Entrepreneurs and business owners wear many hats. You wake up as a marketer, and you’re an accountant by lunch. A full plate might leave you with little to no time to zoom out and prepare a financial strategy. But this could mean losing money in the long run.
A financial plan for ecommerce business should be a part of your bigger ecommerce business plan.
A business needs a robust business model and financial fortitude to stay operational. Minimizing tax outgo, maintaining enough liquidity, and minimizing costs are vital to building that financial fortitude.
QuickBooks shares that 60% of small businesses consider cash flow a major concern. The number underpins the need to build a financial plan for online businesses, and that’s what we’ll help you with.
Here’s what you’ll learn:
- How to Build a Financial Plan for Your Ecommerce Business
- Estimate Revenue
- List Fixed and Variable Costs
- Come Up With a Tax Strategy
- Project Cash Flow
- Estimate Required Working Capital
- Final Thoughts: How to Build a Financial Plan for Your Ecommerce Business
Think of your online business as a sieve. Money comes into your business, passes through the metaphorical sieve, and goes out. What stays in the sieve is your profit.
The sieve analogy is oversimplified for something that can quickly turn into a complex maze of numbers.
When building a financial plan for ecommerce business, you need to look at how the numbers play out on the financial statements.
Below, we’ll walk you through how money flows through your business so you can make financial projections and take a sneak peek into your business’s future.
Estimate Revenue
Revenue is where money enters your business.
Projected Revenue = Expected Sales in Units x Price Per Unit
Projecting revenues is often the most challenging part of creating your financial roadmap. Unless you have a crystal ball, you’ll need to estimate depending on a range of factors.
For an online store, you can use the following to establish a starting point:
- Website’s traffic.
- Average conversion rate
- Average customer value
If you have enough sales data, try to identify a trend. As a last resort, you can use the estimated revenue growth from the global statistics as a proxy.
Look at how things may change in the future.
If you’ve developed marketing strategies that may bring in more leads, factor that into your calculations. Do a competitive analysis to see if your competitors have done something to increase their market share and how that will affect your ecommerce store sales.
List Fixed and Variable Costs
Fixed costs are costs that you’ll incur irrespective of your sales. Operating expenses like rent and salaries are common examples. If you run out of money to buy inventory, you’ll still need to pay the warehouse rent and salaries.
Fixed Cost = Rent + Salaries + Depreciation + Other Fixed Costs
Variable costs are costs you incur every time you sell an inventory unit. The cost of the product, transit, and sales commission are examples of variable costs.
To calculate total variable costs, take the number of units you expect to sell and multiply that with your per-unit variable cost.
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
Come Up With a Tax Strategy
At this point, almost all of the expenses have been accounted for. But you’ve got one more expense to factor in.
And that’s tax.
Ideally, you should minimize your taxable income by strategizing. Make sure you have all invoices properly organized. If you lose an invoice and don’t notice, you’ll end up underreporting your expenses and pay more tax.
Also, you’ll typically pay both indirect and direct taxes. But taxation differs among jurisdictions, so it’s best to have an experienced consultant by your side.
Project Cash Flow
Revenues, costs, and taxes appear on your income statement and help calculate the net profit.
But an ecommerce company’s profit does not equal cash.
Why?
Your company might have unpaid expenses or expenses paid in advance. Outstanding expenses appear as a current liability on your balance sheet, and advance payments appear as a current asset.
While some of your expenses remain unpaid, they appear on the income statement as soon as they become due and reduce your net profit. But your cash remains unaffected by this expense unless you pay it.
Your cash balance also changes when you raise capital with a business loan or pay an existing lender. In essence, only cash transactions affect your cash flow.
Since the cash flow statement is prepared on a cash basis, not an accrual basis, here’s how you can calculate the expected cash you’ll have at the end of a month, quarter, or year:
Expected Cash Balance = Cash Balance at the Beginning + Cash Inflows - Cash Outflows
Estimate Required Working Capital
Not managing cash well is a big reason why ecommerce stores fail.
Say you expected $5k in cash at the end of the quarter. But you have a $10k debt coming due the following month. Quite a pickle, right?
You can take a loan or use your credit card to pay off the debt. But you’ll still need cash to pay salaries and buy inventory.
Instead of relying on band-aid solutions, consider maintaining adequate working capital to ensure you always have enough money to survive in the short term. Ideally, you should aim for a working capital ratio of 1.5 to 2, but this number isn’t set in stone.
Working Capital Ratio = Current Assets ÷ Current Liabilities
Here, current assets are assets like accounts receivable and inventory that you can turn into cash in the short term. Current liabilities are liabilities like accounts payable that will become due in the short term.
Final Thoughts: How To Build a Financial Plan for Your Ecommerce Business
Having a business idea, creating a marketing plan, and aggressively talking about it on social media are great ways to kickstart your business. But when it’s your own business, you’re also responsible for helping it achieve its financial goals.
If you’re a new business, your financial plan should start with a break-even analysis to know how much you need to sell before making your first dollar. If you’ve been operating for a while, a financial plan will help you estimate your expenditures and optimize your profit margins.
Businesses, especially ecommerce businesses, are inherently risky. A financial plan for ecommerce business goes a long way in giving you a preview of what to expect and keeping anxiety away down the road.
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