In eCommerce, tracking the right metrics is crucial for cash flow forecasting. Without it, businesses risk inventory shortages, missed opportunities, or financial trouble during peak seasons. Here are the 5 key metrics you need to monitor:
- Operating Cash Flow (OCF): Measures cash generated from daily operations. Positive OCF means your business can fund growth and operations without external financing.
- Customer Lifetime Value (CLV): Predicts total revenue from a customer over their relationship with your business. Helps plan marketing budgets and inventory.
- Days Sales Outstanding (DSO): Tracks how long it takes to collect payments from credit sales. Lower DSO means faster cash flow.
- Days Payable Outstanding (DPO): Measures how long you take to pay suppliers. Balancing DPO helps maintain cash flow and supplier relationships.
- Forecast Accuracy Rate: Compares predicted cash flows to actual results. Higher accuracy leads to better financial planning.
Why these metrics matter:
They help you manage inventory, allocate budgets, and plan for seasonal trends. Combined with tools like revenue-based financing, they enable smarter decisions and steady growth.
| Metric | Purpose |
|---|---|
| Operating Cash Flow (OCF) | Shows cash generated from core operations |
| Customer Lifetime Value (CLV) | Predicts future revenue from customers |
| Days Sales Outstanding (DSO) | Tracks payment collection speed |
| Days Payable Outstanding (DPO) | Manages supplier payment timing |
| Forecast Accuracy Rate | Ensures reliable cash flow predictions |
Monitoring these metrics regularly ensures your business stays financially healthy and ready to scale.
KPIs and Metrics for eCommerce | Evaluate Your eComm ...
1. Operating Cash Flow (OCF)
Operating Cash Flow (OCF) measures the cash your eCommerce business generates from its main activities. It helps determine if your daily operations bring in enough cash to support growth and other needs.
Here’s the formula for calculating OCF:
Net Income + Non-Cash Expenses (e.g., depreciation) + Changes in Working Capital = Operating Cash Flow
Here’s an example:
- Net income: $50,000
- Depreciation: $5,000
- Inventory increase: -$20,000
- Accounts receivable increase: -$10,000
- Accounts payable increase: $15,000
Using the formula:
$50,000 + $5,000 + (-$15,000) = $40,000 OCF
What OCF Tells You
-
A positive OCF means your business generates enough cash to:
- Buy inventory
- Keep operations running
- Invest in growth
- Build financial reserves
-
A negative OCF could indicate:
- Poor inventory management
- Issues collecting payments
- Pricing problems
- Operational inefficiencies
Tips to Boost OCF
Here are some practical ways to improve your OCF:
- Manage inventory wisely: Focus on fast-selling products to free up cash.
- Negotiate payment terms: Work with suppliers for better terms and offer customers flexible payment options.
- Cut unnecessary expenses: Regularly review and reduce avoidable costs.
- Review pricing strategies: Ensure your pricing covers all operational costs while maintaining profitability.
Keep an eye on your OCF every month. This will help you identify trends, prepare for cash-heavy periods like holidays, and assess opportunities for growth or expansion.
Next, let’s dive into another key metric: Customer Lifetime Value (CLV).
2. Customer Lifetime Value (CLV)
Customer Lifetime Value (CLV) measures the total revenue a customer is expected to generate over their entire relationship with your business. For eCommerce companies, understanding CLV is crucial for making accurate cash flow predictions and informed decisions.
Calculating CLV
The basic formula for CLV is:
Average Order Value × Purchase Frequency × Average Customer Lifespan = Customer Lifetime Value
Here’s an example:
- Average Order Value: $75
- Purchase Frequency: 4 times per year
- Average Customer Lifespan: 3 years
CLV = $75 × 4 × 3 = $900 per customer
Refining CLV with Additional Factors
To get a more accurate CLV, consider these additional elements:
| Factor | Effect on CLV |
|---|---|
| Customer Acquisition Cost | Lowers overall net CLV |
| Return Rate | Reduces total revenue |
| Customer Service Costs | Impacts overall profits |
Here’s how to calculate some of these metrics:
- Customer Acquisition Cost (CAC): Marketing expenses ÷ New customers
- Return Rate: Total returns ÷ Total orders
- Support Efficiency: Support costs ÷ Customer base
How CLV Improves Cash Flow Forecasting
CLV plays a key role in improving cash flow forecasts by helping you:
1. Allocate Marketing Budgets
- Adjust acquisition costs and focus on growth opportunities.
- Plan seasonal campaigns more effectively.
2. Plan Inventory
- Anticipate repeat purchase trends.
- Forecast demand for specific products.
- Manage stock levels based on customer buying habits.
3. Predict Revenue
- Estimate sales from current customers.
- Project customer retention rates.
- Calculate expected recurring revenue on a monthly basis.
When combined with other metrics, CLV offers a clear view of your business’s financial health.
Boosting CLV to Strengthen Cash Flow
To improve CLV and positively impact cash flow, focus on these areas:
Customer Retention
- Launch loyalty programs.
- Offer subscription models.
- Deliver top-notch customer service.
Increasing Purchase Frequency
- Send targeted email campaigns.
- Use personalized product recommendations.
- Encourage cross-selling opportunities.
Raising Average Order Value
- Bundle related products.
- Provide volume discounts.
- Introduce free shipping thresholds.
Regularly track CLV across customer segments, acquisition channels, and product categories. This data helps you make smarter decisions about inventory, marketing, and cash flow planning.
Next, we’ll dive into Days Sales Outstanding (DSO) and its role in maintaining steady cash flow.
3. Days Sales Outstanding (DSO)
Days Sales Outstanding (DSO) tracks how long it takes to turn credit sales into cash. A shorter DSO indicates quicker cash conversion, which is crucial for accurate cash flow planning.
How to Calculate DSO
The formula for DSO is:
(Accounts Receivable ÷ Total Credit Sales) × Number of Days
Example:
- Accounts Receivable: $50,000
- Total Credit Sales: $300,000
- Time Period: 30 days
DSO = ($50,000 ÷ $300,000) × 30 = 5 days
Why DSO Matters for Cash Flow
Keeping an eye on DSO helps you estimate when cash will flow in from credit sales. This allows better planning for working capital and smoother cash flow management. Analyzing DSO alongside other metrics gives a clearer picture of your overall cash flow.
Up next, learn how Days Payable Outstanding (DPO) can further enhance your cash flow strategy.
sbb-itb-d7b5115
4. Days Payable Outstanding (DPO)
Days Payable Outstanding (DPO) tracks how long it takes your business to pay its suppliers. It's a key metric for managing your working capital, helping you balance cash flow with maintaining strong supplier relationships.
How to Calculate DPO
The formula for DPO is:
(Accounts Payable ÷ Cost of Goods Sold) × Number of Days
Example:
- Accounts Payable: $75,000
- Cost of Goods Sold: $250,000
- Time Period: 30 days
DPO = ($75,000 ÷ $250,000) × 30 = 9 days
This number, combined with Days Sales Outstanding (DSO), gives you a clearer picture of your cash conversion cycle.
Finding the Right DPO Balance
Getting DPO right is crucial. A higher DPO can improve cash flow flexibility, but delaying payments too much might harm supplier relationships or cause you to miss out on early payment discounts.
| DPO Range | Business Impact | What to Do |
|---|---|---|
| 0-15 days | Quick payments may hurt cash reserves | Negotiate extended terms with dependable suppliers |
| 15-45 days | Works well for most eCommerce businesses | Keep an eye on supplier relations and payment timing |
| 45+ days | Could strain supplier relationships | Reassess payment policies and supplier agreements |
Tips for Managing DPO Effectively
- Stay on Top of Supplier Terms: Regular communication can help avoid misunderstandings and uncover opportunities for better terms.
- Automate Payments: Use accounting tools to set up reminders and streamline payment processes.
- Evaluate Discounts: Early payment discounts can sometimes outweigh the benefits of holding onto cash for longer.
5. Forecast Accuracy Rate
Evaluating forecast accuracy helps you refine your ability to predict cash flow with more precision. This metric measures how closely your forecasts align with actual cash flows, providing insights for better future predictions.
How to Calculate Forecast Accuracy
Here’s the formula:
(1 - |Actual - Forecast| ÷ Actual) × 100
Example:
- Forecasted monthly revenue: $100,000
- Actual monthly revenue: $90,000
Using the formula: (1 - |$90,000 - $100,000| ÷ $90,000) × 100 = 88.9% accuracy.
Interpreting Accuracy Levels
| Accuracy Range | Performance Level | Suggested Action |
|---|---|---|
| 95-100% | Excellent | Stick to current forecasting methods. |
| 85-94% | Good | Adjust specific variables as needed. |
| 70-84% | Fair | Reevaluate key forecasting assumptions. |
| Below 70% | Poor | Revamp the entire forecasting process. |
Next, let’s explore the factors that can influence this metric.
Factors That Impact Forecast Accuracy
Seasonal Patterns
Identify recurring trends in your sales data. Breaking forecasts into quarters can help account for seasonal shifts in customer behavior and inventory needs.
Market Dynamics
Keep an eye on external factors, such as:
- Supply chain issues
- Competitor pricing changes
- Updates to platform algorithms
- Broader economic trends
Quality of Historical Data
Accurate historical records are critical. Ensure your financial data is consistent and clean across all sales channels to improve forecasting reliability.
Steps to Improve Forecast Accuracy
Regular Reviews
Evaluate forecasts monthly by comparing key metrics like revenue, campaign results, inventory turnover, and expenses.
Adjust Variables
If accuracy dips below 85%, identify the main contributors to the variance. Common factors include:
- Shipping costs
- Return rates
- Marketing expenses
- Payment processing fees
Integrate Data Sources
Consolidate data from various platforms to get a complete picture. Useful sources include:
- Sales platform analytics
- Inventory systems
- Customer service data
- Payment processor reports
Onramp Funds: eCommerce Cash Flow Solutions
Effectively managing cash flow isn't just about tracking numbers - it also requires access to flexible funding options. By combining key metrics with tailored funding, eCommerce sellers can better handle and predict their cash flow needs.
Platform Integration Benefits
Onramp Funds connects seamlessly with major eCommerce platforms, simplifying the funding process. These integrations allow the platform to review sales histories and create personalized cash offers:
| Platform | Integration Benefit |
|---|---|
| Amazon | Analyzes sales data to provide a tailored cash offer |
| Shopify | Analyzes sales data to provide a tailored cash offer |
| Walmart Marketplace | Analyzes sales data to provide a tailored cash offer |
| BigCommerce | Analyzes sales data to provide a tailored cash offer |
| WooCommerce | Analyzes sales data to provide a tailored cash offer |
| Squarespace | Analyzes sales data to provide a tailored cash offer |
| TikTok Shop | Analyzes sales data to provide a tailored cash offer |
Revenue-Based Financing Advantages
With revenue-based financing, repayments adjust according to your actual sales. This removes the stress of fixed monthly payments during slower periods, allowing you to focus on growing your business. This flexible approach not only eases cash flow challenges but also supports long-term growth.
Real Impact on Business Growth
Many eCommerce sellers have seen meaningful results from this funding method. For example, Kindfolk Yoga used the funds to make smarter inventory investments and expand their operations.
Strategic Fund Allocation
Revenue-based financing can fuel growth when allocated strategically. Key areas to consider include:
-
Inventory Management:
- Buy inventory at the right time
- Take advantage of bulk discounts
- Ensure stock availability during busy seasons
-
Marketing Initiatives:
- Expand successful ad campaigns
- Experiment with new marketing channels
- Fund seasonal promotions
-
Operational Efficiency:
- Upgrade logistics and shipping processes
- Invest in automation tools
- Enhance warehouse systems
Quick Access to Capital
The application process is streamlined, giving sellers fast access to funds. Nick James, CEO of Rockless Table, shared his experience:
"Applied, got our offer, and had cash in our bank account within 24 hours. Their Austin, TX based team was very professional and helped me deploy the cash to effectively grow our business."
Automated Payment Structure
Onramp Funds simplifies cash management with an automated payment system. Repayments are tied to your sales, reducing manual effort and making it easier to manage your finances.
Conclusion
Accurate metric tracking is the backbone of reliable cash flow forecasting. To forecast cash flow effectively, eCommerce businesses need to understand and consistently monitor key financial metrics. Focusing on metrics like Operating Cash Flow (OCF), Customer Lifetime Value (CLV), Days Sales Outstanding (DSO), Days Payable Outstanding (DPO), and Forecast Accuracy Rate helps create better predictions and make informed decisions.
Here's a quick breakdown of how these metrics influence cash flow forecasting:
| Metric | Role in Forecasting |
|---|---|
| Operating Cash Flow | Highlights actual cash generation capabilities |
| Customer Lifetime Value | Estimates future revenue potential |
| Days Sales Outstanding | Reflects how quickly payments are collected |
| Days Payable Outstanding | Tracks timing of outgoing payments |
| Forecast Accuracy Rate | Evaluates the reliability of predictions |
To manage cash flow effectively, use these insights to guide your decisions. Keep a close eye on these metrics and consider flexible funding options to strengthen and grow your eCommerce business.
