One of the biggest tasks you’ll need to do when starting your Shopify or Amazon ecommerce business is to prepare a detailed budget. It can be a pretty daunting task. But when done right, especially when using AI bookkeeping and AI accounting, it can help grow your online store exponentially.
Just like ecommerce accounting and ecommerce bookkeeping, ecommerce budgeting requires careful planning and attention to detail. It’s the key tool for you to monitor if you’re overspending and eating into your profits, or if you’re underspending and underachieving on your goals. Without a budget, you’re quickly going to lose track of your cash flow.
Here are 10 tips to help you set up your ecommerce budget.
1) Estimate your revenue
Your first step is to estimate your revenue for the upcoming month or year. But, be warned—your estimates must be realistic and conservative! Whatever figure you choose will be how much you will spend on fixed and variable costs. If your estimates are too high or too low, your overall business plan will be severely thrown off.
If your ecommerce business is a startup, it is enough for you to use a rough rundown of your costs to quantify your expected revenues. Otherwise, you can use insights from your previous year's sales and expenses, industry trends, market research, or your growth projections.
Once you have these estimates, the next step is to conduct a revenue forecast to see whether your allocation can hit your goals over the budget period and then make necessary adjustments if it can’t. In order to allocate your finances knowing you’ll stay profitable no matter what happens, you should make sure to consider scenarios affecting your financial health, including seasonal variations, competitive factors, market saturation, or regulatory changes.
2) Identify your expenses
Make a list of all of your expenses, including product costs, shipping, advertising, website maintenance, software subscriptions, and any other expenses that are necessary to operate your ecommerce business.
3) Categorize your expenses
Once you have identified your expenses, you need to organize your expenses into categories such as cost of goods sold (COGS), marketing expenses, operational expenses, and overhead costs. This will help you to better understand where your money is going and make informed decisions about where to cut back or invest more.
4) List your fixed costs
Identify your fixed costs, which are expenses that exist completely independent of sales and are the same amount no matter the order volume. For example, even if you don’t make any sales, you still need to pay office and warehouse rents, payroll, and utilities.
Other fixed expenses include:
- Domain & hosting renewal
- Software subscriptions and maintenance
- Loan repayment
Once you have identified your fixed costs, estimate the monthly or annual cost of each item.
5) Identify your variable costs
Variable costs are expenses that increase or decrease based on sales volume such as:
- Credit card fees
- Shipping costs
- Sales commission
Once you have identified your variable costs, estimate the percentage of revenue that each item will cost.
6) Determine your cost of goods sold (COGS)
Now you need to identify the direct costs associated with producing or purchasing the products you sell. However this can be tricky as most people don’t understand which costs to include in calculating inventory or COGS.
Should you include only finished products or also packaging supplies? Inventory on hand or also inventory in transit? What about inventory ordered but not yet paid for? The different variables are enough to give anyone inventory anxiety.
You should calculate your COGS as a percentage of your revenue to help you estimate your profit margins.
These inventory costs make up your COGS
- Sales tax
- Vendor fees
- Raw materials
- Finished products
- Manufacturing or production
- Shipping stock to your warehouse
Want to know how to calculate your COGS and track your inventory? Here’s a guide on Fundamentals of inventory management: How to track your ecommerce inventory
7) Set your financial goals
Now’s the time to identify your financial goals for the year.
Determine your revenue targets, profit margins, or return on investment (ROI). Use these goals to guide your budgeting decisions and ensure that you are allocating resources effectively.
Calculating your break-even point, the minimum amount of sales revenue required to cover your expenses, will help you to understand your minimum sales targets.
Use Finaloop's Ecommerce Profit Margin Calculator to calculate the best selling price for your products to optimize profits and retain customers.
Read our blog on How to calculate the ideal selling price for your product
8) Allocate your budget
Now here comes the strategic bit, allocating the budget for each category. You should base this on your revenue and expenses. Make sure to have your business goals and needs right in front of you as this is exactly what you will need to help you prioritize your spending.
How much should you allocate for marketing?
You will notice that some of your advertising expenses almost instantly drive your revenue. However, you need to be careful and make sure your budget is balanced. have a balance in your budget. This is as, if you allocate too much, too quickly, you will find yourself in trouble, strapped for cash. But if you spend too little and don’t invest sufficiently in your advertising, you run the risk of your ads getting minimal attention and interaction.
Bearing this in mind, we’ve seen our DTC customers’ marketing budgets range between 10% and 35% of their gross revenue. However, the Small Business Association (SBA) recommends if your margins fall at or above 10% to 12%, you should allocate just 7% to 8% of your gross revenue to marketing.
How much should you allocate for R&D?
As opposed to paid advertisements which can bring in immediate revenue, investing in R&D can typically take six months to a year to generate revenue for your ecommerce brand.
Therefore, in our experience, a general rule is for you to allocate between 5% and 10% of your total expenses to R&D. While manufacturing businesses spend around 5% on R&D, tech firms allocate more than 10% of expenses on R&D. The key is for you to find the sweet spot somewhere between.
Allocate a contingency fund
Make sure in your budget to include a contingency fund to cover unexpected expenses or revenue shortfalls. You need to be prepared for all types of unexpected costs which can include sudden damage to equipment, break-in and all sorts of other sudden emergencies.
Note that these types of unexpected costs are usually different from variable costs and they require sudden attention.
9) Review and adjust your budget
Once you have set your budget, it’s crucial that you regularly review your budget to ensure that you are staying on track to reach your financial goals.
We recommend you create a spreadsheet to track your revenue and expenses and to keep a watchful eye for any changes, This will help you monitor your financials and identify any trends, and make adjustments based on changes in sales volume, expenses, or other factors.
10) Seek professional help
If you’re in doubt about anything to do with your budget, seek professional help! They can help you to create a detailed budget that aligns with your goals, ensure that you are compliant with tax laws, and provide valuable financial insights to help you make informed decisions.
Preparing your ecommerce budget doesn’t have to be as complicated as you think. But, what is for sure is that you need your financials to be flawless in order to create your budget that will guide you to manage your finances effectively, make informed decisions, and achieve your financial goals.
Finaloop can help you do all this with our bookkeeping solution built for ecommerce and DTC brands allowing brands to get their financial data 100% accurate, in real-time, and fully reconciled 24/7.
Sign up HERE to get your financials set up today.
We are a technology company providing automated end-to-end accounting service to ecommerce businesses. Our system connects to your apps, syncs all your data and reconciles your books in real-time, replacing your bookkeeper, your accounting software, and your ecomm integrations. We offer reconciled books available 24/7, tax-saving insights, and a single place for all your financial data.
*The information provided on this website does not, and is not intended to, constitute legal advice. All information, content, and materials available on this site are for general informational purposes only. Readers are advised to consult with their attorney or accountant with any questions or concerns.*