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How to Understand and Manage the Cash Flow Cycle for eCommerce business

eCommerce Cash Flow Cycle facts & figures

If you are like most eCommerce entrepreneurs, you probably already figured out that one of the greatest challenges is to ensure fast (and cost-efficient) shipping. This article delves deeper into the issue, by sharing facts & figures about how long it takes for funds to reach your bank account after an online transaction has taken place. It also explains what factors play a role in determining when you can expect to see money deposited into your account.

Factors influencing the speed of Cash Flow Cycle for eCommerce business

In ecommerce, cash flow is everything. You have to have a constant revenue stream to keep the business going, regardless of seasonality or outside factors influencing sales. The more expenses you can cut out along the way, the better. 

When starting an ecommerce store it’s easy just think about making sales and whether people will buy from you. But if you don’t know where the money is going, you’re probably losing more than you think (and wasting precious time trying to figure it all out). So let ‘s go over the big things that affect your cash flow, which you should be aware of at all times.

1. Costs to Acquire a Customer (CAC)

One common mistake entrepreneurs make is not tracking how much it costs to acquire a customer (CAC). For example, let’s say you’re selling t-shirts for $24.95 each and you made 100 sales in September 2015. If one customer turned into two customers by October, then that’s good news right? Not exactly – what if it cost $100 to acquire that first customer? That means at least half your customers are unprofitable! But if the same people spent $50 each month on their t-shirts, you’ll break even . If these customers continue to spend $50 per month every month, you’ll turn a profit. So while it may be obvious that you should focus on acquiring more customers who will spend the same amount, or more money over time – what are some of the best ways to do this?

Facebook ads are great because they allow you to target an audience by location, age, interests, etc. When setting up your ads use gender and language targeting options so you can get specific with your ideal customer or offer. You can also run multiple ads at once for different products then compare which one gets the most conversions based on budget spent.

Email marketing is great for reaching out to past customers who abandoned their carts in order to  give them a second chance to complete their purchase. You can also offer discounts and exclusive offers for those who come back as well as giving your past customers the ability to refer friends and family, thus creating a win-win situation .

Now that social media and email marketing are becoming more important than ever before for ecommerce stores, you might not even need to spend money on acquiring new customers through Google or Facebook ads. Try asking your existing customers for help spreading the word about your business-they might just do it! Also try offering them an incentive if they tell other people about your products or services (like a discount) . Not only will this drive down your CAC , but incentivize current customers to continue buying from you.

If you’re not comfortable with CAC, consider hiring a marketing consultant.

2. Costs to Sell a Product

First, you have your variable costs of materials, labor and shipping that are all integrated into the price you charge to make each product or service that you offer. Next, you have fixed costs to run the business such as website hosting fees, accounting software , customer support services among other things . These may be monthly recurring expenses or one-time upfront costs to get started – it depends on what’s best for your specific situation . You can check out Shopify’s pricing plan here if these types of expenses sound intimidating to manage.

If we go back to our cost per acquisition example #1, unfortunately we’ll  have to say goodbye to half our customers until they’re willing to spend the same amount again. But if you’re able to keep this same customer spending $50 per month on your products (or more) then that’s great! You can use any leftover money in your company’s bank account to re-invest into advertising or marketing, purchase new inventory, pay yourself a salary , offer discounts/promotions and so much more!

When it comes time for quarterly taxes in the US, you’ll need all of your transaction records including how much was spent or earned for each reseller. Shopify stores are required to submit 1099 MISC forms for anyone who earned at least $20k per year selling on their business platform. If you don’t want to deal with the hassle of manually filling out tax forms and mailing them (which can take quite a bit of time!) then you can choose to use an accountant or let Shopify handle it.

Recurring revenue is like money in the bank for ecommerce businesses – it’s much easier to plan ahead and manage your business finances when you know how much cash will be coming in each month. If you offer subscriptions, selling in bulk or bundling products, consider raising prices so recurring customers won’t feel cheated by higher costs. You can compare Shopify’s pricing plans here if you’re interested in starting a subscription ecommerce store .

3. Costs to Sell a Product per Unit

Many types of retailers will add  a markup to each item they sell. This process is called costing-out your products and it’s a strategy that’s used to determine the maximum price you should charge for a product or service. In other words, after finding out what your costs are to make that Buzzfeed Tasty recipe video , then multiply that number based on your ideal profit margin (which can be anywhere from 10% – 30%) .

To find this optimal profit margin, take the amount of money you want to earn in gross revenue during one month, then subtract all of your expenses including labor, materials and overhead costs . For example, say you’re starting an ecommerce store where you sell novelty coffee mugs  – when accounting for every expense possible (overhead , taxes, shipping fees, etc.) your business will probably experience $1,000 per month in total costs.


After doing some research on similar products sold online, you’ve determined that the most money you could hope to earn would be $4,000 in gross revenue during one month (selling 100 mugs). So your new price for each mug should be at least $40 after adding up all of your expenses plus a 10-20% profit margin . This means that if these coffee mugs were bought wholesale from the manufacturer and cost out at around $5.00 each with shipping , then your customer would pay about $30 per mug after all of their combined costs are totaled – this includes overhead/rent/wages/shipping/reseller costs, etc.

Remember that your target customer may be willing to pay up to $100 for that same Buzzfeed Tasty recipe coffee mug  – plus they’re probably more likely to buy additional items from the same company too. If you find yourself selling retail products at a small price point, there’s a good chance it will cost you more in overhead expenses compared to selling bulk orders or subscriptions with recurring revenue .

4. COSTS ASSOCIATED WITH STORES THAT SELL MULTIPLE PRODUCTS

Here’s where things get interesting – if you plan on starting an ecommerce store that offers multiple product lines or types of services then you’ll have some added labor and planning costs before hitting the  “sell” button. Some of this will be determined by your business model , but you can also consider how many products are sold per order .

For example, if each product is offered in small/medium/large sizes or has different color options then it will require more time and attention compared to selling a single item “as is” . To keep things simple, let’s say you plan on starting an ecommerce store that offers only 1 product – so the first step would be figuring out what expenses come with selling a specific item.

Remember that most wholesale vendors charge a restocking fee when returned goods aren’t in good condition during returns. Since postage printing rates go up around January-February , most online retailers start stocking-up  on boxes and bubble wrap during December so they can mark-up their prices on January 1st.

So how much should you charge for each product after figuring out your costs? You can either price products with a markup or cost-plus formula . Most ecommerce stores go with the markup method , which means adding up all of your costs (rent/wages/shipping/overhead, etc.) then multiplying that amount by 2 – 15% to find the new retail price. Using this strategy, your $5 coffee mug might now cost more than $8 depending on how much it actually costs you in overhead.

But what if you want to offer wholesale pricing and market yourself as “the cheapest place” in town? Then we would  suggest using the cost-plus formula instead, which involves adding up your costs (rent/wages/shipping/overhead) then add another 10% or more to that number – this will help you reach an attainable retail price point while still offering discounted wholesale prices .

So if these coffee mugs were bought wholesale from the manufacturer and cost out at $5.00 each with shipping, then we would add another 20% to the final price before marketing it online: $6.25 per mug becomes $7.95 + shipping . Keep in mind that most wholesale vendors offer discounts to retailers who buy larger quantities , so we suggest reaching out directly for better pricing and special offers when possible. 

eCommerce Cash Flow Cycle Impact on your business

If you are concerned about the speed of your company’s eCommerce cash cycle, here are some things you can do to improve your bottom line:

Increase revenue per transaction – by working to increase the average order value and reduce your returns and refunds. Keep an eye on your customers and watch for trends in how they buy from you, so you can tailor your marketing campaigns accordingly.

Look at payment methods – with some card providers offering same day or even real-time ecommerce cash cycles, look into these options for speedy transactions that will speed up the funding process too. PayPal offers this service if you bank with them through their Instant Transfer option.

Minimise customer wait times – if it is taking too long for customers to get their products, they might give up on ordering altogether. Make sure you choose a reliable merchant account provider who specialises  in eCommerce, so you can reduce order processing times and speed up your business’s cash flow.

Add to your company’s success – take advantage of related services offered by merchant providers like high risk merchant account companies that allow you to increase your revenue (and the speed at which it reaches your accounts) by offering additional products for sale through your ecommerce website. Make sure you choose a provider who has experience with online businesses and offers reliable payment solutions.

Most eCommerce startups fail to Understand the Cash Flow Cycle of their businesses. But why do you need to understand it? 

Because when you are aware of it, then only you can manage the flow of cash in your business more efficiently. You can also avoid unnecessary wastage of money and time during each step of the buying process for an online store. If it has to be explained in very simple words, “Cash Cycle is nothing but a process which takes place between payment collection from customers and repayment of money to suppliers.” Now let’s discuss all the steps involved in Cash Flow Cycle below: 

The Cash Flow Cycle starts:

a.)  When a company receives an order from its customer through website or offline mode. Once the order is placed successfully, they will transfer the amount  of money to the company’s bank account. 

b.) After transferring money, the company will confirm the order to its suppliers through fax or email or by phone. Remaining amount of money is sent to the supplier who originally provided their products for order fulfillment. 

c.) Once the product reaches the customer’s hand, they are required to pay the remaining amount of money via cheque/DD/online banking. 

d.) The cycle ends when the company receives cash from customers and sends it to their suppliers (may be the same person).

Note:

If any error occurs during this process then you can end up with bad reviews on your website which cause loss of customers and decline in revenue. So take all necessary steps like selecting the right courier service provider, communicating with the client very politely etc., while managing online transactions ideally.

Can Cash Flow Cycle Management affect eCommerce business?

Cash flow cycle management is essential for any company, whether it is an online store or just a brick and mortar business. Probably you are thinking that managing cash flow could help your ecommerce business? Let me explain to you. If your staff are not aware of this Cash Flow Cycle, then they might face problems in keeping track record of transactions which lead to wastage of time and money which results in poor customer service experience. 

Furthermore if the mistakes occur because of lack of knowledge about the Cash Flow Cycle process, then it may result in giving bad reputation to your ecommerce biz. Unnecessary rework also occurs because of lack of awareness which causes wastage of resources like man hour & material cost etc., Not only that if  you ignore Cash Flow Cycle, then probably you will not be able to manage financial issues like payments of salaries and other monthly expenditures on time which can even affect your business badly.

How to keep track of Cash Flow Cycle for eCommerce business?

There are many ways to keep track record of each and every transaction happening within your ecommerce business. But one most efficient way is through the use of POS software. 

What is POS Software? 

POS Software or Point of Sale software is a type of application that runs on a device known as Point of sale. POS is the abbreviation for Point Of Sale, and this system manages sales transactions in retail stores like supermarkets and departmental stores. The point-of-sale (POS) software allows payment processing and other related functions to be carried out at the store counter rather than by a central office / server. An important function of this software is creating reports which can be used to track inventory usage. Some retail businesses use their POS software for this task alone.

How does it work? 

This enables you to manage all types of transactions happening over website or offline mode with ease. Using such advanced tools also helps companies in managing their expenses on different departments like product development, marketing etc., It also helps them in saving manpower cost because they don’t need to hire additional staff for this task. Not only that reduces manual calculation errors which lead to  wastage of time and effort.

What are the Advantages of implementing a Cash Flow Cycle on eCommerce business?

Cash flow cycle is the perfect solution to manage your ecommerce business. When you are starting an online business, it can be difficult for you to know where exactly to invest your money. This app makes cash flow cycle for ecommerce stores because cash flow management is very important for any kind of business. Here are some benefits of using Cash Flow Cycle on your ecommerce business:

Accurate Profit and Loss report: Cash Flow Cycle updates all transactions so that you can get accurate profit and loss reports. It also enables you to track every purchase made by the customer, making it easier to calculate the revenue generated by each transaction.

Useful reports like Annual Report Summary: will provide useful insights about your business like aging receivables, outstanding  receivables, credit limit and can thus help you take necessary actions to bring down the receivables.

Manage Cash Flow: One of the most important things for any business is cash flow management. With Cash Flow Cycle, you can manage your cash flow effectively as it enables you to generate a list of bills that needs to be paid and this ensures that all expenses are met on time. You can also define multiple payment gateways which means more customers will pay via your preferred gateway and increase sales conversions.

With Cash Flow Cycle, you can easily keep track of outstanding invoices and create invoices with just a few clicks. Moreover, you can also send customizable email notifications to remind unpaid customers about their outstanding payments or  overdue invoices.

Manage employees’ salaries: You can also manage your employees’ work hours and calculate their salary with the help of this app. All you need is to enter the number of working days in a month, select the working hour per day and then enter the hourly pay rate. It will automatically give you an idea how much money to deduct from each employee’s credit card on payday with a cash flow cycle for ecommerce store management.

You can generate bills according to your needs with this app like generating bills for office electricity or managing business rent expenses etc. Moreover, if done correctly, it will make sure that every transaction is updated on a daily basis so that you don’t miss any entry at all.

Once implemented, you can also expect to gain a number of benefits like:

  improved customer service 

better transparency in financial activities etc., which results in improvement of the company’s overall revenue growth. 

it also helps companies in taking crucial business decisions like deciding optimum stock levels for different products because it enables them to monitor inventory closely. Furthermore it enables companies to manage purchase orders easily so they don’t need to waste their valuable money on sending goods back because sometimes these return items become unsellable or break down after 1-2 uses or simply clients don’t want them. 

it also reduces operational overhead cost because these advanced tools not only help companies in keeping track record on transactions but also helps them in improving internal communication. 

furthermore helps companies in managing their expenses on various departments like product development, marketing etc., so they don’t have to hire additional staff for this task.

Other important figures to Understand in the Cash Flow Cycle for your eCommerce business are:

1.) Net profit: your total annual revenue minus all associated costs (including overhead and more, which we will discuss in a bit). For example, if you had $100,000 in revenue and $70,000 of combined overhead and cost of goods sold expenses for the year, then you would have a net profit of $30,000 before taxes.

2.) Operating profit: this is your net profit (as mentioned above) minus interest expense on any outstanding debt or financing for the business’s operations (new equipment purchases; renovations; etc.). If you had an operating loss of $10,000 during the year it means that there was no cash flow available to service additional debt used to finance daily operations . Of course , you may be able to take on debt anyway, but continuing to do so will affect the business’s creditworthiness.

3.) Working capital: this is your current assets minus your current liabilities (current assets include cash and any accounts receivable; current liabilities are typically things like line of credits, short term debt). This number reflects how much liquidity you have available in the business to make new investments, service debt, etc. A good rule of thumb is that working capital should be at least three months’ worth of operating expenses . If it isn’t, then there probably aren’t enough liquid assets in the business currently to fund future growth , which means that more debt must be taken on . If you’re trying to decide between making needed repairs or  investing in new inventory , then you would want to know how much working capital is available before deciding.

Additional important figures for your eCommerce business Cash Flow Cycle

Cash Collection: Company transfers money to its own bank account and gets payment confirmation from customers. Money starts flowing into the company’s bank account now. This amount can be found in Company’s Bank Statement or ledger entry at this stage only. 

Cash Inflow: Amount received from customers is stored in a fixed deposit (Saving Account) for a certain period of time as per company policy (If any). At times, companies transfer this money straight away to the current/operating account so that it can use it  for business expenses, etc.

Cash Outflow: Company transfers money from its Current Account to supplier’s bank account for buying products.

Security Collection: Supplier withdraws money from current account and attaches a security with that against a guarantee that if a particular amount of invoice is not paid by a particular date then this security will be automatically converted into cash and transferred to supplier’s bank account.

The eCommerce cash flow cycle is all about understanding the different stages of the cash flows in your business. eCommerce storefronts typically do not generate regular positive  cash flow, so it’s up to you to ensure you are forecasting correctly during the different stages of your cash flow cycle.

Along with knowing where cash is spent and when it will be recouped, any successful ecommerce business owner should also know how much capital they have available to reinvest in their company.