Balancing budgets for accurate ecommerce forecasting

Balancing budgets for accurate ecommerce forecasting

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What’s your total expenditure going to be this month? And your revenue? How about a year from now?

Cash flow is key in ecommerce. With most of your costs due long before your payments arrives, it's a constant budgetary balancing act.

Budgeting for your expected costs in the short term and forecasting over a longer period puts you in a stronger position to plan, adapt, and grow your business. Having a comprehensive financial overview of your business is a great starting point for monitoring your costs. You can use that information to help you budget effectively and forecast accurately.

Let’s explore how to achieve both of those things by considering:

  • Fixed costs in ecommerce
  • Variable costs in ecommerce
  • Forecasting financials
  • Important metrics for accurate forecasting

Budgeting for fixed ecommerce costs

Your fixed costs are very easy to calculate because — as their name suggests — they tend not to change too much. To work out your fixed costs, you need to consider:

  • Rent & utilities – office space (or virtual office), utility bills and warehouse costs
  • Insurance – contents insurance, employers' liability insurance, public liability insurance, and more
  • Salaries – including your pay and any recurring freelancer fees
  • Tech stack – including subscription fees, domain, hosting, software and marketing tools
  • Loan repayments – for bank loans and other borrowing
  • Fixed taxes – such as property taxes and national insurance payments

Budgeting for variable ecommerce costs

Some parts of your expenditure will fluctuate over time. Costs that change from month to month are known as variable costs. These are slightly harder to factor into your budget than fixed costs.

In ecommerce, variable costs are closely linked to the number of products you sell. The more inventory you buy and then sell, the higher your variable costs will be. They include things like:

  • Inventory – the cost of the goods you will sell
  • Shipping and delivery – the cost of getting goods from your supplier and to your customers
  • Advertisingad spend and other marketing costs
  • Sales and affiliate commission – any referral fees
  • Variable taxes – such as corporation tax and VAT

Creating a budget

By bringing together your fixed costs, variable costs, and (depending on the extent of your trading history) historical or projected sales figures, you can create a budget for your ecommerce business.

The lists above are a great starting point for thinking about your costs. But take a look at your transaction statements to spot any other costs that you’re paying out regularly and include them as you move forward with budgeting. It’s also worth factoring in some wriggle room for new or unexpected costs that arise.

Your budget will help you estimate revenue and expenses over a set period. You can update it to reflect changes in your costs or sales. Whether your top concern is maintaining cash flow or achieving growth, your budget will serve as a blueprint for curbing costs and driving sales at the level needed to achieve your targets.

Budget or budgets?

It might be helpful to think about multiple budgets, not just a single budget. To do this, you can break your costs down into individual functions of your business. For example, you might create a separate budget for:

  • Marketing
  • Inventory
  • Rent and Utilities
  • Shipping
  • Payroll

By studying your expenditure, you’ll get an idea of how your overall budget might split. At that point, you can start to think of your spending in different areas as a ratio of your total budget.

Add up your monthly costs in each of your key budgetary areas. Then calculate this as a percentage of your budget: (monthly spend in a budgetary area ÷ total monthly sales) x 100 = % of budget spent in this area.

This gives you a sense of proportion when thinking about scaling your business. It might also help you identify areas in which you’re currently overspending. For example, an inventory-to-sales ratio of 16% and 33% is generally thought to be healthy. A marketing budget of 7-12% of sales is considered about right for most small businesses, though some agencies consider up to 30% to be typical in ecommerce. And for most companies, payroll costs should be kept below 30%. There are exceptions, of course. But these figures are useful as a rule of thumb.

Forecasting financials

Once your budgets are balanced, you can take a more nuanced look at historical data. This will allow you to make accurate financial projections of what the future holds for your ecommerce business. Forecasting will help you to assess how your budget could change in the future, what you’ll be spending cash on, what your cash flow will look like, and what return you can expect.

There are various types of forecasting, such as:

  • Business forecasting
  • Sales forecasting
  • Demand forecasting
  • Cash flow forecasting
  • Inventory forecasting

The most useful forecasts won’t look at different parts of your business in isolation but bring together cash flow, costs, customer acquisition, customer value, and sales data. That way, you build the most accurate picture of what’s ahead for your business.

Leading vs lagging indicators

The day-to-day forecasts made in ecommerce are usually based on past performance. What worked last time will probably deliver similar results again. Increasing spend on this channel has increased our average order value, so let's do more of that. These are lagging indicators.

There’s nothing wrong with that approach. But the rewards can be greater if you’re able to use real-time data and a more proactive forecasting technique based on leading indicators. For example, you might discover that customers who buy product A on their first purchase have a significantly higher lifetime value than customers who buy product B.

You can work backwards from this to determine what compels someone to buy product A. Based on your findings, you could accurately forecast the impact of increasing the number of new customers buying product A by 25%.

To make forecasts like these, you need not just real-time data but to be able to identify the right metrics within it.

The metrics that matter for accurate ecommerce forecasting

To forecast accurately, it’s vital to study the right metrics. Here are some of the key metrics for ecommerce forecasting. They might not all be relevant to your business, but applying the ones that are will help you start planning for the future.

Free cash flow (FCF)

FCF is the cash left once you’ve paid all the costs we looked at above and any other outgoings. If your FCF is growing, that suggests your sales are growing relative to your costs. If your FCF is shrinking, that’s not necessarily a bad thing as long as you can pinpoint how your working capital is being invested in expenditure that will fuel future growth. This can be calculated in a number of ways.

How to calculate:

  1. Operating cash flow − capital expenditures = FCF, or
  2. Net operating profit after taxes − net investment in operating capital = FCF, or
  3. Sales revenue − (operating costs + taxes) − required investments in operating capital = FCF

Cash runway

Your cash runway is the amount of time before you will run out of money at your current burn rate. A longer runway points to a more robust business with better cash flow or bigger reserves. A shorter runway increases the potential for cash flow problems and puts you in a precarious situation if you have a quiet month or unexpected expenses.

How to calculate: Cash balance ÷ monthly burn rate = cash runway (in months)

Sales-per-employee

Sales-per-employee is the average number of sales each member of your team is making. This isn’t about salespeople who are not pulling their weight. It’s calculating whether you’re able to boost your sales with a stable number of employees and whether hiring more people creates a proportionate growth in sales.

How to calculate: Annual sales ÷ number of employees = sales-per-employee

Return rate

Your return rate is the percentage of your sales that are returned in any given period. Handling returns is expensive and eats up resources that could be better used on other things. A high return rate points to problems with products, descriptions, or packaging and is likely to limit repeat purchases. A low return rate suggests high customer satisfaction and high efficiency.

How to calculate: (Orders returned ÷ total number of orders) x 100 = return rate

Customer lifetime value (CLTV)

CLTV is the amount a customer is estimated to spend with you during their entire time as your customer. A growing CLTV indicates a booming brand and increasing levels of customer loyalty. It also helps to forecast which products attract the best customers for your business. Declining CLTV suggests a business that is bringing in lower-value customers and becoming less efficient.

How to calculate: Customer value x average customer lifespan = CLTV

Contribution margin

Contribution margin is the money you have left after deducting your sales and marketing costs from your gross profit. This is the ecommerce forecasting metric closest to the old ‘turnover is vanity, profit is sanity’ maxim. It shows whether your ad spend and other marketing costs are undercutting your profit.

How to calculate: Gross profit - sales and marketing costs = contribution margin

Customer acquisition cost (CAC) payback period

CAC payback period is the time it takes to recoup the money you spend on acquiring a customer. The sooner that money comes back into the business, the better it is for boosting cash reserves and driving more growth.

How to calculate: CAC ÷ (average revenue per account (ARPA) x gross margin percent) = CAC payback period

Start forecasting the future of your ecommerce business

Every ecommerce business benefits from a balanced budget and a better idea of what lies ahead. Digging deeper into those key metrics and understanding how they apply to your business will help put you on the path to having both.

Put yourself in a strong position to forecast accurately by:

  • Calculating your fixed costs
  • Getting a clear picture of your variable costs and understanding how changes in your business impact them
  • Setting a budget that factors in fixed costs, variable costs, and historical or projected sales figures
  • Working out which forecasting metrics will be most useful for making projections based on leading indicators
  • Using a comprehensive financial overview to give real-time data on cash flow and other insights

If you’d like to introduce that sort of financial overview to your business, you’re in the right place. With more than 2,400 integrations, Juni brings your cards, multi-currency accounts, accounting software, payment gateways, ad networks and more into a single dashboard. This unified, at-a-glance, real-time overview of your cash flow is the perfect starting point for accurate forecasting. Get Juni now.

Balancing budgets for accurate ecommerce forecasting
Juni
Financial platform

Juni is the financial platform built for ecommerce. We give you a unified view of your finances, with cards, mulitcurrency accounts, and banking, accounting and advertising integrations - all in one place. We can even help boost your cash flow with working capital, cashback and more.

Download our free whitepaper and gain important ecommerce and marketing insights, directly from Juni.

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Juni will not share your information with any third parties except for our verified partner network. Submit your email for even more valuable content, delivered straight to your inbox.

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