The emergence of e-commerce businesses has completely revolutionized the ways companies do their sales, inventory management, and customer servicing. Unlike retail stores, online businesses operate through various sales platforms, use digital marketing techniques, deal with outsourced fulfillment, and are subject to variable demand all throughout the year. These peculiarities require more than just ordinary financial reporting; they require financial leadership.
While the business is growing, the decision-making process becomes increasingly complicated. The owners should understand whether their investments in inventory are sustainable, from which sales platforms their profit is the greatest, what impact the platform fees have on the margins, and whether they have enough money for the expansion. This is where virtual CFO services can prove to be extremely useful.
How Virtual CFO Services for E-Commerce Differ From Traditional CFO Work
A typical CFO usually works with established businesses where revenues and operating expenses are predictable and financial accounting is done regularly. An e-commerce company operates in an ever-changing environment where the amount of demand from consumers, the amount of inventory, cost of advertisements and even marketplace rules can fluctuate greatly.
Virtual CFO services for professionals provide assistance to an online company by implementing continuous financial planning instead of evaluating past results only.
An e-commerce VCFO will be concentrating on the following questions:
- Is the investment into inventory in correlation with the expected level of demand?
- Does the marketing campaign bring profit-making customers?
- Which sales channels make the biggest margins?
- Do we have enough cash reserves to expand?
- Do our operating expenses grow faster than revenue?
Instead of evaluating financial results at the end of a quarter, a virtual CFO evaluates business trends on a regular basis and helps to adjust them accordingly. They work closely with management teams to align financial planning with operational decisions.
Marketing budget, purchase of inventory, discussions with suppliers and business expansion have financial implications which should be evaluated carefully.
Inventory Financing and Cash Conversion Cycles
Inventory constitutes the biggest asset for many e-commerce enterprises. Goods are acquired sometimes weeks or even months prior to their sale, which entails that companies need to invest significant amounts of money well in advance before they get payments from clients.
That is the reason why inventory financing and cash conversion cycle have become one of the central topics of virtual CFOs.
Cash conversion cycle represents the period of time during which money, initially invested into inventories, comes back to the company after being used to buy goods, stock them, sell, deliver to customers and finally get paid by them.
The shorter cash conversion cycle is, the better for the liquidity, since money come back sooner.
Virtual CFOs assess:
- Inventory turnover
- Payment terms from suppliers
- Payment terms from clients
- Efficiency of warehouses
- Forecasting of demand for products
Also, virtual CFOs evaluate the possibility of getting additional financing prior to high sales periods, during which inventory purchases go up.
In contrast to viewing inventory as an expense item, virtual CFOs consider it as an investment.
How Virtual CFO Services Help E-Commerce Businesses Manage Platform Fees and Margins
E-commerce often involves selling through multiple platforms that charge differently.
The possible platforms include:
- Company’s website
- Online marketplaces
- Social commerce platforms
- Wholesale sales
- Distributors
Each platform charges commissions, payments processing fees, fulfillment costs, advertising and subscriptions fees.
While the total revenue might look good, the above-mentioned expenses could decrease the company’s profitability. Virtual CFO services allow business owners to assess the impact of platform costs on their overall financial performance.
In addition to analyzing the total revenue, a virtual CFO evaluates the company’s profitability from individual sales channels.
The analysis considers such expenses as:
- Commissions from marketplaces
- Fulfillment cost
- Shipping cost
- Payments processing fees
- Cost of product returns
- Discounts
- Advertising cost
This financial assessment allows companies to understand where their profits come from.
For instance, there is one sales channel that generates more revenue but less profit because of high commissions and another one generating fewer sales but better margins.
Thus, a virtual CFO service allows managers to get the necessary information to make the right decisions instead of concentrating only on the sales volume.
Forecasting Around Seasonal Sales Spikes
Seasonal considerations are important for success in e-commerce.
The holidays, promotions, the start of the school year, as well as specific buying periods for various industries often cause an increase in the demand from the customers.
The preparation for such sales peaks demands careful planning of finances.
Companies can be required to:
- Acquire more products
- Raise marketing budgets
- Hire additional employees
- Increase capacity of their warehouses
- Find short-term financing
Failure to plan appropriately may cause companies to face shortages in their inventories, excess of inventories, or issues with cash flow.
Proper virtual CFO services assist companies with planning by means of accurate financial forecasting.
Unlike general estimation of potential sales, the virtual CFOs conduct forecasts that take into account:
- Previous sales trends
- General market condition
- Customer demand
- Requirements of inventory
- Operating costs
- Financial flows
Moreover, they generate several forecast scenarios to prepare the company for better and worse sales periods. Financial forecasting enables companies to make the right decisions before seasonal demand starts.
Thus, the company is able to act proactively and not react to financial problems that occur during the busy period of time.
Multi-Channel Revenue Reporting
Most of the modern e-commerce enterprises do not focus on only one income stream. Companies generate their revenue using several different online sales channels at once. Although diversification opens up the opportunity for growth, it complicates the process of financial reporting.
Professional services of virtual CFO make this procedure simple with multi-channel revenue reporting.
Unlike reporting all income in one report, virtual CFOs conduct analysis of the financial performance of companies through each of the sales channels separately.
Multi-channel revenue reporting usually includes the following information:
- Income on the basis of each platform
- Gross profit of each channel
- Customer acquisition cost
- Order value
- Return rate
- Marketing effectiveness
- Contribution to the profitability of the business
Thanks to multi-channel revenue reporting, management receives the information about profitable channels. Moreover, it also helps to track the difference in the payment cycle of different marketplaces.
While some of them provide quick payments to customers, others require some time, from several days to several weeks to make payments.
Instead of assuming all sales channels perform equally, management gains clear financial visibility into where investments generate the strongest returns. As businesses expand into additional marketplaces, this reporting becomes increasingly valuable for long-term growth planning.
A successful online business cannot do without sound accounting books alone. Some of the financial issues associated with the operations of e-commerce businesses include inventory management, dynamic platform costs, seasonal demand, and multi-channel sales.
The use of professional virtual CFOs from The Fino Partners is essential in providing such financial guidance. This is achieved by making good decisions on inventory financing, cash conversion cycle monitoring, profitability analysis of platforms, demand forecasting for the seasons, and revenue reporting from all sales channels.
