Cash flow metrics every e-commerce founder should track

Profit and cash flow are different

A profitable business can run out of cash. An unprofitable business can have cash in the bank. Understanding this distinction is critical for e-commerce founders, where inventory purchases and growth investments can consume cash faster than profits generate it.

Cash flow metrics tell you whether your business is building financial strength or heading toward a cash crisis.

Why e-commerce has cash flow challenges

E-commerce business models create specific cash flow pressures.

Inventory prepayment:

You buy inventory before you sell it. Cash goes out immediately. Revenue comes later. The gap between payment and sales creates cash pressure.

Growth consumes cash:

Growing faster means buying more inventory, spending more on marketing, and possibly expanding operations. Growth is an investment that consumes cash before generating returns.

Payment timing:

You might pay suppliers in 30 days but receive payment from customers immediately. Or you might have payment processor holds that delay your access to revenue.

Operating cash flow

Operating cash flow measures cash generated or consumed by normal business operations.

The concept:

Start with net income. Adjust for non-cash items like depreciation. Adjust for changes in working capital (inventory, receivables, payables). The result is cash actually generated by operations.

Why it matters:

Positive operating cash flow means your business generates cash from selling products. Negative operating cash flow means operations consume cash—you need external funding or reserves to continue.

Tracking over time:

Monthly operating cash flow varies. Track the trend over quarters. Consistently negative operating cash flow is unsustainable.

Free cash flow

Free cash flow is what remains after maintaining the business.

The calculation:

Operating cash flow minus capital expenditures (equipment, technology, infrastructure investments). Free cash flow is truly available for growth, debt repayment, or reserves.

What it tells you:

Positive free cash flow means the business generates surplus cash. Negative free cash flow means you’re investing more than operations generate—potentially fine for growth, but unsustainable indefinitely.

Cash conversion cycle

The cash conversion cycle measures how long cash is tied up in operations.

The components:

Days inventory outstanding (DIO): How long inventory sits before selling. Days sales outstanding (DSO): How long before you collect payment. Days payables outstanding (DPO): How long before you pay suppliers.

The formula:

Cash conversion cycle = DIO + DSO - DPO

Example:

Inventory sits 45 days. You collect payment in 2 days (credit cards). You pay suppliers in 30 days. CCC = 45 + 2 - 30 = 17 days.

What it means:

A 17-day cycle means cash is tied up for 17 days on average between paying for inventory and receiving customer payment. Shorter cycles are better. Negative cycles (rare) mean you collect from customers before paying suppliers.

Improving cash conversion cycle

Each component of the cycle can be optimized.

Reduce days inventory outstanding:

Improve inventory turnover. Sell through faster. Order smaller quantities more frequently.

Reduce days sales outstanding:

For B2B, collect faster. For B2C with payment processors, minimize hold periods.

Increase days payables outstanding:

Negotiate longer payment terms with suppliers. Pay at the end of terms rather than early. But don’t damage supplier relationships.

Burn rate

Burn rate measures how fast you consume cash.

The calculation:

Monthly decrease in cash balance. If you started with $100,000 and ended with $85,000, monthly burn is $15,000.

Gross burn versus net burn:

Gross burn is total cash out. Net burn accounts for cash coming in. Net burn is more relevant for ongoing operations.

Runway calculation:

Cash on hand divided by monthly burn rate equals runway in months. $150,000 cash with $15,000 monthly burn = 10 months runway.

Working capital

Working capital is the cash available for day-to-day operations.

The calculation:

Current assets minus current liabilities. Includes cash, inventory, receivables, minus payables and short-term obligations.

Why it matters:

Positive working capital means you can meet short-term obligations. Negative working capital creates risk—you might not be able to pay bills as they come due.

Working capital ratio:

Current assets divided by current liabilities. Above 1.0 is positive working capital. Above 1.5-2.0 provides comfortable buffer.

Inventory cash impact

Inventory decisions directly affect cash flow.

Inventory investment:

Every dollar in inventory is a dollar not in your bank account. Track total inventory investment and its trend.

Cash tied up calculation:

Inventory value times opportunity cost rate gives annual cost of inventory cash. $200,000 inventory at 10% opportunity cost = $20,000 annual impact.

Seasonal inventory buildup:

Pre-season inventory investment can strain cash significantly. Plan financing or reserves for buildup periods.

Payment processor cash flow

Payment processing affects when you access your money.

Hold periods:

Some processors hold funds for days or weeks, especially for new accounts or high-risk categories. Understand your processor’s hold policies.

Reserve requirements:

Processors might hold reserves against chargebacks or refunds. This is your money you can’t access.

Payout frequency:

Daily payouts improve cash flow versus weekly payouts. Optimize payout frequency with your processor.

Supplier payment strategy

How you pay suppliers affects cash flow.

Payment terms negotiation:

Net 30 is better than net 15. Net 60 is better than net 30. Negotiate the longest terms suppliers will accept.

Early payment discounts:

Some suppliers offer 2% discount for payment in 10 days. Calculate whether the discount exceeds your cost of capital. If so, take it.

Strategic timing:

Pay at the end of terms, not early. Use the full time you’ve negotiated.

Cash flow forecasting

Forecast future cash position to avoid surprises.

Rolling forecast:

Project cash in and cash out for the next 8-12 weeks. Update weekly as actuals come in.

Scenario planning:

What happens if sales drop 20%? What happens if a big supplier payment comes due during a slow period? Plan for contingencies.

Seasonal anticipation:

Know when cash will be tight (pre-season inventory buildup) and when it will be flush (post-holiday collections).

Metrics for cash flow tracking

Focus on these cash flow metrics:

Monthly operating cash flow. Free cash flow. Cash conversion cycle and its components. Burn rate and runway. Working capital and working capital ratio. Inventory cash investment. Payment processor hold and reserve amounts. Supplier payment terms. Cash flow forecast accuracy.

Cash flow management is survival management. Track these metrics to ensure your profitable business also stays solvent.