Why your Retail and e-Commerce Business Keeps Running out of Cash
Factors that may be contributing to negative cash flow in your small business
It’s a common question we hear all the time from small retail and e-commerce business owners: “Why do I keep running out of cash?”
Running out of money can be extremely stressful. You can be a highly profitable business, yet still the invoices keep piling up and you’re scrounging for different ways to come up with funds to pay vendors, contractors and employees – then it’s rinse and repeat the following month. Managing cash flow can be complicated and a challenge for many brick-and-mortar and e-commerce retailers. Managed well, healthy cash flow can sustain business operations and allow room for growth. On the flip side, ongoing negative cash flow is a top threat to the success of a business.
If you’re finding yourself constantly running out of cash, then it’s important to evaluate if this is a bigger problem rather than a short-term issue. Here are a few areas that may be causing ongoing negative cash flow.
1. Expenses
Unexpected expenses, overspending and inaccurate tracking of expenses can create negative cash flow. Without an accurate and comprehensive understanding of how money is being spent, overspending can easily happen leaving business owners at risk of cash flow problems. A couple questions to ask yourself are: Do you know how much your monthly expenses are on average? What are your greatest expenses, and are there ways to cut costs? Examining your expenses on a monthly basis can help inform cash flow projection so you will know, for example, if you have enough to cover payroll if a costly, unexpected repair needs to be done.
2. Cash flow projection
A solid cash flow projection helps provide small businesses with an overview of current and future funds so that business owners can control spending as needed and manage effectively – such as planning cash reserves for economic downturns, for example. This understanding of cash inflow and outflow – how much money is coming in and how it is spent – allows business owners to make more strategic operational decisions and reduce risk. It can also help identify opportunities and provide more peace of mind knowing the financial health of the business.
3. Inventory
Inexperienced inventory management can be costly to a retail and e-commerce business. Surprisingly, many small businesses do not properly track their inventory, which causes inaccurate inventory costs and as a result, unnecessary extra financial costs. Some other examples of inventory management issues include high storage costs, a high amount of deadstock or unpopular products, and inability to meet customer demands.
4. Gross Profit Margins
As one of the most important profitability measures, a business’s gross profit margin has an impact on cash flow. If a company does not have the appropriate profit margins – for example, if input costs increase but product pricing remains the same – that could result in not having the expected cash flow. It’s important that retail and e-commerce businesses get their gross profit margin ratio to an optimal level, such as 50% to 70%, for financial stability.
These are just a few possible areas that could be causing negative cash flow, but there could be other reasons for why a business keeps running out of cash. To get cash flow issues under control and avoid future issues, consult with a trusted accounting team who can review your cash flow and create a plan with you to build more financial security and stability for your business.
Book a consultation today to see how Finatics Accounting can help you.