So you’ve been planning your eCommerce business and building a platform for it. But do you know how you can estimate its financial performance?
When venturing into this kind of business, it’s important to have a plan for managing finances as it is a complex task. There’s also high competition in the market, so your costs should not exceed your revenues.
If you are curious about making a financial model for your eCommerce business, this blog post is for you. Read on to know how you can create and manage the financial structure of your business.
Why You Should Create an eCommerce Financial Model
Like other financial models, an eCommerce financial model helps business owners make business decisions. So whether you’re looking at the possibility of expanding the business or investing in a new asset, a financial model is a crucial tool that you should have.
An eCommerce financial model includes the expenses incurred while running the business. It takes note of your expected revenue and determines your margins against the associated costs. Also, it gives you an idea of how much profit your eCommerce business can generate.
You need an eCommerce financial model to gain insight into potential outcomes and assess your venture. With a financial model, you’ll also be able to identify risks and predict the impact of various options or choices. This is why, in addition to ensuring eCommerce POS integration to connect your eCommerce platform and POS system, your eCommerce business should also have a clear eCommerce financial model.
How to Create an eCommerce Financial Model
You can find many kinds of eCommerce financial models. While you can structure an eCommerce financial model using software programs or get a template filled out, you can also start your financial model using Excel.
Firstly, you have to know the basic components of a financial model, which are as follows:
- It fixed the cost sheet. This sheet should contain costs not dependent on sales, including payroll and other human resource expenses, infrastructures and setup fees if there are any, admin and legal fees, and other fixed costs.
- Variable cost sheet. This can include operational costs required to keep the business running and those associated with your sales volumes, such as the logistics cost, cost of goods sold, manufacturing costs, processing costs, and other costs, such as those spent on digital ads. Taking note of these costs becomes even more necessary if you’re into multichannel retailing.
- Sales or revenue sheet. To determine your business income, you need this tab of your revenue streams. You can estimate your revenues by multiplying the number of orders by their value or price, considering the discounts and returns.
Once you have filled out these sheets, the details should be fed into the following other components, which should also be linked.
- Profit and loss statement sheet. Suppose you have your sales and expenses properly filled out. In that case, it’s easy to generate a profit and loss statement, which may include a projection of gross margins, net income, and the earnings before interest, taxes, depreciation, and amortization (EBITDA).
- Cash flow sheet. This sheet should have aggregate data about all cash inflows the business receives and cash outflows used to sustain the operations.
- Balance sheet. This should offer a summary of the financial balances of the business and a statement of the balance of income and expenses at a particular point in time.
These components give you an overview of your business financial statements and how your business is doing. You can also determine your business’s possible future performance based on these sheets.
This is just a simplified overview of how you can create an eCommerce financial model. It can be as detailed or simple as you want or what the business requires. If you find making a financial model for your eCommerce business difficult, consider hiring a professional or getting a consultant.
In summary, an eCommerce financial model should estimate expenses and revenue and help you see whether a combination of these variables can make the business grow. When done right, such a model will help you see how you can scale your team and budget and understand the impact of any changes you’ll make on your revenue.
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Author: Luke is a Copywriter, Content Creator, and Social Media Manager working freelance for various clients, businesses, and agencies. He has many years of experience crafting quality content for various marketing requirements.