Financial planning for eCommerce - A 4 step guide

You have your product releases mapped out throughout the year, the marketing strategy to go with them, and you’ve got everything you need for your website to succeed, so why on earth would you leave your finances up to chance.

It’s not a sustainable business model to look into your finances every day and let that roulette wheel spin. When it comes to finances, even a series of nice surprises do not lend themselves to keeping a business afloat for the long haul - you don’t want to be leaving things to chance.

When your business is running successfully, you may feel like you can leave your finances on autopilot, you may even feel like you have them figured out, but let’s face it, your finances cannot just be left unattended.

So let’s break down a simple method to get your eCommerce store’s finances in order and make a plan for success.

Step 1 - Estimate your predicted revenue

You’ve got to at least have some idea of what your finances will look like if you expect to make any sort of reasonable plan for them. No one can claim to be a business fortune teller, so we do have to make some predictions. 

Your eCommerce platform will be able to give you all the data you need to make a fairly accurate prediction. You’ll need to know your website’s traffic, your conversion rate, and your average order value.

Step 2 - Map out your costs

As with any other business, eCommerce businesses have their own stack of costs and operating expenses that you’ll have to deduct from your gross revenue. You may not have a big operating facility or physical store to sell your product out of, but you’ll still have to pay for materials to produce your products, postage, etc

Fixed costs are costs that you’ll incur irrespective of your sales, operating expenses like rent and salaries are common examples. So, even in the extreme example where you have no sales and can no longer afford to buy new stock, you’ll still need to pay for website hosting, your Shopify store’s licensing fee, and so on.

Variable costs on the other hand, are costs you incur every time you sell an inventory unit, with the cost of the product, transit, and sales commission as some examples.. Furthermore, these costs can vary further depending on where a customer is ordering from and your rate of returns. 

To calculate total variable costs, take the number of units you expect to sell and multiply that with your per-unit variable cost, which if you’ve been in business for long enough you should have to hand

Variable Cost = (Cost of One Unit of Inventory + Sales Commission Per Unit + Freight Per Unit + Other Per-Unit Variable Costs) x Expected Sales in Units

Once you have a sum of your fixed and expected variable costs per month, you’ll know how much you need to sell to break even every month. 

That is, before you’ve factored in tax.‍

Step 3 - Build a tax strategy

Who would have thought that a three letter word could cause so much stress? Taxes are the bane of most people’s lives at the best of times, but to eCommerce store owners they become an even more complex beast to deal with. As much as we wish tax was, in and of itself, merely one consideration, there are several different types of tax you’ll have to account for.

Sales tax will be the most complex to handle, with each country you sell and ship to having its own rate of tax. So, if you’re selling in more than one jurisdiction, you’ll have to map out the different tax considerations and codes, or at the very least employ the use of a third party tool to do so for you. 

VAT is a bit simpler to handle. Whilst you’ll need to take account of your entire stock portfolio to see which items count as VAT exempt, if any, it is a flat rate applied to all other stock.

Depending on what country you’re operating out of, you’ll have other tax considerations to make too, but otherwise these will be the two that keep you occupied.

Step 4 - Project your cash flow 

Without clear insight into how much money is coming in and out of your business, how do you expect to know when it’s time to grow?

Before we get into this, keep in mind that your cash flow and your profit are two entirely different entities, and you best be careful not to get them confused. 

Profit is your take home pay once all your expenses have been paid for, whereas cash flow is simply the sum of all the money coming into the business, minus all of the money coming out at any given time. This does not account for any unpaid expenses, or any expenses that have been made in advance, and so your cash flow is usually a much higher amount than your profit - it’s what you brag to your friends about after hours.

This is not to say that cash flow is not a useful metric to have a hold of, as you can use it to map out whether or not you can expand your business in the near future or whether you're running at a risk of liquidity. 

This is why it’s important to project your cash flow. You need to have full visibility into any upcoming payments that you need to make, vs the sales that you expect to make in order to know whether or not you’ll be able to keep your business running as you are operating over the next few months. 

Some final thoughts

eCommerce business owners tend to be highly creative people who will easily get tied up in the marketing side of the business, whilst largely ignoring the more financially led elements. For example, pushing for a higher and higher ROAS, in place of negotiating a 2% lower operating cost, when the latter will be far more impactful on the business’ profits overall. To this end, a financial plan is a great way to have transparency throughout the whole business.

Your ROAS can be great, but if it's not resulting in a good enough profit at the end of the day, your balance sheet is just going to look worse and worse over time. Alternatively, you might have a comparatively poor ROAS but still be making a profit - try not to look at stats in isolation.

A financial plan for eCommerce businesses helps to estimate your expenditures and optimise your profit margins, giving you a preview of what to expect and keeping anxiety away down the road.

Getting your finances in order can be a much more complicated task then one may initially think when getting started, one that can often unfurl into a larger web of tasks too. If you need someone else to look into your books for you, Speak to us about bookkeeping. Alternatively, If you’re in need of a financial roadmap that links eCommerce metrics to financial goals, talk to us about our GDP or bookkeeping services here.