It’s easier than ever to build an ecommerce business. Modern ecommerce startups have access to some great ecommerce tech features. What’s more, the internet gives us the platform and the opportunity to set up a business, reach a wide audience, market to customers, and sell directly from our own website.
But that doesn’t mean you can throw up ecommerce businesses without a solid plan in place. If you want to make ecommerce a success, it’s important to plan.
You should have a financial plan as part of your overall ecommerce business. This will help you to maintain the financial fortitude you need to drive your business plan forward.
Here, we’ll take you through everything you need to know to build the perfect financial plan for ecommerce business.
The importance of financial planning in ecommerce business success
To create a good financial plan, you need to know why you’re planning in the first place. Here are some of the reasons why financial planning is vital for ecommerce business success:
Expense allocation. With a good financial plan, you will know where your money is best deployed and why. This helps you to allocate expenses efficiently for maximum ROI.
Cash flow management. Stable cash flow will keep your ecommerce business running smoothly. A financial plan will help you to manage your cash flow efficiently and plan all your expenses, whether it’s paying a supplier or estimating the correct amount of VAT in the UK or sales tax in the US . So you’re never short of funds when you need them.
Funding and capital investment. Creating a financial plan shows investors that you are serious about your business and that you know what you are doing. Being able to hand over a financial plan to funding sources and potential investors is a great step toward securing the funding you need. Just make sure that your financial plan is solid and well-researched.
Cost control and inventory management. Your financial plan will help you control your costs and manage your inventory efficiently. Financial planning will tell you what you’ve got to work with and how you can best deploy your resources and costs for the best ROI, without disrupting your cash flow.
Making an optimized ecommerce financial plan
So, we’ve been through why it’s a good idea to make an ecommerce financial plan, but how can you do this? Let’s take a look:
Financial evaluation. The first step is to evaluate your financial position. Ideally, this means collecting data from across your business, including from suppliers, warehousing, inventory, sales, and marketing. This, along with your financial reports, will give you a full overview of your ecommerce business and its financial position.
The easiest way to do this is by using retail ERP software, as it will pull together lists of assets and resources and help you continuously monitor your business as it grows. You can also rely on multiple reports and bring the information together yourself, but it will be a bit more labor-intensive.
Ideally, your financial evaluation should also include projected revenue. This isn’t always easy to figure out, especially if you haven’t started trading yet. Some ways to predict your future revenue include:
- Looking at the financial statements of your main competitors
- Checking out your average web traffic
- Going through your average conversion rates (if you have already begun trading)
Once you’ve completed your financial evaluation, you should have a better idea of what you’re working with. This will help you to build your financial plan from realistic foundations.
Establishing financial objectives. Ultimately, your main objective is likely to be something such as ‘make more money’. But it’s a good idea to break this wider objective down into more granular ones. This will add purpose and direction to your plan.
Examples of financial objectives include:
- Stability. Getting to a point where outgoings do not exceed incomings, and the business can easily run on a day-to-day level
- Profitability. Generating enough funds to meet all expenses plus a predefined profit margin
- Liquidity. Being able to meet short-term bills (which reduces the likelihood of liquidation)
- Efficiency. Using your resources in the most efficient way possible to maximize both productivity and profit
Developing a budget. Building a workable budget is a great skill for any business endeavor. Use your ERP software to look into what resources you have, and what you will need to meet your goals and grow your business.
There are plenty of good budget models out there. With ecommerce, the innovation budget allocation model by Harvard Business School has long been popular.
This model, simply put, assigns 60% of funds to ‘Evolutionary’ endeavors (i.e. things that build and develop your brand, such as new software, platforms, apps, features etc) and 20% to ‘Differentiation’ (for example, new capabilities and directions). The final 20% goes towards expanding into new markets.
This is far from the only budget model out there. Some focus on building new opportunities, others put more emphasis on research and development. The budget model that’s best for you will depend on your business model and business goals. So be sure to do plenty of research before drawing up your final budget.
Managing cash flow. Cash flow management helps you to keep on top of the day-to-day finances of your ecommerce company. Cash flow management involves things such as:
- Inventory management
- Chasing slow-paying customers
- Sorting overheads
- Resource allocation
Record keeping is an important part of cash flow management. Modern technology makes this easy by automatically recording transactions. For example, using invoicing software that monitors cash flow, tracks payments, and calculates your taxes (depending on whether you’re in the UK, US, or Australia).
Tools like these make it easy to sort out payment problems before they disrupt your cash flow and help you to make more accurate financial predictions.
Mitigating financial risks. Any good financial plan for ecommerce business should contain strategies for mitigating financial risk. No business is without risk, but a good financial plan can help you to avoid some of the major pitfalls.
There are several ways to mitigate financial risk, including:
- Optimizing efficiency to make sure you aren’t wasting money
- Creating a caring, nurturing, and positive company culture that encourages staff to look out for the brand’s interests
- Keeping a close eye on your metrics
- Having a contingency fund set by for emergencies
Implementing the financial plan
Having created your financial plan it’s time to put it to work:
Ensuring Plan-Business Alignment. The first step to implementing your financial plan is to make sure it aligns with your overall business plan. This involves:
- Checking that your financial goals line up with your operational capabilities
- Making sure that you are assigning financial resources in ways that will help you achieve your business goals
- Assessing financial risks associated with your operations
If your business plan, marketing strategy, operations management, and financial plan have discrepancies, you will have to go back and rework things until everything is aligned. This is worth doing, as it helps to prevent things from stalling due to lack of funds etc.
Regular financial performance review. You won’t know if your financial plan is working without regularly reviewing your financial performance.
Regular financial performance reviews should be a critical aspect of your business anyway, but it’s important to include your financial plan in your review process. Check that:
- Your business is following the financial plan
- Your business is achieving the goals laid out in the financial plan
- Your financial plan is working for your business (for example, are the budgets laid out in the plan working for each department?)
- Your cash flow is stable and effective
Flexibility to market changes. No financial plan is totally future-proof. As covid taught us, things can change incredibly quickly. And your ecommerce business needs to be prepared to change with it.
Your performance reviews will regularly reveal areas where your financial plan could do with tweaking or even rewriting. As your business grows and diversifies you will naturally have to change your plan to reflect new directions and resources. The same applies to the wider market.
Market changes that could mean you need to alter your financial plans could include things such as:
- New product trends
- New regulations and legislation
- New purchasing trends (for example, paying via Google or Apple Pay rather than entering card details for every new purchase)
- New tech trends (for example, social commerce and ecommerce apps)
Generational trends (for example, using new tactics to reach post-millennial customers).
Use a financial plan to boost and build your ecommerce business
Whether you are launching an ecommerce marketplace from scratch, or already established, financial planning is an excellent thing to do.
A good financial plan for ecommerce business will give you stable foundations on which to build a successful ecommerce business. As well as looking good to investors, a financial plan will give you the knowledge and tools you need to create realistic goals, assign resources efficiently, and get the best possible ROI on your operations. Review the thumbnail summary of your financial plan to ensure it reflects your broader business strategy.
Don’t forget to regularly review your financial plan and adjust it if you need to accommodate market changes or alterations to your business. The best financial plans are created with the future in mind, which means they need to be flexible.
- Yan Anderson is the Social Relations and Content Manager at CS-Cart. He's passionate about creating content that explains complicated things in simple terms. Yan loves writing and making videos about the ecommerce industry and technology trends. He manages this blog as an editor.