How Online Sellers Can Track Cash Flow and Ensure Funds for Inventory and Taxes
Cash flow management is one of the most important aspects of running a successful e-commerce business. Without proper cash flow tracking, online sellers risk running out of money for inventory purchases, missing tax payments, or struggling with unexpected expenses. By following these ten steps, you can maintain a healthy cash flow, ensure profitability, and reduce financial stress.
1. Keep Track of Your Business with Proper Bookkeeping
Bookkeeping is the foundation of financial management. Without accurate records, it's impossible to understand your cash flow, track expenses, or prepare for tax season.
Start by using accounting software like QuickBooks, Xero, or specialized e-commerce bookkeeping platforms that sync with Amazon, Shopify, and other selling platforms. Make sure every transaction—whether it’s income from sales, business expenses, or inventory purchases—is categorized correctly.
Review your financial reports regularly, including your profit and loss statement, balance sheet, and cash flow statement. These reports will help you identify trends, spot cash shortages before they happen, and plan for upcoming expenses.
2. Separate Business and Personal Finances
Mixing business and personal finances makes it nearly impossible to track cash flow accurately. Open a dedicated business bank account and use it exclusively for business transactions.
Consider having multiple accounts to better manage your cash flow. For example, you can maintain:
A primary business checking account for daily operations.
A tax savings account to set aside money for estimated tax payments.
An inventory account specifically for purchasing products.
By keeping these funds separate, you can easily see how much money is available for different aspects of your business without running into cash flow issues.
3. Use a Cash Flow Forecasting Tool
Cash flow forecasting helps you predict when money will be coming in and going out so you can prepare for slow sales periods and major expenses.
Use a spreadsheet or cash flow management software to project your revenue and expenses for the next three to six months. Factor in expected sales, inventory restocking costs, platform fees, advertising spend, and other recurring expenses.
By regularly updating your cash flow forecast, you can anticipate shortfalls and adjust your spending accordingly, ensuring you always have the funds necessary for business operations.
4. Reserve Cash for Inventory Purchases
Without inventory, you can’t make sales, so setting aside money specifically for inventory purchases is critical. Proper inventory management ensures that you have enough stock to meet customer demand while maintaining a healthy cash flow.
Instead of using all your available cash for immediate business expenses, allocate a percentage of each sale toward future inventory needs. Many successful online sellers set aside at least 30-40% of their revenue for restocking products.
Understanding Inventory Turns and Why It Matters
One key metric in inventory management is inventory turnover, often referred to as inventory turns. This measures how many times your inventory is sold and replaced over a given period.
How to Calculate Inventory Turns
Inventory turnover is calculated using the following formula:
Inventory Turnover = Cost of Goods Sold(COGS) / Average Inventory Value
COGS (Cost of Goods Sold) is the total cost of the inventory sold during a given period, typically found on your income statement.
Average Inventory Value is calculated as:
Average Inventory Value = (Beginning Inventory + Ending Inventory) / 2
For example, if your COGS for the year is $200,000 and your average inventory value is $50,000:
Inventory Turnover = $200,000 / $50,000 = 4
This means you sell and replace your inventory four times per year.
Why Inventory Turns Are Important
Helps Manage Cash Flow – A higher inventory turnover means you’re selling products quickly and reinvesting that cash into new stock, reducing the risk of cash flow shortages.
Prevents Overstocking – Low inventory turnover indicates that products are sitting too long, tying up cash that could be used for other expenses like marketing or expansion.
Reduces Storage Costs – Slow-moving inventory leads to increased storage fees and potential losses from obsolete or expired products.
Improves Profitability – Faster inventory turns allow you to capitalize on trends and reduce markdowns, keeping your profit margins healthy.
To optimize cash flow, track your inventory turnover rate regularly. If your inventory turns are too low, consider strategies like adjusting pricing, improving product listings, running promotions, or reducing order quantities to avoid excessive stockpiling.
By setting aside cash specifically for inventory purchases and maintaining a good inventory turnover rate, you ensure that your business remains financially stable and prepared for growth.
5. Set Aside Money for Taxes Regularly
Many online sellers make the mistake of waiting until tax season to think about their tax obligations. This often results in cash shortages when it’s time to pay.
To avoid this, estimate your quarterly tax payments and set aside a percentage of your earnings—typically 25-30%—in a separate tax savings account. If you’re unsure about how much to save, consult with a CPA who specializes in e-commerce tax planning.
By treating taxes as a non-negotiable expense and consistently setting aside funds, you can prevent financial surprises and ensure compliance with the IRS.
6. Monitor Profit Margins and Adjust Pricing
Your profit margin determines how much money you actually keep from each sale. If your margins are too low, you may struggle to cover business expenses and taxes.
Regularly review your pricing strategy to ensure you’re covering the costs of inventory, shipping, marketplace fees, and advertising while still maintaining a healthy profit.
Use tools like Amazon's pricing calculator, Shopify's cost analysis reports, or third-party profit tracking software to analyze your profit margins. Adjust pricing as needed to maintain profitability while staying competitive.
7. Automate Payments and Savings
Automation simplifies cash flow management and ensures you’re consistently setting aside money for key expenses.
Set up automatic transfers to your tax savings and inventory accounts so that money is allocated as soon as you receive revenue. Automate recurring bill payments for expenses like software subscriptions, advertising costs, and supplier invoices.
By automating these processes, you reduce the risk of forgetting important payments and keep your financial system running smoothly.
8. Review Financial Reports Weekly
Waiting until the end of the month to check your cash flow can lead to unexpected shortfalls. Instead, set aside time each week to review your financial reports.
Check your cash flow statement to see if your business is generating more money than it's spending. Look at your profit and loss report to monitor profitability, and review your bank balances to ensure you have enough liquidity for upcoming expenses.
By staying proactive, you can make adjustments before small financial problems become major cash flow crises.
9. Build a Contingency Fund
Unexpected expenses—like sudden inventory shortages, platform suspensions, or economic downturns—can throw off even the best cash flow plans.
To protect your business, build a contingency fund with at least 1-3 months’ worth of operating expenses. This reserve can help you cover emergencies without disrupting your ability to pay for inventory, taxes, or daily expenses.
Even if you can only start with a small amount, consistently adding to this fund will provide financial security over time.
10. Work with a CPA Who Specializes in E-commerce
E-commerce businesses face unique financial challenges, from complex sales tax rules to fluctuating cash flow cycles. A CPA with experience in online selling can provide valuable guidance on tax planning, bookkeeping, and financial strategy.
Regular financial check-ins with a CPA can help you optimize your cash flow, maximize tax deductions, and ensure your business stays compliant with tax laws. Investing in expert advice can save you money in the long run and help you grow a more profitable business.
Final Thoughts
Tracking cash flow is one of the most important financial habits for online sellers. By implementing these ten steps, you can ensure that your business remains financially healthy, always has enough money for inventory and tax payments, and continues to grow profitably.
If you’re looking for expert guidance in managing your e-commerce finances, consider working with a CPA who specializes in online sellers. Having a solid financial plan in place will give you the confidence to scale your business while maintaining steady cash flow.
