You’ve heard it before and you’ll hear it again many times over; cash flow is king. There’s a reason so many successful business owners obsess about cash flow. It’s because it will be the first thing that kills your business if you get it wrong.
If you and your business have been around long enough, you’ll surely have encountered some cash flow issues along the way. Perhaps you also know that whether you have $1MM+ sales this year, or $5MM+, you’re still going to have to think about your cash flow and the macro-mechanics of its inflows and outflows.
Today we look at the 3 biggest mistakes that could kill your multi-million dollar year of revenue.
Engaging in impulse spending
This is a big deal for a small eCommerce brand because it can absolutely ruin whatever spending money you have and bottleneck your growth for a long period of time. This is also a big deal for a medium sized eCommerce brand bringing in a few million a year, but because of a different reason.
Impulse spending is a shot to the heart when you’re small because you can’t recuperate the lost cash. Impulse spending when you're larger however is a slow, and suffocating death for a business.
Because of the fact that you can, in theory, absorb small amounts of impulse spending - this can lead to an unhealthy culture within your organization where large discretionary spending is simply run-of-the-mill. Eventually this can lead to serious, slow building cash flow problems seem to appear out of nowhere when in fact trouble has been brewing for months.
When you were a small company you avoided spending money unnecessarily and that was part of what made you successful. Lapsing back to careless spending can flip the switch and create a snowballing culture that will find you in a tough cash flow position 6 months from now.
Not keeping a cushion of cash on hand
When you talk to a financial planner about your personal finances, they will typically ask you if you have an emergency fund worth 3-6 months of your living expenses. They ask you this because that’s your first priority when building your long term financial future. First you build your emergency fund, then you start investing and growing your savings. Things are very similar for businesses. If you have a rainy week, or a rainy month, or even a rainy quarter - do you have your emergency fund set up so you can buffer your losses?
The answer to that question is vital.
No matter how many safeguards you might have in place to protect your company finances from the unknown, unexpected hits to your cash flow position are a very real threat to the financial health of your eCommerce business.
Imagine if you were working from a zero account balance where you didn’t have any substantial cash on hand. What would happen if your receivables were late when you tried to collect them or there was a sudden business expense that needed to be paid? The answer is obvious - you wouldn’t be able to keep your finances afloat and that could mean instant disaster for your supply chain and possibly your business as a whole.
In order to ensure you’ve got your business emergency fund in place, maintain an account balance equivalent to at least 2 - 3 months of operating expenses. This emergency fund will help you deal with any stalls to your cash flow cycle or other unforeseen circumstances that could harm your business finances.
Not using the correct financing source
Lastly, and potentially the most common mistake made by multi-million dollar eCommerce brands, is obtaining expensive financing that is not flexible enough for your business.
By far the example that repeats itself the most is multi-million dollar revenue brands who continue to use cash flow advancement companies like Clearbanc to finance their business. This type of financing suffocates your cash flow and is a sure-fire way to reduce your potential growth for that month.
When your eCommerce business was younger and didn’t have as many options, sure it was likely not a bad idea to take away a cut of your daily cash flow in order to obtain some much needed funds to increase your marketing efforts or pay for more inventory. However, you are now at a size that dictates that you have many more options and you do not have to stick to one of the most expensive financing alternatives in the market.
Thankfully for both of us, there are great organizations out there who focus on offering lower cost options.
If you’re fine dealing with a 3-month delay time as well as an incessant amount of paperwork, the bank is always a low cost option for business financing.
However, if you feel as though you’re looking for a more innovative solution that can not only cut your direct financing costs but also cut your foreign exchange fees from paying international suppliers and much more, consider using Loop - the first Canadian all-in-one financial services platform made for eCommerce brands which includes an eCommerce line of credit.
Cash flow challenges? Might be time to try a new type of credit facility. Try our new and affordable revolving credit line built specially for ecommerce stores.
