Cash flow is simply the net cash amount flowing in and out of your business, from the revenue that you accrue through your business to the payments that you make to help it run. Although it seems easy enough to understand when we put it like that, cash flow management is one of the trickiest parts of running a business. This most important reason for this is that it is virtually impossible to draw a single straight line between the incoming and the outgoing cash. Instead, the incoming cash immediately gets divided into multiple streams of variable sizes, that individually feed into the separate parts of your business. Imagine a system of veins and arteries through which blood reaches various parts of our bodies. Or a system of tributaries and rivers that ultimately flow into the sea. Looked at this way, cash flow becomes a little more complex.
The other reason is that the movement of cash in modern business enterprises is cyclic. For e-commerce and online retail businesses, the length of the cycle varies according to the market that you participate in. Different incoming and outgoing cycles may also differ according to their length. For example, you may have two supplies to pay on the 1st and the 5th of each month, while your Amazon account may get paid on the 15th.
A cash flow problem essentially means that a business is spending more money than it earns. At the same time, it is important to understand that just because you have cash flow problems does not mean that your business is doing bad. In fact, it may actually be growing a little too fast – so fast that you have to invest your revenue back into the business to acquire more inventory.
Perhaps this is what makes cash flow all the more important – it can jeopardize your e-commerce business even when it is doing well. A business typically owes a lot of entities money, especially in its growing years – from banks to investors to suppliers. Managing your cash flow is the only way you can enhance the longevity of your e-commerce enterprise. Let us look at the different types of cash flow that a business must incorporate.
The Net Cash Flow of a Business is Made up of:
A. Financing Cash Flow
This is the cash flow of the business’s financing activities, like issuing stock or paying dividends. Here, the business deals with venture capitalists, banks, cash injections, etc. which pump money into the business. This cash flow generally has a long cycle of completion.
B. Investment Cash Flow
To run, a business requires certain amount of fixed costs. This may include the company investing in a new acquisition or a space or even fixed equipment. The flow of cash that goes towards these assets is the investment cash flow.
C. Operating Cash Flow
The operating cash flow of a business is the amount of cash a business generates through the revenue that it brings in, while accounting for the operational costs. This is the part that you as a business owner would be managing on a day-to-day basis. While calculating the operating cash flow, you must account for your revenue, the cost of goods sold, the operating expenses including storage, warehouse and logistical and marketing expenses and taxes. You can calculate the operating expenses for different sales channels according to their separate revenue cycles and then consolidate them to find a net cost of operations. This would also include your employees salaries, rent, internet and other day-to-day expenses.
How to Deal with different types of Cash Flow Problems
1. Have a Buffer Working Capital
The most important task is to be ready for the worst. Always make sure that you have some capital stowed away for emergencies that will help you get through the tough months, while you search and dismantle bottlenecks in your cash flow.
2. Plan Your Revenue Cycles
A common situation you can end up in is when you owe your supplier money today, while yourself getting paid a week later. To avoid this, it is important to make a cash flow projection of your business so that you know when to expect situations like these. You can then negotiate at both ends of your cash flow so that the bottleneck is avoided. By establishing a good relationship with your supplier, you can negotiate terms like credit payment and trade terms like extensions on payment. You can even try drop shipping, which would pay you on a commission basis per sale.
3. Plan Your Taxes
Failure to pay taxes will get you into a lot of trouble with the government, so carefully account for your taxes while calculating your cash flow projections. It is also important to have a separate cash flow for taxes so that it doesn’t get mixed up with the rest of your operations.
4. Emergency Cash Injections
Finally, always have a plan B, in case you need an emergency cash injection. This can be your bank, a private investor or various small business lending services specifically for e-commerce businesses provided by the likes of Amazon, Flipkart and Paytm in India. It is advisable to carefully go through the terms and conditions of these schemes before borrowing.
This is what we have on different types of cash flows and how to manage them for e-commerce businesses. To know more, get in touch with Browntape. We are India’s leading e-commerce experts, and we are always happy to help!
