Due to the rapid pace that the world is changing, it has never been more important for e-commerce businesses to create a reliable budget. Unfortunately, the increase in online spending and supply chain disruptions have put e-commerce brands that do not plan under tremendous stress.
We put this step-by-step guide together to help e-commerce brands handle the uncertainty ahead. This guide will teach you how to create a budget and plan for best and worst-case scenarios.
For best results, download our e-commerce business budget template and follow along with the steps outlined in this article.
Free E-Commerce Business Budget Template
Why Do You Need a Budget?
The main reason you need a budget is because a budget will help you plan. Creating effective strategies to boost your income and lower your expenses is challenging when you do not have a reliable budget. Creating a budget allows you to understand the cause-and-effect relationship of your finances. Understanding these relationships will prevent you from overspending and help you plan for unforeseen problems.
How to Create an E-Commerce Budget
A five-step guide.
Step 1: Identify Your Revenue Drivers
The first and most crucial step to developing an accurate budget is identifying what drives customers to buy your products. Examples of revenue drivers are:
- Ad Spend (Includes the cost of advertisements and the costs of publishing blog content)
- Website Conversions (Percentage of website traffic that results in a sale)
Assuming our conversion rate remains the same, we will need to determine how much to spend on advertising to create an accurate budget.
Next, we will determine how much revenue is generated from each dollar of advertising. This will allow you to create strategies to meet your budgeted targets. Your advertising spend includes:
- The cost to run the ads
- The costs to make the ads
- The costs of email campaigns
- Any costs to publish content that drives traffic to your website
Step 2: Determine Best and Worst-Case Revenue
The purpose of a budget is to create a financial plan we can follow during the year. Therefore, we want to hope for the best, plan for the worst, and expect to land somewhere in the middle.
Admittedly, creating best and worst-case scenarios is more art than science. However, for this exercise, we will assume your best-case scenario is revenue grows 15%, and your worst-case scenario is revenue declines 5%.
Step 3: Determine Fixed Costs
Next, we will add up all of your fixed costs. Fixed costs are any expenses necessary to your business that you will pay no matter what. These expenses do not increase as production increases. Examples include:
- Rent
- Payroll
- Taxes
- Depreciation
- Debt repayments
- Subscriptions that add value to your business.
We will most likely conclude that these fixed costs will remain stable in our budget for the next period.
Step 4: Determine Variable Costs
Variable costs are expenses you incur in producing your product or service. Examples include:
- Costs to Manufacture Goods
- Supplies
- Marketing
- Office Expenses
- Utilities
- Shipping
After adding up all of your variable costs, you must determine the relationship between your variable costs and your revenue. For example, you might spend 50 cents on variable costs for every dollar you earn in revenue.
Step 5: Putting it all Together
So, now that we know how our advertising and variable costs are affected by revenue, we can begin to analyze our budget.
First, since advertising is our main revenue driver, we want to see how much we have to increase our ad spend to meet our budgeted revenue target. But, again, we are assuming our conversion rate remains the same.
In the provided template, an equation calculates the exact amount of advertising dollars we will need to spend to meet our revenue goal. From here, we can begin to develop strategies on how we want to spend this money to achieve our budgeted revenue target.
Conclusion
At Windstone Financial, we specialize in helping e-commerce brands with all of their accounting needs. We have experience with helping e-commerce brands plan for the future so they can grow their brands without any unwanted surprises. Click the button below to speak with a CPA today!
