E-Commerce: An Introduction to Business Forecasting and Budgeting
Business forecasting differs from the day-to-day. Day-to-day financials tend to be pretty straightforward for an e-commerce business. When the day is done, just tally your sales to know how much your business grossed. If you want to get fancy, deduct your daily expenses and you’ll have your gross profits for the day.
But what about future earnings?
Unfortunately, we are not able to predict the future, instead, business forecasting is about making educated guesstimations and inferring future outcomes from available data and trends. In this way, you could say that business forecasting is more of an art than a science.
All business owners should be using forecasting for one reason or another. Especially for e-commerce, business forecasting provides a tentative roadmap so you can make smarter, more informed business decisions.
Don’t confuse business forecasting with sales forecasting, however.
A sales forecast is an estimate and assessment about how to manage the future cash flow (regarding how money is going to come in and out). In other, simpler words, it is about predicting when money is going to come into and out of the business in the future so that you can spot business opportunities and avoid risks or anticipate a problem.
Business forecasting is a basic business management concept that is not normally taken into account for online shops, but that can offer competitive advantages when used carefully.
In this post, I’ll be covering:
- Business forecasting and sales forecasting are valuable actions to help your business grow
- Having an accurate and reliable e-commerce business forecast is key
- E-Commerce forecasting is easy once you have your goals in mind and the right tools in place
- Final thoughts
When it comes to the world of e-commerce, there is a whole different set of rules at play. Budgeting and forecasting are crucial to ensure optimal growth but we cover a lot of topics related to e-commerce on the Brixx Blog.
Business forecasting and sales forecasting are valuable actions to help your business grow
So we’ve covered the basics of what business forecasting is used for and its difference to sales forecasting. Both are extremely important for your business so we’ll dive in a little deeper on each of these forecast types for you below.
Business forecasting
Although it would be nice to know for sure how a business will perform over time, forecasting is the next-best thing. In fact, business forecasting even has a number of practical, real-world applications.
Identifying Opportunities
- A key application for e-commerce business forecasting is finding new growth opportunities. Decisions that affect your revenue should never be made impulsively or arbitrarily and forecasting can be used to assess how a new opportunity might affect your revenue.
Assessing Problems and Risk
- The most successful business owners make smart decisions and take only smart, calculated risks. Business forecasting is very useful for assessing risks and anticipating problems.
Setting Goals
- It’s easier to set goals when you’re using business forecasting to estimate future revenue as you will be able to set goals that are both aspirational and attainable.
Human Resources
- Business forecasting can be used to predict when you might need to do some additional hiring or firing.
Finding Investors
- If your business forecasting suggests a significant uptick in business is imminent, it could help win investors over by showing them the potential your business has to offer.
Creating Budgets
- You should always allocate resources as efficiently as possible. Business forecasting can help make sure money and resources aren’t being misused or wasted.
Sales Forecasting
We’ve touched on two of the main points related to sales forecasting but we’ll expand on these a little here.
Tracking Opportunities
- An example of an action based on a future sales forecast would be using some resources to monitor opportunities in an attempt to position your shop for when people search for that product. This way, when you eventually get the product, your website will already be getting visits and may even already have a list of subscribers ready to buy.
Anticipating a Problem
- However, there are different levels of “risk”. A common example is making sure that you have enough stock for special dates such as Black Friday, Christmas, or the sales period. In those cases, foreseeing sales is easy, but there are many additional factors in the equation and we’ll take a look at those later. If your e-commerce already has data from previous years, sales forecasting goes hand in hand with that information.
- For example, if you realize that the conversion rate for a certain month is way lower than the same period the previous year, you can pinpoint the cause and solve it. There may be a problem with something not loading well or with the payment gateway, or maybe your competitors have made a move.
In addition to that, sales forecasting can help you in other ways when managing your shop:
- Setting goals: establishing the sales volume you want to reach compared to the previous year’s volume can motivate and guide you day by day.
- Human resources: there are some periods that require having more employees and you’ll need to have that planned. Knowing when those periods may come will save you lots of money and will avoid you being swamped with work.
- Budgeting: efficient allocation of resources based on needs is a key task that will be impossible to carry out without planning for future sales.
Having an accurate and reliable e-commerce business forecast is key
E-commerce forecasting falls into inventory, orders, and receiving – but there is a process behind it. That forecasting requires accounting for how much stock is available to fulfill an order. It helps the bottom line by projecting how much inventory multiple warehouses need to reduce shipping costs and time. It also improves cash flow, which is something everyone can get behind. Those elements combine to shine a light on predicting what’s needed to fulfill the current slate of orders while forecasting demand for future purchases. Specialized software like Brixx exists to help make business forecasting for your e-commerce company a lot easier.
Spotty weather forecasts can interfere with anyone’s best-laid plans – causing many to wonder about its reliability in terms of whether the forecast was right or wrong, or simply faulty. E-commerce forecasting works the same way. Inventory dictates whatever predictions an ecommerce provider makes; therefore, it’s an invaluable aspect of forecasting and overseeing a digital business. Faulty inventory management can cause companies to mismanage their resources. Monitoring what you have in stock now determines what you’ll need in the future.
There’s also the matter of collecting inbound inventory. By accurately predicting what you need and staying on top of your next re-up, you can have the manual resources to complete orders and keep your supply chain and operations moving.
In short, getting ecommerce predictions right does matter. Without an accurate forecast, you’ll have no way to plan for the possibilities of tomorrow.
Getting the forecast right the first time
In e-commerce, however, you’re only as good as your next successful transaction. To make sure you get your predictions right as often as possible, here are three ways to forecast your business needs accurately:
- Stay out in front by establishing a reorder trigger to automatically restock high-demand items; calculate your lead-time demand and safety-stock in terms of days, coming up with a firm number for each item and just that threshold as needed but use it as a benchmark.
- Experiment a little as forecasting comes in all shapes and sizes. Try out a few different methods to see which one works best for you. Be sure to include internal and external factors and create multiple scenarios based on best and worst cases as well as accounting for possibilities in between.
If you have a minute, take a look at “5 Benefits of Cloud Accounting Software for your Small Business” from Luke Fletcher (@LukejFletcher) – just another reason to use a financial modelling software that integrates into your business’s accounting tools.
By Incorporating a reliable forecasting process into your business model, you’re sure to enjoy a bright future. You’ll be prepared for many, if not most, possible scenarios.
- Learn more about E-commerce integrations
E-Commerce forecasting is easy once you have your goals in mind and the right tools in place
E-commerce forecasting, in a nutshell, is the process of anticipating how much budget you’ll spend, on what (and which platforms and marketing strategies), and calculating what the return on investment looks like. It’s a type of working spreadsheet that helps you know what and where you’re spending, how you’re managing your money, what returns you can anticipate and more.
The one thing businesses look for is clarity or an informed approach to forecast e-commerce performance for the next 12 to 18 months. Forecasting should happen in tandem with figuring out what your customers are looking for, lining up your content strategy, setting up your advertising campaigns, and other digital tactics. Speed, timing and the ability to multi-task is everything.
Identify financial goals
Many businesses in cash-strapped industries have had to face much difficulty in the unusual dynamic that has been – and is – the pandemic. E-commerce was a lucky exception. Since early 2020, the e-commerce industry has been able to innovate and expand.
Looking to the future, as an e-commerce business, you should identify what you want for your business in the coming months and years.
- Do you want to gather more client information?
- Would you like to increase cash flow?
- Would you like to pay off debts?
Before you jump into budgeting, you should know what you’re budgeting for. Once you know what your goals are it will be easier to create a path towards them.
Balance growth with your rainy day fund
It is the prime time for e-commerce businesses to build up a rainy day fund while still pursuing their financial goals. A market crash or unemployment spike could put a significant dent in consumer spending. As e-commerce revenues stem from consumers it’s worth planning for a number of potential futures based on spend fluctuation and seasonal change. 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.
You may want to try:
- Renegotiating any fixed expenses
- Cancelling unnecessary commitments or subscriptions
- Moving short-term profit gains to a savings account
- Taking advantage of government loan programs to pursue growth
Budget from multiple forecasts
Uncertainty is difficult to plan for, especially for e-commerce businesses that rely on consumer spending. With that in mind, while you’re budgeting for your e-commerce 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. However, 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. E-commerce businesses often see widely variable results from day to day. By creating multiple `projections, you can react proactively to multiple actual scenarios.
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 and scenarios to help you be better prepared for what may come your way.
Some best practices while forecasting for your ecommerce business:
- Identify a timeframe for which you’re budgeting such as quarterly, which is a popular choice.
- 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.
While many e-commerce businesses, as with many others, continue to debate on the best tools to use to forecast for their future – spreadsheets versus automated software – it remains essential for e-commerce businesses to have projections and models in place.
Utilizing a specialized forecasting software, like Brixx, can not only save your business time and valuable resources but it reduces the margin for error and can help you predict up to 10 years into the future. Many software solutions like Brixx offer integrations into accounting tools like Xero or Quickbooks. This makes it that much easier to compare your forecasts to your actuals.
Tools like Brixx, whether used as a standalone or with Xero aim to make business projection and planning as simple as possible with dedicated solutions for startups, businesses, and a partner program available for accountants – see how Brixx can work for you today.
