E-commerce accounting: The impact common issues have on cash flow
Amaka Team
January 11, 2024
This article is brought to you by Brixx, a standalone and add-on cash flow forecasting tool.
The world of e-commerce can be unpredictable, especially when the financial health of your business keeps fluctuating. While you may be able to predict seasonal fluctuations, etc. you can’t always account for the unexpected – which takes its toll when you have a steady stream of business expenses.
Aligning your income and expenses to ensure there’s always enough money to keep moving forward is key. The most basic understanding of cash flow is Income – Expenses = Cash on hand. While your business most likely has other money, investments or value tied up in other assets, your cash flow is only concerned with how much value is freely movable.
If anything, one of the most common lessons that stems from failed e-commerce businesses is that you should always pay close attention to your e-commerce cash flow. This is one of the true e-commerce metrics that can make or break your business.
Distinguishing between cash flow and profit is key to managing cash flow for e-commerce
Many e-commerce businesses commonly confuse cash flow with profit, thinking either that the money in their accounts is available to take or that because they have a profit they have cash available to meet the business’s needs.
Each of these views are dangerous as having cash in the business does not necessarily mean that it is profitable, just as being profitable does not guarantee that you have the cash you need to run your business. While both are important factors in operating your e-commerce business, they each require individual attention.
To break it down:
- Operating cash flow is cash generated from sales less the cash paid out to cover expenses.
- Net profit is the income left over from revenues after all costs, business expenses and taxes have been deducted.
So why does operating cash flow matter to your e-commerce business?
One of the leading reasons that e-commerce businesses fail is because they run out of cash. While other leading reasons include offering the wrong products to the market as well as not having the right team to execute on the business idea, successful cash flow forecasting and management can help in the prevention of potential financial issues.
Adequate and consistent cash flow can mean the business between success and failure for e-commerce stores. Where additionally, if you ever decide to sell in the future, investors will take a careful look at your cash flow reports before making a purchasing decision.
Accounting in the e-commerce world has special considerations that impact cash flow
E-commerce businesses have special accounting considerations they need to take into account, where many unfortunately are not aware of some of the nuanced differences, often resulting in avoidable accounting errors. These errors can have serious financial and legal implications for an e-commerce business if left unaddressed.
1. Disorganised record keeping
Often, the result of having too many people having access to business finances, giving authority to less experienced employees or migrating to a new accounting system is having messy books. General ledger errors, cash discrepancies, missing retained earnings, invoice inconsistencies, or other common signs of accounting record issues is a concern for any business.
2. Using the wrong accounting software
Some business owners entering the world of e-commerce may be used to managing their books manually or more traditionally. Not using a cloud-based accounting software to streamline and automate functions is a common mistake. Making a smart decision about which accounting system to use when starting the business will pay dividends in the future.
3. Infrequent bank and credit reconciliations
These should be performed regularly. Failing to maintain consistency with reconciliations (or skipping them altogether) can allow discrepancies to linger through multiple reporting periods, affecting cash flow management, forecasting, and even tax calculations. Using one of Amaka’s accounting integrations can help to dramatically speed up the bank reconciliation process.
4. Recognizing revenue incorrectly
Many e-commerce businesses recognize revenue incorrectly because they keep records based on when they were paid, instead of when the sale was made. However, the revenue from a sale should still be recorded in the month when the sale was made, even if the money from the transaction does not get deposited into your account until the following month.
Recording revenue in this way is compliant with GAAP (Generally Accepted Accounting Principles). This is especially important when the time periods being spanned are years rather than months because e-commerce businesses that offer big year-end promotions can see their data skewed significantly when recognizing revenue incorrectly.
5. Not tracking expenses that are reimbursable
Failing to keep accurate records around these types of expenses is like throwing money away. If you are not sure whether an expense is reimbursable for your specific business, ask your accountant for help.
6. Incorrect inventory levels
For e-commerce companies that sell across multiple platforms, staying on top of inventory is always a challenge. Most e-commerce software providers do not provide multi-channel inventory tracking, requiring the integration of an inventory software to maintain accurate real-time data. Inventory has a direct impact on cash flow and if mismanaged could spell disaster for your financials.
7. Doing all your accounting yourself
Entrepreneurs tend to be more inclined to handle things themselves, whether the motivation is cost savings or increased control. Doing one’s own accounting is not feasible in the long term because as the business grows, more sophisticated financial needs will need to be met to plan effectively for strategic growth.
While we’ve just listed seven of the most common contributors to avoidable accounting errors, there are others to take into consideration as well. These include but are not limited to:
- Mishandling sales tax
- Not using a chart of accountants
- Throwing out receipts for small purchases
- Incorrect COGS calculations
- Missing tax deadlines
In addition to making use of an appropriate cloud-based accounting software to keep track of finances, integrating the application into a specialised financial modelling software like Brixx can help e-commerce businesses plan for multiple cash flow scenarios. If you’ve never used one or are looking for a better fit, take a quick test drive of Brixx with our Bike Shop Demo.
Improving your cash flow starts with getting organized
In order to successfully manage cash flow, you need to know where your business stands at all times. Some simple tactics to implement to help you manage your financials include:
- Practice impeccable bookkeeping – using an accounting integration can automate your entire data entry process
- Put safeguarding margins in your calculations – leave “cushioning” in your calculations to prepare for a bad day, month or quarter, without forgetting the tax
- Automate your regular income and expense payments – regular payments should be automated to give you peace of mind while making bookkeeping easier
- Do what you can to be sure customers pay on time – whether it be payment reminders, highlighting deadlines or other, think creatively about ensuring your money comes in on time
- Utilize balance reports and cash flow projections in your financial reports – Financial reporting and forecasting is a must and using accounting software that tracks sales, expenses, etc. can help you make smarter decisions about future finances
Our post How To Create The Cash Flow Forecast for An E-commerce Business runs through how to build a cash flow forecast for an e-commerce business – providing a general overview as well as tackling some of the cases more specific to e-commerce.
Tips on how to improve cash flow for your e-commerce business
1. Shorten the amount of time between a business expense and getting paid
When businesses sell physical products, they are often left with certain items that cause overstock – causing them to lose money on that investment. When it comes to a business selling digital products there may be a delay in making sales from investments like online advertising, etc. In order to avoid spending money unnecessarily, identifying the average sales cycle in relation to your investment will go a long way.
2. Organize expenses in line with revenue patterns
If you look closely enough there are always patterns that emerge from data. By identifying and understanding how to leverage your business times of the month you can line up your biggest expenses to make sure you don’t dip into the red. By staying on top of key revenue and expense dates you can more easily plan ahead.
3. Stay relevant when marketing to your audience
In the ever-evolving world of social media and digital advertising, it is crucial that you promote your business where your target audience can be found. It is often easy to get stuck in a rut and forget that while your customers may spend the majority of their time on Facebook this month, next they may have moved to TikTok or another trending platform.
4. Boost short term cash flow with promotions
Promotions and special offers are as old as time – but are nevertheless effective. Whether you experiment with a classic discount sale or offer rewards for increased purchasing, by offering your customers rewards for their purchase you make them feel valued, often leading to repeat orders.
5. Increase your average order value
Upselling your existing customers is often accomplished more easily than when trying to acquire new ones. Depending on whether you sell physical or digital products, your tactics may vary, but offering free shipping for example or a discount on an upgraded plan could see your customers increase your cash flow more quickly.
Key takeaways on e-commerce cash flow
Understanding how to successfully manage cash flow is key for any business, especially when it comes to the world of e-commerce. By identifying and correcting commonly avoidable accounting mistakes and learning how to improve cash flow, you can focus more on the growth of your business.