5 Cash Flow Management Mistakes You Can't Afford To Make

While cash flow management can seem basic (you just need to monitor what’s coming in and what’s coming out, right?) financial experts know that there’s much more to cash flow management than meets the eye.

After working in finance for nearly a decade, I’ve seen my fair share of mistakes. Many businesses think that they understand cash flow models, but they’re often missing crucial details that can make a serious dent in their overall finances.

No matter how much fancy software you have to manage your finances, if you’re making these mistakes when calculating cash flow, you are putting your business at a huge risk.

Here are the top 5 cash flow management mistakes eCommerce store owners make.

1. You’re Not Negotiating Rates with Banks and Credit Card Companies

Beyond the basics, there are a few hidden financial expenses that can make a huge difference.

First off: Interest. It’s important to take into account any interest you may be collecting on loans that you used to finance your merchandise or store.

For a business with 10% margins, the difference between a 5% loan to 6% loan is enormous.

You should always try to lower your interest rate and if needed, refinance your loan. Remember, while the macro-environment impacts interest rates, so too does your business’ strength. So, after a few months of running your business successfully, go back to your bank and try to negotiate for lower interest rates.

With persistence, you can eventually lower the rates, and the overall return you will get over time is enormous.

Second up: payment processing fees. If your customers pay you using credit cards or PayPal, don’t forget to take these costs into consideration.

Always continue to bargain with credit card companies. Remember, they want your business.

You’d be surprised how much you can achieve if you only ask. As your business grows, you will have more and more leverage to negotiate better rates with your bank and credit card companies.

2. You’re Not Looking at Rent Alternatives

Whether you are a small business running an eCommerce store out of your basement or a medium-to-large operation with rented office space, you need to make sure you’re taking all of your fixed costs into account.

Check and weigh rent options carefully.

It may be more financially fruitful for you to sublet your basement and lease an office instead. Or maybe you need to move out of your office into a basement. The point is to carefully check the alternatives and how they will affect all of your fixed costs.

For example, if you rent offices or storage facilities in the center of town, check how much you could save by moving to a less prime spot. Take into account all of the costs this would entail, like the cost of moving or the cost of a longer commute.

3. You’re Not Paying Attention to Exchange Rates

If you buy your inventory in a foreign currency, you need to be aware of how exchange rates impact your cash flow forecast.

For example, let’s say you buy inventory from Spain that costs 1,000 Euros when the USD/Euro rate is 1.1. And 30 days later, when your payment is due, the rate changes to 1.15. This means that you’re paying $1,150, instead of the $1,100 you expected.

It may seem like a small difference, but these additional costs can really add up.

Talk to your bank about hedging and other ways to manage exchange rate exposure.

4. You’re Not Taking Refunds Into Account

You absolutely must take refunds into consideration when building your cash flow model.

The best way to factor refunds into your cash flow forecast is to look at the past year and calculate your refund costs, then deduct this cost from the upcoming year’s expected revenues.

For example, let’s say you had $1,000,000 in revenues in 2015, and you had to refund for products in the amount of $50,000 (5%). If you anticipate that you’ll have $1,500,000 in revenues in 2016, you should plan to finish the year with $1,500,000 * (1-0.05)= $1,425,000.

Another aspect to consider is if you can re-sell a product after it has been returned, or if returns mean you lose the inventory.

Always follow up with credit card companies to get your payment processing fees back for sales that were refunded — these may seem small, but they can add up in the long run.

5. You’re Not Calculating Both an Optimistic and a Pessimistic Outlook

When building your cash flow forecast for next month or year, try to calculate two scenarios and see how you will cope with each of them. Change your assumptions by up to 10% to see how it affects your results.

For example, when you’re forecasting, create a model where sales decrease by 10%, refunds increase by 10%, your inventory gets stuck in customs for a week and you are hit with a big, unexpected fee.

Then make sure you have what you need to continue for the next month with these results.