Cash flow forecasting, P&Ls, accrual versus cash accounting—ugh! These are the things that keep entrepreneurs up at night. But get your finances wrong and you’ll steer your business straight into an iceberg of dysfunction, not only losing sales, but ultimately devaluing your business. Whether you want to earn more this year or plan to exit, you need to stop plotting your course through dangerous waters. Follow pro accountant Tyler Jeffcoat’s 4 tips to do better cash flow forecasting for your eCommerce biz.
IN THIS POST
Picture this: you’ve got a bangin’ Amazon business. Orders are coming in like crazy and you’re seeing fat stacks of cold, hard cash hitting your bank account. Life couldn’t be sweeter. You feel like your biz is on the right trajectory and you’re living the high life. You’re even wanting to sell your Amazon business so you can turn a big profit for your next venture.
But wait. What’s that?
A HUGE ICEBERG, straight ahead! As you scaled your Amazon business, you didn’t get your cash flow forecasting right (or maybe you didn’t even bother, because math). As a result, the bills you just paid turned your bank account from hero to zero overnight. Oh, and you need $50,000 to fund a PO by tomorrow.
You’re screwed. Missteps like this can sink your ship in a matter of hours.
Instead of going down like the Titanic, Amazon entrepreneurs have to avoid the icebergs in the first place. The problem is that, like the captain of the Titanic, you think you’ve got stuff under control. It’s not until you smash into a huge obstacle and start taking on water that you realize, “Uh oh. I think I made a wrong turn.”
You probably do a great job at forecasting sales figures, but when it comes to cash flow forecasting, you likely need help. And if you want to sell your Amazon business, bad accounting is like begging an iceberg to ram into you.
It’s the number-one reason people decide not to sell their businesses, because they realize their numbers aren’t right or that they aren’t actually earning enough to entice buyers. Plus, even if you do sell your Amazon business with bad numbers, you’re going to earn way, waaaaay less for it.
Don’t do that to yourself. Once your Amazon business gets its sea legs, it’s time to find robust processes, tools, and maybe even pros to help you out. It might sting at first, but it’s better than sinking your entire business over accounting naiveté.
Fortunately, proper accounting can help you reach your destination, unscathed and profitable. Tyler Jeffcoat, an eCommerce accountant, shares his 4 tips for better cash flow forecasting—and the 3 options you have to make it happen in your Amazon business.
Tyler Jeffcoat sold his healthcare company two years ago and learned a lot about M&A in the process. After that venture, he decided to put his accounting expertise to work, founding Seller Accountant.
Tyler wanted to be different than other accountants. After seeing how Amazon sellers really needed a leg-up with their accounting, Tyler pivoted his business to:
- Be vertical. He only works with eCommerce clients so he can help people eventually sell an Amazon business for more moolah.
- Stop focusing on the price of admission. Tyler focuses not just on clean books, but also on helping clients use those books to drive profitability.
“eCommerce retail is a cash-hungry business, and a lot of sellers tend to be undercapitalized,” Tyler says, “We help our clients not just get to the bottom line, but help them get data to make better decisions.” Today, Seller Accountant manages eCommerce and Amazon books for entrepreneurs, as well as fractional CFO help.
Tyler’s biggest pet peeve is when eCommerce businesses use cash-based accounting methods instead of accrual-based methods for their finances. It’s like you’re intentionally sailing through icy waters, daring the ocean to come at you, bro.
You can’t do cash flow forecasting if you get this wrong, and this is why so many entrepreneurs’ bank accounts are effed. The issue is that most entrepreneurs don’t know the difference between cash-based and accrual-based accounting, and why it is so frickin’ important.
Cash-based accounting works for smaller businesses. It’s very simple: when you sell something in April, it goes down as profit in April. When you have an expense in April, that’s an expense for April. “You book the sale when the cash hits your account, and you book expenses when you pay the money,” Tyler says. Sounds simple, right?
This works if your business is an itty, bitty tug boat making a handful of sales. But if you’ve built a bangin’ luxury liner, you’re going to need something more sophisticated. Cash-based accounting is problematic because, if you look at your P&L, it’s all over the damn map. “If you’re doing it on a cash basis, you have no idea if you made money last month,” Tyler says.
You bought $200,000 of inventory in April, which you’ll then sell and earn a profit for in subsequent months. But on a P&L, it looks like you’re at a loss for April when that’s actually not the case. Instead of having that inventory as an asset and expensing it slowly, as you sell the goods, it’s hitting you all at once.
So that means cash-based accounting can’t tell you if one month was profitable. You have no way of knowing, really, until the end of the fiscal year. That’s like saying, “Huh. I guess we hit an iceberg,” after the ship has sunk and you’re treading water. Oh, and if you want to sell your Amazon business? You’ll get less for it with this method, too, because you have no flipping clue how much your business actually earns.
Accrual-Based Accounting Is What You Need
Accrual-based accounting keeps the boat afloat. It tries to match every dollar of sales with the expenses associated with that dollar. So if you sell $100,000 of product on Amazon in January, accrual-based accounting helps you know what it cost to make that inventory as you sell it. “You have to understand what it really costs you per unit to get your product to the customer,” Tyler says.
If you spent $100,000 on inventory to buy 1,000 of a SKU, you didn’t spend $1 per SKU. The math is more complicated than that, accounting for mind-numbing (but still critical) factors like shipping, tariffs, and duties.
Sound complicated? Well, that’s because it is. But don’t let that turn you off. Entrepreneurs need to switch to accrual-based accounting because, remember, you’re going to leave this business eventually. We haven’t found an elixir for eternal life yet, so you can’t manage your business for eternity. You’ll need to sell your Amazon business at some point.
And if you want to sell your eCommerce business, your buyer will pay a multiple based on:
- Seller’s discretionary earnings (SDE)
- Landed cost of goods
If you aren’t tracking your landed cost of goods (which you can only do with accrual-based accounting), you could be losing thousands of dollars in inventory value when you sell.
Bottom line: you lose a crapton of money and it could have been avoided.
When you get accrual accounting right, you can finally deal with receivables, and making your money work for you. Instead of struggling against the tide, you learn to navigate and control it.
If you stay up at night wondering, “Did I actually make any money last month?” you need accrual-based accounting.
Once you switch to an accrual-based accounting method, it’s time to get to business. Set sail from port and avoid the icebergs in the first place by plotting a safer route. It’s all about smart forecasting. In Tyler’s experience as an eCommerce accountant, he’s managed $70 million in sales every year. He’s gathered his fair share of experience to know what 4 factors matter for eCommerce forecasting. “The fun part of this business is helping business owners make money,” Tyler says, grinning.
1. Be Honest With Yourself
You gotta be careful with your cash flow forecasting. Tyler says he sees a lot of entrepreneurs with “dangerous optimism” talking up their company as a badass eCommerce earnings machine that’s really a rusted old schooner in a junkyard.
Even if the last 6 months have been awesome, that doesn’t mean the business will continue performing at that level. Tyler says businesses have great years and then they have shitty years. You can’t extrapolate that much from just a few months of data.
“Most entrepreneurs are good at building a forecast around what their operation is going to generate,” Tyler says. But instead of looking just at sales projections, remember that your products have seasonality. You also need to consider:
- The product’s you’ll launch in the future
- Cost of goods sold
These are more meaningful than just sales projections, because that’s money in your pocket.
2. Forecast Inventory
A critical part of cash flow forecasting is forecasting your inventory. After all, you’re selling these products to bring home the bacon, so yeah, you have to forecast inventory if you want to forecast your cash flow.
But, like all things in accounting, inventory forecasting is tricky.
For example, if you’re manufacturing in China, it takes an average number of days for that container to come to the US. So if you forecast that, in April, you’ll have $30,000 cost of goods sold, you’ll have to pay for that inventory 90 days (or however long it takes to ship the container) after the fact.
“If you know the waiting times for your inventory, you can use that forecast,” Tyler says. Once you get a handle on where in the world your inventory is coming from, when, and how you pay for it, you know what cash is in the bank. That means you can plan ahead of time to make sure your checks clear, steering away from icebergs altogether with a little advance planning.
3. Don’t Forget Your Debts
It’s fun to think about earnings, profits, and revenue, but guess what? There are a lot of people in line to snatch those earnings out of your hand. Your sales don’t mean flip if you have so many expenses that they dwarf your earnings. Since you take home the difference, that means you’ve got less money in your pocket, pal.
The good news is that you’re probably tracking some of this. You’re likely tracking things like:
- Advertising budget
But a lot of entrepreneurs stop there, and that’s why it’s a problem. You’ve also got to look at:
- Debts (like SBA loans)
- Owner distributions
You have to look at all of your operational data to do an accurate eCommerce cash flow forecast. And yeah, it’s not uncommon to think you’ll make money one month, but because of all these unexpected debts, you end up in the red and can’t score the cash to keep your business running.
4. Grade Your SKUs
The last component of smart cash flow forecasting for eCommerce business is looking at your SKUs. And I mean really looking at them. Whatever you do, for the love of Poseidon, have a system to evaluate your SKUs. This will help you know which products are good and which ones are punching holes in your ship. And it doesn’t matter how many SKUs you have; you still have to analyze them.
Let’s be real for a second. We all have our “favorite” SKUs. Without looking at any numbers, you could probably list your top 2-3 products. But guess what? That’s not always reality. Tyler once had a client whose favorite SKU had an 80% advertising budget, which meant it was far from the shores of profitability. You have no idea which SKUs are slowly sinking you until you look at the numbers. “They didn’t know their SKU wasn’t profitable because it was buried,” Tyler says.
Use SKU grading to separate the heroes from the duds. You’ll almost always be surprised by the results.
If all the hubbub of cash flow forecasting is making your head spin, I don’t blame you. It’s rough running a business, especially in the eCommerce space. But just because something is big or confusing doesn’t mean you can skip it. In fact, there are two huge, problematic drawbacks when you aren’t cash flow forecasting for your business.
1. You Can’t Cut Costs In Time
Which scenario would you prefer?
A: You see an iceberg and have five minutes to steer away from it.
B: You know weeks ahead of time that sailing through icy water in a giant boat is stupid, so you take the longer but safer route.
Hopefully, you’d prefer option B. If you forecast, it’s going to give you time to chart a course away from disaster in the first place. “If there’s going to be a negative on the sheet, I know it now instead of it being an emergency,” Tyler says.
This means you’ll have time to say, cut costs before it’s an emergency. Cash flow forecasting gives you a 6-month head start before any budget shortfalls. That gives you plenty of time to course-correct and cover that shortfall before it’s a pants-on-fire emergency.
2. You Can’t Secure Financing
But what happens when, try as you might, you can’t slash costs fast enough? That’s okay, because with cash flow forecasting, you can use your data and 6-month lead time to secure financing.
Basically, forecasting buys you time. And when you have time on your side, you can get more favorable loan terms. In fact, Tyler’s helped some of his clients get SBA loans to cover shortfalls. And yes, this is totally kosher. If you have an eCommerce brand with good financial history, you can secure a line of credit with SBA. “If you have six months, you can go through the SBA underwriting process and explore that as an option, instead of having to take whatever emergency landing pops up,” Tyler says.
This is way, way better than turning to Amazon (which has interest rates from 14 – 20%). SBA loans have 12-month terms with interest rates from 5.5% – 8.5%. That’s a titanic difference between your two financing options.
The thing is, you need time to navigate the complexities of SBA financing. If you wake up, don’t have money, and need to fund a $60,000 purchase order by tomorrow, you have limited options. That means you’re desperate and you’ll take funding however you can get it, usually at interest rates that are so high you have to wonder if they’re even legal.
Don’t do this to your business. Forecast from the start so you know what’s ahead. Even if you’re on course to crash with an iceberg, you have plenty of time to take action and avoid a big mess.
So, we know that cash flow forecasting is a must for anyone planning to sell an Amazon business. But how do you make that forecasting happen, especially if you aren’t a big math person? You’ve got a lot of options to choose from, but it boils down to three categories.
1. DIY Tools
If you’re running a tight ship and funds are scarce, try tools that let you DIY your forecasting. This is usually better reserved for growing but less-complex businesses. If you have a limited number of SKUs but want to grow, these DIY tools are a great option (and they’re affordable, too!)
- A2X Accounting: his tool helps you pre-map Amazon entries so it’s easier to track accruals.
- Xero: Xero integrates with Amazon, eBay, and AliExpress to track your inventory, orders, and more.
- QuickBooks: We’ve still got a lot of love for ol’ QB. This system can do either cash-based accounting or accrual-based methods, so you’ve got options no matter where you are in your business.
- NetSuite: This tool from Oracle is a little fancier than QuickBooks, but it’s designed for international eCommerce. It processes multiple languages, currencies, and tax situations, so it’s good if you have a more complex business.
When you’re out to sell an Amazon business on the cheap, these tools will get you where you need to go, boss.
2. In-House Accounting
If you’re like me, you might shudder at the thought of doing your accounting solo. While the DIY approach works for plenty of entrepreneurs, it can take time. And if your biz is a touch more complicated, it helps to have a pro look over your numbers—you don’t want to piss off Uncle Sam, after all.
If that sounds like you, consider bringing in an in-house accountant. You won’t need to hire someone unless you have a pretty sizeable eCommerce operation, but if you’re finding yourself spending hours on BS finance tasks you don’t want to handle, a full-time bookkeeper can keep you sane.
Try to balance cost and experience here. You might not want to hire a bookkeeper fresh out of college for an eCommerce business. Try to hire someone with a bit more experience since the world of eCommerce is more complex. Look for a bookkeeper with experience in accrual-based methods to get the most bang for your buck.
3. Fractional CFO
The third option you have at your disposal is to hire a consultant to help you with big decisions. This is called a fractional CFO. It’s like getting a CFO who works part-time hours, so it’s cheaper than having someone in-house.
Fractional CFOs see things differently. They can help you with big decisions like:
- Choosing between Amazon and Shopify
- Reducing overhead costs
- Seeking the right investors for your business
Keep in mind that a fractional CFO is going to be different than a bookkeeper. Think of a bookkeeper as the deckhand who sees the iceberg, and the CFO as the person with the power to steer the business away from said iceberg—way ahead of time.
A traditional bookkeeper can’t help you make these decisions. If you need expertise and guidance, a fractional CFO is better for your bottom line. And actually, if you bring one on with enough time, they can even help you get a better multiple when you sell your Amazon business. Nice, eh?
Oh, and by the way: in-house bookkeepers can cost you more moolah. Quiet Light had a client who hired a recent graduate to do their books for $24,000 a year. This poor bookkeeper didn’t have experience in eCommerce and tracked the numbers incorrectly. This person used a cash-based accounting system instead of an accrual-based system. The business thought it was doing $1.2 million in discretionary earnings, but after looking over the numbers with a fine-toothed comb, they realized it was just $800,000.
If DIY sounds overwhelming and you need more heavy lifting than a bookkeeper can offer (or you can’t find a reliable bookkeeper), consider bringing on a fractional CFO. You do yourself a favor when you outsource certain specialty work. That’s the key to sell an Amazon business for a big return. You’ll get the work done on time, correctly, and you won’t have to manage another employee, either.
Running an eCommerce business shouldn’t be a disaster. You don’t have to go down with the ship when you build a business that navigates even the most icy, shark-infested waters. Go with accrual-based accounting methods and use DIY tools, a bookkeeper, or a fractional CFO to help you do cash flow forecasting right.
Once you’ve laid the foundation for a sizzlin’ business, remember to keep your forecast realistic, look at inventory, address debts, and grade SKUs. Even if you identify cash flow problems, forecasting the right way helps you cut costs and secure financing in time—steering away from that iceberg and towards profitability.
Get your books in ship-shape so you aren’t cursing like a sailor at your P&L, but sailing into the sunset. Which way will you steer the ship?
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