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How to Forecast Cash Flow in Your Amazon Business

Forecast Cash Flow

“Cash flow is the life’s blood of your business.”

We’ve all heard this saying a million times by now, but that doesn’t make it any less true. To run a successful Amazon business, you simply have to have enough cash to purchase inventory, pay bills, pay your employees and hopefully pay yourself!

You will either manage cash, or cash will manage you. That’s why it’s vital to have a plan for the cash coming into and going out of your business. Being short on cash puts you in a position of weakness.

Let’s take a classic seller example:

Cindy followed the great American entrepreneur path and bootstrapped her Amazon business. Unfortunately, because she didn’t start out with enough funding, she ran out of cash before she could buy her second round of inventory. She knew she could make money on her next inventory purchase, so she maxed out her credit card. But she forgot to factor in her credit card’s high interest rate, and now she owes a big debt month after month. To complicate matters, the next time she runs short on cash, she no longer has her credit card to turn to. She may have to take out a loan with predatory interest rates or worse, go out of business. And sadly, even when you go out of business, those bills don’t just disappear. And bankruptcy is no fun for anyone!

Cindy could have avoided this worst-case scenario by managing her cash flow.

Why is it vital to manage my business’s cash flow?

Terms like “managing cash flow” can quickly turn sellers off. After all, any kind of financial task often conjures up images of hours spent poring over a boring spreadsheet.

However, it helps to think of managing cash flow as just a fancy way of saying “I am going to have a plan for how I intend to pay for things as my business grows.”

Example Cash Flow Management:

Cindy’s upcoming cash needs are:

  • Inventory payment due Dec 12 – $8500
  • Payroll due Dec 14 – $3800

Cindy’s incoming cash will be:

  • Amazon 2-week deposit on December 5 – $5000
  • Expected Shopify proceeds for month of December – $5000

Now that Cindy is aware of her cash needs, she can plan her spending. For example, she may feel flush with cash when that Amazon disbursement hits her account. But now that she’s aware of her big upcoming expenses (inventory payment and payroll) she can make plans for those funds in her bank account. In this case, it looks like Cindy may face a December shortfall. But now that she sees the danger on the horizon, she can make a plan, such as using a line of credit to cover the expense. This will also prevent her from making any rash decisions while her bank account balance is looking deceptively flush.

By forecasting your cash flow, you’ll, just like Cindy, start to construct a picture of the ebb and flow of your business’s cash.

Cash Flow 101: 3 Ways Cash Enters and Exits Your Business

Any business activity involving cash can be separated into one of these three buckets:

  1. Operations – Money your business makes from day to day activities, after expenses. In other words, profits. If you are making more cash than you are spending, congrats – you are profitable! If you’re making less cash than you’re spending on your operations, then funds are exiting your business as a loss.
  2. Financing – Using debt to bring cash into your business. Anything from using credit cards to accounts payable to long term loans fall under this category.
  3. Investment – The owner either writes a check from their personal funds or leaves profit in the company rather than taking it home as part of their personal earnings. When an owner chooses to leave profit in the business, this is called Retained Earnings (RE.)  Less frequently, e-commerce business owners may also take on outside investment.

How to Forecast Your Amazon Business’s Cash Flow

Now that you’re aware of how money enters and leaves your business, it’s time to forecast your cash flow.

Seller Accountant Co-Founder Tyler Jefcoat recommends businesses at least perform a monthly forecast covering the next six to twelve months. Some larger businesses even forecast weekly.

No matter how far out you chose to forecast, just be sure to keep your analysis updated. Due to market forces, the availability of new inventory, technology and many other factors, e-commerce businesses can change as the wind blows. An out-of-date forecast is as useless as no forecast at all.

When creating your forecast, think about how cash flows in and out of your business in each of these categories:

  • Operations – Select your time period and predict sales, expenses and profits. Is this number good news or bad news? If it’s good news, you may find that you have cash to spare to beef up inventory or hire. If it’s bad news, you can make changes, or plan for lean months.
  • Financing – Calculate what debt you have due each month.
  • Investing – Consider 2 activities: 1) If the owner adds money to or retains earnings in the business (Retained earnings (RE) are when the owner leaves money in the business rather than taking it out to pay themselves.) 2) If the owner pulls money out as a profit distribution (some businesses call these dividends, but just think of this as money you, the owner, gets from the business that isn’t your salary.)
  • Inventory Purchases – Most businesses focus on Accounts Payable (AP) and Accounts Receivable (AR) here, but e-commerce businesses are singular in that AP is almost 100% related to inventory. So, inventory gets its own line in your forecast because purchases, deposits, etc. can crush the average seller if not planned for. Think ahead to times of year when you expect to actually spend cash on inventory.
  • Accounts Payable – This number can increase or decrease month to month. (It can also stay the same, but rarely does.) What you want to look at is the amount you expect your AP to change every month. If you expect your AP to go down, this harms your cash flow because you paid money to a vendor. If you expect AP to go up, this actually helps your cash flow because your vendor has “loaned” you money by allowing you more time to pay.
  • Taxes – Keep in mind that profitable businesses are expect to pay quarterly estimated taxes to the government in April, June, September and January. Don’t forget to add these tax payments to your forecast.

With all these numbers in mind, check out Seller Accountant’s example Cash Flow Forecast and quick video walkthrough.

Other Cash Flow Forecasting Resources

Need help managing your cash flow? Contact us for a free Amazon accounting consultation.

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