While online businesses have clear potential and are able to benefit from significantly lower operating costs than traditional retailers, managing the finances of an online business is a tricky area. From keeping track of online orders and recording sales to making sure your daily expenses are entered into the system, handling your finances can sometimes feel like a monotonous task that never seems to end.
The graph below shows a research from Statista, depicting that e-commerce sales amounted to $ 2.3 trillion worldwide in the year 2017 while this figure is expected to double and reach $ 4.8 trillion by the year 2021. These statistics are proof that online businesses can only expect to do well in the coming years.
The success of an online business depends on its online presence –customers know about the business and its products. To ensure active money management, the business must wisely handle its finances. Mentioned below are a few tips to ensure sound management of your finances.
- Keep track of revenues and expenses
An online business needs to keep a track of its revenues and expenses, just like any other business. Although it may seem like an unnecessary cost if you are operating on a small scale, hiring an accountant and using on accounting software can have several benefits:
- Convenient way of holding financial records. With accounting software, you don’t need anything else. You can simply take a picture of receipts and bills and upload with each transaction, allowing you to keep a record of every expense, without any hassle.
- Monthly statements of Profit and Loss and Balance Sheet are always available on record.
- Updated record of sales and expenses are accessible when needed. You can see whether sales are growing or declining and use expense reports to monitor your expenses. Any significant variances in expenses can be identified, allowing you to take corrective action in a timely manner.
- Accounting software handles all financial matters from invoicing to payroll and bank reconciliation.
- Have a plan to follow
Just because you run an online business doesn’t mean you can let the website work through an automated system, without any planning. You need to set clear financial goals including monthly and quarterly budgets to achieve them.
Think how to target the right audience for lead generation and come up with customer acquisition strategies to increase profits. You need to compare actual performance with these targets on a monthly basis to monitor your progress. Without a defined plan, your online business cannot achieve its full potential.
- Account for costs of running an e-commerce store
An online business has a different cost structure than a traditional one and there are some additional costs you will have to account for in your budget.
- Initial cost of building an e-commerce website – engaging the services of professionals (i.e. web designers and web developers to come up with design and content) is likely to be required and the cost will vary depending on the complexity of your website.
- Maintenance costs – routine cost of running the software and hosting as well as yearly fee of holding a domain name.
- Support fee – cost of technical support in case of any problems.
- Payment processing fee –to process payments from online customers, you need to work with a payment getaway that charges a fee for processing each transaction. This needs to be accounted for when pricing your products.
- Manage shipping costs
Shipping is a major cost and a factor that can make or break any online business. To stay ahead of the competition, ship off your product to the customer quickly, but not at the cost that will eat up your profit margins.
Therefore, it is best to work in collaboration with your shipping provider to find ways to minimize costs. A long-term contract can be signed to ensure timely, cost-effective deliveries.
According to a research, high shipping costs are the main reason why customers choose not to buy from an online business. If you offer free shipping, which is a great incentive for customers when buying online, make sure that your pricing takes this cost into account so that there is no loss to you as a result.
Many online businesses offer free shopping only on larger orders above a certain amount, which is a useful strategy to adopt.
- Manage your working capital
If the industry norm is to offer customers the option to purchase items on credit, your online business will have to follow suit. However, credit sales put a strain on the cash flows, as cash inflows to the business are delayed.
A strict receivables management policy needs to be adopted whereby customers are sent invoices on regular basis as the reminder for payments and early payment discount offered where necessary.
If you still have trouble collecting money from customers, receivable financing is a great option that allows the business to receive money against its receivables as a loan, so that your working capital doesn’t get tied up unnecessarily.
The Final Verdict
To sum up, an online business can be highly profitable if its finances are managed correctly. By applying a coherent financial management approach right from the beginning, you can ensure that your business is headed in the right direction.