It’s that time of year again…
In the fast-paced world of e-commerce, it’s easy to get caught up in the whirlwind of product launches, marketing campaigns, and customer service.
But while these aspects are crucial for driving growth, they’re only half the story.
The other half is managing your finances effectively.
Which brings us to the “time of year” that we really meant—it’s budgeting time!
We know it’s not everyone’s favorite activity, but with a few tips, it might just become something you enjoy!
We said might.
As experienced e-commerce accountants, we’ve been through numerous budgeting processes, and while there’s no one-size-fits-all approach, we have a few tricks up our sleeves to make the process smoother.
So, grab a cup of coffee, and let’s get started. Here is how we recommend going through your e-commerce budgeting process for 2024.
Take a Look at Your Last 12 Months
Imagine trying to navigate a maze with your eyes blindfolded. That’s what it’s like running your e-commerce business without a budget.
Without a clear understanding of your expenses, you’re essentially flying blind.
That’s why the first step in crafting a budget is to take a deep dive into your past financial records.
Gather your receipts, invoices, and bank statements from the previous year.
Better yet, just pull up your financial statements in QuickBooks Online.
Then, categorize your expenses into various buckets, such as inventory, marketing, shipping, and operational costs.
This should already be set up in your accounting software.
Don’t be afraid to get granular; the more detailed you are, the better.
This exercise will reveal patterns in your spending, highlighting areas where you can potentially save money or optimize your processes.
Think About The Next 12 Months
Just as you wouldn’t build a house without considering the weather, you shouldn’t create a budget without taking into account your business’s future.
Growth projections, new product launches, and anticipated market shifts will all impact your financial needs.
For instance, if you’re expecting significant growth, you’ll need to factor in increased inventory costs and marketing spending.
Similarly, launching new products may require additional marketing and packaging expenses.
By anticipating these changes, you can adjust your budget accordingly and ensure you’re well-prepared for the challenges and opportunities ahead.
Now, let’s delve further into the budgeting process.
Start With Your Sales Forecast
First and foremost, we recommend working with reliable forecasting software to help you with this part.
We like using tools like Fathom, which offers the flexibility to build forecasts based on various rules and pulls information directly from your accounting software, ensuring you’re always working with accurate historical data.
Let’s break down how we go through each category in detail:
- Sales Forecast: Begin with your sales forecast. For e-commerce, it’s essential to consider factors like seasonality and trends in online shopping. You might base your forecast on historical data with adjustments for anticipated growth or changes in market conditions.
- Cost of Goods Sold (COGS): Estimate your COGS based on your revenue percentages from past years. This approach provides a practical way to predict your production costs.
- Overhead Costs: Set your regular overhead expenses to match the previous year’s numbers. This provides a stable foundation for your budget.
- Marketing Expenses: For e-commerce, marketing expenses are a significant factor. You can base these costs on your historical marketing spend or allocate a percentage of your expected revenue for marketing efforts.
- Shipping Costs: E-commerce businesses should also account for shipping costs, which can vary based on order volume and shipping partners.
Balance Your Budget
Now, the ultimate goal is to ensure your sales forecast and expense budget align harmoniously.
If they don’t add up, you’ll need to make adjustments to either your expenses or revenue.
We recommend aiming for a specific profit goal and working backward from there:
- Set a Target Profit: Decide on a target profit goal for the year, such as $100,000.
- Calculate EBIT: Based on your current expenses, calculate your EBIT (earnings before interest and taxes). Aiming for a 10-15% EBIT margin is a good starting point.
- Calculate Gross Profit: Your gross profit should cover expenses and profit. Use the same margins as the previous year to estimate your COGS.
- Determine Revenue: Calculate the revenue needed to cover COGS, profit, and expenses. This becomes your revenue goal for the year.
Sound complicated? It’s really not!
Put simply, figure out how much profit you want to bring home at the end of the year and work backward. By identifying a target profit number, you can calculate exactly how much revenue you need to bring in, given your expenses stay roughly the same.
Adapt and Adjust
It’s always important to keep in mind that your budget should remain flexible.
As an e-commerce business, you’re operating in a dynamic environment.
If there’s a gap between your budget and your target profit, consider strategies to increase sales while managing expenses effectively.
Whether it’s expanding your online channels, exploring new distribution methods, or launching a new venture, ensure that additional revenue justifies the associated expenses.
Embrace Change
And finally, don’t get too hung up on sticking with the same budget for the entire year. Life changes, and so does your e-commerce business.
Be prepared to revise your budget as needed to accommodate any unexpected developments or opportunities.
If you need assistance with your budget planning, we’re always here to help. As experienced e-commerce accountants & bookkeepers, it’s what we do!
Simply fill in the form on our Getting Started page and schedule your complimentary discovery call.
If we can’t help, we’ll point you in the right direction anyway.
Until next time, happy budgeting!
