4 Small Business Cash Flow Issues and How to Solve Them

In this article, Doron Gordon, Founder and CEO of Viably, shares four common cash flow issues for small businesses and how to overcome them in the future.

Poor cash flow management is the most common reason small businesses fail. In eCommerce, the problems are magnified by a lag time from production to sale to revenue, fragmented financial data across platforms, and seasonal demand and expenses.

In this article, I'll explore the most common cash flow pitfalls for small businesses in the eCommerce space. I will also provide solutions that you can implement today or build toward. Most importantly, you should have an understanding of small business cash flow and how it shapes your opportunities for growth.

Why is Cash Flow So Important in eCommerce?

Cash flow refers to the amount of money flowing into and out of a business at a given time. Positive cash flow means a business has liquid capital to pay expenses or reinvest in growth. Profitable businesses are not always cash flow positive. This is especially true in eCommerce, where businesses must often pay expenses long before they realize the revenue from those investments.

Small business cash flow management is a critical skill that will help you make decisions and pay for operational costs. More importantly, it will help you convert profit into growth opportunities because you’ll know how much cash you can afford to invest at a given time.

4 Common Small Business Cash Flow Problems

Let’s start with four of the most common small business cash flow problems in eCommerce and examine how you can avoid these challenges.

1) Underestimating Startup and Operational Costs

Early-stage businesses are the most frequent candidates to experience cash flow issues. Many small business owners underestimate the costs of licenses, professional services, initial inventory for product launches, and marketing. eCommerce business owners also make initial investments in technology to help them identify and price products, manage listings and PPC campaigns, and generate reviews. Not to mention platform subscriptions and fees.

In the startup stage of your business, these costs are especially difficult to manage since you won’t see any revenue for a while. But even for mature eCommerce businesses, operational costs can quickly drain your cash flow without careful oversight.

The Solution: Budget carefully. Startup costs are up to you to manage. Many startup owners keep their own books to save money, so be meticulous. Whether your startup capital is bootstrapped from personal savings, fundraised, or borrowed, it’s all you’ve got until you earn some revenue. Even then, it may take some time before you’re profitable.

Track and categorize every expense. Hunt for lower banking fees. Use free budgeting or startup cost templates to help you stay organized. Set revenue goals for product launches that lead your business to profitability. Your cash flow management options expand once you get your business off the ground.

2) Funding Inventory for Product Launches

This is one of the easiest things for eCommerce business owners to overlook. You thoroughly research products, customer behavior, seasonal trends, and pricing before moving forward. You then make an informed decision to launch a new product. You (hopefully) budget enough cash for the initial order, but what happens when the inventory starts to sell?

Spoiler alert: you don’t get paid (yet). It will take a few weeks to see your money, and you need more supply now. If you don’t have cash on hand to back up your first order, you’re in danger of stocking out and losing all momentum. Inventory management is a critical skill in eCommerce, but you can’t do it successfully without managing your cash flow.

The Solution: Don’t just plan a launch; plan a successful launch. Set aside the necessary cash to produce, ship, store, and market three full orders before you ever collect a dime. Start with one order, and when it starts to sell according to plan, you have cash on hand to back it up.

But what if you don’t have that much cash? Even successful online sellers often have their cash tied up in inventory and operations, but there’s an alternative. You might qualify for eCommerce funding to fuel your growth. Product launches and additional inventory during busy seasons are two perfect use cases for eCommerce funding. Once you're up and running, inventory management software like RestockPro by eComEngine can help you stay in stock with more accurate forecasting calculations and timely restock suggestions.

3) Your Business Sales are Seasonal

In eCommerce, most businesses are seasonal to some degree. Seasonality puts tremendous pressure on cash flow because it requires large investments in short periods. The payoff is great, but it doesn’t happen until long after the bills are due.

For example, the holiday season requires heavy investments in inventory, labor, and operational costs beginning as early as July. For Amazon sellers, it could take until December before the Black Friday sales hit your bank account.

The Solution: Tracking your cash flow is a requirement, but forecasting your cash flow is a game-changer. Preparing for seasonal sprints is all about maximizing inventory and PPC campaigns right up to the point of stretching too far. The best way to find that line is to project expenses and revenue over the course of the year and anticipate how much liquid cash you can expect at any given time.

Here are a few more tactical approaches you can take to offset seasonal expenses:

• Purchase smaller but more frequent orders from your suppliers. You pay slightly more per unit, but it limits how much cash is tied up at once and allows you to pay over time.
• Cut expenses in slower seasons. When things are status quo, do you need all of those monthly tech subscriptions and professional services? Can you trim the payroll in the warehouse? Could you dial back (but not turn off) your PPC campaigns and see what happens? Try to save that money for peak season.
• Plan ahead. If you forecast your cash flow, you can anticipate when you might need funding to stock up. You also have a good idea of when you can comfortably pay it back. Shop around early in the year and see if an influx of capital would give your business an advantage.

4) Invoices are Due Before You’ve Been Paid

Everyone in eCommerce deals with this. Your suppliers are due a percentage at purchase and the remainder is invoiced for a later date. In most cases, the terms are net 30. That means 30 days after you place an order, you owe your supplier the full amount. This is well in advance of sales, fulfillment, and revenue resulting from that order.

So, how do you continue to pay suppliers and vendors in advance of your sales revenue?

The Solution: Your options are straightforward, and you should implement a combination of all these strategies. First, negotiate with your suppliers and vendors. See if you can extend the payment terms. This way, you’re already generating revenue from that inventory to offset a big expense. You might even consider paying a little more for longer terms.

Second, diversify your revenue streams as much as possible. With each successful product launch, you have another source of revenue through which you can pay your expenses. Profitable products lead to cash reserves, which will help you budget for inventory and growth.

Third, finance your orders. Your funding provider will extend your cash flow much further than a net 30 or net 60 invoice from a vendor. Now, you’ll have the cash to invest in more inventory. And when the bill comes due, you’ve already made the sales.

Solve Your Small Business Cash Flow Problems Today

There are a number of other cash flow challenges you might face as a small business owner. But in general, these solutions will serve you well across many different scenarios:

• Track and forecast your cash flow.
• Write a budget and hold the business accountable.
• Monitor, trim, and negotiate expenses.
• Save the cash you need for product launches and busy seasons.

And finally, leverage eCommerce funding to fill the remaining gaps. Viably can fund your eCommerce growth and track where every dollar goes with a free cash app.