This report continues my series about the managerial, operational, and fiscal aspects of running an ecommerce business. Up to now, the series comprises the following installments.
Finance Is Important
My background is in marketing and sales. As a small business owner — my wife and I previously owned a household of jewelry-related ecommerce companies — I immediately learned that understanding finance was crucial. There are numerous things I understood as our business grew.
- You will not ever have too much money.
- Your earnings will be different than you expect, for better or for worse.
- Your costs will always be greater than you expect.
- Your cash flow has to be handled outside of your accounting system.
- It is possible to model your company in a spreadsheet with no Excel expert.
If you’re starting a company, in a high growth period, or desire to raise additional funds, you want to develop a set of financial tools to assess your business’s earnings, costs, profits and cash flow.
A Financial Model, Really?
How many smaller ecommerce owners prepare an annual budget or revenue forecast? I’m guessing less than 50 percent do so. If your organization is large enough to have a chief financial officer, then these actions are happening on a daily basis. That is because financial modeling is critical to your business success, and someone needs to keep an eye on forward-looking fiscal models.
Let’s say you want to put in a promising new product line which could increase earnings. But you aren’t sure what the total return on investment will be. As a starting point, you will need to appear at the cost of the initial stock and related carrying costs. You will have to assess the earnings potential and ramp-up period. You’ll also have to evaluate (a) loading the products and articles in your ecommerce website, (b) promotional and establish costs to attain your intended audience, and (c) the influence on your satisfaction or other business processes — such as customer service.
Last, you’ll have to estimate the investment’s effect on your cash flow. Will you have the money available to support the new products? Will it take away money from other significant marketing or operational initiatives?
How to Model Your Organization
There are lots of unique ways to approach this. You should consider consulting a financial adviser for templates and much more specific advice for your organization. I will share a few of the things I did to handle the procedure.
Besides maintaining a good handle on our income statement and balance sheet, I used several Excel spreadsheets to additional plan and model different aspects of our company.
Begin with the fundamentals: Establish a projected budget for the next 12 months. For those who have historical data, simply start with your last fiscal year’s results. Add formulas to subtotals and totals so you can start to predict new revenue and cost amounts. You can make this as easy or complicated as your abilities allow. However, your goal is to input some basic targets like raising your earnings by a given percentage, while maintaining costs even with inflation. You will want to be certain to bring any new projected revenue streams, in addition to planned investments in personnel, equipment, marketing, site, and other regions of your company.
Your financial plan should be very comprehensive and include everything — down to the bottom line profit. Spend some time getting your revenue projections right. Your cost of goods sold will be tied directly to sales. Those are two important projections which are worth getting right.
On the cost side, start with things which are tied tightly to your earnings projections. To enhance sales 10 percent, by way of instance, will you will need to boost your marketing expense? Moving things like supplies cost forward and adding 5% for inflation might be adequate.
The purpose here is to be certain you are still hitting your profit goals, to offer you the baseline budget to simulate a couple of distinct scenarios.
You should be ready to make adjustments to your budget on a monthly basis to reflect learned realities from your company and economic conditions.
Cash Flow Projection
As soon as you’ve completed your finances, you’ll be ready to construct a cash flow model. Do not forget that cash flow is linked to your financial plan and your earnings statement. However, it’s on a really different schedule. The purpose is to project when you will get money from your sales, in addition to if you pay your bills. Should you cash sales, your version will be much easier to grow than if you bill your clients with terms.
Likewise, if you cover expenses as your get the merchandise or services — versus paying your vendors on terms — your cost modeling will be simpler. Most retailers are flush with cash after the holiday season, but quite sparse on money before the holidays as they ramp up stock and promotion.
My cash flow model comprised weekly earnings projections. On the other hand, I recorded all of our vendors and projected monthly expenditures. So, as opposed to categorizing by expense type just like you do in your budget, really list who the invoices will be paid to and in which period. Things like payroll can be aggregated into one payment.
As soon as you’ve set up this model, you will notice where you may have cash flow shortages or surpluses throughout the year. If you maintain this version , you’ll have an extremely precise representation of your cash flow position on a weekly and monthly basis.
Scenario Planning Tools
As soon as you’ve completed a good budget and cash flow model, you can start to develop more robust tools to really model unique scenarios. I liked to plug-in “worst case” and “best case” scenarios. You can do this by adding variables to the spreadsheet for items like”earnings growth,””new products,” and related products. I also maintained separate spreadsheets for payroll, pay-per-click advertisements, and other marketing expenses — so that I could roll those into different models quickly.
This is the fun part of financial modeling. Don’t be scared to examine new revenue streams. Raise your prices by 5%. Stop giving away free delivery and project what effect that will have on your earnings. A year or so ago I thought about increasing our transport costs by about $1 for”non-free” transport requests. By modeling the effect we thought it would have on our orders, we determined the several hundred bucks we would make in transport earnings wasn’t worth the risk of losing those requests entirely.
None of these tools happen overnight. You may develop them and continue to improve them. The main thing is the idea behind the spreadsheets, versus focusing on constructing them.
If you will need to qualify for a lease, a loan, or seek investments, acquiring a strong financial model is a vital component. Showing a previous ability to forecast your company results is important. Do not wait until you need money to begin doing these activities.
In the long run, you may wish to look back and see what worked or not, and look ahead to what you project will work in the coming months and years.