The cash flow statement is often seen as the less straightforward financial statement for e-commerce businesses, especially when compared to the balance sheet and the income statement. However, just like its counterparts, understanding the cash flow statement is absolutely essential to keeping your business afloat.
Cash flow defines the inflows and outflows of money or what’s being transferred in and out of a business. A cash flow statement summarises these flows for a certain period of time, giving a snapshot of how well your business is managing its cash position. In this article, we go through the importance of the cash flow statement for e-commerce and how to draw insights from it.
What’s on the cash flow statement?
The cash flow statement measures how well your business is paying off its debts and expenses using the cash available. It is split into cash flow from operating activities, cash flow from investing activities and cash flow from financing activities. Data is taken from the balance sheet and income statement to determine the amount of cash you have for a given period.
Where your income statement looks more at profitability and the balance sheet looks more at your overall financial health, the cash flow statement looks at your operational integrity. Your operational integrity is essentially your ability to remain cash positive as you manage your business’s operational activities.
Cash from operating activities includes the cash inflows and outflows from your general business activities. For an e-commerce business, this might be:
- Sales of goods
- Payments made to suppliers
- Salaries and wages
Cash flow from investing activities includes any use of cash considered a business investment. For example:
- Purchase of an asset
- Sale of an asset
- Loans made to vendors
Finally, cash flow from financing activities involves any cash from banks, investors or any other financing activity such as shareholders. This might include:
- Loan from the bank
- Repayments of term debt
As a quick note, you’ll find there are actually two ways of drawing up a cash flow statement, either with the direct method or the indirect method. The direct method looks solely at cash inflows from sales and cash outflows from business expenses. The indirect method starts with the net income in the operating activities then adds and subtracts all other operating activities.
Different accounting professionals and different accounting software will typically have a default method used. As a business owner, it’s not extremely important to understand the nuances, however, the indirect method is generally easier to implement and provides useful insights into your net income.
E-commerce cash flow statement example
This is an example of what an accounting software may generate as a cash flow statement for an e-commerce business. In this example, the business automatically syncs their Shopify data to their accounting software with a Shopify accounting integration by Amaka.
Fake E-Commerce Business Name
Statement of Cash Flows
January – December 2023
|Sales Tax Payable
|Gift Cards Outstanding
|Shopify Collected Taxes
|Net Cash from Operating Activities
|Furniture and Equipment
|Net Cash from Investing Activities
|Net Cash from Financing Activities
|NET CASH INCREASE FOR PERIOD
|Cash at beginning of period
|CASH AT END OF PERIOD
Why e-commerce businesses should track the cash flow statement
Striking the right balance of cash inflows and outflows as an e-commerce business is crucial. The more healthy your cash flow is, the more peace of mind you’ll have. At the same time, you’ll be confident in knowing that if a great opportunity came up, low cash wouldn’t be a reason for passing it up. Here are some of the key ways cash flow impacts e-commerce businesses.
As an e-commerce business, it’s important to understand the cash flow cycle, the movement of cash from beginning to end. At a high level, this generally centres around inventory. When you purchase or manufacture a product, cash leaves. Then it arrives and needs to be stored until it’s sold. That’s when cash comes in. Eventually, you’ll need more products and the cycle continues.
The way business activities affect your profitability and overall health can differ from how they affect your cash flow. Following on from the example above, when the products are purchased or manufactured, you technically have an increase in current assets. However, it could take weeks or even months until it’s turned into cash.
Managing your cash flow appropriately allows you to have enough cash on hand at all points in the cash flow cycle. If you run out of cash before it ends, you’ll have to rely on other sources, such as with a credit card or loan. At the same time, you need to balance having enough inventory on hand without going out of stock for too long.
How to analyse your e-commerce business’s cash flow statement
Looking at an individual cash flow statement will reveal whether you have positive or negative cash flow for a certain period. However, over the long term, it’s useful to analyse how your cash flow statements change over multiple periods. This can highlight specific areas that could be creating a cash flow problem for your e-commerce business.
The following sections go through certain parts of the cash flow statement that you should keep a close eye on.
Assuming our cash flow statement is made using the indirect method, the first lines you’ll see are net income and then accounts receivable. The accounts receivable line might only be relevant to some e-commerce businesses, such as for those with wholesale relationships. Comparing these two line items is another example of how profit and cash differs.
After you make a sale to a wholesaler, it could take weeks or months to receive the cash. In some months, your accounts receivable is significantly higher or lower than your net income depending on when you collect the cash. To ensure you make it through your cash cycle, it’s important to keep an eye on how much you’re owed and how long people have to pay you.
One of the next lines you’ll see as an e-commerce business is inventory. Though in your income statement, your inventory isn’t expensed as COGS until it’s sold, the cash still has to leave your business upfront in most cases. Hence, inventory management and cash flow management go hand-in-hand.
In the same way that your net income and accounts receivable might differ drastically, so can your net income and inventory. In periods where you’re making a significant amount of sales, you might see a lot of cash coming in from your inventory asset. However, your net income or profit might not show the same pattern if your COGS were also high that period.
On the flip side, if you’re paying for operational expenses with credit such as with a credit card, even though it’s been expensed in your income statement and decreasing your net income, the cash hasn’t actually left your business. It will make more sense in certain periods than others to pay down your credit depending on what cash flows you’re predicting.
Signs that your business is doing well with cash
Though we do recommend working with an accounting professional if you want to get down to the nitty gritty details of your cash flow statement, the key sign you can look out for is whether your operating activities are cash positive. This means that without considering your investing and financing activities, you can stay afloat.
Of course, your business might have seasons or cycles. For instance, you’ve forecasted that the months leading up to the end of the year are the busiest for you. In August or September, you might leverage financing activities to stock up on inventory and end up being cash negative for that month. However, in November, you make it all back and overall, you’re still cash positive.
Hence, a lot of cash flow management is dependent on your cash flow forecasting and your ability to understand what impacts your cash flow. The cash flow statement is vital in getting the information you need for this. You can learn about the tools you need for an e-commerce cash flow forecast and the common issues that affect your e-commerce cash flow.
Key takeaways on cash flow statements for e-commerce
Ultimately, you can find yourself in hot water if you don’t stay on top of your cash flow statement. Understanding your entire cash flow cycle as well as your cash flow statement can make sure you can manage all your activities without having to depend on external sources of cash. Knowing the right metrics to look at and tools to use can save your business!