10 Financial Tips You Need to Know to Run a Successful E-commerce Business

ecommerce

To run a Successful E-commerce Business you need:

1. Setup your e-commerce business on cloud accounting software system

Cloud accounting software enables your e-commerce business to always have your data and software accessible online and from any device. 

Here’s a short checklist of things to consider when getting started with cloud accounting software. 

  • Is the software easy to use? 
  • Does it handle sales tax?
  • Will it give you the necessary reports to assist you in managing your business?
  • Does it sync with your business bank account, credit cards, etc.? 
  • Does it integrate with third party apps? 
  • Is it fully secure and encrypted?
  • Does it handle inventory management?

2. Stay on top your cash flows

Your e-commerce business will live or die based on how you manage your cash flow.

You need to know that your business is making money. And the easiest way to see this is to watch your cash flow. You need to watch the money coming in and going out every week. You also need to forecast your cash flows for next month, 3 months and 6 months.

The Cash Flow Statement summarizes the amount of cash (and cash equivalents) coming into and going out of the business. It also measures how well cash is being generated to pay debts and cover operating expenses. There are three types of cash activities that are considered, which include: operating, investing, and financing activities. 

Operating Activities: This looks at where the money that is being generated from the company’s products and/or services is being spent and used. This can include income tax payments, rent payments, salaries, or any other operating expenses. 

Investment Activities: This looks at how much money has been made or spent based on investments. This includes purchasing physical assets and investing or selling securities. 

Financing Activities: This is the net amount of funding a company generates within a given time. Issuing and repaying equity and debt and paying dividends are all considered financing activities. 

3. Managing inventory

E-commerce business inventory is the product purchased to sell. Inventory is valued at cost.

Decide what minimum volume of inventory you want to have on hand, and make sure you are tracking inventory so you can reorder before you pass this point. The last thing you want is to run out of inventory and lose sales. That said, shrinkage can happen to anyone. Therefore, it’s important to physically count inventory regularly.

4. Understand your cost of goods sold

Your e-commerce business cost of goods sold is the expenses directly tied to the products you sold. These costs are directly tied to sales volume.

The retail price of an item minus the cost of that item is your gross margin.

5. Know your fixed expenses

Any expenses that don’t increase when you sell more or decrease when you sell less are called ‘fixed expenses’ or ‘overhead expenses’. For example, if you pay for insurance, property tax and rent, these fixed costs. These costs won’t change based your sales volume. These costs aren’t part of the cost of goods sold and aren’t factored into your gross margin. These fixed expenses do affect your profit and your cash flow.

6. Plan by knowing your break-even point for an e-commerce business

A business’s break-even point is the stage at which revenues equal costs. Once you determine that number, you should take a hard look at all your costs — from rent to labour to materials — as well as your pricing structure.

Then ask yourself these questions: Are your prices too low or your costs too high to reach your break-even point in a reasonable amount of time? Is your e-commerce business sustainable?

Calculating your break-even point

There are a few basic formulas for determining a business’s break-even point. One is based on the number of units of product sold and the other is based on points on sales in Canadian dollars.

  • To calculate a break-even point based on units: Divide fixed costs by the revenue per unit minus the variable cost per unit. The fixed costs are those that do not change no matter how many units are sold. The revenue is the price for which you’re selling the product minus the variable costs, like labour and materials.

Break-Even Point (Units) = Fixed Costs ÷ (Revenue per Unit – Variable Cost per Unit)

  • When determining a break-even point based on sales in Canadian dollars: Divide the fixed costs by the gross margin. The gross margin is determined by subtracting the variable costs from the price of a product. This amount is then used to cover the fixed costs.

Break-Even Point (sales CAD) = Fixed Costs ÷ Gross Margin

Gross Margin = Price of Product – Variable Costs

7. Review your e-commerce business profit and loss statement at least monthly

A profit and loss statement are extremely important for a business for making decisions. It gives a clear picture of whether the company’s operations are resulting in a profit or a loss after considering all the related expenditures. Therefore, the company can take corrective actions on a timely basis if there is a need.

The Profit and Loss Statement is a report that shows how much revenue was earned over a period and shows the expenses that were incurred while earning that revenue. Income statements break these numbers down on a granular level and show the final net profit. This can be used to demonstrate how profitable your business is, which is what a bank will want to see from you to help prove that your business is viable and profitable. 

8. Why it is important to set up the correct sales tax rates for your e-commerce business customers

Your customers are charged different sales tax depending on where the product is delivered.

9. Plan for your tax payments

By planning for your e-commerce business income tax, sales taxes, and payroll taxes you avoid late payment Canada Revenue Agency penalties and interest.

10. Understanding your balance sheet

The Balance Sheet provides a statement of the company’s assets, liabilities, and shareholders’ equity. They give you a snapshot of what your company owns (assets), what your company owes (liabilities), and what your company’s net worth is, which is what would be left over if your company sold all its assets and paid off all its liabilities. 

A balance sheet is calculated based on this equation:

Assets = Liabilities + Shareholder Equity 

For your balance sheet to balance, the combined value of your liabilities and equity must be equal to your assets. This will give you a full picture of your company’s financial health, otherwise known as the total value of the business. It’s important for these to balance because the total value of the business’s assets will have all been funded through the Liabilities and Equity.