Managing Your Business Finances
No retailer ever started a company because they loved managing business finances. In fact, 40% of entrepreneurs say bookkeeping, taxes, and payroll are the worst parts of owning a business, according to inDinero. Since money quickly flows into and out of businesses – typically tracked in disparate systems and spreadsheets – many struggle to properly manage cash flow and prepare profit and loss (P&L) statements, as well as tax documents. And the more your sales grow, operations scale, and employee count increases, the more complicated your business finances become.
This guide will walk you through how to better understand your retail finances, identify the best accounting software for your business, unify and automate reporting, and tackle tax season.
Signs You Need To Improve Your Finance and Accounting Processes
- Your record keeping isn’t accurate or up-to-date
- You have a difficult time accessing the financial data you need
- You’re unaware if you’re in compliance with tax regulations
- Bookkeeping is taking up too much of your time
- Your revenue is increasing, but your profits aren’t growing accordingly
- You’re unable to get additional funding
- You’re not confident your records would hold up during an audit
Calculating the Unit Economics of Your Business
Understanding the unit economics of your business is key to building a solid foundational financial model for your company. Without knowing the unit economics of your business, it can be difficult to determine your company’s current profitability and whether or not changes need to be made in order to improve your gross margins and sustainably scale your business. Think of it as a check-up to determine the true health of your business.
To understand the scalability of your business, you need to calculate your per product (gross profit / margin) and per customer unit breakdown (customer acquisition costs and customer lifetime value). A healthy business is one where the cost to acquire a customer (CAC) is less than the lIfetime value of a customer (LTV).
CONSIDERING YOUR COSTS
To calculate the CAC for your eCommerce business, divide your total marketing costs by your total number of new unique customers in a given time period. The equation looks like this:
TIPS TO IMPROVE YOUR CAC
If your CAC is hurting your company’s profitability, don’t fear! At least now you know what’s stopping you from expanding your profit margins.
Increase your on-site conversion rates – You’re investing in marketing activities to drive people to your site, but if you’re not gaining enough new customers to lower your CAC, you need to examine your online conversion rates. Is the number of new visitors to your site increasing? Is the rate of new customer purchases climbing along with your increased site traffic? If not, you need to start testing changes to your eCommerce site: switch up the messaging, post new high-quality product photos, change the size and color of your buy buttons, etc.
Reevaluate the profitability of your various sales channels – If you’re selling on multiple online sites and marketplaces, each has different associated costs and access to different audiences of potential customers. Determine the profitability of each of your sales channels by evaluating which channel costs the most, provides the highest rate of new customers, and has the highest average order value.
Create customer advocates – Wowing your customers with a great experience can create repeat purchases and increase the likelihood customers will tell family and friends about your brand. Word of mouth is one of the most effective types of marketing but also the hardest to earn. For this you need to provide top-notch customer service and a unique and seamless shopping experience. Make customers feel like VIPs with rewards programs that offer special discounts, or try experimenting with packaging – just make sure you watch how it affects your gross margin, as discussed below.
Understanding Customer Lifetime Value
Since it is typically more costly to acquire new customers than it is to keep current customers, you should calculate the average lifetime value of a customer. Knowing the CAC and LTV of your customers can help you determine the ROI of your marketing activities and better understand which sales and acquisition channels provide the best customers. While this may seem like an obvious metric to track, it is often overlooked by many retail businesses. The basic formula for determining the LTV of your customers is:
Note: you can choose a different duration length than the 6 months, just be sure you are consistent.
The metric in this equation that’s typically most challenging for retailers to accurately calculate is the expected lifetime of their customer base. First, you need to calculate the churn rate: take the number of customers you have at the end of a particular time period (E), say the month of April, subtract that from the number of new customers you acquired in April (N) and the amount of customers you had at the beginning of April (S) and divide that by the amount of customers you had at the beginning of April (S). Second, divide 1 by the churn rate. The full equation is Expected Lifetime = 1/[(E-N-S)/S}.
HOW TO IMPROVE YOUR CUSTOMER LTV
To improve the average lifetime value of a customer, you need to find ways to improve each element of the LTV equation.
Increase customer order frequency – If you can increase the average number of purchases your customers make, you can improve your customer LTV. Leverage strategic email marketing, start a loyalty program, or develop a gamified shopping experience to keep your customers engaged. Push timely emails to offer them special discounts, remind them of unpurchased items in their online shopping carts, invite them to events, etc.
Extend the average lifespan of a customer – The longer you can retain your customers, the more value they’ll ultimately provide to your business. How do you elongate the lifespan of a customer? Keep them happy. Offer top-of-the-line customer service, create a positive customer experience across all your sales channels, and personalize their service and products as much as possible.
Upsell – Track what items your customers are purchasing (or considering purchasing) and offer them complimentary items. For example, if you’re selling apparel and a shopper is looking at a pair of gloves on your site, highlight a bundled offering that includes that pair of glove along with the matching hat and scarf. And if you offer that bundle at a slight discount, shoppers will be even more compelled to buy those three items instead of just the gloves.
OPTIMIZING YOUR GROSS MARGINS
Since your gross profit margins ultimately determine whether your business fails or succeeds, it’s paramount that you not only understand your profit margins, but are constantly working to optimize them. Typically, eCommerce businesses have gross margins of about 20-50%, with the exception of resellers who operate with thinner margins but higher volume.
To calculate your gross profit, use the following equation: Gross Profit = Total Revenue – Cost of Goods Sold. And to calculate your gross margin use this equation: Gross Margin = Gross Profit / Total Revenue.
Your costs of goods sold include costs you pay your supplier or wholesaler or the cost of materials and labor needed to make your products, shipping and packaging.
Maintaining Accurate Financial Records
The cornerstone of every successful and scalable business is sound accounting practices. Businesses that don’t maintain accurate and detailed records are not only unable to understand the profitability of their company, but are also exposed to government fines, audits, fraud, and theft. Although it is time-consuming and tedious to maintain complete financial records, it is a necessary evil that helps businesses:
- Actively track income, expenses, assets, and liabilities
- Make more informed decisions for increased efficiencies and profitability
- Project cash-flow
- Apply for additional funding, benefits, or credits
- Prepare, file, and pay taxes in a timely manner
The best way to reduce your accounting workload while also ensuring you maintain comprehensive records is to get professional assistance from accountants and accounting software solutions. Any person you hire or software you purchase should be accurate, reliable, consistent, and timely with their reporting.
The following accounting solutions are top options for small to mid-sized retailers:
InDinero – inDinero offers accounting software and services for small and mid-sized business.
Xero – Xero provides online accounting software for small businesses.
Getting Funding to Grow Your Business
Growth requires capital investment. Finding funding is one of the biggest challenges facing entrepreneurs who are trying to grow their retail business. While there are many conventional – and a growing number of unconventional (e.g. crowdfunding, peer-to-peer loans, etc.) – ways to raise funds for your business, it’s important to seek out sources that make the most sense for your unique company and industry. Here are some common paths for growth financing:
Debt Financing – These are loans made to your company by a bank or lending institution. The size for the loan and interest rate you receive are typically based upon your ability to repay a loan within an agreed upon time period. Lenders are usually expected to provide enough collateral to satisfy the creditor’s risk threshold, which can be difficult for start-ups.
Pros of Debt Financing
- Access to short or long-term financing
- You maintain ownership and control of your company
- Loan interest rates are tax deductible
Cons of Debt Financing
- Loans must be paid back within a fixed time period
- Fluctuating cash flow can potentially cause late payments or defaults
- Business assets can be held as collateral to guarantee payment of the loans
- If you have a first or second lien loan, your lender will receive priority payment over all your other debts and obligations in the event of corporate liquidation
Equity Financing – If you don’t want to take on debt or you’re just getting started, equity financing may be a better option. While equity financing doesn’t have to be repaid to investors, you are essentially accepting their financing in exchange for ownership shares in your business.
Start-ups usually receive equity funding from friends and family or angel investors, while established and high-growth businesses tend to receive funding from venture capitalists and private equity firms.
Pros of Equity Financing
- You’ll have more cash on hand to quickly invest in growth strategies
- You don’t have to repay investors, making it less risky than a debt loan
- Investors tend to buy into your brand vision and goals and don’t expect a quick return on investment
Cons of Equity Financing
- Investors will have a percentage of ownership in your company, meaning they’ll be entitled to a portion of your profits
- Depending on your profitability, you could end up paying investors dividends that far exceed the interest you would have had to pay for a bank loan
- Investors may need to be consulted before you can make a significant decision about the direction of your business and their shares will come with rights like voting on important items or vetoing significant decisions
- It may be difficult to find the right investors for you business
Tackling Tax Season
According to inDinero, 53% of entrepreneurs say the administrative burden of managing federal taxes is worse than actually paying taxes. For anyone who has attempted to prepare their business taxes without the help of professions, that number is not a surprise. Taxes codes and government regulations are complex and complicated to navigate.
Identifying forms you need to file – Depending on the type of business you run and how you employ your workers, there are various tax forms you’ll have to file:
- 1120S – Corporate income tax returns
- 1099 – Need to file for contractors
- W2 – Need to provide to employees
Be mindful of deadlines – Tax deadlines are strict and the penalties for missing them can be steep. Consult the IRS Calendar for Businesses to find all the important deadlines you must meet.
Understand sales tax requirements – Where your business operates is key in determining whether or not you have “sales tax nexus” in any particular state. Depending on where your company sells, has warehouses, or drop ships from, you may be required to collect sales tax. An experienced professionals can ensure you are in compliance with nexus obligations within each individual state.
Take advantage of applicable deductions – There are numerous tax deductions available to SMBs that many businesses overlook. Everything from property rentals and operating equipment to accountant fees and employee wages may be tax deductible for your company.
Get your bookkeeping in order – Organization is key to keeping complete accounting records. The accounting softwares we listed above should be able to help you automate and organize your finances to help ensure your deductions are maximized.
Hire a professional – Find an experienced certified professional accountant (CPA) to ensure your business is accurately preparing and filing all the proper taxes on time.
Apply for an extension if needed – If you won’t be able to file your business taxes before the deadlines established by the IRS, you need to file an extension. Your CPA should be able to help you file for an extension.
Things To Do Today
✔ Determine the unit economics of your business to understand and improve your Customer Acquisition Costs and Customer Lifetime Value.
✔ Hire a professional bookkeeper to get your financial records in order
✔ Seek debt or equity financing to fund your business growth
✔ Work with a professional to file your business taxes accurately and on time