Little is more important in business than knowing your numbers. Business numbers give you clear insight into where you are and where you’ve been so you are able to make educated decisions about how to move your business forward. It helps you determine what new products to add, when to move to a new sales channel, when to hire more employees, and other important business decisions.
Most small business owners do not review their numbers on a regular basis or understand how to read an income statement, do not trust that their finances are accurate or don’t know how to make decisions based on their financial information.
Forty-seven percent of retail businesses fail in the first four years for a variety of reasons: emotional pricing, lack of planning, no knowledge of financing, no experience in record keeping or not paying taxes. (Source: http://www.statisticbrain.com/startup-failure-by-industry/)
The following study shows that 97 percent of ecommerce businesses fail. That is a significant number and it comes down to businesses running as a business and constantly monitoring the business, not just the ecommerce site or marketing on the front end, but the business aspects and finances of the business - http://www.keypersonofinfluence.com/why-do-ecommerce-businesses-fail/
So how is your business doing?
Other than a gut feeling, do you know how your business is doing? Are you only monitoring the balance in your checking account? Could you go on Shark Tank in an hour and answer questions about your business?
What questions do you have about business?
- Are you profitable?
- If you invest X dollars in inventory, how much profit will you have in 30, 60, 90,180, 365 days?
- How much cash do you have to buy inventory?
- How much do you owe for the quarterly income tax payments?
- How much have you collected in sales tax and when is it due?
- Is your business compliant: sales tax, state filing, notices, IRS?
- Are you growing? How fast?
- What are your top 10 products for margin, worst 10?
- What is the velocity of your top products?
- When can you afford to outsource your warehouse/fulfilment, marketing/SEO, accounting, hire more staff?
Knowing your numbers and having the right business processes will enable you to have this information when you need it.
There are key decisions every business needs to make on a daily basis, so you need to know where to get the information to make smart, informed decisions.
- Purchase the right products (the highest margin/fastest selling)
- Purchase the right quantities
- Spend the right amount on marketing (not too much or too little, get an ROI)
- Which channel to list products to maximize profitability (or all channels)
- Paying the owners vs. buying inventory vs. marketing
- Hiring a virtual assistant, employees, outsourcing services
- A dozen other key decisions made every day by an ecommerce business owner.
Here are some of the top metrics to watch:
“Cash is king” rings true for all businesses. You can be profitable on paper, but if you don’t manage your cash flow well, you may find yourself cash poor. If you are unable to get new financing, your business may become insolvent.
Many profitable businesses fail every year simply because they don’t have enough cash to keep it going. Make sure you use your cash efficiently. Be careful not to tie up all your cash in slow moving inventory, or poor cash flow can be a real risk for your business.
Cash flow is going to include your base burn rate (overhead for rent, payroll, utilities, insurance, the basics), your current bank balance and available credit (cash, savings, loans, and available credit (credit cards)), variable operating costs (shipping, packaging), the estimated income, and the available cash that is left over. That available cash is what you can spend on inventory, marketing, or paying the owner.
Inventory is the heart of an ecommerce business. You will want to track what you have on hand at all of your warehouses and do what you can to safeguard this important business asset.
Don’t buy too much of a product that may become obsolete quickly, but you may want to buy larger quantities of well-selling items to take advantage of supplier discounts.
You need to have enough inventory on hand to avoid losing potential sales by being out of stock but not have so much on hand that you tie up your cash in stock that’s just sitting around in a warehouse.
Inventory Velocity tells you how quickly you are running through your products so you can better estimate when new purchases should be made to minimize the amount of cash you have tied up in inventory at any particular time.
Gross Profit per Channel
Keep track of your sales made in each channel (point of sale, online shopping cart 1, online shopping cart 2), marketplace, and merchant account fees related to each. Also keep track of the cost of the goods sold on those channels.
The net amount will allow you to see which channels are most profitable so you can maximize the profitability for your entire company.
Profitability by SKU
To optimize profits, you must know which of your products is the most profitable. Knowing the profit margin (price less cost of the product) is critical for your business.
Keep in mind that some products will have different price points when sold through different channels, so you may have higher or lower profitability for a product depending on the channel.
Where to Find These Numbers
One of the advantages of being an ecommerce business is that you have no shortage of accessible data. The challenge is how to harness that data and turn it into useful information for managing your business.
Accounting software is a critical component in capturing and understanding your financial information.
An ecommerce business should use a cloud accounting platform (i.e., www.xero.com) to track all income, cost of goods sold, expenses, bills, inventory value, and other items.
Every financial account, including bank, credit card, loan, and merchant accounts (PayPal, Shopify Payments, Stripe), should be tracked in this system and reconciled regularly to ensure you’re not missing any transactions.
Ideally, the accounting system will connect with a cloud inventory system and all shopping carts so you can track not only your overall profitability but also your profitability by channel.
Costs for every SKU are stored in this tool and are necessary for calculating cost of goods sold and inventory.
Detailed profitability by SKU, profitability by channel, and inventory velocity all live in this database, and the summarized information can flow into your accounting system for higher level analysis of profitability for your company as a whole.
Finding the right cloud inventory solution is critical to optimizing the operations of your business and providing the key information to manage your business finances. Here is an article to help identify the right cloud inventory solution for your business - https://www.xero.com/blog/2015/05/selecting-a-cloud-inventory-solution-for-an-ecommerce-business/
Here are a few cloud inventory solutions that integrate with Shopify -
There are automated tools, such as Crunchboards (www.crunchboards.com), that help business owners track their cash flow and integrate with their accounting system, but many businesses choose to track their cash flow using a basic spreadsheet that is customized to their own unique needs.
Regardless of the tool you use, it’s important to update and review the information regularly, particularly before any large inventory purchases or big business decisions.
How to Understand These Numbers
Now you know what to look for and where to find the numbers, the hardest part is interpreting the numbers you see.
Start simply by reading blogs and books on the topic to get a fundamental understanding of the differences between a balance sheet, a profit and loss statement, and a cash flow statement.
Here are a few resources to get you started -
- Financial Intelligence for Entrepreneurs - http://www.amazon.com/Financial-Intelligence-Entrepreneurs-Really-Numbers-ebook/dp/B005DI8XV2/ref=dp_kinw_strp_1
- Income Statement - http://www.ecommercefuel.com/income-statement-format/
- Balance Sheet - http://www.ecommercefuel.com/how-to-read-a-balance-sheet/
Every business and business owner needs advice from more experienced ecommerce business owners and peers, business advisors and business coaches. Make sure you are asking the right person the right questions about tasks that are part of their core experience and services.
- Can help with setting up and structuring your business properly: Sole Proprietor, Partnership, LLC, S-corp. Selecting the right structure is important to managing the income tax you will pay personally and as a business. A good CPA will meet with you a couple times a year to do tax planning and file your federal and state income tax. They also can provide a business valuation if you are planning on selling (or buying) an ecommerce business (this depends on accurate finances).
- You have a number of options on how you manage the accounting for your business; from doing it yourself, hiring a virtual assistant or bookkeeper to handle the basics, or outsourcing your accounting to a business that specializes in providing outsourced cloud accounting services, more specifically an outsourced ecommerce accounting service like Catching Clouds. The right accountant and process will tell you what is happening in your business and provide a short-term cash flow view (maybe two to six weeks out).
Ecommerce Virtual CFO
- Will provide a longer term view of your business to build a short-term and long-term budget, a financial forecast out over months, quarters, and years, will provide a cash flow view over months and analyze your current inventory to make those strategic decisions. Your numbers need to be accurate for you and an Ecommerce VCFO to make accurate decisions.
- Every business owner should have an advisor they turn to discuss their business. Find a family member, another ecommerce business owner (look on the forums at www.ecommercefuel.com) or advisors at a range of groups like: www.score.com or www.cranksetgroup.com, or a local business coach.
Knowing your numbers means knowing your business and is critical to making the right decisions. Financial knowledge will provide peace of mind and, the more you learn, the better you will be able to communicate the state of your business to partners, employees, and bankers. It will take focus on an ongoing basis, but it is definitely worth the effort.