eCommerce Growth and Financial Strategy: Key Accounting
eCommerce growth is rapidly changing the global economy. Yet up to 80-90% of eCommerce companies fail during the first four months of starting up. There can be several reasons for the failure. But one of the main reasons is poor financial strategy and ineffective financial planning.
Running an online store isn’t for the faint-hearted. There must be a solid product strategy, attractive design, user-friendly website, robust marketing, easy checkout process, and more.
One more factor that serves as a powerful tool to shape the path of an ecommerce business is: accounting. Running an online store without good accounting practices and sound financial planning is HARD. It can be confusing for store owners to keep track of money coming on and going out of the business.
Plus, it can be frustrating if there isn’t anyone in the company who truly understands how to manage the money properly. It’s like finding your way in the dark. Store owners may even be unsure if their store is actually making them money (or not!).
But,
- “I’m concerned that hiring an accountant might not provide enough tangible benefits to justify the investment, especially when I have so many other priorities to focus on.”
- “Sharing all my financial information with an outside accountant feels risky. What if they mishandle the data or it gets into the wrong hands?”
- “I’m skeptical about whether an accountant can truly make a difference for my store.”
These are examples of some of the (real-life) doubts that eCommerce entrepreneurs have about investing in accounting services for their company.
In this article, we aim to address such doubts and uncover the indispensable link between ecommerce growth and a well-crafted financial strategy supported by effective accounting practices. Let’s dive in!
Boost Your eCommerce With Effective Accounting Practices
Here’s how effective accounting practices can boost your eCommerce growth:
1) Financial Performance Tracking
At the heart of every prosperous eCommerce venture lies the ability to monitor and understand your financial performance.
This doesn’t just include tallying up sales. Instead, it’s about keeping track of revenues, analyzing expenses, and calculating profit margins. Robust accounting practices provide you with a clear and accurate picture of how your business is performing.
This data-driven insight is invaluable; it empowers you to:
- Identify your most lucrative product lines
- Pinpoint operational inefficiencies, and
- Make informed decisions about resource allocation.
2) Scaling with Prudence
eCommerce growth often equates to rapid increases in sales and an expanding customer base. The exhilaration of this upward route can be exhilarating, yet it comes with potential pitfalls.
Scaling without a well-structured financial strategy can lead to resource drain, excessive spending, and ultimately, stagnation. Maintaining meticulous records and leveraging financial data, allows you to allocate resources intelligently, ensuring your expansion is sustainable and your bottom line remains healthy.
3) Inspiring Investor Confidence
There is a strong connection between accounting and investor confidence. Scaling eCommerce business without a solid financial strategy can lead to overextension and cash flow issues.
As eCommerce entrepreneurs explore potential partnerships and funding opportunities their financial health must be transparent. Investors and potential partners scrutinize your financial health to gauge the viability of collaboration.
Reliable accounting practices are your ticket to showcasing:
- Transparency
- Responsibility, and
- Long-term vision.
Presenting accurate financial records and well-founded forecasts, instills confidence in those considering joining forces with your brand.
4) Real-Time Decision-Making
eCommerce operates at breakneck speed. The ability to make timely decisions can be the difference between seizing an emerging trend and being left behind.
Your financial strategy, rooted in solid accounting practices, provides real-time insights into your financial health. This empowers you to make swift, informed choices – restocking inventory, launching a new marketing campaign, or adjusting pricing strategies.
Real-Life Successful Ecommerce Businesses with Exceptional Accounting Practices
Warren Buffett is often attributed to coining the statement,
Accounting is the language of business
a notion that remains profoundly accurate.
Looking at some of the successful eCommerce businesses, it is no surprise that exceptional accounting practices have contributed to their growth:
Here are our favorites:
Warby Parker
Warby Parker, an eyewear brand, disrupted the industry by offering affordable, high-quality glasses online. Their transparent pricing and strong financial management have contributed to their growth.
Blue Nile
Known for its engagement rings and fine jewelry, Blue Nile’s efficient inventory management and data-driven financial decisions have been key to its success.
Shopify
Beyond being an e-commerce platform, Shopify’s financial strategies and accounting practices have contributed to its steady growth and expansion.
The following are hypothetical scenarios of how accounting and financial decisions play a crucial role in eCommerce growth:
Scenario 1:
Many successful eCommerce clothes and accessories brands are anticipating a surge in demand during the Q4 of 2023. Qualified accounting professionals can help the brand analyze historical sales data to predict the increase in sales volume.
Based on this data, the company can increase its inventory levels strategically to meet customer demand without overstocking. This decision involves assessing the cost of holding additional inventory against potential sales revenue.
Hence proper inventory management prevents stockouts and lost sales opportunities during peak times, contributing to business growth.
Scenario 2:
Suppose an eCommerce brand, like Stitch Fix, wants to diversify its revenue stream by launching a subscription box service. This service will deliver curated products to customers each month.
In this scenario, the accounting team can help the company determine the subscription pricing that will cover the cost of goods, packaging, shipping, and a desired profit margin. They will also calculate the projected customer retention rate to forecast recurring revenue.
By aligning the pricing strategy with the company’s financial goals, the accounting professionals will ensure that the new service generates sustainable revenue and contributes to eCommerce growth.
Scenario 3:
Many eCommerce brands invest heavily in digital advertising to bring traffic to their website. As the company’s marketing team launches several campaigns across different platforms, the accounting team can help monitor the advertising expenses and analyze the return on investment (ROI) for each campaign.
They can help identify which campaigns drive the most conversions and which need adjustments.
By reallocating resources to the most effective campaigns, the company can maximize its advertising budget and attract more high-quality traffic, ultimately boosting sales and revenue.
However, the majority of businesses believe the US is in recession. Hence they tend to question the costs vs. benefits of hiring an accounting/finance team for their company. The good news is that instead of hiring full-time accountants to manage their company’s finances, the eCommerce brands can outsource any specific, temporary or ad-hoc accounting/finance task to the offshore accounting company. This helps eCommerce businesses get access to efficient accounting/finance services, save costs and boost their growth.
Conclusion
Accounting is not just a necessary evil – it’s a powerful tool that can shape the path of any ecommerce business. From tracking financial performance and scaling responsibly to inspiring investor confidence and mastering tax efficiency, many facets of e-commerce growth depend on financial acumen.
So, entrepreneurs should invest their time and commit to finding the right accounting support, whether hiring a professional or investing in accounting software that can simplify the process. And watch their venture not just succeed, but thrive in the competitive digital sphere.
