The Ecommerce Lifeline: Mastering Cash Flow Management to Stay Ahead of the Game

Key Takeaways for Ecommerce Brands:

1. Eric Youngstrom's admiration of America's small business owners led him to found Onramp Funds, a helping ecommerce brands manage cash flow challenges.
2. Cash flow management, an essential but underutilized tool in ecommerce, can significantly improve working capital without taking on debt.
3. Mastering the cash conversion cycle and gaining real-time visibility into cash flow can boost working capital by up to 30%, offering ecommerce brands control and growth opportunities.

Eric Youngstrom grew up in the 1980s in Yakima, Washington, a small city in the foothills of the Cascade Range. There were no big industries in Yakima, only small business owners like your local auto glass shop and mechanic. Youngstrom remembers looking up to them, mainly because of the “independence they had, the ability to run a business but still go coach Little League at three o'clock in the afternoon was really cool. I just think that's the American spirit.”

Youngstrom's affinity for small businesses ended up shaping his career. In 2012, he helped launch ShippingEasy, an order aggregation and shipping software solution for ecommerce SMBs. Two things came out of this experience:

1. ShippingEasy was acquired by stamps.com, where Youngstrom served as Vice President of Business Development for four years;
2. He got to see up close “the challenges our merchants were facing with cash flow.”

Time and again, detailed Youngstrom in a recent interview, ecommerce brands “would have orders coming in from Amazon or Shopify, but they were out of money, so they couldn't even buy the next shipping label to ship the product. Which then of course means they have to cancel the order, refund the money, and the customer is disappointed. And so you're losing a customer, which is the worst and last thing you want when you’ve fought so hard to get that order.”

The most frustrating part, said Youngstrom, was not being able to help these ecommerce brands: “These are not companies that are going to be VC-financed, they are really bootstrapped, and they have to go fund an inventory purchase that's going to drive three months of sales. They’re going to get that money back over these three months one sale at a time, but where do you come up with that $30,000 or $100,000 to buy that 90 days worth of inventory?”

Beyond Lending: How Smart Cash Flow Management Can Fuel Growth

Youngstrom’s answer was to launch Onramp Funds, a lending platform that provides working capital to ecommerce sellers. There is, however, another way DTC brands can increase working capital – one that doesn't involve taking on debt. It requires optimizing an unfortunately underused tool in the ecommerce space: cash flow management. 

A primary indicator of financial health, cash flow refers to the amount of money that goes into and out of a business. Income from sales of goods, services, or assets represents cash inflows. Conversely, money spent on expenses or investments represents cash outflows. When total inflows exceed total outflows, the business has a positive net cash flow – and vice versa.

Managing your cash inflows and outflows starts with creating a cash flow statement. One of the three most important financial reports for businesses – together with the balance sheet and the profit and loss statement – the cash flow statement is used to track inflows and outflows over a specific period, offering a clear picture of the brand’s financial stability and operational efficiency.

The cash flow statement includes three parts:

1. Cash flow from operating activities, such as receipts from sales of goods and services,  suppliers and employee payments, rent, taxes, office supplies, etc.

2. Cash flow from investing activities, such as purchases or sales of long-term assets, payments related to mergers and acquisitions (M&A), etc.

3. Cash flow from financing activities, such as capital raised, repayment of loans, dividends paid to shareholders, etc. 

There are two ways to create a cash flow statement: the direct method and the indirect method. Most ecommerce brands use the direct method, which simply lists, line by line, all the cash inflows and outflows during the reporting period. The indirect method looks at the company's net profit, then adds non-cash revenues (e.g., credit sales) and non-cash expenses (like depreciation) to the net income balance. At Finaloop, we create real-time, on-the-go cash flow statements using both methods, depending on the client's needs.

The Holy Grail: Achieving A Negative Cash Conversion Cycle

The first part of the cash flow statement focuses on liquidity, i.e., the business's ability to cover operating expenses and pay its debts. This is where your cash conversion cycle (CCC), another important metric of cash flow management, comes into play. CCC shows how much time your business needs to sell its inventory, collect receivables, and pay its bills.

The formula is straightforward: 

{Days of inventory outstanding (DIO) + Days Sales Outstanding (DSO) – Days Payables Outstanding (DPO)}

*DIO: the time it takes to sell your inventory 

*DSO: the time it takes to collect receivables

*DPO: the time you have before paying your bills

The lower the CCC – a negative one is the holy grail – the better, as it means the business can convert its inventory and receivables into cash quickly. Managing that requires, first and foremost, accurate and up-to-the-minute financial data. Based on our experience working with thousands of DTCs, real-time visibility into cash flow can improve working capital by 25-30%.

This improvement stems from: 

• Payment terms optimization
• The ability to adjust inventory orders based on actual demand rather than projections
• Quick identification of late-paying customers

This level of control allows you to maintain a healthier cash reserve, reduce reliance on external financing, and capitalize on growth opportunities as they arise. In a relatively young industry like ecommerce, that's invaluable.

“The picks and shovels of this industry are still being built,” admitted Youngstrom, “we're still figuring out what are the optimal ways to do things.” Optimizing cash flow management would be a good start.