When starting your first e-commerce business, one of the first steps you should be taking is planning out your business’ finances. Financial planning is a facet of E-Commerce that’s easy to overlook. Due to the industry’s generally low overhead costs and high ROI, many people think it’s easy money! However, like any business, there will always be a chance that you could lose the money you invested.
Managing the Finances of Your eCommerce Business
To prepare for the risks associated with starting a business, have a solid financial plan that can act as a valuable safety net for your business.
Tracking Earnings and Expenses
Keeping track of your business’ finances is the first step to managing your e-commerce business finances. If you’re constantly aware of your revenue and expenditures, you will never be surprised by where your money is going. Not great at accounting? No worries, this guide keeps things simple!
Start by writing out a simple spreadsheet, setting aside one column to cover all your revenue, and using each row to show the source of that revenue. Then, utilize the second column to track expenses, using each row to list the source of the expense. Finally, add sections at the bottom that combine all these to calculate the total revenue, expenses, and overall profit.
|T-Shirt Sales||$200||Facebook Ads||$100|
|Mug Sales||$100||Instagram Ads||$100|
|Hoodie Sales||$100||Shipping Costs||$50|
Your budget, once completed, will show you how much profit your business is currently earning based on the difference between the revenue and expenditures (Profit = Revenue – Expenditures). Most likely, during the first few years of running your business, you may find that you will be putting the majority of your revenue directly back into the business, giving you very low-profit margins. This is very common and should not scare you. Most startups tend to break even during the first few years while the owners use the money earned from them to build up and promote the brand. You should see low-profit margins as a sign your business is growing, and look forward to the day that the sacrifices pay off and start earning you money!
Paying your taxes is an important part of an e-commerce business but is also frequently overlooked. Many people are used to income taxes being directly taken from their paycheck and often forget about the business taxes they will also be charged come tax season. Because of this, many new small business owners do not have enough money stowed away for when their first tax bill comes, which can lead to steep fines or even jail time for tax evasion charges.
To keep track of your small business’ finances for when your tax bill comes in, it’s recommended that you keep your revenue in a secure online bank account separate from your personal bank account. If your e-commerce business is a side project, this is a great way of not confusing your business profits with your income. Consider this as putting your paystubs aside for tax season to keep everything in order when filling out your tax returns.
Once you have a secure, separate account for your business’s profit, it’s time to calculate how much you owe. Depending on if you are running this as a full-time job or as a side hustle, the tax rates can change, so make sure to look up local and federal tax laws to get a better understanding of what your tax rate is going to be. Try doing this every month, and then set aside what you owe to be more than prepared for when that tax bill comes around.
Preparing for a Loss
A faulty product, a misplaced order, and an unsatisfied customer. What do these three things have in common? They are all unexpected circumstances that could be a huge loss for your business. Therefore, putting aside an emergency fund for your business is important.
Treat your emergency fund for your business the same way you would a personal emergency fund. Does your emergency fund have enough money to cover you for a few months while out of a job? Your emergency fund should have enough money to cover a situation where an entire batch of orders might fall through. Remember, in the startup phase of a business, anything that can go wrong will go wrong, so you need to have enough money saved to be prepared for an unexpected loss.
When first starting an e-commerce business, a good portion of your expenses will likely go toward advertising and marketing fees. When you start, it’s good to have a rough estimate of how much you will be spending monthly on advertising, such as Instagram and Facebook advertisement costs. However, as your business grows, you’ll want to put more money into these advertisements. You may find that you will need to spend more money if you aren’t bringing in as many new customers as you once did at the start of the business.
If you’re having difficulty finding the funds to expand your marketing campaign, consider looking into low-cost marketing techniques. One way of doing this is with word-of-mouth marketing. This involves giving sample products to close friends and family with decently sized social media followings. Chances are they’ll start talking about your brand on their social media pages and generate leads for your business. While it costs some money for the sample products to be distributed, it’s far cheaper than investing in influencers, who will often want a sample product on top of an advertising fee.