What is cash flow management and why it is important for ecommerce businesses

19 March, 2024
Tom Mercer

Tom Mercer

8 minutes
Person in front of computer

In our experience, many eCommerce business owners place too much emphasis on revenue and not enough focus on cash flow.

This leads to cash crunches when it is time to place a big inventory order or pay the team that could be prevented.

If you find yourself in need of more working capital, there are three ways to increase cash flow: 

  1. Increase your sales/revenue 
  2. Cut expenses
  3. Seek out short-term financing 

In this post, we’re going to share some actionable strategies to better manage your cash flow and increase eCommerce working capital in times of uncertainty.

What is cash flow management?

Simply put, cash flow is all of the money flowing in and out of the business in a given time period. And, cash flow management is the actionable tracking of cash inflows and cash outflows. It includes analyzing cash flow trends, forecasting future cash flows, and taking actionable steps to ensure financial stability. One effective cash flow management system is the Profit First Framework. It helps people better organize where their cash is, budget their day to day costs, and know at a glance, ‘Okay, I’ve got X in operating expenses, and I’ve got Y for this month’s profit. So, I know I’m doing okay.’

Simply put, the Profit First Framework forces business owners to run a more profitable company, which usually means running a more streamlined operation in terms of the cash you’re spending for the money you bring in the door.

Pro Tip: We recommend having three to six months’ worth of cash to cover your expenses just as a backup. So, in times like these, if you have been running Profit First for a while, the benefits are showing up because you’ve got a buffer to help you through tough times.

What’s the difference between cash flow and profitability? 

The difference between cash flow and profitability lies in the timing and nature of the transactions they represent: 

Cash flow refers to the actual movement of money in and out of a business over a specific period. It focuses on the liquidity of the business, indicating how much cash is available at any given time to cover expenses and investments.

Profitability, on the other hand, refers to the financial health of a business in terms of its ability to generate profits. It is typically measured over a longer period, such as monthly, quarterly, or annually, and reflects the difference between revenue earned and expenses incurred.

For instance, a business can be profitable but still experience negative cash flow if there are late payments or if expenses exceed the available cash on hand. Similarly, a business can have positive cash flow but may not be profitable if expenses consistently outweigh revenue.

That’s why it is important to keep track of both profitability and free cash flow, since profitability assesses the overall success of a business in generating income and cash flow management ensures that the business has enough liquidity to meet its short-term financial obligations, meet payroll, and continue to run its operations.  

Why is cash flow management important for ecommerce entrepreneurs? 

Cash flow management is essential for ecommerce businesses to plan ahead, maintain a solid financial position, and ensure long-term success. This means you can do all of the following: 

  • Meet financial obligations
  • Avoid financial strain
  • Secure better terms
  • Take advantage of discounts
  • Sustain supplier relationships
  • Meet your sales and income tax obligations
  • Facilitate strategic planning
  • Mitigate business risks and potential cash flow issues 
  • Reduce your own stress

How to manage your cash flow

There are three keys to cash flow management.

Understand your baseline numbers 

In order to do this effectively, you first need to know your baseline financial numbers, including revenue, expenses, profit, and free cash flow.

Here at Bean Ninjas, we talk about knowing your numbers all the time. After all, how can you grow your business if you don’t have a clear picture of your cash position at any given time?

This is especially important in an economic downturn. The old adage – cash is king – is more important than ever right now. Often the best deals are available during a downturn, be it strategic business acquisitions, new hires, or supplier terms.

When you know how much money you are generating from new sales and how much money you are spending on expenses, you’ll know what you need to maintain your baseline. 

Read your cash flow statement 

One key financial statement in Xero that is invaluable for this process is your cash flow statement. A cash flow statement aims to have a holistic picture of all of the cash moving in (such as new sales) and out of the business (such as expenses).

For example, if you have delivered $10,000 worth of sales in Amazon during the last week of the month and you’re using accrual accounting, you booked those Amazon sales at month end, but that cash will not hit your bank account as the Amazon settlement will not post for another week. Then, there are the timing differences related to the accounting for the production and purchasing of inventory. Because you’ve spent the cash to produce or procure your product well before you will record the expenses (costs of goods sold).

The key is to look at the trends and make sure you understand why things are going up or down at any given time. 

It is not always a bad thing if your expenses are going up. For example, if you are spending more on Facebook ads, that’s resulting in more sales and more cash in the bank, that’s great news. Your return on investment for that advertising channel is working. 

Pro Tip: If you have 3-6 months of expenses in the bank, then we recommend looking at your cash flow statement monthly. And, if you are in a cash flow crunch,you should be looking at this weekly in addition to monitoring accounts receivables.  

Build out cash flow forecasts 

When you use the Profit First Framework combined with cash flow forecasting, it can be especially powerful because it gives you an extra level of detail, including: 

  • Your current cash position 
  • How much cash you will have to pay yourself
  • How much cash you’ll have to pay your team 
  • How much cash you have set aside for your next large inventory purchase
  • How much cash you have set aside for year-end taxes
  • And, if your business will still be cash flow positive at a future point in time. 

Then, you can forecast out different, future trends if sales increase or decrease by X%. For example, if your revenue drops by 40%, you know that you have to cut X amount in expenses if you want to remain cash-flow positive. 

Cash flow management and tax planning 

Cash flow management can make tax planning easier while alleviating financial stress and ensuring compliance with regulatory requirements.

By keeping accurate records and utilizing tools like online sales tax calculators and platforms such as Hubdoc for expense/receipt management, businesses can streamline tax processes and optimize VAT claims, if in the UK or Europe. Or, optimize sales tax collecting and filing if in the US.

Then, set aside funds for taxes in separate accounts, such as those offered by online banks like Revolut and Wise, which helps businesses avoid last-minute scrambling for funds.

Lastly, submitting tax returns early provides clarity on expected payments and enables businesses to accrue necessary funds in advance, promoting financial stability and peace of mind.”

Cash flow management and inventory planning 

One critical piece of ecommerce business cash flow management is inventory planning. You need to strike a delicate balance between stockouts and overstocking, which is essential to maintain a healthy cash flow and operational efficiency.

Stockouts, which occur when products are unavailable for purchase, can result in lost sales opportunities and dissatisfied customers. To mitigate this risk, businesses must track product lead times and turnover rates, ensuring they have sufficient inventory on hand to meet demand without excess.

Conversely, overstocking poses its own set of challenges, tying up valuable cash reserves and incurring storage costs. Holding excessive inventory not only limits cash flow but can also increase the risk of raw materials as well as inventory reaching their expiration dates, leading to potential losses.

To address this issue, businesses should use inventory management software, regularly review their inventory levels, prioritize fast-moving items, and negotiate favorable payment terms with suppliers. 

How to increase eCommerce working capital 

We’re sharing the three main ways that you can improve cash flow and increase cash balances in your business.

1. Increase cash flow from new sales and revenue streams 

Sell more products and services 

To add extra cash, this could mean creating new products, selling more of your existing products, upselling, cross-selling, or getting more repeat sales from past customers.

Increase your prices 

When’s the last time you increased your prices?

Has the demand of any of your products or services increased significantly? 

Have you spent a bunch of time improving the quality of an existing product or service without raising your rates?

If the answer to any of these questions is yes, then it might be time to raise your prices.  So, you are getting more cash in the bank from each sale you make (even if you are making less sales as a result of the price increase) .

Pro Tip: If you are considering raising your prices, make sure to think through your pricing strategy. A few things to think about are: 

  • Do the new numbers work? 
  • Is the market willing to pay your new prices? 
  • Will you be grandfathering pricing to recently purchased customers? And if so, what’s your messaging strategy look like? 

Add a BNPL option to increase conversions  

One way to increase average order value is to integrate with a buy now pay later option, like Klarna or Affirm. 

In fact, brands see a 41% increase in average order value after integrating with Klarna.  

Make free cash flow work for you

It is all about making your cash flow work for you. This could mean putting it in a high interest earning account or using it to get discounts for things like annual plans or providing working capital loans to suppliers you may be dependent on and in return negotiating interest payments or discounts on restock PO’s.

2. Cut any unnecessary business expenses

Another way to increase excess cash is to trim your operational expenses. This starts by going through your Profit and Loss statement and making a list of all of your mandatory vs nice-to-have expenses. You want to go through each item and ask if it is adding value to the business.

For instance, recurring software subscriptions can add up quickly, and there are often a few unnecessary expenses in there: 

  • Are there any recurring charges that you completely forgot about? 
  • Are you paying for the same subscription twice? For example, are your marketing and sales teams both using the same tool, but on different company cards?
  • Can you consolidate any of the tools that you use? For example, if you have ten employees, do you really need two different project management software? Or could the whole company use one? 

It is a good idea to audit your expenses at least a few times a year, and not just when you are in a cash crunch. 

If you are really strapped for cash, you can also reduce spending on capital intensive projects. For example, this might mean putting your new website redesign on hold. 

Or, for eCommerce clients, it could be holding a fire sale to reduce their stock levels to a more manageable level, so you have more cash in the bank and less sitting in your warehouse. 

Pro Tip: It can be easy to go overboard with trimming expenses in a recession where you end up cutting too quickly and further reduce your growth. One of the most common places we see this is with advertising. Companies get scared when sales drop and turn off all of their ads – including the ones that still had a positive ROI. This means it may take longer for business to recover. 

Negotiate more favorable payment terms with suppliers and vendors

If you have strong relationships with your vendors and suppliers, they may be able to help you out if you are struggling. This can include offering more favorable terms, pushing back payment deadlines, or offering a payment plan. 

After all, if you proactively communicate any issue, it benefits them to work with you as opposed to dealing with the hassle of going to collections or small claims court.  

3. Turn to financing options

Another way to increase cash flow is by taking on long-term debt, such as taking out loans, running a crowdfunding campaign, using credit cards, or refinancing existing equity. 

However, if you turn to financing, you need to factor in debt repayments into your cash flow forecasts. 

Apply for government loans 

If you have to take on debt, government loans usually have the most favorable terms – outside of borrowing from friends and family.

For example, in this economic downturn, the U.S., Australian, and U.K. governments are all offering generous stimulus packages for small businesses. 

Turn to revenue-based financing

Popularized by Wayflyer, this short-term financing option  allows eCommerce businesses to get funding for inventory or advertising expenses without giving up equity in their company.

For instance, see how Bean Ninjas customer UnderOutfit used 8fig to scale to 7 figures in under 12 months.

Use credit cards as a last resort

Most business credit cards have high interest rates, which means it is bad debt. Since you can really rack up expenses on a credit card, it is best to use lines of credit as an absolute last resort.

If you do take on credit card debt, make a plan to pay down as much as you can every month until it is fully paid off.


In sum, managing your cash flow helps you make informed decisions and increases the chance of hitting your financial goals. 

The better you can get at managing your cash flow through these three strategies, the more likely you are to not only survive but to thrive in your business.

Posted By

Tom Mercer

Tom Mercer

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