Why Ecommerce Startups Fail At Cash Flow (And How You Can Succeed At It)
The eCommerce industry is welcoming to entrepreneurs. It offers unrivaled opportunity to get a business going without needing any external investment, support, or guidance. Got a laptop, a stable internet connection, and some free time? Everything you need to enter the world of online sales on your own terms is there in SaaS form.
Factor in the sheer amount of money flowing throughout the eCommerce landscape — the global revenue now exceeds $2 billion — and you can understand why there are fresh eCommerce startups appearing on a regular basis. Of course, most of them fail.
They’re launched very optimistically, stocking all the wrong products, misunderstanding the market, and having no strong branding… but mostly lacking cash flow management. Liquidity is key in eCommerce, given the intermittent nature of sales revenue and supply arrangements.
To make your eCommerce startup a success, you need to have a solid plan for staying on top of your cash flow — you should be tracking it just as consistently as you’re tracking customer information. Here’s why it’s so easy for budding sales businesses to get it wrong, and how you can avoid that pitfall by properly handling your finances:
Why Merchants Fail to Handle Cash Flow
Per the Wave cash flow guide, “Your cash flow represents all the transactions in your business bank account.” It’s a concept that sounds simple enough, but it actually has a lot of complex elements to it. What does good cash flow look like? When is negative cash flow OK? How do you benchmark how much cash your business has in the bank against others?
Because eCommerce is so sporadic, you need your incomings and outgoings kept in line. Here are the three main reasons (as I see them) why merchants manage to mess cash flow up:
Their Leaders Bottleneck Innovation
It’s normal for an eCommerce store to start out as a solo operation: someone dabbling with sales in their spare time hits upon a compelling niche or a hot product and uses their initial profits to scale up. Sadly, going solo doesn’t work for long in a field as complex as online sales, rich as it is with promotional opportunities, business arrangements, and changing consumer demand.
One person running everything soon turns into a business-wide bottleneck, slowing innovation causing new income streams to be overlooked. eCommerce demands flexibility, whether bringing in hot products (remember fidget spinners?) or embracing new marketing channels (such as Pinterest) — stagnation leaves money on the table, and eventually leads to failure.
The only one-person stores that stay open for any length of time are those with highly-limited ambitions, using selling generic products at low cost or targeting very narrow niches. If you don’t fall into either of those categories, you need a team around you to handle everything from customer service to product development — not to mention the ongoing development of your store’s aesthetic, functionality, and UX (mission-critical for long-term success).
They Focus too Heavily on Being Profitable
Despite being such a key part of business, one of the most common reasons why eCommerce merchants fail to take care of cash flow is that they simply don’t realize they need to. They assume from the outset that the only thing that really matters is profit — generate a profit and nothing else about your finances really matters.
This isn’t true, however. While being profitable is certainly a huge positive, it’s entirely possible to be profitable and still fail due to a lack of cash flow. This is typically a matter of failing to account for the delay between investing in something and reaping the reward: if you need money in your account to cover everyday costs, emptying that account on a purchase that would make a profit, in the end, won’t help you when you run aground shortly after.
Overstocking is a classic example. Your results show a product selling well and making you money, so you take all your profits and fill your warehouse with stock — but the sales ebb slightly, and you’re unable to convert that investment into revenue before your next storage invoice comes in. Getting exactly the right amount of stock to maximize profit and minimize risk is extremely difficult, even with smart inventory management software.
They Don’t Plan for Emergencies
Some sellers do understand cash flow fairly well and commit time to track it sensibly, but still, fail because they don’t think to allow safeguarding margins in their calculations. Even if things are going well today, and have been at a consistent level for weeks or even months, they can still go wrong tomorrow. Just one snippet of unearned optimism in your figures can lead to a chain reaction which sinks your business.
What’s more, the instigating factor can be something simple that has a broad impact on your business. Take the Supreme Court decision to allow states to seek sales tax from out-of-state online sellers as a prime example: your store is motoring along, then suddenly you’re asked to pay sales tax in numerous states with unfamiliar legal frameworks. Raising your prices to cope, your sales take a hit while consumers become accustomed to the change — with no money in the bank to protect you, you can run out of funds to keep your store going.
Note: TaxJar has a solid guide to sales tax for eCommerce, so I suggest reading through it. Much of it can be automated through a good CMS, but don’t simply trust that your system is doing all the legwork for you — do some manual checks, and bring in a financial advisor if you want to confirm that you’re doing everything by the book.
How You Can Keep Your Finances in Check
Having established what cash flow is, and why so many eCommerce startups get it wrong, we need to consider how you can get it right. If you’re currently trying to grow your eCommerce business, you shouldn’t take any unnecessary risks. Here’s what you should do:
- Avoid maxing-out your inventory. Overcommitting to your product range not only saps your finances but also leaves you with no room to work in new products and a huge amount to offload (dead inventory apparently costs the US retail industry $50 billion every year). Learn what your restocking time is for each type of product, and only order new stock when you know you’re going to need it — it’s better to have the occasional shipping delay than to have an inventory full of items that won’t sell.
- Share out your responsibilities. Forget trying to do everything yourself. As the company head, your responsibility is to make great use of the team working for you, so get everyone involved in different ways. Have one person research new products, and another collect social media feedback, and another negotiate supply deals. If everyone is working towards a strong cash flow in some minor way, your life will be much easier.
- Run promotions at appropriate times to boost sales. Timed sales and incentives are core parts of the eCommerce playbook, and they grant you the power to temporarily turn your fortunes around — not sustainably, at least as far as profitability goes, but enough to get your cash flowing again. If you do have overstocking issues, find creative ways to overcome them (offer a substantial bulk discount, for instance).
- Line up your payments as much as possible. When you have supplier charges staggered at different intervals, it can cause a lot of confusion. Getting your payments lined up wherever possible will help you keep track of your cash flow (if you can, push each obligation as far as it will go without affecting the relationship with the supplier — paying at the end of an allowed period instead of the beginning, for instance, because that will give you more room to move).
- Always consider the worst-case scenario. Hope for the best, but always plan for the worst. eCommerce is consumer-driven, and consumer interest can vanish in a heartbeat — particularly when one fad is supplanted by another. When you have money to save, save it — when you can cut costs, do so. When something goes wrong, you’ll be able to endure long enough to get back on your feet.
- Use all the resources available to you. The internet is packed with information and tools that can help you keep up. Accounting tools, comprehensive guides, free business courses, supportive communities, and more. Here’s a community list that can help, encompassing some that are generic and some that pertain to specific eCommerce systems. Take advantage of everything, because doing otherwise is passing up value.
If you can do each of these things, you should find yourself in a strong position for the future. It might sound intimidating if you’re still in the early days of selling online and you have a lingering attachment to the notion of simply relaxing on the beach while the money rolls in, but you’ll get used to it. Soon enough, it’ll be just another part of your routine — one vital to your success.