06 Dec How do I Calculate Working Capital?
Working capital is a fundamental part of running an online business. On paper, it’s a calculation of the difference between a company’s current assets and current liabilities. However, for e-commerce companies, this calculation is too simplistic. Generally, a business has positive working capital if it has enough cash, accounts receivable and other liquid assets to cover its short-term obligations. On the other hand, a company has negative working capital if it doesn’t have enough liquid assets to cover its short-term financial obligations. Put simply, a company with negative working capital may have trouble paying suppliers and struggle to raise funds to drive business growth. Liquid assets are defined as assets that can be easily converted into cash. As a business owner, you should strive to have a positive working capital balance with more current assets than current liabilities. However, for an e-commerce business, inventory is less liquid than other current assets because it is harder to convert into cash. The problem for e-commerce companies is that using a conventional working capital calculation; the business can look unhealthy. This is because their capital is tied up in inventory that they don’t yet have and sales for which they have not yet been paid.
The Long Wait For Your Cash
Typically, payment delays are the biggest obstacle affecting e-commerce companies’ working capital. Generally, if you’re selling your products on a marketplace like Amazon, there is a delay between when a customer buys your product and when you get paid. Cash flow issues tend to arise because of the delay between the point of sale and when you’re paid by the marketplace. It can take several weeks before the money from your sales makes it to your bank account. In that time, you still have to cover inventory costs, marketing, and other general expenses, before you see money in the bank. With funds tied up for online sellers, there isn’t always enough cash – and herein lies the cash flow issue.
Cash Flow Makes or Breaks E-commerce Companies
Working capital is fed by cash flow, which means positive cash flow is required to maintain working capital. As an e-commerce business, you might find yourself constantly worrying about bringing in profit and neglecting the importance of cash flow in the process. You may have sold most of your goods and raked in a huge profit. But, that amount of money will not be beneficial to your business unless it is on hand. In other words, it is essential for e-commerce businesses to diligently manage their cash flow. E-Commerce companies have a lot to keep track of: what products to sell, how much to stock, how to market, manage supply chains and much more. You don’t really have the time to focus on what you need to if you’re constantly worrying about cash flow and if you can pay for the inventory you need and the marketing required to grow your business. Poor cash flow can stifle the growth of e-commerce companies. Luckily, there are some steps you can take to combat it.
Cash Flow Tools
Cash flow management is much more than simply looking at how much money your business has. Fortunately, there are many tools that you can use to help you manage your cash flow more effectively.
- Quickbooks offers ways to track the cash flow of your business via cash flow forecasts and cash flow projector. The forecast feature uses data from your receivables, payables and bank accounts. It shows you what your cash flow looks like for up to a month ahead. The projector tool allows you to manually input data to get a view of the next six weeks of your company’s cash flow.
- Xero is another tool that can make budgeting easier without the hassle of too many complex features. Xero’s app marketplace houses hundreds of apps that can also help you project and manage your cash flow.
- Float integrates with many accounting platforms and gives you a real-time view of your cash flow. This enables you to get an idea as to where your business is headed, letting you plan more efficiently.
- PlanGuru also offers cash flow forecasts, budgeting, financial analytics and strategic planning tools. Its planning function lets you look at “what if” scenarios, so you can see how particular events might affect your cash flow.
Ultimately, tools like these can help you understand and improve profits, decision-making and working capital.
Once you have established your base working capital, the next step is to think about your cash flow. Do you have new product launches coming up? Do you foresee big expenses? Do you need to stock up on goods before the holidays? There is a suite of tools and account software that you can use to forecast your cash flow into the future. Even with these tools, as you are trying to grow your business, there will be months where you are cash flow negative. A capital advance ensures you never miss a growth opportunity and can grow your business at your own pace. It provides you with the ability to receive fast capital based on your future sales and gives you an instant boost of the funds you need. At Yardline, we give e-commerce owners access to growth capital to fill the gaps left by the nature of online businesses. Contact us today to get started.