Why eCommerce merchants need financial flow
Profit isn’t the only goal in business. It all comes down to cash flow—the money that comes in and goes out of your firm on a monthly or yearly basis.
It is critical to have cash on hand. Your company may be producing a substantial profit, yet it still may not have enough cash on hand to meet a vital financial need at a critical point in time. Cash flow is crucial in guaranteeing the smooth operation of a firm on a day-to-day basis.
What exactly is the difference between cash flow and profit?
In business, cash flow refers to the net amount of money that is transferred in and out of the company, while profit refers to the financial gain that the company gets when its revenue exceeds its total expenditures, expenses, and taxes. This is why the importance of timing cannot be overstated. Even though your company generates a sizable profit every month, it may nevertheless have difficulty meeting its financial obligations during a given week.
Essentially, cash flow may be defined as the proper circulation of blood through your body. Profit is defined as the advantages you get as a result of your health.
The formula for calculating your operational cash flow ratio is as follows:
You’ll need to figure out your ‘operational cash flow ratio’ (also known as a ‘liquidity ratio’) before you can proceed. This shows you whether or not the cash produced by your company’s activities is sufficient to pay off its existing obligations.
First and foremost, determine your ‘cash flow from operations.’
This figure may be seen on the cash flow statement for your organization. Alternatively, you may use this formula.
Changes in working capital are included in cash flow from operations. Noncash costs are included in net income.
All you have to do to figure out your operational cash flow is follow this formula: Cash flow from activities minus current liabilities equals operating cash flow.
You have current liabilities if you have commitments that must be met before the end of the trading year. Examples of current obligations include accounts payable, accrued liabilities, and short-term debt.
Suggestions for managing cash flow
Managing cash flow seems to be a daunting undertaking, comparable to deciding to finally adopt a healthy diet after years of consuming Big Macs, but it is the first step toward building a successful firm. Here are a few pointers to remember.
Maintain the integrity of your records.
Make a note of every transaction. Pay attention to payments and bills. Know where your money is at all times. That is what it means to keep your books up to date.
It’s overwhelming and a complete headache. However, when tax season rolls around, you’ll be the one who gets to enjoy yourself. Maintaining your records to the highest possible standard saves you a significant amount of time in the long run, enabling you to monitor your profits and losses in real time.
Consider outsourcing your accounting in order to make the process less time-consuming. Having an expert on hand frees up your time so that you can concentrate on what you do best: running your company. You may discover a bookkeeper in your neighborhood. There are other firms who handle this kind of work that can be found on the internet.
Keep an eye on your financial flow.
Knowing how much money you’re spending requires keeping track of your cash flow. How much money do you have on hand. What amount of money you will have after getting money that is due to you. Everyone should get a routine physical examination with their doctor. In the same manner, you must keep track of the health of your company on a regular basis.
If you want to know how much money your company has available to spend, you’ll need a daily cash report, which will give you with important information on profit, loss, and growth opportunities for your company. Afterwards, you may begin searching for trends. For example, if your customers are delaying their payments, you will be able to take appropriate action.
Cash flow projections
Now that you have a daily cash report, you can start acting like a financial weatherman and make predictions about the future. Running an eCommerce company might seem similar to going through seasons of feast and famine, especially in the beginning. However, by monitoring your cash flow on a daily basis, you can prepare for famine by putting procedures in place to keep the ship afloat during times of negative cash flow.
Unfortunately, there isn’t a mathematical formula for this. Starting with an estimate of the expenditures you would incur during a “famine,” you can go on to the next step. What does a typical week’s worth of spending look like for you? Make your following budgetary decisions based on this information.
The advantages of having a solid cash flow
Maintaining positive cash flow ensures that your company’s liquidity is maintained, enabling it to expand. You’ll begin to reap the advantages within a short period of time.
Payment of commitments on time will result in stronger relationships with your suppliers. Your credit rating will be elevated to the highest possible level if you make your payments on time.
Reduce the stress caused by unanticipated crises by making preparations for ‘famine’ times. Make opportunistic investments when the opportunity arises.
When it comes to negotiating the conditions of a bank loan, you’ll be in a better position to negotiate interest rates and payback terms.
Cash flow is a measure of the overall health of your company. A firm may be lucrative while also failing to satisfy its financial responsibilities, resulting in a bad credit rating as a result of the failure.READ MORE—5 Things You Should Know Before Starting a Business Possible corporate restructuring solutions 10 legal issues every business should know
What is the best way to manage your cash flow?
Don’t let your business run out of money by learning how to correctly manage your cash flow by predicting, maintaining records, obtaining timely payments from clients, and more.
When launching a company, the most important item to consider is cashflow. Small company failures are mostly caused by insufficient financial flow, according to a startling 90 percent of cases.
It is possible to have a good product or service, lovely clients, and a smart business strategy, but if you don’t manage your cashflow properly, your company will go out of business. Is it really so frightening, and is it really that straightforward?
What it is and how it functions
A cash flow statement shows the quantity and timing of cash that comes into and leaves your firm on a weekly basis. Your cash situation at any given moment is shown in this picture. Otherwise, you will rapidly run into troubles if you do not maintain a proper balance between your expenditures and revenue at all times. With strong cash flow, a company may establish an income and expenditure schedule, which helps the company to always have enough cash on hand to pay payments on time.
Contrary to cash flow, revenue or income is merely the amount of money that has been promised to you but which may or may not have showed up in your account as of the time of writing.
In other words, the difference between having a piece of paper with a number inscribed on it and carrying cash and coins in your hand is that the former is more secure. Despite the fact that you may have sold a large number of items over the course of a week, unless you have also received payment for those things, you will not be able to pay your power bill or equipment invoice. As essential as the time of when you receive payment for an order is the timing of when the transaction is accepted to begin with.
Managing your cash flow and ensuring that you always have enough cash on hand to pay your payments are two important aspects of running a successful company.
Predicting cash flow is step one.
It is possible to anticipate peaks and troughs in your cash balance using cashflow forecasting. It assists you in determining how much to borrow and when to borrow it, as well as how much accessible cash you are likely to have at any one moment. The sources and quantities of cash that will flow into your company, as well as the destinations and amounts of cash that will flow out of your firm during a certain time, are identified in a cashflow projection. If possible, break the amounts into two columns: one for the amount you expect to get and another for what you actually receive.
If you are making a prediction for the year ahead, it should be broken into either weeks or months. It ought to demonstrate:
the difference between receipts and payments – preferably a positive number your company bank balance at the end of the year the receipts minus the payments minus the difference between receipts and payments the difference between receipts and payments
When calculating the values that will be included in your projection, be reasonable – there is no use in doing so if you are not realistic. In addition, segregate cash flow for business operations from financing cash flow so that you can get a comprehensive view of your company’s real day-to-day activities.
advice from an expert
Using a rolling forecast, you may add a new month’s predictions to the far end of the spreadsheet as each month’s actual data is finalized and entered into the spreadsheet. As a result, you’ll always have a 12-month forecast to consult.
Secondly, you should encourage your consumer to pay on schedule.
Invoices should clearly state the payment terms and conditions that have been established.
Prepare invoices as soon as possible, and follow up on unpaid bills as soon as possible.
Consider charging late-payers penalty interest or putting in place invoice financing — under the Late Payment of Commercial Debts (Interest) Act, all businesses now have the authority to charge late-payers interest on outstanding balances owed. In many cases, merely informing clients that you have the ability to charge them will be sufficient to get them to pay you back.
Provide incentives to customers who pay on time – or who join up for a direct debit plan – to encourage fast payment.
When it comes to huge contracts, insist on a deposit as well as phased payment.
Maintain a positive connection with your consumers so that you can identify whether they are experiencing financial difficulties as soon as they occur.
Third, instead of purchasing equipment, consider leasing.
Purchasing equipment and other assets outright may be very expensive in the early stages of a company’s development, thus it may be more cost-effective to lease them or acquire them on hire purchase / or via a kind of equipment financing instead.
Fourth, maintain accurate records
As a business, you may be subject to a variety of taxes, including income tax, corporation tax, value-added tax, business rates, and stamp duty (amongst others). Having insufficient funds to pay your taxes when they become due might cause your company to go out of operation completely.. Consequently, you must maintain correct records in order to assist you in calculating your tax due and completing your tax reports.
5.Identification of possible cashflow issues.
Watch for changes in market circumstances that might cause your projections to be thrown off course. The actions of rivals, the introduction of new technology and innovation into your market, and the fluctuation of interest rates and foreign currency rates are all examples of such events. Keep an eye out for potential shifts in the market and make necessary adjustments to your projections and plans in order to adapt.
If you maintain a positive connection with your bank, you will be more likely to get compassionate treatment if you ever have cash flow challenges.
Look out for consumers who may be experiencing financial difficulties and are unable to make their monthly payments on time. There are various warning signals to watch out for, including the ones listed below.
not paying their payments as quickly as they should
refusal to accept your phone calls, putting lower orders than normal,
credit limit extensions were unexpectedly requested by the customer.
Study of a particular case
Kate Castle is working hard at her company, Boginabag, to master the skill of controlling cash flow. In 2008, while camping in Dorset, she developed the inspiration for Boginabag. Being awake and in desperate need of the bathroom, she reasoned that there must be a better choice than trekking across the darkened campground to the nearest toilet block to use the facilities. Her return to the house prompted her to begin looking for a portable toilet that she might use for a subsequent visit. But all she could find were clunky chemical-based toilets, so she set out to design and build a better option.
The Boginabag portable toilet was born two years after she had successfully negotiated the patenting and product design processes. There are five absorbent disposable bags included with this lightweight foldable three-legged stool, which has a hole in the seat for easy cleaning. They are designed to fit over the hole and may be knotted together at the top before being discarded.
The first part was simple enough, but there was more to come! Because her Boginabags are created in China and then sent over to the United States for sale on her website, monitoring her financial flow has been challenging. When Kate puts an order with the manufacturer in China, she must pay 30% of the whole amount up advance, and the remaining 70% when the items are being carried to her location in the United Kingdom. Creating the toilets takes at least 30 days, and shipping them to the United Kingdom takes another 30 days. Customer money, on the other hand, does not come in until after the product has been sold, which might be weeks or even months later.
Customers flocked to her Boginabag when she featured on the BBC television program Dragons’ Den, where she demonstrated how it would be great for campers and festival-goers to transport their belongings. Customers’ interest was instantly piqued by the show, as was that of dragon Theo Paphitis, who invested £50,000 in exchange for a 30 percent ownership. As a consequence, sales are predicted to soar from £28,000 in 2011 to £150,000 in 2012.
Although this was good news for Kate’s profit figures, it had the unintended consequence of making her cashflow situation even worse, as she was suddenly required to spend far more on purchasing new stock than she had received from customers for toilets already sold – and to pay the money out for at least two months before seeing any of it returned to her account.
As Kate, who works from home in Winchester, explains, “I didn’t realize how critical cash flow was until I got started.” The matter is a major concern for me, though.READ—Strong-willed people think in 14 ways that others don’t. 13 Smart Online Business Tips And Tricks How to Stand Out on Your Freelance Resume
Simple methods for putting an end to payment chasing
Payment troubles may make or destroy your business if you are a fledgling entrepreneur with a growing company. Maintaining a constant and predictable flow of cash is critical to keeping your doors open, your services accessible, and the background parts of your company working smoothly. Unfortunately, not all transactions are as clear as we’d want them to be, and many entrepreneurs spend endless hours tiptoeing around people, suppliers, and other organizations that are late with their payments or who fail to adhere to their contractual obligations.
There are a variety of reasons why bills get unpaid, including:
Your payment conditions are not clearly stated.
Customers are experiencing cash flow issues.
They’ve either forgotten about or purposely disregarded your invoice.
Moreover, although knowing the causes why this is beneficial, it will not assist you in getting your payments back on schedule. So, with that in mind, let’s look at some basic methods for putting an end to payment chasing and allowing you to concentrate on the growth of your business.
Make a financial investment in accounting software.
Did you know that effective accounting software can assist you in more than simply managing your financial commitments; it can also assist you in creating, sending, and tracking invoices? Entrepreneurs that have the correct accounting tools at their disposal not only get paid on time, but they also get paid quicker! Creating high-quality, accurate, and professional-looking invoices is a smart place to start since companies are more likely to react to a company that takes pleasure in its brand image.
Because of the option to automatically send these completely customized invoices, your payment reminders will be received at the same time each month, allowing you to establish a pattern that your customers will find simple to follow. Furthermore, the monitoring feature allows entrepreneurs to determine whether or not these bills have been read and paid at any moment by checking the status of these invoices. When you have the correct tools to assist you, protecting your cash flow is a simple task.
Establish explicit payment conditions.
Clear payment conditions might help to eliminate any ambiguity before your invoice is ever sent. You may make these phrases as simple and jargon-free as feasible in order to eliminate the possibility of loopholes or justifications for misunderstanding. Make them crystal apparent when you sign a contract, and include them on your website as well as on your invoices.
Develop a relationship with your clientele.
Relationship-building and networking are critical components of establishing a successful company enterprise. This strategy may also assist you in receiving payment more quickly and ensuring that your customers see you as a legitimate business partner. A simple “thank you for your business” message at the bottom of your customized invoices may make a significant impact in how your customers see you. Once bills have been paid in full, try sending a “thank you” email or letter in the mail to sweeten the deal and maintain the relationship.
Expand the number of available payment alternatives.
When making payments is simple, you’ll discover that customers pay more quickly. As a result, providing as many payment choices as possible, whether it’s cash, PayPal, credit card, or the touch of a smartphone, while keeping convenience in mind, may help you get paid quicker.
Finally, some thoughts…
Late payments may be avoided by using accounting software that allows for configurable and trackable invoicing. Providing you with more time to devote to other aspects of your organization.