Many aspiring entrepreneurs worry about the amount of capital they need when starting an ecommerce business. This was also my initial concern when I thought about building my own online store. I knew from the start that being frugal was essential in avoiding failures. However, I also knew that it was difficult to succeed in business with a shoestring budget. The biggest challenge that ecommerce entrepreneurs face is being under-capitalized.
Do any of these sound familiar?
- You don’t really think that a written financial forecast is important since your capital is rather small. At the back of your mind, you’ll take care of the financial plan once your business is successful.
- You may want a fancy set of office furniture, so you’re borrowing cash from relatives and friends to purchase them. Never mind if it’s not included in your original budget, you just want your physical office to look nice, and there is nothing wrong with that, so long as you can afford it.
- You start receiving invoices left and right because you didn’t anticipate that the cost to get those nice things would be higher than you thought or budgeted for.
These are a few scenarios that novice entrepreneurs encounter when trying to start up an online store. The reason why a huge percentage of entrepreneurs fail in the first three years of operating online is the lack of a well-prepared financial plan or lack of capital to do all the necessary things to help them be successful. The problem is they think that this tool is only for those ecommerce entrepreneurs with millions worth of capital. This mindset is completely wrong.
Here are some reasons why preparing a financial plan is a must-do:
- Helps define your financial goals – Earning profits is one of your goals. However, it would be difficult managing your business’ sales if you don’t know where you are spending your capital. You have to outline your budget for a specific time, say monthly or quarterly, in order to keep track of your income and expenses.
- Helps keep your goals realistic – A budget allows you to determine whether your goals are feasible or not. Based on your financial plan, you can analyze if you can afford to purchase a new system or new equipment without having to borrow money from friends or a bank.
- Helps prevent a negative cash flow – If you’re spending more than you’re earning, there’s no way for your business is going to make it. Being frugal as well as having an intense self-discipline is important, but without a financial plan, you are at risk of losing track. It is imperative to check your financial plan again and again to ensure that you are not spending more than your business can afford. Truthfully, as a consultant I see a lot of waste and even in my own company, we would sometimes spend unwisely or be wasteful. All of these things can add up and the combination of both is deadly.
- Helps measure the progress of your ecommerce business – Once you have already put the financial plan in place, you will have to continuously review it as your online store grows. Learn from your mistakes, identify risks you didn’t consider in the first place, discover opportunities, and fine tune your business goals.
- Helps avoid failures and bankruptcy – This is the most important reason for why you shouldn’t underestimate the importance of a financial projection. Venturing into ecommerce is not about daydreaming and wishing for everything to fall into place. You have to plan your every step especially when it involves money. When you have a financial plan, you are ahead of the game. You can easily anticipate your next move, and say goodbye to surprise expenditures.
Of course, some entrepreneurs would tell you that they were able to succeed online without a business plan, without a financial projection, without a mentor, without hard work, etc. Although it is possible to gain success from PURE LUCK, you have to understand that not all people are lucky enough to hit the big time by just being at the right place and at the right now. I believe we make our own luck.
You really need a financial plan. The good news is that you don’t have to make it complicated.
Consider the following essentials when preparing your financial plan:
- Expenses budget – Think about the permanent costs (webhost, domain, office space rental, payroll, etc.) and variable costs (marketing and advertising fees). There is no need for exact amounts, a smart estimate should suffice. Business taxes and interest rates must not be forgotten.
- Sales forecast – What are your projected sales for the first three years? Monthly? Quarterly? Annually? What is your projected cost of sales? What is your gross margin? These numbers are crucial in determining whether or not your business goals are attainable.
- Cash flow statement – How much of your invoices will you be able to collect in cash right away, after 30 days, or 60 days? Or the reverse, you will need to pay in the next month or so. You need to calculate and compile these numbers for 12 months. A realistic ratio will enable you to manage your business more effectively.
- Break-even analysis – Make sure that your sales are going to exceed or at least match the expenses. This is critical not only to determine if the online store can survive the first three years, but also to attract potential investors or help you get a business loan.
There are other sections to include in your financial plan. Just remember that planning does not matter until you put those plans into action. My advice is to take this seriously, keep it logical, realistic, and feasible. It is best to exert efforts now that you are still in the start-up stage rather than to lose all your investments in the end.
Written by: Shirley Tan