How to create a cash flow forecast for an e-commerce business

How to create the cash flow forecast for ecommerce business

E-commerce is a business model that can have lower overheads and strong profit margins compared to their brick & mortar retail equivalents and a cash flow forecast for ecommerce business can go along way to succeeding.

However, like any business, cash flow problems can rear their head!

Whether it’s struggling to raise the cash to pay your bills or uncertainty over the safest time to spend your savings on growth initiatives, a cash flow forecast can help. 

In this article, I’ll run through how to build a cash flow forecast for an e-commerce business – providing a general overview as well as tackling some of the cases more specific to e-commerce. 

Cash flow is pretty simple in theory. It’s just the total movement of cash in and out of your bank account at any particular time.

A cash flow forecast formalises this in a clean, readable report. The figures in this report are entered by analysing your past data and looking to the future to see what changes are afoot. 

If you are thinking of starting an e-commerce business and have no past data I recommend reading this article:

How to start an e-commerce business guide

With a base cash flow forecast built, you then broaden your expectations by running various cash flow scenarios.

The future is unpredictable after all and creating one cash flow forecast might mislead you if you base all your decisions on it. Any single forecast will be inaccurate and a range of forecasts with identified levels of uncertainty will be required to make sound decisions about your future. 

The 4 main ingredients of any cash flow forecast are:

  1. The length of time you’ll forecast for
  2. How much your costs are
  3. How many sales you’ll make
  4. The timing of payments

So let’s run through these ingredients!

Related:


The length of time you’ll forecast for

Cash flow forecasts can vary dramatically in length and purpose. Shorter forecasts can work in a lot of detail and ensure you have enough cash over the coming weeks and months. Beyond that, you become more strategic.

Looking further ahead helps you ensure you’ve got enough to pay your next tax bill, survive your next off-season and plan your spending to grow your business.

E-commerce businesses selling products to consumers might find a longer forecast useful for planning:

  • Future inventory purchases
  • New product launches
  • Future marketing campaigns
  • Hiring new staff
  • Paying your tax bills
  • Purchasing new equipment

Of course, if you are applying for funding or reporting to investors they will want to see the big picture – often 3-5 years out. They want to see your ambition for growth and your strategic plan for getting there.

They know it won’t be 100% accurate over long periods but it helps to show you’ve thought about it and that you’ve got a long term vision laid out in your business plan

Even if you are self-funded this type of planning can open your eyes to a wider viewpoint and make you think differently about today’s problems and decisions. 

I recommend choosing a forecast length between 12 months and 5 years depending on your goals.

Next, it’s time to start collating your figures. We’ll begin with costs as many of your operational expenses will be repeatable, predictable amounts.

Even if you are a startup not yet launched and without any historical data, this is a great place to start.

It’s the area of your forecast you’ll have the most certainty around.

Related: How to Create an Effective Financial Forecast With No Historical Data 


How much your costs are

The next phase is to make some lists. We need to categorise your costs and enter the values you pay at the frequency you pay them.

Here are some examples of repeating cost categories typical for an e-commerce business:

  • Website hosting – £100 per month
  • Domain name – £25 per year
  • Rent – £3000 per quarter
  • Webchat support software – £150 per month
  • Social media ads – £500 per month
  • Insurance – £750 per year
  • Utility bills – £250 per month 
  • Staff salaries & pensions – £6000 per month

We are not covering your variable cost of sales here like packaging costs or inventory. These are dependent on the units of sales you sell, so we’ll look at in the sales area.

You might also have a number of one-off costs that are either ad-hoc or infrequent. These might typically be equipment purchases like a new laptop or other equipment.

If you are just starting up, you might have a set of these costs all at once so it’s good to list them out too.

An e-commerce business running out of a small office will have purchases similar to this:

  • Laptops – £1500
  • Computer monitors – £500
  • Computer misc – £250
  • Printer – £150
  • Furniture – £300

Going forward, you may need to replace these items or expand them as you grow. They are also an emergency source of cash should you run into problems paying your bills. 

Of course, if you are manufacturing the products yourself, you might also have specialist equipment required for production.

Make sure you list these out too, they can be expensive.

Be comprehensive in this section and reference your past bank statements or accounts to find all the hidden costs you’ve forgotten about. 

Related: What is an asset?


How many sales you’ll make

Your sales categories are just as important to break down as your costs.

You might have some product categories that sell reliably and some ranges that sell less frequently.

When it comes to forecasting cash flow, this kind of information is very useful for making decisions. It helps to identify weak areas or areas for growth.

It can help you identify how much of your income you can rely on to keep coming back month on month as well as areas ripe for growth. 

In our sister article How to start an e-commerce business guide, I used the example of homemade soaps sold through an e-commerce website.

The product breakdown for my starting products went like this:

Soap bars

  • Lavander
  • Coconut
  • Grapefruit
  • Lemon
  • Rose
  • Aloe Vera
  • Peppermint

Gift hampers

  • Gift pack 4 bars
  • Gift pack 8 bars
  • Gift pack 12 bars

This modelled the initial range of products which I expanded later on in the plan to include other categories.

You need to choose the right level of detail to forecast in. Often this is dictated by the way in which your data is recorded already in your systems. However, if you have hundreds of products, your cash flow forecast will get too bogged down in detail to be useful. 

You can group up products together into one category and use average prices and average unit sales to deliver quick insights into the future. 

When forecasting, you are always making compromises to yield useful information quickly but at an acceptable level of accuracy.

Related: How to start planning your sales forecast 

Cost of sales

The units you forecast in your sales projections will help you calculate your cost of sales too. 

You should know the unit cost of each item you sell as well as any other relevant costs like a percentage payment gateway change on each sale. 

Using a unit forecast to drive both your sales and your cost of sales in your cash flow makes it a lot easier to test out different scenarios later on.  


The timing of payments

Payment timing covers a few factors. For your costs, it’s about the frequency at which you pay all the types of bills you owe. You should have already noted these down earlier.

For your income, you are at the mercy of your customers and your sales forecasts. An e-commerce business selling a range of consumer products will need to pay close attention to their seasonality

However, there is another aspect too which is the delay between making a sale and receiving the cash. Or receiving a bill to pay and actually parting with the cash.

Depending on your payment gateway, you might not receive all the cash immediately at the time of purchase when you sell an item.

You might get all the months sales on a specific date each month.

This can lead to cash flow problems even if you have a great month of sales! If you owe bills before the cash from your sales actually lands in your bank account, you could be in trouble. 

It’s key to understand this dynamic in order to get some realism and accuracy into your cash flow forecast. It’s the difference between accrual-based reporting and cash-based reporting. You need to be careful of this as if you’re looking at your accounting platform for historical data you need to ensure it is showing you cash based results.

This means it’s reporting the figure on the date money actually entered or left your bank account rather than when a sale or bill was made.

As you start entering your figures you need to keep all of this in mind as it’s often the timing of cash payments that gets companies into cash flow problems.

Related:


Creating your E-commerce cash flow projections

With the information you’ve gathered so far, we can begin constructing your cash flow forecast. 

Now, I’ll be building a plan in Brixx – you can follow along by starting a free trial, or you can download any of our Excel & Google Sheets templates here.

Brixx is an easy to use financial modelling tool perfect for creating comprehensive cash flow forecasts and testing out business scenarios.

I’ll split this down into the following sections:

  • Section 1: Setting up your plan
  • Section 2: Income & cost of sales
  • Section 3: Operating costs
  • Section 4: Assets
  • Section 5: Funding

Section 1: Setting up your plan

Your first step is to start a new plan:

We’re going to create a 3 year forecast.

As we went through earlier, you could choose a variety of different planning lengths.

This 3-year forecast will allow me to analyse the next 12 months with more focus whilst more looking at the potential impact on the following years more broadly. 

My blank Brixx plan starts like this:

You begin in the area on the left hand side where you see all the activities your business undertakes. Brixx plans start with some placeholder income and cost components.

We are going to run through these areas in the next few sections and customise them with the appropriate income, costs, asset purchases and funding sources organised into groups.

Having a structure like this gives you a picture of all the cash activities your business undertakes. You can then easily expand this structure to reflect changes to your business in the future, mapping out the financial consequences with ease.

Let’s get started with your sources of income.


Section 2: E-commerce income forecast

It’s time to take the income categories you outlined earlier and enter them as Brixx income components. This way you can forecast the cash sales for each item and see them broken down in your reports. 

My hypothetical soap bars sell at the premium price of £3.99 per bar. They cost £1 per bar from my supplier.

I’ll also sell them as gift boxes of 4, 8 and 12 at a time at a discount to the consumer.

When I click on an income component it reveals its forecast:

Here I have entered my unit price of £3.99 at the top.

I’ve entered the expected units sold in the table below it with a simple assumption around growth. It’s here that you need to investigate your past data. How many did you sell this time last year? What were the factors that went into those numbers? Are they similar this year? What are you doing differently this year to promote growth?

You’ve got to do some serious research to build accurate expectations for the future. 

I also mentioned earlier about the timing of cash payments.

You have two choices:

  1. Enter the units in the period you receive the cash
  2. Enter the units in the periods you make the sale and then use the cash delay dropdown to time when you receive the cash

If you choose the second method you’ll benefit from having an accurate accrual-based profit & loss report as well as an accurate cash basis cash flow report in the reporting area of the app.

The next step is to click the +INVENTORY button. This will add an inventory component connected to this income component. If you don’t hold inventory, you can use the Cost of sales component instead.

The inventory component has some additional options around modelling stock purchased in advance and recording its value on your balance sheet.

Again, if you are just interested in cash flow, the cost of sales component is a great option. 

Adding an inventory component to each item means my group now looks like this:

Now, clicking on my inventory component reveals the forecast:

I have set this forecast to be ‘cost per unit’. This means it checks the units in the income component, in this case lavender, to calculate the inventory purchase requirements.

As I work on my sales unit forecast, my inventory requirements will automatically update at the same time so I can keep track of the costs easily.

Finally, I add two ‘Group cost of sales’ components at the bottom of the group. 

My payment gateway is a charge on all my sales. My postage and packaging costs vary slightly with the size of each order so I have entered an average value to make it easier to model and calculate. 

These are set to calculate the costs as a percentage of all the sales coming out of the group.

I have added another group for my gift boxes that have a similar setup:

Let’s take a look at the finances so far. In the first year of my cash flow chart I can see my sales growing over time through my basic growth assumption:

My costs also grow as well since they scale at the same rate as my sales. 

It’s a good starting point even with very simple assumptions. You should spend as much time as you need crafting the unit forecast to reflect your predictions for the future. Consider all the changes that you can see coming in the future:

  • New product launches
  • New marketing campaigns
  • Competitor activity in the market
  • Market changes that impact your industry

It can be difficult to understand the impact these will have on sales which is why you should run a number of scenarios to understand a range of financial consequences. 

Make sure you check out our detailed article for more assistance in this area: How to start planning your sales forecast


Section 3: Operating costs

Moving on from sales and their related costs we are now onto a slightly easier section – your operating costs. 

Businesses typically have a large range of cost categories and I’ve divided mine up into ‘Operating Costs’ and ‘Marketing’. You might also have a section dedicated to employees if you have a number of staff members. 

Operational costs are then broken down into further groups:

My marketing costs are similarly broken down:

As we saw earlier, many of these costs are predictable and repeatable. This means you don’t have to profile a varying amount in a table.

You can simply enter the figure and the frequency at which it repeats.

For the example below its £30 per month:

My marketing spend section is the area that will have the most variability. My spending might vary throughout the year as I launch different campaigns or increase my ad spend in the right season for my products. 

It’s another critical element of your cash flow projections.

You want to make sure you’ve got the cash reserves at the right time to spend on advertising so your growth isn’t hampered. 

Let’s take a look at how our cash flow is doing after entering more costs:

My sales aren’t covering my costs particularly well at the moment. I’m modelling a startup and it needs a period of time to grow its sales in order to cover its running costs. 

It’s looking better over the 3 year period:

As my sales grow over time, they gradually increase over and above my running costs. This highlights why it’s important to view over a long period of time!

It also highlights that we are going to need some funding sources to cover our first burn period whilst we grow our sales.

More on that in Section 5.

Next, we need to take a look at another category of spending – asset purchases (or capital expenditure). 


Section 4: Asset purchases

This category of spending is centred around large purchases of land, equipment, fixtures etc that are required to operate your business. 

The items we identified early that fit this category centre around office equipment as well as any specialist equipment required to manufacture your products.

Of course, e-commerce covers a wide variety of businesses categories. Perhaps you are running a consultancy business where each of your consultants has a company car. Vehicles are another category of capital expenditure you should record here. 

Every business, no matter the scale will likely have some asset purchases. A gardening business might need a lawnmower, a mobile coffee van needs a vehicle and a clothing business might need a high quality fabric printer. 

The main difference between your everyday expenses and your capital expenses is these generally are less frequent and more expensive. They, therefore, require careful planning as to where they fit into your cash flow forecast. 

I also record any existing assets I have in the business:

Whilst this doesn’t have any immediate cash flow impact as I already spent the money in the past – they do have a value that contributes to my business. You’ll see this on your business balance sheet report.

This value might be used later for calculating the sale of an asset if I need to generate some quick cash.

Here is the setup in Brixx:

I’m modelling that my laptop loses 20% of its value each year. Again this loss in value has no immediate cash impact, but if you have a lot of assets then it is an important financial measure nonetheless. 

If your particular e-commerce business does need to purchase a large number of assets you can easily explore the best time to spend this money by adjusting their start date on the timeline:

In the timeline view, you can drag the start months of each component.

The initial cash purchase will occur on this start date so you can adjust these around and then check the impact on your cash flow in your dashboard and reports.


Section 5: Funding

Last but certainly not least by any means, is your funding sources. 

Whether your business is already slowly burning through an initial investment or you are looking to apply for funds in future – you can test all the cash ramifications in Brixx. 

You can model introducing loans with various repayment terms, put your own capital in the business or model the shares and dividends of equity holders.

In my forecast so far I need to introduce funds to cover my first year. Using the capital component I introduce £10,000 into the business at the start of the plan.

It’s set to one-off but I could also use the same component to introduce more of my money over time using the table.

This investment just about covers my first year:

I could also use a bank loan instead. However, this loan will need to be much larger since not only do I have to pay it back over time but it also costs money through interest.

Here I am modelling a £20k loan paid back over 3 years at a 5% interest rate:

This also keeps me afloat in my first year but at a higher cost:

If you don’t have the savings, this might be your best option. Learn more about your business funding options in our article: How to Fund a Small Business or Startup in 2020

Like with assets, demonstrated earlier, you can use the timeline to introduce various types of funding sources over the course of your plan to finance your activities. 

This covers all the elements that go into any financial plan. The output is your base cash flow scenario.

Once you’ve spent time considering your potential sales and all the other activities that are coming into the future you’ll have a really solid cash flow forecast to base your decisions on. 


Running cash flow scenarios for an e-commerce business

As you continue to work on making your base forecast more realistic you’ll find yourself asking more and more ‘what-if’ questions. Questions around a range of categories from risk planning to growth initiatives that require more funding.

In the startup guide for e-commerce I explored scenarios around growth where I expanded my product range over time:

I also looked at the right time to hire and expand my team:

Employing people can be one of the most expensive costs to any business and it’s key to do it at the right time when you’ve got the cash funds to do it.

Again, I’ve used the timeline to plan when I might be able to afford hiring new people.

In my operating costs section, I’ve also planned a move to a full office and explored the costs around the rent and bills involved:

Of course, one of the key areas you need to think about in regards to cash flow is your income. 

With your base case established you can copy your plan to run these scenarios independently: 

In my copies, I’ve run simple scenarios like 25% more sales vs 25% fewer sales. Does your business stay cash positive in these scenarios? What about if you have 3 months of no new income? Will your current cash reserves be enough?

These worst-case scenarios can help you be ready with the steps you need to take if they do become a reality. Whether it’s applying for more funding or reducing your cost base – you can be prepared in advance with the right decisions. 

Your best-case scenarios allow you to plan how to spend your profits wisely to propel your growth even more. 

That covers the basics of creating a cash flow forecast and running your first scenarios. You’re now set to model the future of your business!

Here are some additional resources to help you out on your journey:

Guides:

Spreadsheet templates:

Financial terminology: 

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