The saying ‘cash flow is the lifeblood of business’ is a familiar one but how significant is the inflow of money to ecommerce businesses?
When it comes to fast-growing enterprises, it seems that understanding and managing the impact of cash flow may well be the difference between long-term success and faltering sales.
Here are 5 insights into how cash flow unlocks growth and helps you to run an ‘opportunity-ready’ ecommerce business.
1. Cash flow is not profit
One of the most surprising things to learn is that profitable businesses can fail.
A positive net income does not guarantee a company’s financial stability or its future success. A company can still fold despite generating a profit if it has high levels of debt, poor cash flow and liabilities such as rent, and money owed to suppliers and employees.
Effectively managing the amount of cash coming in and going out, as well as supervising operational costs, is what allows companies to succeed over time.
Having cash reserves of two-to-three months to cover operations and inventory purchases enables companies to navigate market turbulence and act at speed when sales opportunities arise.
2. Cash flow matters to investors
Any business looking for finance might be surprised that investors don’t zero in on profit as the deciding factor when assessing a company’s viability.
Profit can be manipulated, for example, inflating the value of inventory or recording revenue before supplying goods. Cash flow statements are not easy to misrepresent as they are a simple record of money coming and going out.
It is why investors prefer to determine the health of a business based on cash flow as even if a growth opportunity exists, expansion is very cash intensive. Inventory, equipment, new personnel and marketing costs all add up and lenders need to be confident that a company can afford additional debt repayments.
Cash flow is the clearest indicator of a company’s financial health.
3. Cash flow matters to suppliers
Maintaining healthy cash flow ensures that a business can meet its short-term obligations and key amongst them are payments to suppliers.
Suppliers are businesses like any other and cash flow is critical as they manage their own operational costs and outlay for materials. It is why it is common for suppliers to offer favourable terms to companies able to make faster payments.
By paying suppliers sooner and securing better pricing, sellers improve their margins. So, get it right and everyone benefits, all of which is unlocked through positive cash flow.
4. Cash flow matters in marketplaces
It will not be news to ecommerce sellers that payouts lag far behind the speed of sales in marketplaces.
Delays of 14 days or longer are standard and money held back is money sellers cannot put to work. Issues arise if your inventory is low, or out of stock, as this jeopardises your sales ranking, plus you can lose sales to a competitor.
Having cash available enables you to manage your marketplaces as well as your margins.
5. Cash flow accelerates growth
Sometimes, academic research can throw up some interesting insights.
A few years ago, economists looked at the early 2000s to understand how Chinese firms achieved very high growth rates at that time. It found that the private enterprises which enjoyed rapid growth did not rely on access to external capital markets. What allowed them to grow was abundant cash flow.
Digging deeper, they found that the companies that had achieved growth of more than 8% per annum, had a correspondingly high average ‘cash flow to total assets ratio’ of over 8%.
This ratio indicates a company’s ability to generate cash flow relative to its total assets. When the ratio is low, it signifies poor inventory management, slow collections or high capital expenditures.
Beyond indicating whether a company is efficient, a positive cash flow turbo-charges growth. As one seller told Storfund: “To get money each day versus once per 1.5 month allowed us to run faster, order more frequently, launch new products in a more smooth way.”
Getting cash from sales quickly is a game changer. Watch this video and you can see how improving a cash cycle can see sales accelerate from £700,000 to £1m over a one-year period.
That’s over 42% increase in sales, simply by shortening a cash cycle by 15 days.
Get Opportunity-Ready
Cash flow is the lifeblood of business, indicating how well your company is performing today but also determining how significantly it can grow tomorrow.
If your consumers want what you are selling, slow cash flow should not get in the way of rapid growth.
The good news is that with Storfund, you can keep your inventory as healthy as your consumers’ interest and keep your business going from strength to strength. Get in touch to find out how to get started.
