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3 Reasons Why Understanding your Cash Flow will either Make or Break your Business

Imagine a hydroelectric dam with three different inlets and three other outlets. This dam symbolizes your cash reserve while the inlets and outlets represent the influx of cash from operating, investing, and financial activities. The dam manager (business owner) must properly manage his dam without letting the water level get too low or too high. If it gets too low, the dam will not be able to sustain and the town nearby will lose its power; but if the water gets too high, then there will be flooding and a missed opportunity to let out some water to create electricity for the next town over. The hardest part for the dam manager is not focusing on the profit and loss report from the hydroelectric plant, but the dam’s water reserve. If he forgets to pay attention to the current state of the dam too frequently,  then the whole dam is in jeopardy.

In the business world, there are three financial statements that are revered to be the holy scriptures of accounting: Balance Sheets, Income Statements, and the Statement of Cash Flows. The balance sheet is a screenshot of your business–giving a manager a basic understanding of the current financial condition; but if an owner really wants to understand how well their company is performing, they must study and live by their Statement of Cash Flows. This report is the most powerful accounting tool your business has to understand. If you can understand your Statement of Cash Flows, then you will be able to understand the future needs of your business, where your current cash reserve looks like, and which past mistakes caused your company to lose out on a profit-maximizing opportunity.

1.) Do NOT get Distracted by your Company’s Profits and Losses

Choosing to look at only your balance sheet or profit and loss report is like looking at your business with one eye closed–this is especially common for E-Commerce sellers. With thousands of different online companies and millions of products, each company is like a snowflake. It is not economically efficient to base your company off of market trends or your competitors. As a business owner, you must figure out what is best for your corporation.

Let us look one of our client’s statements for example:

If this company was only looking at its profit and loss report, then they would be in complete chaos mode. Before they checked their Statement of Cash Flows, they would only see their net income to be ($6,454.14); but after the proper adjustments, the loss from selling was ($8,533.65)*–ouch! Even though this company operated at a loss, the business as a whole actually gained $3,966.35 in available cash. Most people would assume that these past five months have been a failure, but on the other hand, the company is still operational and has the proper amount of cash to not worry about their company going under or being unable to pay for any unexpected expenses. Sometimes looking inwards in the company can be like ripping off a band-aid–it hurts at first but is necessary to finish healing. If this company chose to ignore their cash flow statement, then they would not know that they have the runway to keep operating and would make the wrong mistake for their business. Even though it is ugly to look at, the loss of ($8,533.65) is only a part of the business and it does not determine the success of the company.

*numbers in parentheses are negative

2.) Inventory and Assets vs. Flexible Cash

If you have ever taken an accounting class, the first thing everyone learns is the foundation formula for accounting:

Assets = Liabilities + Stockholder Equity

At the end of the formula, everything should equal out on both sides ( $100 = $100). This is a pretty simple concept, but where it gets tricky for e-commerce businesses is the ability to understand your assets in depth. For example, cash and inventory are both assets, but are also contra-accounts–when one increases, the other decreases (a.k.a. cash inflows and cash outflows). If a business owner has too much inventory, he is probably going to be short on cash; this can lead to bills not being able to be paid, liquidation, or even worse, bankruptcy. On the other hand, if a company has too much cash and not enough inventory, then they are going to be stuck in a back order limbo. Not being able to sell your product to eager customers is a death wish for your company. Even though you have people willing to buy your item, potential customers are just going to go to the next seller; while you’re losing money from daily operations, your competitor is going to be able to take a larger percentage of the market. Being able to understand your Statement of Cash Flows is critical for these situations and even a deciding factor if your business survives.

If you are a toy company and know your sales are going to slow down in the summer, tie up less money in inventory, and save that flexible cash for the Christmas season. Since your company decided to save that extra cash and invest it later, you will be able to reap the benefits of having enough stock while your competitors run out.

3.) Learning from your Mistakes

If you have not paid enough attention to your Statement of Cash flows, then it is ok; now is the time to go back and learn from your mistakes so you can take your company to the next level.

From mishandling their expenses to not having enough inventory, every successful entrepreneur has failed at some point in their life. Companies like Toys-R-Us eventually failed because they were unable to innovate to modern standards and e-shopping. They did not look at their inability to sell their product in their superstores while they tied up their cash into a large amount of inventory. Instead, the board blamed their downfall on millennials not having enough children and not buying enough toys. The board of Toys-R-Us is correct about one thing, but yet Amazon sellers do not see the same problem when it comes to selling toys. In fact, toy revenue has steadily increased over the past 10 years via statista.



With the ability to sell across the world, e-commerce sellers have the potential to make more money than ever. It is time to set apart yourself from the thousands of other vendors by being able to manipulate your Statement of Cash Flows. After you have a better understanding of your business, go out and reap the benefits and expand your company to the potential it has! If your business needs a more in-depth look at your Statement of Cash Flows, contact us for a free consultation!

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