To plan and analyse your cashflow, you should be noting how much free cash (FCFF) is available at the start and end of a specific period. This can be a week or a month. The default for this template is a 12 month statement. In the Excel or Google Sheets spreadsheet, enter the start month and the amount of opening cash you have on hand at that time.
If you are expecting any cash injections throughout the year, you should note them down in the template. The most common forms are cash raised in exchange for equity, debt taken on from traditional banks or personal savings you are investing in the business. Plan ahead and estimate which months you expect to receive this cash inflow.
Start by taking a look at your sales data for the last year or two of operations. This will give you an insight into sales patterns you need to identify sales trends that will help predict demand, like when sales could begin to pick up and which products are most popular. Use past data to guide your projections, but make sure to account for your growth ambitions too. You can split projected revenue into online sales (e.g., via your Shopify, WooCommerce or other DTC store) and wholesale.
All DTC businesses experience some level of demand fluctuations. Fluctuations can be drastic, especially for seasonal businesses. If you anticipate sales fluctuations, especially coming in to Q4 with Black Friday and Cyber Monday, try to reflect this in your sales forecasts.
After forecasting revenues, you'll have a good idea of what sales demand will be and which products you need to meet that demand. Then you can begin assessing the cash outflows to understand what capital your business needs to capitalise on this demand.
This is important, because an eCommerce business' ability to pay for product defines order size. If a business doesn't have access to financing, it might not be able to afford enough product to meet forecasted demand. This is particularly true for growing brands, whose future sales will outpace current operations, which means they won't have enough profit to buy product, and they will miss out on sales opportunities.
You should estimate and create a budget for the expenses you'll need to pay to meet demand. Some of these will vary depending on seasonal fluctuations, such as inventory and marketing spend. Others remain relatively constant, even in the low season, such as rent, wages and software subscriptions.
For inventory planning, it is important to understand lead times and payment terms. "Lead time" is the period of time between when you first place an order with a supplier and when you receive the shipment. In simple terms, it's how long it takes a supplier to fulfil you order - and it has a big impact on your business.
Lead time dictates when you will need to place an order to prepare for seasonal demand and when you'll need the funds to pay. It can vary greatly depending on the business and the industry it operates in.
For example, an eCommerce business that specialises in home and garden supplies will need outdoor patio furniture in stock when customers begin shopping for those items in the spring. Manufacturing this type of furniture takes months, translating to six-to-eight month lead time. This means the business would need to place the order in August to have products in stock by February, when it will begin receiving its first orders. The brand should also be prepared to pay a deposit when it places the order, which it won't recoup until it sells the products months later.
While retailers selling garden furniture have months-long lead times, holiday chocolate sellers may only need to wait a few weeks for a supplier to fill their order. Consider when your demand fluctuations are, and estimate the cash outflows that are needed in advance to meet this demand. After forecasting revenues, you'll have a good idea of what sales demand will be and which products you need to meet that demand. Then you can begin assessing the cash outflows to understand what capital your business needs to capitalise on this demand.
When are the most capital intensive periods? Will I have enough cash on hand to fund my growth? Are there any periods when external financing could help my business
After completing the Excel template and getting a clearer picture of your projected cash flow for the year ahead, now you need to make important decisions to unblock any cash constraints, improve your cashflow management and maximise the chances of success for your business
NOTE: This is intended to be a living document. You can run a scenario analysis to see how different forecasts will impact your business. It can be difficult to make accurate projections months in advance, but you should keep updating your estimates throughout the year as more information becomes available.
You should always maintain a cash buffer for the business to operate. When small business owners face a financial obstacle, 62% of them dip into their own personal funds to help them overcome it. But risking personal assets for a business venture is rarely the best option. That leaves one alternative: funding.
Outside financing is often a sound option to help build up a cash buffer. Deciding what type of funding is the best for your business is a big decision. One option that many DTC eCommerce businesses may consider is equity financing, which sees a business sell stock in the business to get capital. Another option is a traditional business loan, but for businesses with fewer assets to borrow against, traditional bank loans may not be an option.
Increasingly, however, eCommerce is turning to revenue-based funding, a type of financing that gives businesses access to working capital without giving up equity. This type of financing strategy raises non-dilutive capital by partnering with a financier like Wayflyer, which receives remittances as a percentage of sales and gives credit based on predictions for future sales.
Navigate to the bonus tab in the template and complete the highlighted section. You can enter how much funding you need and at what time period - for example, heading into BFCM. Enter various scenarios and assess how your cash position changes with Wayflyer's funding, compared to your existing cash flow situation. As a next step, complete the form below and our experts will get in touch about the options available to you.
A strong cash management strategy will make your eCommerce business more resilient and allow you to take cash out of your company with peace of mind. Ensuring you always have enough operating cash flow on hand is important because it allows you to meet existing financial obligations, be ready for any unexpected bumps ahead, and plan for your future growth.
We spoke to Waddy about his top cash management tips for keeping your business healthy and geared towards growth:
eCommerce businesses should keep enough inventory on hand to cover manufacturing lead times and meet demand until their next batch of stock comes in. Importantly, they should hold enough stock to account for fluctuations in sales so that they don't run out of cash if demand rises before a new batch hits.
"I would encourage anyone to check their month's cover - in other words, how much stock do I have on hand right now at a sales level", Waddy says. "If I'm doing a million bucks in sales and I've got $3 million of stock on hand, I have 3 months' cover."
With that data, you can determine how quickly you'll sell out and when you'll need to reorder. That will also help you understand when you're at risk of having too much inventory as your next order is arriving. You don't want to have too much cash tied up in inventory. Crunch the numbers, and if you're getting close to the end of the month and holding too much stock, it's time to run a sale.
While finding and then holding the right inventory levels is important, that can't be your only focus. You also need to have money in the bank to acquire new customers and move your business forward in the long term. Plus, you need cash on hand to withstand those challenging periods where something goes wrong. Keeping at least 10 weeks of cash in the bank gives you a buffer to ride out any storms and operate with some wiggle room.
"You need to hold money in your bank account in order to hire new people, pay wages, do marketing - all of these things that are required as you grow", Waddy says.
Plan for a rainy day and hold onto cash even when you're growing. To figure out how much you need, Waddy recommends adding up only your fixed expenses for 10 weeks: staff wages, rent, and utilities, for instance. That's the number you should target. Otherwise, it might be too late to access funding from financing providers once you really need it because they're more likely to see you as a risk.
You should seek out funding partners who have an eCommerce background to make sure you're getting the most value for your brand. "There are nuances with eCommerce finances that just don't exist for other businesses", Waddy says.
Financing providers who have an eCommerce background will understand how to view the industry and your company's place within it, giving you more value and better terms than other providers.
Instead of seeking out funding from a bank or a commercial lender that may not have the modeling or the background to properly assess your company's potential, try a revenue-based financing provider like Wayflyer. You'll get quick access to funds and flexible remittance terms - because we're deeply ingrained in the world of eCommerce, and we want to see founders succeed.