E-commerce accounting: Cash flow forecasting 101

Cash flow forecasting helps you look into and prepare the future of your e-commerce business. However, the complexities that come with managing cash flow has led many business owners to ignore it. If you want to stay on top of making a profit and building a growth-focused brand, understanding cash flow is absolutely essential. We’ll go through the basics in this article.

What’s on the cash flow statement?

Cash flow, as the name suggests, are the inflows and outflows of money, or the money being transferred into and out of a business. The cash flow statement is split up into three sections; cash flow from operating activities, cash flow from investing activities and cash flow from financing activities.

The statement takes data points from the balance sheet and income statement to calculate how much cash you have on hand for a given period. It measures how well the business is managing its cash flow. This is how well it can pay debts and expenses using the revenue and income available at any given moment.

What is cash flow forecasting?

We’ve partnered with Float, a cash flow forecasting add-on, and Brixx, a standalone and add-on cash flow forecasting tool, to combine our expertise and bring you the next two sections.

Cash flow forecasting is the process of predicting your future cash position to help with making sure you have enough cash to meet future obligations. This means you’ll be able to have a lowered reliance on loans or other forms of debt. Cash flow forecasting also allows you to better plan for potential opportunities and challenges.

Why do a cash flow forecast?

Every business needs a cash flow forecast they can trust. Especially when 82% of companies that go out of business do so because of poor cash flow visibility and management. Monitoring cash flow in spreadsheets can be extremely time consuming and error-prone.

Short-term planning over the next few weeks can help you ensure you have enough cash in the bank to pay your staff and survive. Long-term forecasts over the next months or even years allow you to strategically look at your business and understand what you need to do to reach your business goals.

This is achieved through modelling the financial impact of your decisions over time. This might be when to hire new staff or understanding when it is safe to invest your surplus cash into new equipment required to expand your sales.

You can save days every month and get peace of mind by using a cash flow forecasting tool that keeps your expectations updated with what’s actually happening in your business. It’s important to use a tool flexible enough for you to model these time-based scenarios with ease so that you can have confidence in the decisions you’re making to grow your business. 

How to do a cash flow forecast

You’ll want to do a cash flow forecast on a regular basis, such as monthly. Start by knowing your beginning cash balance or the amount of cash you’re expected to have at the start of the month. Then, predict what cash you’ll have flowing in, such as sales revenue or receivables collections. Finally, predict the expenses you’ll have flowing out, such as fees, utilities, rent, etc.

When making predictions, you’ll want to consider best case, moderate and worst case scenarios. Remember that your business won’t necessarily grow every month. You can use averages and estimates from your accounting software, however, consider that there could be fluctuations based on seasonality or external factors such as an economic downturn.

At the end of the month, figure out what your actual cash flows were. Your accounting software should be able to generate a cash flow statement for you. You can sync your e-commerce system to your accounting software by using our accounting integrations. See how accurate your predictions were and consider how you can make better predictions in your next forecast.

Finally, a good forecast is built with ease of communication and collaboration in mind. You should be able to lay out a model of your business that makes sense to you and your colleagues/investors and let financial modelling software handle the calculations.

There are a range of tools that can help with cash flow forecasting and analysis. These can generally integrate with your accounting software to make your life easier. Some examples include:

  • Float is a cash flow forecasting add-on to Xero, QuickBooks Online and FreeAgent. It will give you an accurate picture of your past, current, and future cash flow so you can save time, make more informed decisions and make plans to grow your business.
  • Brixx is a cash flow forecasting tool that can be used on its own or with Xero. It allows you to build your model, project into the future and simulate different scenarios.

How to improve your cash flow and keep it positive

Being able to predict your cash flow is only part of managing it. Essentially, you’ll want to have enough cash flow from normal operating activities to cover your current liabilities. There are many more complicated rules and ratios related to cash flow that you may want to get into. However, it’s recommended that you work with an accountant if this is the case.

Here, we’ll go into a few easy tips that e=commerce store owners can take on to help in making sure cash flow remains positive.

  1. Manage inventory by ensuring you don’t overstock products and keep inventory turnover high by running campaigns on most-stocked items
  2. Work on customer retention strategies, increasing repeat orders and building customer lifetime value
  3. Focus on marketing channels that offer immediate return on investment
  4. When cash is low, have low budget marketing campaigns ready such as email campaigns and loyalty campaigns
  5. Make payments, such as to suppliers, as late as possible, without going past the due date (unless you get a discount for paying early)
  6. Audit your costs and only pay for what you really need or is giving you a strong return on investment
  7. Avoid large one-off purchases if possible, opt for for payment plans, renting or other forms of payment

Key takeaways on cash flow for e-commerce

Staying on top of cash flow as an e-commerce business is absolutely essential. With stock moving around constantly and a range of regular costs that can fluctuate dramatically, you need to make sure you can stay afloat. Regularly drawing insights from your cash flow forecasts and cash flow tools can significantly improve your decision making in the long run.