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Understanding the cash flow bill in e-commerce

Understanding the cash flow bill in e-commerce
Patrik Vieiras
1 September 2022
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A good understanding of cash flow helps e-commerces to keep a good economic condition and to ensure that they always have sufficient financial resources in the bank. In order to keep control of your E-commerce finances, we would like to explain to you why a healthy cash flow is vital for your company, how to read a cash flow invoice correctly and what needs to be checked if your cash flow is currently declining.

How to read a liquidity statement

  • Opening balance: Here you will find the cash balance at the beginning of the reporting period (month, quarter, year, etc.)

  • Investing Activities: In this section, you will find information about your company's capital expenditures. This includes any changes in equipment, assets, or investments. For example, the purchase or sale of equipment, ownership of real estate, or investments in the stock market are recorded. Again, cash refers to total receipts minus disbursements.

  • Financing activities: This section will not be relevant to many e-commerce businesses. However, if it is for your business, cash from investors or banks, dividends paid to shareholders, and debt repayments are reported here. (Interest payments are part of operating expenses).

  • Operating Activities: This tells you how much money your business is generating. In e-commerce, this is probably done by selling your products. Remember that cash on hand is not simply money received, but "revenue/income". "Gross" refers to sales minus expenses, which is profit. For most e-commerce businesses, this is where you will find most of the information.

  • Closing balance: This is the final cash balance after valuing all activities listed in the cash flow statement.

Why is a cashflow control important in E-commerce?

A cash flow (or also known as liquidity) indicates the amount of money that an e-commerce business has in the bank after all expenses have been credited. A liquidity statement typically shows this for a specific time period - monthly, quarterly, or annually. A liquidity planner allows to actually plan expenses such as buy new supplies or invest in some related area of the business and most of all gives a balance of the company performance.

Evaluation of a liquidity statement.

In the perfect setting, at the end of a reporting period, the cash balance is always higher than it was at the beginning, however this is not always the case. Reasons might include:

  • Recently expanded business.

  • Inventory and supply restocking.

E-commerce cash flow management, is a bit complicated. In the case your E-commerce is negative it does not necessarily mean that it is in trouble. It's simply a sign that it had to temporarily increase its own expenses. As long as these costs are offset by an increase in purchases from customers, everything is fine. Not only do you have to sell your product, but you also have to account for inventory, delivery costs, defective or broken products, and returns.

How to improve the cash flow?

  • Control the payments. The fastest way to improve a cash flow is to speed up the payment cycle. Use automatic payments (by credit card) and payments upfront upon the request of the goods. In the exception of this, use maximum Net-30 clients. (Clients with payment clauses of 30 days maximum).

  • Pay immediately to vendors. Many companies try to delay payment as long as possible to keep as much cash in their account as possible. The downside to this system is that the money is already used to pay an invoice, so it's not available for other business purposes. Pay your vendors within a shorter time frame to ensure your cash flow statement is as accurate as possible.

  • Control the inventory. Controlling inventory is critical to maintaining cash flow in e-commerce. If the business is currently short on cash, it may be a good idea to sell some items at a discount to make money on the inventory. When it's time to restock, consider whether it makes more sense to pay a little less per unit and place a smaller order.

Gain control over your cash flow

There are many things to consider when running a business, but knowing exactly what your cash flow is is crucial to the success of your business. This knowledge can be extremely useful in helping you plan for the company's future and make effective decisions about expansion and other business activities. By taking the time to find out more about your cash flow, or by working with companies that can help make your financial management simple and smooth, your business can look forward to a bright future in the years to come.


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