isn’t smart or healthy. I’m so glad that I found Profit First in 2019. It’s been a game changer! – CS”
If you haven’t implemented Profit First and want the peace of mind during these uncertain times, get started with the steps above and then start your profit account. I’ll be happy to share our quick start guide if you’ll email me at email@example.com.
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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! Contact bookskeep today for more information on bookkeeping for ecommerce business.