EcommerceBytes-Update, Number 274 - November 07, 2010 - ISSN 1528-6703     4 of 7

Five Things Online Merchants Should Know about Cash Flow

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If you wonder why you have trouble paying bills despite operating a profitable business, you might have cash flow issues. Denise O'Berry has over two decades of operational and management experience and has built a successful consulting business helping small-business owners (see her website at DeniseOBerry.com). She writes a weekly column and wrote the book, Small Business Cash Flow: Strategies for Making Your Business a Financial Success). AuctionBytes sat down with Denise and asked her what online merchants and marketplace sellers should know about cash flow to help them stay on top of their business finances.

AuctionBytes: What is cash flow and why is it important to an online retail business?

Denise O'Berry: Cash flow is about the flow of cash coming into and moving out of your business. Cash comes into your business via sales and moves out of your business via expenses. If you have more cash going out of your business for things like web hosting, shipping fees, and payroll expenses, than you have sales coming into your business, the business will not survive.

It's important not to confuse profit with cash flow. You might buy something for $10 and sell it for $20 which would yield a $10 profit, but that doesn't equal cash flow. Payment for business expenses will need to come out of that $10 profit. Once all the expenses are paid, the amount of money you have left is the cash available (cash flow).

Many small businesses run on tight cash flow, especially in the current economy, so it's important to keep an eye on what's ahead. I recommend that every small business prepare and monitor their future cash flow by using a cash flow budget. This is a projection of sales and expenses for at least the future six months so you have a good idea what your financial situation will be and can fix it before it becomes a crisis. Don't confuse a cash flow budget with typical business financial statements like the income statement and balance sheet. These reports provide good historical information on your business, but won't help you much with what's going to happen in the next few months like a cash flow budget will.

Cash flow is the most critical metric in your business. It will tell you whether your business is healthy or on the verge of collapse.

AuctionBytes: What should online merchants do if they don't have an accountant and handle the bookkeeping themselves? Are there software programs that can help them get a handle on their finances?

Denise O'Berry: I am a total believer that all small business should have a professional by their side. That includes having an accountant. It is really easy to miss something that may benefit your business if you try to do it all yourself because you are not the expert. Even if you only have someone review your financials once a year, make sure and do it. You could be very surprised (and pleased!) at what they find. They can also keep you out of hot water with the government. The last thing a small business needs is to be dealing with tax headaches.

That said, if you truly believe you can do everything yourself, most definitely use technology to help you out. My favorite is Intuit QuickBooks. I've been using it in my business since 1999 and it is incredibly helpful in keeping track of finances. Intuit has both a computer based version and an online version. I've used both and my preference is the computer version. Although this is one of the most common finance software packages, there are other options. Just do a search on accounting software if you want to explore alternatives.

Accounting software can help save you time by managing some of the tedious (think - not fun!) parts of the business like automatically importing sales receipts, issuing invoices, and preparing payroll to name a few.

AuctionBytes: What are the five key things online merchants should know about cash flow to help them improve their ecommerce business?

Denise O'Berry:

1) Don't be a bank. When you sell something, get payment in full. Don't use terms like "buy now, pay in 30 days." This is one method that can surely throw a small businesses cash flow out of whack.

2) Hire a professional. You're an expert in your online business, not in accounting principles. Would you want an accountant telling you how to do business online? Probably not. So don't try to be an accountant for your business. Get help.

3) Use a cash flow budget. Projecting what will happen with sales and expenses can help you sleep better at night. Use your history to set up your cash flow budget and then always keep it updated with at least the next six months projections. That way if you see trouble coming, you can act on it before it damages your business.

4) Stay on top of outstanding invoices. Make sure that the people who owe you money, pay you that money. Don't let invoices get stale. The longer it takes to get an invoice paid, the less chance it will ever get paid.

5) Package your products to increase sales. If you sell "like" products, those that are complementary, put together a package for sale on your website rather than selling items one at a time. You can make a lot more profit on products that are packaged together properly. And it will move your inventory faster too.

Denise O'Berry Recommended Links for Cash Flow

Cash Flow Budget Worksheet (Free template) - link
IRS e-News for Small business (Timely IRS news) - link
Small Business Administration - link
SCORE (Free mentoring for small business) - link
Cash Flow Tips - link
Denise O'Berry's website - link


About the author:

Ina Steiner is co-founder and Editor of EcommerceBytes and has been reporting on ecommerce since 1999. She's a widely cited authority on marketplace selling and is author of "Turn eBay Data Into Dollars" (McGraw-Hill 2006). Her blog was featured in the book, "Blogging Heroes" (Wiley 2008). Follow her on Twitter at @ecommercebytes and send news tips to ina@ecommercebytes.com.


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