Nice Accounting Adventures: Cash Flow

Better flow than Lamar

When I'll rise like my stacks of doooooughhh

Money comes in, money goes out.

That is arguably a realistic (though mildly materialistic) summary of life, yes, but it is also a good definition of cash flow.

Cash flow is the inflow and outflow of money from your business. It covers things like employee wages, taxes, operating costs, you name it. However, there is a big difference between having positive cash flow and actually being profitable. Just because you have money coming in, that doesn’t mean that you are actually turning a profit. We want to help you be aware of some things to keep in mind in order to determine whether you are actually turning a profit, or you just have positive cash flow.

In this article, we are going to be looking at some good practices for staying on top of your eComm’s cash flow, breaking it out into 3 sections: 1. Management for new product launch and restock; 2. Mapping out sales and expected dips; and 3. Freight/shipping considerations. Elsa would be so proud.

As always, our fearless accounting leaders, Accountfully, have partnered with us in this series. They know their stuff, so check them out!

1. Management for new product launch and restock

That's one heck of a fart

Launching a new product is always exciting, but don’t get so lost in the hype that you forget good practices. Good practices include things like:

Figure out the true cost of launching a new product. As you probably know, the cost of the materials is only the tip of the iceberg, you should fully account for everything else, such as design, production, research, marketing, etc.
Find the best time to launch. The timing of your launch is arguably the single most important aspect of whether a new product will be successful. You should launch at a moment that is safer for you in terms of managing your cash flow — make sure you have enough in the bank to get the idea off the ground
Plan an exciting reveal that generates hype. These days, the word “hype” gets a bad name, because it has been abused and overused by wannabe marketers…but there is still such a thing as good hype! You could have an absolutely amazing product or service, but without creating hype, it may never get off the ground. Embrace the hype, produce the hype, and spread the hype. Or as Ghandi once said “Be the hype you want to see in the world”

Yes, I totally made up the above Ghandi quote — he was not much for hype. Yes, the “original” quote about being the change was ALSO not said by Ghandi. And yes, the above picture is not actually Ghandi, but an extremely white Ben Kingsley in THIS movie. The internet is a dangerous place, folks.

Here are a few more general accounting good practices, not just related to a new product launch:

Separating your personal and business expenses. Sounds kind of obvious, but they have a sneaky way of getting mixed up if you are not careful, especially in a small business
Track closely your revenue and expenses — even the little stuff matters!
Schedule regular bookkeeping time. If you procrastinate, you are doing it at your own business’ expense (accounting puns are the best, and that’s the bottom line)
Budget for major expenses, and set clear financial goals

Still not convinced? I guess no amount of bullet(point)s is going to take you down, much like 50 cent. Respect. Fortunately for all of us, I’ve come prepared with an alternative method of selling you on accounting good practices:

Make sure your bookkeeping and reporting is up-to-date:
Trust us, your life will be easier with your books in top shape;
don’t leave it for later, and play catch up when it’s too late;
get your numbers figured out now, it makes no sense to wait

#BARS
#SpittingFire
#HitThePoundKey

Don't let your dreams stay dreams, kids

One way we suggest to make your bookkeeping more manageable is to use accrual based accounting and planning. Simply put, this means that you record transactions — such as a sale or an expense — as soon as they happen, independently of whether the money actually changes hands at that point. The alternative, recording the transaction only once the money is sent or received, is known as the cash method of accounting, and here is a short, helpful article with more details on the two accounting methods. Accrual accounting has many benefits:

Real-time view of finances; a more accurate assessment of finances
Good management of debt and income
A clear picture of your company’s financial health
The ability to increase revenue

2. Mapping out sales and expected dips

He is REALLY happy about the projected increase in sales

Another key aspect of maintaining good cash flow (remember: that is what Elsa wants for you. And she is the queen), is to plan ahead. Here are a few ways to do this:

Earmark cash for future launches
Explore longer terms and maintain good supplier relationships
Explore alternate funding options like cash flow loans, but be wary of rates

If you are not staying on top of your cash flow by planning ahead, your cash-on-hand may run low. This means that even if your business is technically making enough money to cover all expenses, due to the timing of the incoming revenue, you could find yourself temporarily unable to pay for something really important, like your payroll. Needless to say, that would be an absolute disaster…and all it takes to avoid disaster is good planning! Turns out our moms were right all along: an ounce of planning in accounting is worth a pound of gold (Was that just my mom that had that version of the quote? What about “an apple a day keeps the doctor’s-and-big-pharma’s insanely high prices away”? That one is universal, right? Love you mom! Never stop thrifting like an absolute queen!).

Conversely, if you handle your cash flow well, you could cover payroll and all your expenses even while the business is technically losing money. This is commonly known as “operating at a loss”, and if you think that would only work in small companies, think again! Some really big companies operated at a loss for years, while employing thousands of people and growing at a tremendous pace (here are just a few examples: Amazon, Facebook, UBER, Twitter). And that, my friends, is the magic, the beauty, and the power of good accounting.

3. Freight and Shipping Considerations

Besides solving the Evergreen fiasco with one simple word, Ross would’ve also been a fantastic start-up cofounder

If you have overseas suppliers, try to stay well informed regarding how long customs will take. You should have a plan already in place for any expected delays, but unexpected delays will still happen. These post-COVID days, it might just be better to assume delays will happen, and have your response ready, something we discussed in more detail in THIS article.

Even Bernie knows the importance of cash flow…up until we abolish capitalism, of course

See you next week for Part 4: Inventory Management!

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