Efficient cash flow management is crucial for the smooth running of online businesses. For starters, it ensures that various expenses are properly sorted out, including expenses related to operating costs and restocking inventory.
Furthermore, it is about ensuring that the business is in a good position to invest in growth opportunities for profitability and sustainability. This makes e-commerce accounting a necessity as it helps in this regard.
Fortunately, this article delves into this subject. So, read on to stay well informed.
Understanding Cash Flow in E-Commerce
Cash flow is the term that sums up the inflow and outflow of money in a business. As a result, there are two sides to it, and they are:
- Inflow – Investment capital, revenues generated from sales, and even refunds belong to this side. This is as it has to do with money coming into a business
- Outflow – Marketing costs, payroll, platform fees, and supplier payments all belong to this side. This has to do with how money leaves a business.
Cash flow management is a business necessity, regardless of online presence or otherwise. However, there are points of uniqueness for online businesses. Some of these peculiarities are evident in the following:
Digital Transactions
Although digital transactions are possible in brick-and-mortar stores, it remains an option as physical transactions are still possible.
However, this is not the case with e-commerce, as digital transactions are an absolute necessity. As a result, delays in payment processing and even marketplace platforms must be addressed to ensure efficient cash flow.
Platform Fees
There are online marketplaces where buyers connect with sellers. Prime examples include Shopify and Amazon. Well, leveraging such online marketplaces comes at a cost that can impact an online business’s net earnings.
Inventory Cycles
The inventory cycle implies the various stages, as well as the time taken from when products are ordered and eventually sold, and the cycle repeats itself. The various stages involved include:
- Ordering
- Product Reception
- Storage
- Sale
- Disposal (if need be)
There are two possible concerns in this regard. Firstly, there is the issue of bulk purchasing, which can be capital-intensive. It could be such that it affects the feasibility of funding other expenses in some situations.
Secondly, there could be long lead time issues, simply known as delays. Both issues affect the availability of funds for the smooth running of an online business.
E-commerce Accounting’s Role in Efficient Cash Flow Management
Addressing most of the concerns brought about by the peculiarities of running an e-commerce store requires several things. Some of them include:
- Having a Detailed and Realistic Plan for Business Growth
- Timely Anticipation of Financial Needs
- Avoidance of Shortfalls
Overall, these all have to do with informed cash flow forecasting. This is where an ecommerce accounting guide is a welcomed development, as it ensures that efficient cash flow management is within reach of online business owners. But understanding why it is important in this context is a good place to start for e-commerce business owners, and some of the reasons include the following:
Bookkeeping
It ensures that there is no misinformation about the business’s net cash flow. This happens specifically by accurately tracking the inflow and outflow of funds.
Expense Categorization
There is a need for accurate categorization for better budgeting. Against this backdrop, an important part of e-commerce accounting is the categorization of the various expenses into fixed and variable costs.
Real-Time Monitoring
Fortunately, technological advancement has made it possible to monitor cash flow in real-time. For example, there are cloud-based software solutions that can be deployed for this purpose, ensuring financial insights at every business phase.
Practical Strategies for Efficient Cash Flow Management
There is so much at stake for e-commerce businesses that do not take cash flow management seriously. Some of the adverse possibilities for such businesses include:
- Increased Debt
- Bankruptcy
- Inadequate Working Capital
- Competitive Disadvantage
- Business Stagnancy
In the spirit of avoiding the above-listed and several other adverse possibilities, the implementation of practical strategies for efficient management is crucial. To this end, some of the recommended strategies for implementation include the following:
Inventory Tracking & Optimization
Do not stock up on products for the mere sake of having products available. Your decision to stock up should be well informed.
On the one hand, this is because overstocking implies that cash flow will be restricted as funds would be tied up in unsold products. On the other hand, understocking results in lost sales that could have resulted in revenue increase, at the very least. Worse still, under-stocking presents your store as unreliable to customers.
In the spirit of avoiding both, the right forecasting tools should be deployed to track and optimize inventory levels. This is a crucial part of what proper e-commerce accounting is about.
Improvement of Payment Terms
Favorable payment terms should be negotiated and renegotiated wherever necessary. For example, considering how capital-intensive the demand for restocking can be, an agreement to extend payment time can be made with suppliers. However, such an agreement should not be out of the blue as it has to be pre-arranged.
Leverage Subscription Models
The inflow of cash is very important. Maintaining outflow is not possible if the inflow side is not well sorted out. This is especially through revenue generation.
As a result, strategies to increase revenue should be explored, and one such is leveraging subscription models. For example, the arrangement can be such that services are auto-renewed. All these are in the spirit of stabilizing and optimizing cash inflow.
Expense Control
One of the ways to protect cash inflow is by controlling cash outflow. In other words, you have to reevaluate your expenses and do away with those that are unnecessary.
By the way, the term unnecessary can be time-sensitive. For example, a reduction of the advertising budget may be necessary at some point and unnecessary at another point in time. So, you should bear this in mind.
Conclusion
The fate of any e-commerce store is tied to several things, with cash flow management being one of them, especially for the long term. As a result, ensuring efficient cash flow management is necessary, which is why e-commerce accounting is important, as discussed in this article. E-commerce store owners should, therefore, take this seriously to ensure the profitability and sustainability of their online stores.
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