We can use the following formula to calculate operating e-commerce cash flow : Net cash from operations = cash receipts from operations – cash outflows for operations Let's analyze this equation a bit: Cash outflows for operations : for e-commerce stores, such as payments to suppliers, salaries, interest, income taxes. Cash Receipts from Operations – This is cash from the primary business activity. To fully understand it, let's draw an example: Suppose the store had $2 million in annual sales, all in cash. Product expenses were $1 million, plus $100,000 in salaries were paid, along with $50,000 in interest charges to the bank and $200,000 in income tax. Then: Net cash from operations.
Learn more: ROI and ROAS: Variables facing each other in Digital Marketing Why is e-commerce cash flow important? A study by email database Insights , which aimed to assess the failure of 101 startups and find out why, showed that almost one in three — 29% — failed companies were left without liquidity. In other words, a lack of proper management and planning ahead of e-commerce cash flow challenges is one of the leading causes of company closures . This was only surpassed by the main cause: the market does not need the product on offer, at 42%. Particularly, this important reason also adds to the worsening of e-commerce cash flow , since the organization cannot make sales to replenish it.
The third most common reason was not retaining the necessary equipment to execute the business idea, representing 23% of the failures. Understanding the fluctuation of cash is essential to ensure that we can complete the cash flow cycle and remain profitable. The current account statement gives us visibility into where the money is actually coming and going. It gives us what is called “operational integrity”; which is to make sure that business activities are cash positive so that we don't have to rely on outside sources to stay competitive. In eCommerce terms: This is a critical tool for knowing when to buy new inventory and hitting the right target to save costs and maximize profits. 3 good practices to manage e-commerce cash flow.
