How Ecommerce Brands Can Tackle Cash Flow Issues and Avoid Common Financial Pitfalls

Key Takeaways for Ecommerce Brands:

1. Poor cash flow management can destabilize even profitable businesses, making it one of the most significant pain points for ecommerce brands. 

2. Ecommerce brands frequently struggle with delayed or inadequate bookkeeping practices, adding fixed costs too fast, and overstocking inventory. 

3. To avoid these pitfalls, ecommerce brands must prioritize financial management. This means, first and foremost, investing in robust bookkeeping and accounting systems that provide real-time insights into cash flow. 

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Kurt Elster's career was shaped by loss. When he was a child, his father lost his job and wasn't able to find work again. “He used to tell me, ‘If you work for yourself, you can’t lose your job’” said Elster. “You are your own boss.’”

After a brief stint working for an auto parts drop shipping company in Chicago, Elster followed his father's advice and opened an ecommerce platform for bike shops. He quickly learned that being an entrepreneur is anything but easy. A year later, with no cash left in the reservoir, Elster started developing websites for local businesses – which turned out to be much more lucrative – and pivoted his company, Ethercycle, to an ecommerce consultancy. 

In 2011, Ethercycle joined the Shopify Partner Program. Since then, Elster has leveraged his status as a senior consultant to start “The Unofficial Shopify Podcast,” which features interviews with ecommerce entrepreneurs and experts sharing their experiences building businesses, and boasts more than two million downloads.  

While the podcast focuses on success stories, it also tackles the pain points of running an ecommerce brand. One of these pain points is cash flow. “Sometimes you feel like you've got it under control, you know what you're doing and then things go sideways on you,” said Elster in a recent episode dedicated to managing cash flow. “I started my first business in 2009, I took accounting classes, read the books, and yet this is still such a scary, painful thing.”

Where Does Your Money Go? Cash Flow Leaks in Ecommerce

To prevent brand owners from experiencing the same pain, Elster invited Matt Putra, a fractional CFO who has worked with dozens of ecommerce businesses over the past few years, as a guest. According to Putra, the three most common mistakes brands make when managing their cash flow are: 

1) Poor ecommerce bookkeeping

In most businesses, said Putra, “the bookkeeping is done too late and not every month. Then people don't look at it. It's like you're driving blind.”

This is where the relationship between ecommerce bookkeeping and accounting comes into play. While often used interchangeably, ecommerce accounting and bookkeeping are not the same thing. Bookkeeping is the practice of recording, tracking, and managing financial data. Accounting is the process of analyzing this data to make business decisions. In other words, if bookkeeping is the “how,” accounting is the “what” of ecommerce financial management.

Unfortunately, too many brands have gotten used to receiving their books and accounting reports a couple of weeks or one month after the end of the month. This borders on bookkeeping malpractice, especially in the ecommerce space, where cutting-edge services like Finaloop can continuously update key financial information and provide real-time accounting.

In the context of cash flow, real-time accounting 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:

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

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

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

Reconciling your cash inflows and outflows relating to your operating, investing, and financing activities to your actual cash on hand is the only way to be sure you know exactly where your money is going. It's pretty straightforward: inflows minus outflows against the actual amount of money you have at your disposal. As long as the data in the cash flow statement is not too old. 

2) Adding fixed costs too fast

Fixed costs are expenses that remain constant regardless of sales volume. They can be categorized into four types of operating expenses: 

General and Administrative (G&A)

General and administrative expenses encompass the day-to-day costs associated with managing and maintaining a business – such as rent, utilities, and contractors. The biggest G&A cost in ecommerce is typically software and legal or professional services.

Salaries and Wages

This category represents the cost of labor required to operate the business, from executive pay to part-time staff.

Advertising and Marketing

All costs related to promoting and selling products – including agencies or freelancers, affiliates, in-house content creation, marketing software, giveaways, and more. This generally does not include variable marketing costs (which are not fixed-and usually appear higher up in the P&L).

Per Putra, salaries and wages are a typical example of the "adding fixed costs too fast" issue. “The general rule for ecom businesses is that a dollar of fixed costs requires $4 to $6 of revenue to cover it,” he explained. “So imagine if you add a person (that costs you) a thousand dollars a month – you have to bring in an extra five grand revenue just to pay that person, let alone to put money in your own pocket.”

Research and Development (R&D)

Costs incurred developing new products, services, or processes. These include expenditures on innovative activities, product development, and process improvements aimed at fostering long-term growth.

3) Overstocking

Overstocking happens when brands purchase more inventory than they can sell. “People don't want to sell out, so they buy too much,” said Putra. “You have money just sunk into these low-turning SKUs. Ideally, you wouldn't have more than three months' worth of inventory. There's a calculation for this: it's called days sales in inventory.” 

One of the main ecommerce inventory KPIs, days sales in inventory (DSI) is the rate of inventory turns per day. It is also known as the average days to sell inventory or the average age of inventory. The equation is:

Days sales in inventory = Days in Accounting Period / Inventory turnover rate

A lower DSI is generally desirable, as it signifies a brand doesn't need much time to sell off the inventory (although if it is too low, this could be an issue as well). A high DSI, on the other hand, may suggest inadequate inventory management or that your inventory is challenging to sell.

As high-price items tend to sell slower than low-price items, you may want to calculate a separate DSI for each product category.

Investing in Numbers: A Path to Business Health and Confidence

For Shopify expert turned podcast host Kurt Elster, the goal of episodes like "Cashflow Tips from an Ecom CFO" is clear: to demystify things that he knows, from personal experience, create headaches and keep DTC founders up at night.

Keeping on top of your numbers is key to your financial (and mental health). Check out Finaloop, to make sure you have on-time and real time numbers, that you can actually trust!