The coronavirus pandemic has shown us how many businesses are unprepared to navigate a sudden economic crisis. But while massive corporations may be able to rely on government bailouts, small businesses can’t, which is why it’s crucial to budget well in uncertain economic times.
This noted, although coronavirus has been kind to ecommerce businesses, they must remain cautious about the future. There are an estimated 12-24 million ecommerce websites in existence, which makes competition fierce. Some ecommerce sites won’t survive this pandemic, while others will struggle to recover as the economy returns to normal. Even though Statista projects retail ecommerce revenues will surpass $476 billion in the United States by 2024, there’s no guarantee that your individual ecommerce business will take a significant piece of that pie.
So, even though many ecommerce businesses have been able to find success during the pandemic, this crisis has reminded us that times change in a hurry, on a macro and microeconomic scale—and therefore, all businesses, ecommerce included, should plan for alternate realities.
How do you plan for the future in an uncertain economic climate? How do you react when things suddenly change for the worse? Here’s how to budget and plan for your ecommerce business’s future during uncertain economic times:
Identify financial goals
The pandemic has created an unusual dynamic in which businesses in many cash-strapped industries have to preserve every last dollar, while ecommerce businesses could invest in expansion and innovation. But don’t take a victory lap based on short-term success.
As you look to the future, you should identify what you want for your business in the coming months and years. Do you want to gather more customer data? Would you like to pay down debt? Do you want to increase your business’s cash flow? Before you jump into budgeting, you should know for what you’re budgeting.
Once you know what your goals are, you can steer the business forward with greater purpose.
Balance growth with your rainy day fund
Now is the perfect time for ecommerce businesses to build a rainy day fund while still pursuing their financial goals. A market crash or another unemployment spike could put a significant dent in consumer spending. Considering ecommerce revenues typically come from consumers, it’s worth planning for that potential future.
Fortunately, if your ecommerce business is thriving, you can have it both ways. By looking at your current incomes and expenses, you should have an idea of your company’s success compared to the previous year, quarter, or month. From there, you can identify whether you should be trying to grow your business in the short-term, maintain its present course, or contract.
Therefore, you can use this time to renegotiate any fixed expenses, like software subscriptions, or equipment and office leases. (If your ecommerce business can work without an office, it may be worth terminating your office lease.) You also might offer a greater upfront payment in exchange for a lower future rate on subscriptions, equipment, or manufacturing agreements.
Simultaneously, instead of going all in on expansion by hiring and acquiring more inventory, you can move those short-term profit gains into your business savings account. Rather than bring on new staff, you can promote from within and invest in your team by giving employees new responsibilities. (Today, you could subsidize raises with eliminated office perks like food, coffee, cleaning services, and in-person parties.) Likewise, you should maintain roughly the same level of product acquisition or inventory manufacturing. If the economy takes a turn, unsold inventory that you can’t move will be a wasteful expense.
If you want to be more aggressive, you can take advantage of government loan programs. In recessionary times, Small Business Administration (SBA) loans often have lower interest rates. Receiving a low-interest loan will give you the capital you need to pursue growth opportunities while ensuring more of your profits go into your rainy day fund.
Budget based off multiple forecasts
The worst part about uncertainty is that it’s difficult to plan for—especially for ecommerce businesses that rely on consumer spending. When it comes down to it, there are many possibilities for how things could turn out.
With that in mind, while you’re budgeting for your ecommerce business’s future, you should forecast for exceeding your goals, meeting your goals, and falling short of your goals. In today’s economic climate, it’s next to impossible to forecast revenue scenarios precisely, but you can do your best to identify what great success, mild success, and failure would look like. Then, examine how each scenario will impact the health of the business.
Again, many ecommerce businesses are thriving now, which is why it’s a great time to build a rainy day fund while you pursue a brighter financial future. When you forecast, you should try to put your current growth in context, avoiding overly optimistic projections.
Some best practices while forecasting for your ecommerce business:
- Identify a timeframe for which you’re budgeting. (Quarterly is best for most ecommerce businesses.)
- Analyze the fixed or variable costs you can reduce, eliminate, or avoid to achieve your goals.
- If your goals are data-based, project how many site visitors or buyers you’ll need to reach reasonable conclusions.
- If your goals are revenue-based, project how much gross profit and physical inventory you’ll have to move to reach your goals.
- Bear in mind that seasonal demand often impacts ecommerce businesses.
- Remember to account for money deposited to a rainy day fund.
Planning in uncertain times is, well, uncertain. Ecommerce businesses are particularly susceptible to consumer behavior and sudden downturns in disposable income. You’ll want to do your best to make informed projections and budget accordingly.
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Stick to, and update, your budget
Budgets are only as good as your devotion to them. Once you’ve budgeted for the next quarter, or year, you should follow the budget you created for meeting your goals.
Nobody can predict the future, however, so your budget should be flexible. That’s why you’ll create multiple projections. As time goes on and you collect more information, you can allocate funds as needed. If your products begin selling well on Facebook, you can increase your paid advertising budget. If your sales slow down, you can look to cut expenses based on your pessimistic projection.
Ecommerce businesses often see widely variable results from day to day. By creating multiple projections, you can react proactively to multiple actual scenarios. You shouldn’t pour millions of dollars into video marketing after one successful video—but you can use the insights you gain over time to adjust your overall strategy and budget.
Regardless of how things play out, you should revisit your forecasts so each day you have a clear view of the company’s financial performance. Failing to do so may result in overextending the business or missing out on growth opportunities.
The bottom line
Budgeting in uncertain times is difficult for ecommerce companies that rely on consumer revenue. Although ecommerce has thrived during the coronavirus pandemic, continued success is far from a guarantee. To plan for the future, it’s important to build a rainy day fund while continuing to pursue the growth opportunities that come your way. Ecommerce isn’t going anywhere, but companies that try to expand too fast may face dire consequences if the economy takes a turn for the worse.
About the author
Randa Kriss is a senior staff writer at Fundera, a marketplace for small business financial solutions. She has written hundreds of reviews on various small business services and tools, including accounting, merchant services, ecommerce, and human resource solutions.