For the average small business, cash flow is slim. The average daily cash balance is $12,100 (with a lot of variation in either direction) with a net daily cash inflow of just $7. What this means for businesses is a very small pool of cash for growth opportunities or emergencies. While these averages vary across industries, they also vary across the year.
Online retail businesses generally see a wild upswing in revenue around the holiday season and then a sharp dropoff once the holidays pass. Whether your business hits those same cash flow numbers or even has the same season on the calendar, that cash flow cycle with sharply changing peak and off-peak seasons and only small incremental infusions of cash can ruin your business.
Instead of focusing solely on growth, pursue a more stable cash flow cycle. To get started, examine your own business's historical cycle and what it can mean for businesses that don't prepare for it. Then begin developing your own stabilizing strategies so you have more even-handed access to cash throughout the year.
eCommerce Businesses Experience a Turbulent But Predictable Cash Flow Cycle
Cash flow is the pattern of how money moves in and out of your business. Consider the stats of the average small business with a daily cash inflow of $381 and outflow of $374. While that margin is slim, it indicates a positive cash flow; the business is making money. Provided the net cash inflow is positive enough throughout a quarter or annual period, the business is profitable.
However, it's not as simple as hitting the same daily goal throughout the year. The vast majority of small businesses are seasonal. Some are obviously seasonal—holiday decor businesses will make far more money in the fall because there's at least one major holiday every month, and landscaping tool sellers will naturally see more business in the spring and summer. But even less obvious businesses will see seasonal ebbs and flows. Over time, even subtle patterns will become clear—upswings in demand during the start of the school year or downswings during dreary weeks in February.
Before you can begin to strategize around this phenomenon, you need to identify it. Comb through your business's historical sales volumes to identify peak and off-peak seasons and whether they're mild or severe. If you have the data, you can assess your net daily cash inflows to identify those trend lines. (Generally, they'll align with your sales volume trends but may be a half step forward or back in time.)
How This Cash Flow Cycle Can Impact Your Business
Business consultants continue to debate whether cash flow or profitability is more important for businesses. However, cash flow has a much bigger impact on your business. If you have cash on hand, you can buy more inventory, invest in more facilities or staff, and push out more marketing campaigns. But if you don't have cash flow, you'll have very limited orders, may have to let go of staff, and won't be able to expand your business or stave off debt.
But that's just simple net cash flow. You can have positive cash flow even if you don't account for seasonal turbulence, especially if you have a great peak season. So, why is it so important to be prepared for seasonal cash flow changes?
If You're Unprepared
Failing to prepare for changes in your cash flow cycle and overall sales volume cycles can jeopardize your business.
- During high cash flow periods, you may overspend because of the sudden influx of cash.
- During low cash flow periods, you will have insufficient savings to maintain business operations.
- Most forms of marketing (both direct paid ads and organic digital methods) benefit from consistent momentum. Choppy marketing due to inconsistent funds will curtail your ROAS.
- Your business can go into debt or even become bankrupt.
82% of small businesses that fail have cash flow issues, and failing to prepare for anticipated flux in your cash flow increases your chances of failing.
If You're Prepared
Knowing when slim times are ahead won't eliminate all of the challenges of inconsistent cash flow, but preparing can bring sizable advantages like:
- You can forecast your net cash flow and save money accordingly during high cash flow periods to prepare for off-peak seasons.
- Your team won't let intermittent periods of being flush with cash sink your business.
- You can identify business-essential expenses to account for all year long.
- You can consider product and marketing strategies that even out the most severe swings in off-peak seasons.
- When you know upcoming slow periods won't give you the cash flow you need, you can search around for financing that fits your financial goals and business plan.
Knowing that your business needs ongoing stabilization puts you on the right path to examine strategies before you find yourself in the middle of a money emergency.
How to Stabilize Your eCommerce Business's Cash Flow Cycle
Unfortunately, knowing that you need strategies for stabilizing your business throughout the cash flow cycle doesn't automatically give you answers. However, each of these strategies can help stabilize or strengthen your cash flow. Identify your preferred options from these strategies, or build a multi-faceted strategy that incorporates multiple approaches at once.
Forecast Your Business's Unique Cash Flow
Try this strategy first: accumulate your business's data and really understand the shape and severity of your business's cash flow cycle. Is there a distinct peak and off-peak cycle with deep troughs? Or is there a small, gradual up-and-down wave? If your business is brand new or you don't have the data, research your industry to see what behaviors other businesses in your niche experience.
Based on this research, you can identify what dangers lie ahead, how much cash you need to save up for the off-peak seasons, and which strategies best align with your needs.
Diversify Your Products to Even Out Low Cycles
If you can, stabilize your cash flow cycle by finding ways to keep cash flow higher during the off-peak season. You can expand your product offerings to include items that are better suited to off-season trends. For example, when you sell scarves, gloves, and socks in the winter, you can invest in more summery outdoor wear for the other half of the year. This approach will require more control over your inventory costs and better relationships with a wider array of suppliers, but it can stabilize your sales.
Prioritize Evergreen Products for Additional Stability
You may not be able to fully erase cash flow turbulence, and that's okay. Most online businesses naturally see more activity during the holiday season, and there's simply no way to replicate that on the opposite side of the calendar. However, you can mitigate its negative effects by choosing a core line of evergreen products. Is there something your business sells—or something that your business can sell—all year long? Products like subscription boxes, all-season gear, and home essentials give you a steady revenue stream even as other product sales ebb and flow.
Manage Expenses Through Inventory Management
A standard tactic in business is to minimize, or at least control, expenses. Whether you want to increase profits or stabilize cash flow, go through your business expenses and identify where you can make improvements. For most online businesses, that list will include inventory management. Costs like month-to-month 3PL services, storing excess inventory, and outdated software that requires too much manual attention will eat into your cash flow. However, you can stabilize and reduce these costs by:
- Setting aside funds for annual 3PL plans
- Investing in software and inventory processes that better suit your needs
- Create backup plans for offloading excess stock during and after the holidays
This is essential for ensuring low-volume months eke out as much positive cash flow as possible.
Maximize Sales During Your Seasonal Peaks And...
Once you're aware of your business's cyclical nature, you can lean into it. Save up cash or find third-party financing to fund marketing campaigns and advance orders during your peak sales season. The more you can capitalize on the moment, the more money you have to even out your average net cash flow.
...Shore Up Your Business Infrastructure During the Low Periods
When low sales periods are inevitable and you've already done your best to increase sales, let the off-peak periods happen. Instead of chasing expensive leads or pouring money into ad campaigns that just worsen your ROAS stats, use slow periods to work on your business—creating blog and social media posts, redesigning your website, and combing through your data. These and other projects are best done when more directly revenue-driving work isn't available. And by having valuable tasks reserved for the off-peak season, you'll feel less stressed.
Use Financing Options to Bolster Your Cash Availability
Making more sales is the best way to bring up your cash flow, but it's not the only way to get more cash into your business. There are plenty of financing options available for online businesses all year round. Amazon, Shopify, and Walmart each offer limited financing options for some of their sellers. You can also turn to conventional measures like business loans and credit cards.
Growth capital financing and eCommerce business advances are also available. By calculating your sales volume and forecasting your anticipated sales, growth capital lenders can give you a merchant advance that you can put toward any of your business expenses, from increasing your inventory to hiring a web designer.
When you're using financing to grow or stabilize your business, be careful of repayment terms that add to your cash flow concerns. Instead of financing that requires a strict, flat repayment amount every month, look for more flexible solutions that tie repayment schedules and amounts to the actual revenue coming through your store in real time. If you don't check the fine print, financing agreements might just delay cash flow problems instead of resolving them.
Build Your Business Around Cash Flow to Stabilize Your Operations
All businesses have some degree of cyclical cash flow changes. Online retail businesses almost certainly experience severe changes in demand throughout the seasons. The best way to protect your business from these up and down cycles is to know they're coming and prepare accordingly.
At Onramp, we give businesses quick access to funds, and repayment is based on your sales volume so you can focus on long-term growth. If you're not making money, we're not going to make money off of you. Get cash today and stabilize your cash flow cycle with flexible financing.