How-To Guide: Managing Affiliate Marketing Cash Flow
As an affiliate marketer, it can be very easy to get fixated on commissions. After all, that’s the number you see when you log into your affiliate account every day, and it’s exciting to see it grow as a result of your hard work.
But every seasoned affiliate knows that there’s another metric that matters much more for building a thriving business – though it does take a bit more work to figure out.
That metric is cash flow.
What is Cash Flow, And Why Does it Matter?
Cash flow refers to the amount of money that is being transferred in and out of your business within a specific time period. When a business is cash flow positive, more cash is entering the business than leaving it – which is essential for paying your bills and keeping the lights on. In contrast, a business with negative cash flow is losing cash over time, and is unlikely to survive for very long.
It’s important to understand that cash flow is different from income. Many novice affiliate marketers make the mistake of simply subtracting operating expenses from total revenue (or commissions), and assuming they’re doing well if that number is growing. But this simple income calculation leaves out the critical factor of time. Many profitable companies have gone out of business because they were making money on paper, but weren’t able to collect that cash before their bills came due. Hence the common business maxim, “Cash is King”.
This is especially relevant for affiliate marketers, who typically pay their vendors in cash, but receive network commissions on a delayed basis. For example, if an affiliate generates $10,000 in commissions in February 2020, the affiliate network might not deposit that money until March. In the meantime, the affiliate has had to pay a number of costs to generate those sales, including:
- Website hosting
- SEO research tools
- Paid traffic
- Employee salaries
- Outsourced services
Assuming the affiliate pays $8,000 for these costs, they would have a paper profit of $2,000, but a negative cash flow of $8,000 in February.
Of course, in the real world, this affiliate would also have received commissions in February for sales they generated in January. If those commissions exceed $8,000, their net cash flow for February would still end up positive.
Clearly, cash is required to fuel growth. While it’s possible for affiliate marketing businesses to scale up very quickly, any sustainable expansion plan must be built on a foundation of smart cash flow management.
Tracking Cash Flow
The first step in managing cash flow better is to carefully track where every dollar is going. If you don’t already keep up-to-date cash flow statements, you should definitely make this a priority.
There are four ways to create cash flow statements for your business:
- Do it yourself in Excel. Spreadsheets are basic but effective tools for keeping track of your finances. There are many pre-made templates that are designed specifically for cash flow management. This is the cheapest option, but requires reasonably strong technical and financial skills.
- Use accounting software. Popular options include Quickbooks and Xero. These software packages make it easier to prepare cash flow statements than Excel, but you’re still doing the work yourself.
- Hire a bookkeeper. Most independent bookkeepers charge $20-50 an hour to handle your accounting, leaving you free to focus on your business. They can generate cash flow statements for you from your transaction history, which they maintain for you on an ongoing basis.
- Outsource to a cloud accounting service. Services like Bench offer an end-to-end bookkeeping service integrated with powerful cloud reporting tools for cash flow management and beyond. These services can scale alongside your business, providing more sophisticated accounting as your needs grow.
Whichever option you choose, the quality of your cash flow statements will be directly dependent on the accuracy of your financial records. That’s why it’s essential to implement good habits and systems for organizing your business finances.
Common best practices include:
- Setting up a separate business account for all affiliate marketing expenses and revenue
- Establishing a regular schedule for checking your cash flow. Ideally, this would include daily, weekly, monthly, quarterly and annual check-ins.
- Maintaining a single digital folder for all your invoices, with standardized categorization and naming conventions.
- Tracking money stored in various online accounts, including traffic sources and payment services like Paypal.
- Scheduling alerts for commission payment dates, and sending a reminder email immediately if a payment is late.
- Safeguarding your financial data with an automated cloud backup solution like Dropbox.
These practices will ensure your financial data stays current and accurate, making it easy to generate high-quality cash flow statements.
How to Read a Cash Flow Statement
Once you have your cash flow statements, you’ll need to know how to read them. Cash flow analysis can be a very complex topic, and we’re not going to cover everything in this article. But understanding the basics can go a long way.
Here’s a sample cash flow statement:
There are three types of cash flow reflected in this statement:
- Cash Flow from Operations. Also known as “operating cash flow”, this is the money that goes in and out of the company as a result of its main business activities. Common examples for affiliate marketers are commission deposits, web hosting fees and paid advertising costs.
- Cash Flow from Investing. This includes all cash flows related to longer-term investments. For example, if you purchase a website and promote affiliate offers on it, the money you paid for the website would be a cash outflow.
- Cash Flow from Financing. This refers to money received or paid out due to financing activities, such as raising equity investment, or paying back a bank loan.
In reality, most affiliate marketers don’t do that much investing or financing on a regular basis. So as a general rule of thumb, operating cash flow is the most important thing to track on a regular basis. Instead of waiting for your bookkeeper to prepare your quarterly cash flow statement, you can do a quick-and-dirty calculation of your operating cash flow with the following formula:
Operating Cash Flow = Total Commissions Deposited – Operating Expenses
Monitor this one number on a daily or weekly basis, and you’ll never be caught unawares by a sudden cash crunch.
Managing Affiliate Payment Terms
Armed with a solid understanding of your cash flow statements, you can begin identifying opportunities for improving your cash flow. For most affiliate marketers, the biggest opportunity by far will be better management of network payment terms.
As explained earlier, most cash flow challenges arise from the gap between when your affiliate network pays you, and when you have to pay your employees and vendors. Therefore, anything you can do to reduce this gap will have a massive impact on your cash flow metrics.
Why do affiliate networks delay payments?
There are two main reasons why affiliate networks delay payments.
- The first is the advertiser payment cycle. When an affiliate generates $10,000 worth of advertiser sales, they don’t get that $10,000 from the advertiser until a month later. So paying the affiliate any sooner than that impacts their own cash flow, and requires them to bear the risk that the advertiser won’t pay up.
- The second is the risk of affiliate fraud. Most affiliate networks and advertisers regularly monitor affiliate behavior for possible signs of fraud, and delays in payment give them a window to identify unethical behavior. In fact, a Harvard Business School study has mathematically proven that payment delays significantly reduce the risk of fraud, which increases profitability and allows advertisers to offer better commissions to ethical affiliates.
The common thread here is that payment delays are ultimately a form of risk management for affiliate networks. Understanding this, affiliate marketers should adopt a two-pronged strategy to manage payment terms:
1. Spread Out Your Budget
When planning your operating budget, account for the full interval between payouts, not just the pay period. Let’s say your network has a 30-day pay period, and net 15 terms. This means that all sales made in the first 30 days will earn commissions, but those commissions will only be paid out on day 45. If you have a $4,500 operating budget, you should be spending $100 a day over 45 days, instead of $150 a day over 30 days.
Since you’re spreading out payments over a longer period, this will reduce your cash outflow, thus improving your overall cashflow position. Additionally, you’ll never be in a position where you have to stop advertising because you’re out of cash, and this steady performance will win your network’s trust over time.
2. Build a Long-Term Relationship
In the long term, your goal is to build a strong relationship with your network. As you become more of a trusted partner, their risk goes down, which means they can justify paying you more frequently. This is especially the case if you’re sending them a high volume of business, which is why newer affiliates should focus their efforts on a single network.
Of course, you want to select your primary network carefully. A good start is to research networks on review sites like G2 and Trust Pilot to see what other affiliates say about them. Affiliate communities like affLift and STM can also be very helpful resources.
The right network will view affiliates as partners, not replaceable commodities. At Fintel Connect, for example, we pride ourselves on supporting our affiliates and being responsive to their needs. That’s why our affiliates give us reviews like this:
“The Fintel Connect team is always listening to its affiliates. I appreciate the willingness to improve the product and to quickly find solutions to problems that may arise. It is also appreciated to receive industry news and events in which the company participates.
The company is growing and it’s interesting to see new advertisers appear, especially in the financial sector. This opens up new growth opportunities for my company.”
– Jean-Maximilien V
We’ve helped many affiliates grow their business with blue-chip financial advertisers who are in this for the long haul. If you’re looking for a long-term partner who’s invested in your success, contact us today to learn how we can work together.