Low overheads and typically high profit-margins make e-commerce businesses relatively easy to start. Unfortunately, the vast majority of online stores still fail.
Two of the biggest reasons why e-commerce websites fail is a lack of proper financial planning and cash flow problems.
Having a solid financial planning process for your online store is vital so that you can stand out in the crowd of three million e-commerce websites.
Keep reading to learn:
- What financial planning and analysis is all about
- Why financial planning is important
- Six steps in the financial planning process for online store owners to follow
Financial Planning and Analysis
Financial planning and analysis (FP&A) is the process of budgeting, evaluating, predicting, and planning the expected economic outcomes of a business to achieve its financial goals.
The financial planning process assists in wealth management and business growth. It begins with creating a financial plan for your e-commerce website.
A financial plan is a document that contains an entity’s current financial situation, long and short-term monetary goals, and data-backed strategies to achieve those goals.
The process of financial planning and analysis should be all-inclusive and tailored to your business’s financial goals, risk tolerance, and existing situations in your planning cycle.
Why Financial Planning Process is Important For Online Stores
There are several advantages to a strategic financial planning process.
Financial planning for your e-commerce business will help you:
- Define your financial goals
- Check the viability of your financial goals
- Avoid a negative cash flow
- Create yardsticks to measure your process
- Reduce business-induced anxiety
Let’s explore these benefits further.
Define Your Financial Goals
With financial planning expertise, you will create specific financial goals and determine how you can achieve them.
A financial plan empowers you to build a streamlined workflow that guarantees more customers, a high rate of return, and a profitable financial future.
Financial planning knowledge helps in the development of strategic-performance-management systems.
Check The Viability of Your Financial Goals
A financial planning process prevents you from setting non-realistic financial and business goals.
Your e-commerce brand needs to be supported by a financial plan to ensure you set SMART goals — specific, measurable, achievable, realistic, and timely.
Avoid a Negative Cash Flow
Financial planning advice and strategic decisions help ensure proper money management.
You could be making a lot of sales in your e-commerce business. However, if you do not have a financial plan to check cash inflow and outflow, you may be spending more than you earn.
If you have more expenses than sales, it could lead to bankruptcy, losing your domain, and closing your online store. Financial and sales planning will help you build financial independence and resilience.
Create Yardsticks to Measure Your Progress
With a financial plan, you can set monetary goals to measure your business’s achievements.
Your goals serve as touchstones that let you know if you’re making progress in your online store or not.
A financial planning process gives you something to look forward to, a goal to achieve, financial decisions to make, and milestones to celebrate.
Reduce Business-Induced Anxiety
When you have a financial plan in place, you get a sense of relief from financial worries.
If you have done financial forecasting and strategic planning, you’ll have the confidence to get through your e-commerce website’s financial troubles.
The 6-Step Financial Planning Process For Online Store Owners
The Certified Financial Planner Board of Standards (CFP Board) uses an efficient process, which e-commerce website owners and other individuals can use to build a sound financial future.
Here are the six steps in financial planning strategies.
Step 1: Understand Your Financial Circumstances
Start your financial planning process by answering a series of financial planning questions.
Ideally, these questions should lead to an improved understanding of your current financial status, including:
- Current assets and liabilities
- Insurance coverage
- Cash flow
- Risk tolerance
- Mutual funds
- Government benefits
- Retirement planning
- Net worth
These financial planning questions are often open-ended and designed to help crystalize your financial goals for your e-commerce website.
When you understand your financial circumstances, you’ll have the groundwork to build a solid and well-suited plan.
Step 2: Review Your E-Commerce Business Plan
In this step of the financial planning process, you have to review the business plan you made for your e-commerce website.
Your financial plan should harmonize with your company’s mission, vision, and other components of your business plan.
What do you need to put in place to realize your financial goals at one, two, or even ten-year intervals? Think about whether you need to hire an assistant or purchase software for workflow automation.
Step 3: Develop Specific Financial Goals
The odds your financial plan will work is highly dependent on how specific your financial goals are.
Document fixed expenses and anticipate your variable costs based on existing data. Create financial projections for your weekly, monthly, or annual planning process.
The projection scope and timeframe you should use depends on your cash flow. For instance, weekly projections are the best option for businesses with a tight cash flow.
It’s a smart move to go over your financial decisions with a financial advisor or an accountant.
There are many variables to consider, so your plan needs to be flexible. But you should also be careful to remain within your risk tolerance and capabilities.
Step 4: Evaluate Risks and Plan for Contingencies
The advantage of a financial plan is foresight. You never know for sure what is going to happen until it does.
The best way to bulletproof your business against unplanned life events and potential difficulties is to gauge risks and think of solutions in advance.
As you are budgeting for estate planning, ensure you plan for an emergency fund and insurance.
Some decisions require a low level of financial risk, while others may be worth giving an extra thought.
Here are some easy ways to estimate risk:
- Learn from your experiences
- Study and document e-commerce market risks
- Ask for financial planning recommendations
- Use a financial planning software (An example is a free retirement calculator)
There will always be unexpected happenings, but planning ahead of time reduces the chance of being overwhelmed.
Step 5: Develop and Implement a Financial Plan
This is the part where you turn all your goals, analysis, and evaluations into a working strategy.
In the development stage, you convert your data into a game plan. Implementation is following through on that plan to get your desired results.
You can lay out an excellent plan with or without a financial professional’s help. But it takes grit, discipline, and zeal to put it into action without procrastinating.
Even if you’ve been working through the previous steps on your own, you may need the help of a financial planning professional to help with your plan.
Step 6: Monitor, Reevaluate, and Update Your Financial Plan
As time goes by, your current course of action, perspectives, and financial circumstances will evolve.
That’s why you should never stop adjusting your financial plan. A good financial plan is highly flexible while it sticks within the limits of your risk tolerance.
There are foreseeable life events you can plan for, such as childbirth, marriage, and moving to a new city. Usually, when such events happen, they make a significant difference in your relationship with money.
Let’s say you were content with $5,000 a month when it was just you and your partner. But if you decide to have a baby, you might need twice that amount.
Your financial plan needs the capacity to accommodate an increased need for income.
Re-evaluation is a crucial and infinitely repeated financial planning step.
Continue to monitor and update your financial plan throughout changes in tax laws, interest rates, economic recessions, and other events beyond your control.
Final Thoughts: The Financial Planning Process For Online Store Owners
Online stores come in many types and sizes. But every e-commerce business owner needs a solid financial plan that works as a roadmap to their future as a profitable company.
Many small to mid-sized e-commerce entrepreneurs skip the financial planning process thinking it’s better suited to big online stores with millions of dollars in capital.
But it’s possible to create a financial plan for your e-commerce website on any budget. You can build it yourself or hire a professional financial planner to do it for you. Whatever you do, don’t miss out on the benefits a financial plan will bring to your business’s future.
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