A successful eCommerce business is the culmination of several moving pieces, from a working Shopify website and well-stocked warehouse to dedicated employees and digital marketing initiatives. All of these elements cost a fair amount of money — and can get out of control—without a proper eCommerce budget. Once you factor in shipping costs, eCommerce expenses can create a financial frenzy.
The best way to understand if your eCommerce business is headed towards the red or the green is by constructing a reliable budget. Here’s a quick guide to explain how and when to set a budget for your eCommerce business, including how much to allocate for strategic growth initiatives.
What is an eCommerce budget?
An eCommerce budget is a detailed plan of how your business will spend its capital over a specific period, such as monthly and annually. A budget helps you track and control how much you spend on expenses, including inventory and shipping costs, and is essential to predict your expected revenue.
Why do eCommerce businesses need a budget?
Every eCommerce business needs a budget for the same reason: to monitor if you’re overspending and eating into profits, or if you’re underspending and underachieving on your business goals. Without a budget, eCommerce businesses are quick to lose track of their cash flow.
Cash flow is important to eCommerce brands, in particular, because it’s an industry where seasonality and competition can significantly impact expenses and revenue. With a budget, eCommerce brands can better understand where to spend money and where to hold back, to predict expected revenue and generate a likely profit/loss statement to compare to real growth.
Likewise, budgets help eCommerce businesses conceptualize how much capital they will need to efficiently maintain operations throughout the year. Between fluctuating prices for shipping and staffing costs, budgeting at the start of the year allows eCommerce brands to identify shortfalls of cash and plan for gathering the sufficient funds.
What’s the difference between a cash flow forecast and a budget?
An eCommerce budget is an accounting tool used to plan your income and expenses, utilizing standard accounting principles like accrual based recognition for cost of goods and inventory.
This is the holistic view of your business whereas a cash flow forecast informs you of the exact timing to when you will receive and disburse cash in your business
How much of your eCommerce budget should you allocate to R&D?
Research and development, better known as R&D, is an integral growth initiative for eCommerce brands. The process of R&D allows business owners to research or manufacture new products to add to their inventory or streamline internal operations and third-party logistics (3PL).
Before allocating a portion of your eCommerce budget to R&D, you must consider that it’s an investment that cannot bring in immediate revenue the way paid advertisements can. Rather, R&D initiatives typically take six months to a year to generate revenue for an eCommerce business.
With that in mind, a general rule of thumb is to allocate between 5% and 10% of your total expenses to R&D. Technology firms allocate more than 10% of expenses on R&D, whereas manufacturing spends around 5% — eCommerce can find a sweet spot somewhere between.
How much of your eCommerce budget should you allocate to marketing and advertising?
Unlike R&D, certain types of marketing and advertising expenses can begin to drive revenue almost instantly. Yet, while these initiatives can be fast-acting, there must be a balance in the budget. If you spend too much, you can find yourself strapped for cash, which can impact other elements of your operations. But if you spend too little, you risk garnering little to no interaction on your ads.
For these reasons, marketing budgets can range between 10% and 35% of an eCommerce business’s gross revenue. However, if your margins fall at or above 10% to 12%, the Small Business Association (SBA) recommends you allocate just 7% to 8% of your gross revenue to marketing.
It’s imperative to remain flexible with how much of your eCommerce budget you allocate to marketing and advertising. Though you never want to have a negative cash flow to run ads, it is possible to whittle already narrow margins if you’ve proven marketing can increase overall sales.
How to build your eCommerce budget
An eCommerce budget is a continuous task, since you cannot anticipate all fluctuations in sales and expenses, like warehouse rent, shipping costs, unexpected equipment replacement costs, or even a sudden increase in competition that can impact finances.
That’s why we recommend creating at least an annual (high-level) budget and a monthly one.
A monthly eCommerce budget ensures that revenue is sufficient to cover monthly expenses, as well as demonstrates where adjustments may need to be made to meet projected revenue growth. A monthly budget can help weigh the potential effects of seasonal events that may cause fluctuations in sales or revenue, and inform upcoming inventory and equipment purchasing or staffing decisions.
Every monthly budget should include the expected income and expenses for that specific timeframe. For most eCommerce businesses, monthly income includes revenue from sold retail products, bulk wholesale revenue, and dividends from displaying advertisements on the eCommerce website.
Expenses for eCommerce businesses consist of fixed costs and variable costs. Fixed costs remain the same from month to month and often include expenses such as website hosting, rent, and payroll costs. Variable costs fluctuate each month based on business activity and performance, such as shipping costs, usage-based utilities like electricity, and customer acquisition costs.
Aside from recurring income, expenses to list in a monthly eCommerce budget include:
- Market and advertising costs:
- Paid search ads
- Email marketing
- Affiliate marketing
- Influencer marketing
- Social media marketing
- Search engine optimization (SEO)
- Product listing or shopping feed ads
- eCommerce website costs:
- Add-ons and extensions
- Security monitoring costs
- Payment processing costs
- Store theme and design costs
- Hosting and SSL maintenance costs
- Shipping and handling costs:
- Inbound freight costs
- Warehouse inventory fees
- Packaging and fulfillment costs
- Inventory tracking program fees
- Costs of packaging, embellishments, and inserts
Annual budgets map out projected spending throughout the year as well as estimations for company growth, updates to sales or marketing initiatives, or major adjustments to anticipated expenses. Other factors that are typically included in an annual eCommerce budget are competition rates, fluctuating raw material or inventory costs, and expansion or new product offerings.
While all budgets benefit from input from all relevant stakeholders, an annual budget should only be created after a thorough discussion with each department of an eCommerce business. Be sure to loop in the sales and marketing team, customer service team, product fulfillment team, and R&D team. All relevant employees should provide insight, expectations, and feedback on the budget.
Once you begin to construct your annual eCommerce budget, you’ll break down your anticipated income and expenses much like you would for a monthly and quarterly budget. The difference with an annual budget, however, is that you’ll be making revenue estimates that span 12 months. Factors like expected sales, employee headcount, and shipping costs can all influence revenue estimates.
For the most accurate annual eCommerce budget, include all aforementioned elements as well as:
- Maintenance and development support costs:
- Annual services
- Equipment lease costs
- Insurance costs for employees and product
- Website maintenance and optimization costs
- Capital expenditures:
- Updated machinery costs
- New computer or system costs
- New vehicle or furniture costs
- Updates to employee compensation:
- Annual raises
- Cost of living wage increases
- Hiring and onboarding costs
Build an eCommerce budget to take control over your finances
Successful eCommerce businesses remain successful not because they have an overwhelming amount of profit compared to costs, but because they accurately budget month-to-month to account for said costs.
Looking for help creating an eCommerce budget or cash flow forecast? Our team at Bean Ninjas can help. Schedule a free call here.