The world of ecommerce is constantly expanding, and it’s more important than ever to make your mark as an online seller. The Covid-19 pandemic has caused online shopping’s popularity to increase even further as global ecommerce sales grew by 27.6% in 2020 and are expected to have risen further throughout 2021.
Cash flow disasters are by far the most common killers of small business, with some research suggesting up to four-fifths of all businesses that fail in their first five years were forced under thanks to cash flow problems.
There are some business mistakes that simply stop a business from growing, but cash flow mistakes can stop your business from surviving.
We look at five of the worst cash flow mistakes growing online sellers can make.
Not using hedging products to secure the price of international invoices
Whether buying stock or paying service providers, currency market volatility adds yet another layer of unpredictability to your cash flow management.
Fluctuating exchange rates could change the amount you have to pay month-on-month by several percentage points.
This means you have to leave a wide margin of error in your forecasts for international invoice payments - unless you use hedging products to fix your costs.
A Forward Contract allows you to freeze a current exchange rate and use it up to a year in the future, meaning you know exactly how much you’ll pay to fulfil foreign invoices.
Not budgeting for daily cash flow requirements
You need to know what is entering and leaving your books on a daily basis, but also what’s left over.
Creating a cash flow budget allows you to see how much wiggle room you have in your day-to-day finances, which is a vital piece of information when it comes to making purchases, considering new products, marketing your business or taking on new staff members.
Without a budget, you’re making these decisions blind, and you may not realise that the new outgoing is unaffordable until it is too late.
Seeing as you’re selling online, you’re likely to see earnings and outgoings fluctuate in response to volatility in the currency markets. This also needs to be budgeted for, as a sharp rise or fall in exchange rates could otherwise derail your entire cash flow by cranking up the cost of invoices or shrinking repatriated profits.
A cash flow budget also allows you to prepare for the times of the year when the strain on your cash flow will be heaviest, as you can identify these in advance and use months where your costs are low to create a buffer against rising expenditure.
Having no cash reserves
Unfortunately, regardless of how well you plan ahead and how accurate your forecasts, things sometimes go wrong and surprises happen.
You’ll face unexpected costs or late payments, and these can deliver a significant blow to your finances if you aren’t prepared.
It’s therefore vital to keep some cash in reserve to act as a buffer against unexpected expenses or earnings shortfalls.
It’s worth keeping cash equal to a couple of months’ worth of expenditures in reserve just in case the worst should happen, then you’ll be prepared and able to minimise the negative effect on your business.
Overestimating sales volumes
It’s easy to be over-optimistic when it comes to predicting sales growth, especially when using an international marketplace that promises the world.
Getting your sales forecasts wrong can leave you with numerous problems. Not only do underwhelming sales leave a hole in your cash flow, they can also leave you with excess stock – ordered in the belief that sales would be much higher – that you have to find something to do with.
Don’t ignore your sales history, if you have one, or the history of other businesses in your sector. Working on creating realistic forecasts is an important task that ensures you’ll be adequately prepared for the worst and best-case scenarios, as well as the middle-ground.
Everyone knows you have to invest in a business to get it off the ground.
Knowing the difference between a vital capital expenditure and an impulse purchase that ‘feels’ like the kind of thing a business should be spending money on is important.
You can’t afford to restrict your cash flow with unnecessary purchases and luxuries. Look at what meets your needs and go for that; everything else can wait until you have a plan for growth.
Get used to evaluating every purchase in terms of the return on investment you expect to receive from it; if you can’t see it paying for itself, you know it’s best to leave it alone.
Enjoy the benefits of solid cash flow when selling online
Cash flow is the lifeblood of your online business; without stable and well-managed cash flow you’ll spend your time fighting numerous fires, chasing up payments, and being pursued for late payments yourself.
Follow these tips and you’ll be on top of your cash flow and prepared to make the most of opportunities and avoid pitfalls.