The Biggest Challenge With Cash Flow, and How To Overcome It

The Biggest Challenge With Cash Flow, and How To Overcome It

Some business challenges aren't actually about how much money you are making, but how to plan for growth by managing your cash flow cycle. This can be challenging in running an e-commerce business with the vast fluctuations in money in and out.

For many start-ups, the challenge is a timing issue. Cash flow can quickly become one of the many reasons it’s so hard to get a new business off the ground.

First, let’s look at Cash Flow Management.

Cash flow is the amount of money coming into and out of a business. Positive cash flow is more money coming in than going out (AKA In the Black) and negative cash flow is less money coming in than the expenses needed to operate the business (AKA Running at a loss).

Calculating cash flow is easy if you have the right data in front of you. It is the cash available at the beginning and at the end of a specific period such as a week or a month. Positive cash flow is if there is more in the account at the end of the period than when the period began and less would be a negative cash flow.

Managing cash flow is difficult. The fluctuations are every day, weeks, months, seasons and years! And, that won’t change.

Perhaps you’re one of the lucky few that have made it deep ‘In The Black’, where excessive cash can breathe. Unfortunately, some aren’t so lucky. In fact, one study found that 82% of businesses fail due to poor cash flow management skills.

This is one of the areas to focus on that will have a dramatic impact on your business.

The Three Rules of Cash Flow Survival are:

Rule One: Every Dollar Counts. Cut costs as much as you can, without sacrificing customer service or quality. Be ruthless!

Here is a tip, each month we evaluate all expenses to see if there are any to cancel. In fact, just this month I shaved off $697 worth of expenses, which is $8364 over the next 12 months.

Are you paying for services or subscriptions you don’t really use or need? Maybe! Are you negotiating better prices or at least terms with your suppliers?. Keeping more money in your pocket is the name of the game.

Rule Two: Inventory Matters. Timing is everything! How much capital do you have tied up in slow-moving inventory? Knowing how much inventory you need to order is a difficult task. Holding too much inventory can crush your cash flow, but running out of stock is equally detrimental. So managing the flow of sales and inventory turnover is critical.

Rule Three: Profits Do Not Always Equal Cash. Profits are an accounting term, the by-product of a journal entry between 2 columns in a spreadsheet (revenue and expense). Just because you are killing it, with a + 20% margin, doesn’t mean that money really in the bank account!

To play the long game, you need to concentrate on cash flow, while optimizing your profit margins. Cash is King and always will be.

In summary, cash flow management can be simple: know your numbers and deal with the troublemakers. Be consistent at managing your flow of cash. And, get control of your cash flow by understanding where it is all going.