Mastering the Cash Flow Statement for Ecommerce | Webgility (2024)

The global cash flow management market is estimated to reach 1.2 billion USD by 2025. With the rise of online shopping platforms and digital payments, ecommerce owners need to remain vigilant with their cash flow statement.

For every business, small or large, the cash flow statement represents the financial heartbeat of financial management. In this comprehensive guide, we’ll break down the cash flow statement from top to bottom.

What is a cash flow statement?

The cash flow statement precisely captures the amount of cash and cash equivalents entering and leaving a company over a specific period. This is also known as cash inflows vs. cash outflows.

A business’s cash flow is typically segmented into three main categories: operating, investing, and financing activities.

Operating activities

Operating activities detail the cash inflows and outflows from the company’s core business operations. This includes revenue from sales and payments to suppliers and employees.

For ecommerce, cash inflows primarily consist of sales made through online platforms. This can include payments for acquiring stock, digital marketing campaigns, platform fees, and other operational costs.

Since consumer behavior and preferences change throughout each season, cash inflows are a lot more volatile in ecommerce than traditional businesses. Ecommerce owners need to understand these trends in order to plan accordingly with regards to spending.

Investing activities

Investing activities deal with transactions related to the purchase and sale of assets. These include property, equipment, and securities.

Ecommerce businesses operate a bit differently than brick-and-mortar enterprises. Investment might look like purchasing or upgrading technology such as ecommerce platforms or accounting software.

As an ecommerce business begins to scale up, owners may also invest in software development and digital assets, rather than in physical property and equipment.

Financing activities

Financing activities reflect changes in equity and borrowings. This indicates cash raised through issuing stock or taking loans and cash paid out as dividends or debt repayments.

For ecommerce, financing activities include raising capital through venture funding, crowdfunding, or traditional loans.

The cash flow from these activities provide insights into how ecommerce businesses fund their operations and manage financial obligations.

Cash flow statement vs other statements

The cash flow statement operates alongside the balance sheet and income statement. Together, these three financial statements provide a holistic view of the company’s financial health.

The balance sheet, for instance, details the company’s assets, liabilities, and shareholders’ equity at a specific point in time. Meanwhile, the income statement focused on the company’s revenues and expenses over a specific period, highlighting profitability.

So, while the income statement may show a profit, the cash flow statement may reveal a decrease in cash on hand. This could indicate potential issues in working capital management and cash collection.

Example of a cash flow statement

To clarify how a cash flow statement functions in the context of an ecommerce business, consider the following detailed example for an online store with a fiscal year ending on December 31, 2022.

The above cash flow statement shows how the online store manages its cash flow across different operations. Ecommerce businesses typically have smoother operational cash flow, lower fixed asset investments, and streamlined inventory management systems.

How to read a cash flow statement

Ecommerce owners need to understand their cash flow statement and how it impacts their company’s financial health. Here’s a detailed look at how to interpret each section.

Interpreting operating activities

This section showcases the cash generated from the company’s primary business activities. Key figures to watch include:

• Adjustments for non-cash items

• Changes in working capital

Healthy businesses typically show positive net cash from operating activities. This suggests that the company is self-sufficient and can fund its operations from revenues.

Interpreting investing activities

These activities indicate a company’s expenditures on long-term assets and investments. Companies typically invest in assets like equipment, technology, and property to expand operations.

It’s not uncommon to notice negative cash flow here, particularly in growth phases. However, significant and sustained negative cash flow can be a red flag. This can indicate that the company is not generated enough from its operations to support its investments.

Interpreting financing activities

This area reflects the company’s funding and how it manages its capital structure. This includes deb, equity, and dividends.

An increase in cash flow might be due to new debt or equity issued. This often suggests expansion or restructuring. Paying down debt or issuing dividends decreases cash flow, signaling a return of value to shareholders.

How to use a cash flow statement

Once you understand the structure and each section of the cash flow statement, you can utilize it to maintain and enhance your company’s financial health. Here are key steps for leveraging insights provided by your new financial tool.

Analyze cash flow from operating activities

This section tells you whether the core operations of your business are generating sufficient free cash to meet your obligations. It will also show you if you can invest in future growth.

A consistent positive cash flow from operations indicates a solid business model. If the number is negative, it might signal operational inefficiencies or issues with how the business generates revenue.

Evaluate cash flow from investing activities

This reflects the company’s investment in long-term assets and its ability to generate returns from these investments. A negative number is common here, especially for growth-focused businesses.

However, a positive cash flow might indicate the company is selling off assets, which could be a concern if this trend continues long-term. Analyze these activities to help assess your company’s growth strategy and execution.

Assess cash flow from financing activities

The flow of cash fromfinancing activities reveals how a business finances its operations and growth. This is shown through debt, equity, and dividends.

An increase in debt or equity financing can signify the need for additional operating cash flow to support business. Conversely, returning capital to shareholders through dividends or debt repayment can indicate financial stability and profitability.

Monitor net cash flow

The net change in the cash flow at the bottom of the statement captures the overall increase or decrease in a company’s cash position during the period. This figure proves critical as it directly impacts the company's liquidity.

Ecommerce owners need to monitor this number over time to help predict future cash flow trends. This will enable more informed strategic planning and decision-making.

Practical application

Businesses should conduct regular analyses, either monthly, quarterly, or annually. Compare actual cash flows against forecasts, identify trends, and make adjustments as needed.

Incorporating cash flow analysis into the financial review process supports strategic planning, risk management, and investment decisions. It also ensures that the business remains solvent and thrives in the competitive marketplace.

Benefits of cash flow statement

Ecommerce businesses stand to gain remarkable benefits through diligent cash flow management. Here are a few key elements:

• Enhanced financial planning: By tracking cash inflows from sales and outlfows for expenses, ecommerce businesses can better plan for future financial needs. This will ensure they have the funds necessary for inventory purchasing, marketing campaigns, and other operational expenses.

• Improved cash management: The cash flow statement allows ecommerce businesses to identify periods of high and low cash flow, helping them manage cash reserves efficiently to handle slow periods without affecting operations.

• Identification of payment cycle gaps: This helps pinpoint discrepancies between sales and payment receipts, allowing for the adjustment of credit terms or the implementation of strategies to encourage prompt payment.

• Facilitates investment decisions: A clear understanding of cash flow helps ecommerce businesses make informed decisions about investing in new technologies, platforms, or market expansion plans. This ensures that investments are made with affordability and potential ROI in mind.

• Monitoring of expense trends: Regularly examining cash flow statements can alert businesses to increasing costs or unexpected expenditures, allowing for timely adjustments to maintain profitability.

• Aids in debt management: By highlighting the capacity for debt repayment, the cash flow statement can guide ecommerce businesses in managing borrowing levels. This helps avoid excessive debt that could stifle growth or lead to financial stability.

• Better stakeholder confidence: Detailed and transparent cash flow statements build confidence among investors, creditors, and partners. This showcases the company’s ability to effectively generate cash and manage its financial obligations.

Risks of not preparing a cash flow statement

Ecommerce owners face significant risks when they neglect to prepare a cash flow statement. These distinct challenges are outlined as follows:

• Inventory mismanagement: Ecommerce businesses may struggle with maintaining the right inventory level without clear visibility of cash flows. Too much cash tied up in stock can result in liquidity issues, whereas too little may lead to missed sales opportunities.

• Overlooking seasonal cash flow fluctuations: Ecommerce sales can be highly seasonal. Not preparing for periods of high expenditure or understanding when the cash inflows from peak sales periods will materialize can severely impact operational capabilities.

• Difficulty in managing marketing spend: A statement of cash flows can help assess marketing campaigns' effectiveness in terms of return on investment. Without it, ecommerce businesses risk overspending on marketing without adequate returns, affecting overall free cash flow.

• Challenges in supplier payments: Timely payment to suppliers is crucial for maintaining good relationships and ensuring a steady supply of products. Without understanding cash flow, businesses may face difficulties in managing payment schedules. This can lead to stock shortages or halted sales.

• Inability to capitalize on growth opportunities: Ecommerce businesses must be agile and ready to invest in technology, new products, or market expansion. A lack of cash flow awareness can lead to missed opportunities or delayed reactions to market demands.

• Limited access to financing: Like any business, ecommerce operations may require external financing to fuel growth or bridge cash flow gaps. Without a documented cash flow statement, acquiring loans or attracting investors becomes significantly more difficult, limiting growth potential.

How to create a cash flow statement

Once you have a complete understanding of the cash flow statement, you can accurately organize your business’s financial activities. Here are the detailed steps to guide you through generating a cash flow statement.

1. Collect basic financial information

Start by gathering your company’s financial records, including the income statement and balance sheet. These documents provide the foundation for identifying the cash flows in your business.

2. Identify the cash flows from operating activities

Capture cash flows directly related to producing and delivering your goods and services. Adjust your net income by adding back expenses that do not require cash outflows (such as depreciation).

Then, account for changes in working capital, such as accounts receivable, inventory, accounts payable, etc. These adjustments to net income will help income reflect the actual cash generated or used in operations.

3. Determine cash flows from investing activities

List cash flows associated with the purchase and sale of long-term assets such as property, equipment, or investments in other businesses. Purchases typically represent cash outflows, while sales represent cash inflows.

4. Outline cash flows from financing activities

Financing activities involve changes in debts, loans, and equity. Include proceeds from issuing stock, borrowing activities, repaying loans, and paying dividends.

Summing up these activities will show how financing contributes to your overall cash position.

5. Calculate the net increase or decrease in cash

After identifying all the cash inflows and outflows from the above activities, sum them up to find the net change in your cash position over the period.

6. Reconcile starting and ending cash balances

Finally, add the net cash increase or decrease to the opening cash balance (the cash amount at the beginning of the period). This calculation should give you the closing cash balance.

This must match the cash amount shown on your ending balance sheet for the same period.

Direct and indirect cash flow management

Ecommerce businesses can manage their cash flow through either direct or indirect methods. Online sellers should understand the differences between these approaches for effective financial planning and insight.

Direct cash flow method

Use the direct method to track actual cash transactions as they occur. This means recording every cash flow inflow from customers and every cash outflow for expenses in real-time.

For ecommerce businesses, this may include daily sales revenue, immediate cashpayments to suppliers, and instant marketing campaign expenses. This method provides a detailed and accurate view of a company cash position.

Indirect cash flow method

Conversely, use the indirect method to start with net income from the income statement and adjust for non-cash transactions. This includes depreciation and changes in working capital.

This approach provides a broader overview of where cash flow originates and where it’s being spent without requiring the detailed tracking of every cash transaction. It’s often easier and less labor-intensive because it leverages already-prepared income statements and balance sheets.

Enhance your cash flow with automated data sync

As your ecommerce operations grow, a cash flow statement will become an essential tool for tracking your financial health. This includes keeping up with payments, orders, and other operational expenses.

Tracking expenses manually can be overwhelming, time-consuming, and prone to errors. Thankfully, a real-time data sync solution can streamline your process by automatically downloading that information to your accounting software.

Growing your business means your solution grows with you. Expand sales channels, integrate new apps, and streamline data all in one place. Sellers have reported saving up to 10 hours a week by avoiding manual data entry, preventing errors in records and ensuring a clear cash flow report.