Operating in an environment of consistently changing trends and market demands makes e-commerce uniquely challenging for business owners. It’s easy to be left behind by competitors who are in a better position to deal with the uncertainties of the sector.
There’s one thing that is certain in the world of e-commerce, though, and that’s cash is king. Good cash availability provides the fuel that propels a business forward, allows it to meet revenue and profit targets and reach its full potential when the time comes to exit.
What makes controlling your cash so important in e-commerce?
E-commerce success relies on smoothing out the sometimes severe variations in demand – not just seasonally, but for the days and weeks that are now an established part of the online trading calendar, such as Black Friday and Cyber Monday.
Planning your cash needs well in advance is crucial to providing the best customer service, delivering goods as promised, and extracting the maximum profits possible from these much-anticipated shopping days.
Good stock control is, therefore, a key feature of running a successful e-commerce enterprise, which leads us back to making sure sufficient cash is available to purchase additional stock at the right times. The intricacies of e-commerce clearly make cash forecasting a necessity.
How do you forecast cash flow in an e-commerce company?
Including all your projected income and expenditure over a specified timeframe allows you to see where cash shortfalls will occur and seek additional funding where necessary. Cash forecasting is also fluid, so you can amend the figures if they become more certain with time.
Using the right technology you can incorporate all business elements that affect your cash position and get a full picture of how cash flows in and out of your company. The information you’ll need includes but isn’t limited to sales and other expected income such as tax refunds, as well as operational expenses and loan repayments.
When all the figures are in, subtracting your net expenditure from net income gives you a positive or negative figure for cash. This can guide your spending or allow you to take proactive steps to resolve the problem if cash flow is negative.
Benefits of cash flow forecasting for your e-commerce business
Instil confidence in potential investors
Investors need clear evidence that you’re running a stable business and that cash flow is healthy. Long-term cash flow forecasting shows you’re in control of your business’s cash, which in turn, helps to attract investment.
Test different scenarios
Once your cash flow forecasting is more established you can test out different scenarios, such as what would happen if sales rose or fell significantly, you lost a key customer, or operational expenses increased.
Secure lending
As well as highlighting when you might need more funding, accurate cash flow forecasting supports your applications for borrowing by showing the lender how the business can afford to repay.
Easier inventory management
Cash forecasting smoothes out the ups and downs in demand that are experienced in your sector and helps you manage your inventory so you’re not over-purchasing or running out of stock at a vital time.
Cash flow forecasting in preventing financial distress
Financial decline can take hold quickly when cash flow is compromised and forecasting is a tool that safeguards against this. Cash flow insolvency may lead to liquidation so the importance of forecasting for e-commerce businesses cannot be understated.
Cash flow forecasting uses known information from the past to help control the present whilst also providing vital insights that guide future strategy. It can help you in so many ways, from seeing what drives your cash flow and where you can make improvements, to encouraging investors and reducing lender risk.
Jon Munnery is an insolvency and company restructuring expert at UK Liquidators, a leading provider of company liquidation services to both solvent and insolvent limited companies.
