Ecommerce Cash Flow Management and How to Improve Cash Flow

What is cash flow in ecommerce?

Cash flow means you have money moving in and out of your business in a given period. You have enough money to cover immediate expenses and future purchases when you have good cash flow. Your cash flow statement measures your organization’s ability to operate based on cash inflows and outflows.

Companies generate positive cash flow to create value for shareholders and maximize free cash flow. Free cash flow represents cash from normal business operations after subtracting money you spend on capital expenditures.

You can use the latter to fund long-term investments, which are crucial for the growth and sustainability of your ecommerce company.

Ecommerce cash flow encompasses the cash generated from online sales minus operating costs such as shipping, marketing, and the procurement of goods. It may also be affected by abrupt changes in consumer behavior and fluctuating supply chains. 

What is negative cash flow in ecommerce?

Negative cash flow in ecommerce means your cash out exceeds your cash in over a specific period.

This scenario happens due to various factors such as high operational costs, excessive inventory purchases not matched by sales, and delayed payments from customers. If your cash flow is negative, you may not have enough cash to cover immediate expenses.

Negative cash flow doesn’t mean your business is unprofitable. But it may indicate a liquidity issue, where you run out of cash before you meet short-term liabilities. 

Breaking down your cash flow statement: Investing, financing, and operating cash flow

Your company's cash flow statement is an essential financial statement that starts with your cash or cash equivalents over a specified period of time.

Then, it breaks down three types of cash flow that represent a different facet of the business’s financial activities and provides insights into how you generate and use funds. At the end of your statement, you should have your cash and cash equivalents for the current period.

There are two ways to calculate your cash flow: the direct method or the indirect method. The direct method represents actual cash in and out.

The indirect method represents things like depreciation and amortization of non-cash items and losses from equipment or asset sales. Both methods break down cash flow by each of the three activities.

Operating cash flow

Operating cash flow reflects the amount of cash the company’s primary activities generate. Activities include selling goods and services in person or online and paying employees.

To calculate cash flow from operations, start with your net income. If you're using the direct cash flow method, add any adjustments from cash in and out from sales, COGS, shipping, marketing, payroll, marketplace fees, and other costs.

If you're using the indirect method, add adjustments for depreciation and changes in working capital to get your net cash from operations.

Investing cash flow

A company’s investment activities determine its investing cash flow. These activities include purchasing or selling long-term assets, property, and equipment. For online sellers, these investments might be new equipment, sales of major assets, or other investments outside of the norm.

Add or subtract purchases and sales related to those long-term investments to calculate your investing cash flow. Money out or losses are represented by parentheses on your cash flow statement. Hold on to that final net cash used for investing activities.

Financing cash flow

Cash flow between a business and its financiers makes up its financing cash flow. This type highlights how a business manages its financial structure to support operations and growth.

For mid-size ecommerce businesses, this can look like acquiring loans for expansion, issuing stock to raise capital, or making payments on existing debts. Add or subtract payments and earnings to calculate your financing cash flow to get your net cash flow from financing activities.

Cash flow statement example

Scroll through our interactive cash flow statement example to see how each type of cash flow affects a business's cash flow. For this example, we used the direct cash flow method. This example can guide you in preparing a cash flow statement and finding your cash position for a given period. Line items in this example aren't exhaustive, so keep your business's unique expenses in mind.

7 factors that affect a healthy cash flow

1. Sales and revenue
2. Cost of goods sold
3. Operating costs
4. Time of year
5. Payment terms
6. Returns and refunds
7. Economic trends

1. Sales and revenue

Sales are the primary source of cash inflow. Fluctuating sales volumes, consumer demand, marketing effectiveness, and a competitive landscape can all lead to inconsistent cash flow. While high revenue periods can boost ecommerce profits and cash flow, it’s important for ecommerce sellers to prepare for slower periods.

2. Cost of goods sold (COGS)

The costs of goods sold are the direct costs associated with producing the products you sell. These costs can include materials, inventory, and labor. Reducing these costs can lead to higher gross profits, positively affecting cash flow.

3. Operating costs

Operating costs include day-to-day expenses such as shipping, warehousing, marketing, and employee salaries. They ensure the business functions smoothly. But you must manage them carefully to avoid overspending. Ecommerce business owners should regularly review and optimize operational costs without compromising quality.

4. Time of year

Seasonal trends can shift quickly, significantly impacting ecommerce businesses. Peak seasons offer increased sales opportunities, while off seasons can lead to cash flow challenges. Online sellers can offset this by driving sales during slow periods and managing inventory levels accordingly.

5. Payment terms

Longer payment terms from suppliers can delay cash outflows. But shorter payment terms from customers can accelerate cash inflows. Sellers can negotiate more favorable payment terms with suppliers by offering customers incentives to pay early.

6. Returns and refunds

Returns and refunds present more of a challenge to ecommerce stores than traditional retail. Customers don’t see the product in person until they receive a delivery.

This delay can increase the likelihood of returns or exchanges due to shipping delays and items not arriving as expected. But efficient, flexible return policies and excellent customer service can minimize cash flow impact.

7. Economic trends

External economic and market trends often influence customer spending habits. For example, in 2020, ecommerce conversion rates were 3%-5%. By the end of 2023, the highest conversion rate was around 3.7% in food and beverage, with the average hovering around 2.1% for nine major industries.  

Knowing what's affecting consumer behavior can help you adjust your marketing, pricing, bundling, and customer experience strategies accordingly. 

What is the difference between cash flow and profit?

While similar at a glance, cash flow illustrates how money moves in and out of your business. Profit shows how much money is left over after a business pays off its financial obligations.

Profitability measures a company's capacity to make money relative to its expenses or investments.

The primary difference lies in their focus and composition. Profit is a broader measure of overall financial performance, while cash flow focuses on a company’s liquid assets.

Businesses can be profitable on paper but struggle with cash flow issues if incoming cash can’t cover immediate expenses and investments.

What causes ecommerce cash flow problems?

Cash flow problems come from various sources and are becoming increasingly complex due to the nature of digital sales and operations.

• Mismatched cash inflow and outflow: Online sellers often need to make significant upfront investments in inventory, technology, and marketing long before they see returns from sales.
• Unpredictable sales cycles: Seasonal or volatile sales cycles can make it challenging to forecast cash flow.
• Overstocking and understocking: Inventory mismanagement can cause significant cash flow issues. Overstocking ties up cash in unsold products, while understocking leads to missed sales opportunities and dissatisfied customers. 

Why is ecommerce cash flow important?

Ecommerce sellers who prioritize cash flow management gain several benefits that enable them to operate effectively. For one, when you improve cash flow, you also improve liquidity or your ability to convert assets to cash, which can keep you in good standing with partners and suppliers.

Then, there's your ability to forecast. Understanding cash flow patterns can help you decide when to invest in inventory, marketing, and expansion efforts. Your cash flow forecast ensures you always have enough cash to avoid shortages that can hamper growth or  lead to business failure.

Overall, the quality of your cash flow indicates how well you can manage your spending and debts. Positive cash flow means lenders and creditors are more likely to see your business as a good bet. This perception can lead to better financing options, lower interest rates, and more favorable repayment terms.

How to improve cash flow in your ecommerce business

Online sellers should take a multifaceted approach to solving cash flow problems. Short-term fixes and long-term strategies can help maintain a more resilient business model.

1. Optimize your online store conversions and use SEO to attract more visitors. Or experiment with marketing campaigns that target different audiences.  
2. Use a cash flow forecast to predict highs and lows. Add your current cash to your projected cash (or everything you expect to come in), and then subtract your projected cash outflow. Forecast between 30 and 90 days at a time, and keep going back to the result and compare estimates to reality to improve accuracy.
3. Streamline inventory counts across channels with a multichannel inventory sync solution and prevent overstocking and understocking.
4. Identify areas where you can cut expenses without compromising product quality or customer experiences. Cost-cutting can look like renegotiating contracts, reducing waste, and switching to more cost-effective shipping options.
5. Bridge temporary cash flow gaps with external financing via merchant cash advances, business lines of credit, and invoice financing.
6. Practice competitive yet sustainable pricing, or consider introducing premium options or bundles with higher margins.
7. Track fees and expenses in real time to stay on top of your spending.