Bang for Your Buck: 7 Signs You Are Mismanaging Your Business Capital

business financesEcommerce has drawn entrepreneurs of all hues; there are some of us who know how exactly this compliments our core business plan, and others who are jumping in to see what all the fuss is about. Whether you are here with a clear strategy or just testing the waters, the ecommerce experience is likely to be profitable only if you manage your finance well.  I always tell my clients, it’s not about how much you make but how much you keep. At the end of the day its all about the checks and balances in the bank!

I’d recommend that you watch out for these 7 bad habits that have tripped up many an ecommerce entrepreneur:

1. Mixing business and personal funds

The old adage about keeping your professional and personal life separate applies so well to ecommerce. Your company expenses are different from your family budget and you should make that your mantra! Mixing both funds makes your financial transactions difficult to manage. Aside from the financial difficulties, there is also the potential risk of having legal issues with taxes. Without a clear distinction between your personal and business checking accounts, it will be a nightmare to claim business deductions from the IRS. So make sure that the “twain shall never meet! One specific case where I’ve seen some clients blur the lines is using personal credit cards for business transactions. Sometimes  owners think that it is convenient to use personal credit cards to fund their online expansion. This can potentially harm your personal credit history if things don’t work out well. And in the event that things progress well, this strategy can also prevents you from establishing your company’s credit card payment history.

2. Not Respecting the Business

There are no barriers to entry for most ecommerce businesses. IT is easy to get started with a few hundred dollars and this has lead to some entrepreneurs making choices without forethought. It is important to understand that starting an ecommerce store can be risky. Don’t proceed far without a well-laid plan. A plan will help you determine the level of risk you can comfortably handle. For example, it will help you decide the time you have to ramp up sales without drawing on personal funds. Risky opportunities may come your way with the promise of getting the highest returns on investment. Use your plan to determine the risks you can take with your business.

3. Budgeting money unwisely

Ecommerce businesses have multiple components much like brick-and-mortar stores. It surprises me that some business owners forget the marketing budget for their ecommerce stores. The website and quality product photography are all part of initial set-up costs. This is sometimes seen as the marketing by some business owners, and then they don’t plan on social media marketing. Much like the real-life version, the virtual store should also have budget for everything from inventory and store management to marketing and customer service. The amounts are different but the roles cannot be eliminated.

4. Poor inventory management

The rhythm of sales and re-stocking can be challenging for new ecommerce enterprises. If it is an additional outlet for an existing retail store storage and management may already be handled well. Otherwise, every ecommerce business owner has to take the time to analyze the pattern of sales over a period of time and avoid periods of overstocking or under-stocking as both these can be a tremendous drain on capital.

5. Confusing revenue and profits

This is something that many retailers fail to understand. Revenue or turnover is the total amount you earned from selling products/services. Profit is the difference between your sales and costs. For your online store to be profitable, you need to make money more than your expenses, or you need to spend less than your earnings. This framework is critical for proper capital and asset management.

6. Not recording every financial transaction

Businesses, big or small, give warning signs before they fail. Business 101 is, all about recording all transactions to understand income vs expenditure. If you don’t keep records of your expenses and revenues, it’s hard to tell if your ecommerce business is already bleeding. Early warning signs can help with making strategy changes in how to proceed. Aside from that, it is also difficult to settle your taxes without a complete financial record.

7. Using your business as a personal cash machine

We spoke earlier about how it is a bad idea to use personal finances for business expenses. The flip is also very much true. Entrepreneurs who use their business’ revenue to support an extravagant lifestyle will surely close down before their 3rd year of online operation. Seeing your business as an automatic source of cash (ATM) for your personal needs is a dangerous mindset and a big no-no.

Lack of self-discipline can surely drive your business down-the-drain, and very quickly at that. It’s easy to spend your precious capital on things that don’t really matter, but it’s difficult to make amends in the end. I know a few ecommerce entrepreneurs who could have succeeded in the industry if only they were smarter in terms of money. Even those who know the broad principles sometimes forget to have a periodic gut check, and indulge in buying that big house or decorating the fancy office with business capital that could have been better spent elsewhere. So, keep these as your guiding principles and revisit them often to stay on track with your ecommerce enterprise.

Written by: Shirley Tan


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