Between inventory, payroll, and all of the marketing expenses, managing your finances can be a balancing act.
You often need more money for inventory to fuel growth. But you also need to ensure you have enough money set aside at any given time to cover expenses — including unexpected ones.
But how do you make these decisions?
You need to implement effective cash flow management strategies for your Shopify store. In this post, we’re sharing how to do just that.
What is cash flow management?
Cash flow management allows you to understand and optimize the amount of money going into and out of your business. It lets you monitor and track your earnings compared to your business’s expenses (like bills, salaries, and materials).
Ideally, you want the amount of money coming into your business to exceed the amount going out, called a positive cash flow. Conversely, a negative cash flow occurs when you have more money leaving your business to cover expenses than coming into your business.
Why is cash flow management important for Shopify merchants?
Cash flow management can help Shopify merchants understand the day-to-day flow and availability of your business’s money, allowing for a more long-term financial outlook.
For instance, knowing your cash flow can help you:
- Identify potential periods of shortfalls — when you might have more money leaving your business than coming in — so you can plan a way to cover the expenses
- Establish an accurate budget
- Plan when it’s a good idea to grow (or not grow) since you’ll know whether available money can be spent on growth versus saving it for an upcoming shortfall
- Avoid and/or get out of a cash flow crunch – As a cash intensive business, you need to manage your working capital efficiently for inventory, payroll, etc.
7 best practices for managing cash flow
In our experience as eCommerce growth accountants, here are seven best practices you can implement to manage your cash flow.
1. Don’t confuse profit and cash flow
Cash flow and profit aren’t the same.
Cash flow is the balance of cash going into and out of your business over a certain period or specific point. However, profit is how much is left after subtracting all costs from your revenue.
While both are useful, they provide different information about your business. For example, profit helps indicate the financial health of your business overall. But cash flow offers more information about how your business is functioning financially from day to day.
Additionally, just because a business is profitable doesn’t mean it has a good cash flow. Profit is an accounting equation that can be messy due to various complex accounting principles, cashflow is the reality of how much cash is on-hand at any given time. For instance, a business could experience growth with a significant increase in orders but not have enough available money to fill the orders.
2. Keep your books up to date
Regularly updating and maintaining your business bookkeeping lets you better understand your business over time. In addition, having this regular information can help you identify likely periods of shortfalls, periods where you can invest in growth for your business, and more.
This will also ensure that you have all information accounted for as you make decisions about your business, help set an accurate budget, and make better informed financial decisions based on your business’s historical data.
3. Set up cash flow forecasts
Setting up cash flow forecasting for your Shopify business can help you understand what you need to do to cover expenses and grow your business. It can also help you build a buffer to cover unexpected expenses or plan for when to order more inventory. It may also pinpoint the times where outside working capital needs may be necessary, as well as, how long it will take to repay borrowed capital.
Essentially, cash flow forecasts estimate how much cash will enter and leave a business in a given period. This information can help you make more informed plans during the quarter that can impact or depend on your cash flow. For instance, you may find that the first quarter has more expenses than the second quarter, affecting growth, hiring, or investing decisions.
You can create a cash flow forecast by hand or use accounting software to help. You can also update your forecast throughout the period to help maintain and improve its accuracy.
4. Factor in seasonal spikes to your monthly, quarterly, and annual projections
Sales often vary from month to month or over different seasons, especially for eCommerce businesses. Additionally, certain types of products may sell more or less depending on the time of year. For instance, clothing companies are more likely to sell bathing suits leading up to summer than winter.
Understanding and taking into account your seasonal spikes can help you:
- Improve inventory stocks and reduce losses due to stock ordering errors
- Avoid overstocking or running out of stock that’s popular at certain times of the year
- Make informed decisions on marketing and timing sales activities
- Understand fluctuations in customer demand
- Plan for periods with less income
This information can help you improve your understanding of your cash flow and establish more accurate forecasts.
5. Audit your expenses on a regular basis
Business expenses can add up, increasing the amount of money flowing out of your business. Additionally, as businesses grow and evolve, the expenses can change.
Auditing your expenses regularly can ensure you’re:
- Spending money on only the things you really need
- Know how much incoming money you need to cover your expenses
- Identify any expenses you no longer need
6. Use a cash flow management strategy like Profit First
A cash flow management system can help you make informed decisions and adjust your business as needed. Additionally, using a system helps ensure you’re consistently evaluating your company and able to identify problems early instead of reacting.
One popular strategy for small businesses is the Profit First system by Mike Michalowicz. This approach changes the generally accepted accounting principle of “income-expense=profit” and switches it to “income-profit=expense.” This approach can help small businesses only spend money on expenses they already earned.
Additionally, this approach can help you set up a system for managing business spending. For instance, instead of putting all your business money in one account, you can set up separate accounts for operating expenses(OPEX), inventory, taxes, business savings, owner’s salary, etc.
7. Invest adequately in sales and marketing
Having solid sales and marketing are key elements to help improve your cash flow.
Investing in sales and marketing consistently, even in an uncertain financial climate help you:
- Attract new customers
- Maintain existing customers’ loyalty
- Increase repeat sales
How Bean Ninjas can help Shopify businesses
Whether you are looking for help creating a Shopify cash flow management system, want help getting Xero or Quickbooks set up, or need regular eCommerce bookkeeping support, our team at Bean Ninjas is here to help. Schedule a free call here.