eCommerce Cash Flow Forecasting: A 13-Week Rolling Plan

What is cash flow management?

In simple terms, cash flow management is the process of tracking, understanding and optimizing the amount of money that moves in and out of your business over a period of time. You have positive cash flow when more money comes in than goes out, and negative cash flow if you have more outflows than inflows.

Why do you need a cash flow forecast?

Mastering cash flow management is a huge advantage for your business. You can plan your growth, predict any shortfalls and avoid the shock of unexpected cash squeezes.

Almost every business creates an upfront "strategic plan" that outlines their goals for the period ahead. Sell X units. Improve margins to Y. Launch in country Z. But not enough businesses have a granular cash flow forecast in place to guide day-to-day operations. This is a risk, because as we've said before, it's a combination of profitable unit economics and careful cash flow management that makes a good business. Your growth ambitions might be feasible, but not if you run out of cash in the meantime.

In addition to your annual plans, you need to set up a 13-week cash flow forecast that maps the expected receipts and disbursements in and out of the company bank account for the quarter ahead.

The question your strategic plan answers is: what should our cash position look like in a quarter? The cash flow forecast provides a micro-level view of this: who do we need to pay, and when? Who needs to pay us, and when? It's a critical decision-making tool to keep track of cash going in and out of the business, and should be updated on a weekly basis as new information emerges.

How to build a cash flow forecast: 5 steps to plan your growth

You know you need a cash flow forecast, but what is the best way to set it up?

Having spoken to thousands of eCommerce founders, we recognise that keeping on top of your cash flow can be a tedious task. That's why we've built a free cash flow management template and a 5-step guide to help.

1. Set your timeframe

To plan and analyze your cash flow, you should be noting how much cash is available at the start and end of a specific period. The default in our template is a 13-week rolling forecast to align with quarterly reporting cycles, but you should also consider the year-long view that anticipates seasonal peaks and troughs.

2. Note any expected cash injections

Note down any cash injections you're expecting. The most common forms are cash raised in exchange for equity, debt taken on from external financing providers, or personal savings you are investing in the business.

3. Forecast your revenues

Start with the year-long perspective. Almost every consumer brand experiences some level of seasonality. These fluctuations can be drastic for particular products, like swimwear, winter coats, or back-to-school supplies. It's important that this seasonality is taken into account when managing your cash flow. Take a look at your sales data for the last year or two of operations. Look for patterns that help you predict demand, like when volume could pick up and which products are most popular. Use this to guide your predictions, but make sure to account for your growth ambitions too.

Now move into the micro-level view. How is the next 13-week slice impacted by sales fluctuations? How do you expect your cash inflows to adjust in response to this?

4. Estimate your cash outflows

After forecasting revenues, you'll have a good idea of what sales demand will be and which products you need in stock to meet that demand. Then you can begin assessing the cash outflows required, which can typically be estimated as a percentage of revenue.

How much capital does your business need to achieve its growth ambitions? This is an important assessment to make, because your inventory order size is directly tied to how much cash you have available. If a business doesn't have access to financing, it might not be able to afford enough product to meet forecasted demand. This is particularly true for growing brands, whose future sales will outpace current operations. As we've outlined in our cash conversion cycle article, successful sales growth can bankrupt a business, because an increasing amount of cash is "tied up" in stock and can't be recouped in time to cover expenses.

You should estimate and create a budget for the expenses you'll need to pay. Some of these remain relatively constant, even in the low season, such as rent, wages, and software subscriptions. Others vary depending on seasonal fluctuations, such as inventory and marketing spend.

When planning your inventory spend, it's important to factor in lead times and payment terms. Your lead time is the period of time between when you first place an order with a supplier and when you receive the shipment. It can vary greatly depending on the product category. An eCommerce business that specializes in home and garden supplies will need outdoor patio furniture in stock when customers begin shopping for those items in the Spring. But manufacturing this type of furniture takes months and could translate to a six-to-eight month lead time. That means the business would need to place the order in August to have products in stock by February, when it begins receiving orders. The brand should also be prepared to pay a deposit when it places the order, which won't be recouped until the products sell much later. Their cash conversion cycle is much longer than say, a chocolate brand that only needs to wait a few weeks for a supplier to fill their order. Their upfront capital requirements are likely larger too. But if you think back to our previous articles, this might be justified by a higher contribution margin per unit and a lower break-even point in units, provided they can manage their cash flow effectively in the meantime.

Each product category has inherent features that affect cash flow requirements. Consider when your demand fluctuations are, and estimate the cash outflows that are needed to meet this demand.

5. Analyze your projected cash position

When are the most capital intensive periods? Will I have enough cash on hand to cover fixed operating expenses? Are there any periods when external financing could benefit my business?

After completing your cash flow forecast and getting a clearer picture of your projected cash flow, you need to make important decisions to unblock any cash constraints and maximize the chances of success for your business.

You should always maintain a cash buffer so that the business can continue to operate day-to-day. Many businesses dip into personal funds to overcome cash flow constraints, but risking personal assets for a business venture is rarely the best option. External financing providers are often a sound option to capitalize on growth opportunities while maintaining a cash buffer.

Expert tips for cash management

A strong cash management strategy will make your eCommerce business more resilient and allow you to take cash out of your company with peace of mind. Ensuring you always have enough operating cash flow on hand is important because it allows you to meet existing financial obligations, be ready for unexpected bumps ahead, and plan for your future growth.

Prescribing an exact one-size-fits-all approach wouldn't be smart, because it depends on the nature of your business. But to get some general tips for keeping your business in a healthy position, we spoke to renowned eCommerce expert Paul Waddy:

Hold 12 weeks of inventory to keep up with demand

eCommerce businesses should keep enough inventory on hand to cover manufacturing lead times and meet demand until their next batch of stock comes in. Importantly, they should hold enough stock to account for fluctuations in sales so they don't run out if demand spikes before a new batch arrives.

“I would encourage anyone to check their month's cover – in other words, how much stock do I have on hand right now at a sales level?” Waddy says. “If I’m doing a million bucks in sales and I’ve got $3 million of stock on hand, I have 3 months covered.”

Monitoring this data will also help you identify when you're at risk of holding too much inventory. You don't want too much cash tied up in inventory. Crunch the numbers, and if you're holding too much stock towards the end of the month, either adjust upcoming inventory orders or consider running a sale.

Keep 10 weeks of cash on hand to stay resilient

Keeping 10 weeks of cash in the bank gives you a buffer to cover operating expenses that might arise.

"You need to hold money in your bank account in order to hire new people, pay wages, run ads", Waddy says.

Partner with a capital provider that understands your business

You should seek out financing partners that understand your business model. "There are nuances to eCommerce financing that just don't exist for more traditional businesses", Waddy says.

With a financing partner like Wayflyer, you can access financing quickly, with flexible remittance terms to suit your business needs.