Cash flow – or where is my money?

It’s a funny thing running an online board game store.  As any accountant will tell you, Cash is Reality, and for an online business, that’s particularly true.  You find yourself staring at your bank account quite often, wondering where all the money is even if you are making good sales.  It’s something I didn’t realise till I got into it, and I tend to think of it as ‘cash  flow lag time’.  This is  particularly problematical when you take into account payments to distributors for stock.

Here’s a quick, simplified example of what I‘m discussing.

On Day 1 (a Monday), you make an order for 20 games at $25 each.  Let’s say you have 15 day terms with your distributor (common); so you are expected to pay them on Day 16 a total of $500.

It takes 2 days for the order to arrive at your warehouse and 1 additional day to check the stock and update the website for selling.  It is now Day 4 (Thursday).

Let’s say you sell, on average, 2 orders a day.  You get two orders on Friday, Saturday, Sunday and Monday.  You only ship on Day 8, Monday (for ease of the example).  Now, assuming you sell each board game for $50, you have now generated (8 * $50) $400 of revenue.  Not a bad amount of revenue.

However, your merchant provider only processes those transactions at the end of Monday (Day 8) and only ‘clears’ your account every 2 days.  That means, you wait till Tuesday (Day 9) for the revenue to be sent to your bank account.The banks however take 3 days to clear  this payment (depends on your bank, smaller banks will do this slower, larger banks will get this done in 1 day), so you are now at Friday (Day 12) before your funds ($400) from Day 8 arrives.

Now, you make additional sales on Days 9 – 11, 2 copies each day for another 6 copies that all clear and are processed to transfer to your account on Thursday; Day 11.  That is another $300 that will now arrive on  Tuesday, Day 16.  So, on Tuesday Day 16, you will have $700 in the bank, enough to pay your distributor.  Perfect.

Wait a second! You need to get your check to the distributor by Tuesday, Day 16 but it takes 2 business days to arrive at your distributor so your check has to leave Friday.  And your bank account is only seeing $400 on Friday.

Now you have to decide either to send a check that might bounce if your distributor cashes it straight away before your money arrives or make the distributor wait till Tuesday to send the check (which will then arrive on Thursday, Day 18). But you made sales didn’t you?

The solutions

Well, there are a few things you can do.  Firstly, you can just make sure you have enough cash to flow through, always keeping a ‘float’ amount in the account.  Lines-of-Credit are particularly useful for this, and were made for this particular reason in mind.

You can also try to reduce lag-time.  Areas that are particularly problematical include shipping time between you and the distributor, processing time with your payment gateway (e.g. Moneris ‘sweeps’ your money into your account everyday) and using a larger bank (they generally process your transfers faster than credit unions).

However, all the above have costs associated with them.  Faster shipping times might mean paying for XPressPost.  Moneris charges a minimum monthly fee and works with only a few banks.  Larger banks have very high banking fees (starting at $60 a month and charging you per transaction including all those deposits…).

It’s all a balancing act really, but if you don’t notice and keep track of the lag time in receiving funds, it’s something that could easily put you out of business as you find yourself unable to meet your obligations.

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