Many business owners are looking to scale their eCommerce businesses but don’t have the finance function in place to do so. This is a risky move because you will be putting your company at risk for several problems if you don’t have someone overseeing all of the finances.
As an eCommerce business scales rapidly, the finance function and systems face new challenges. Such challenges include a focus on rapid sales growth while ignoring potential issues that arise from it, such as poor integration of financial technology or weak debtor management. Businesses scaling fast need access to the correct information asap. This is why the finance function gains importance over time, and its ability to provide forward-looking insight is growing.
Finance leaders can only provide insight when they have access to all relevant resources, including the entire range of eCommerce systems. The primary challenges for scaling a business include poor integration between finance technology and other business systems, weak debtor management, or problems with inventory visibility.
In this article, we will be covering some of the risks that come with scaling an eCommerce business without having a proper finance function and how these risks can be mitigated by implementing a financial management system.
What Is The Finance Function?
In organizations, the finance function is responsible for acquiring the funds necessary to maintain efficient operations. The finance function is vital to business, and without it, things would run less smoothly. The efforts of the finance functions help keep a business running, as it gathers resources and acquires money that helps with daily activity.
As part of financial management, the finance function is tasked to manage a company’s financial resources so that they can be used most efficiently. The finance function is responsible for planning, budgeting, forecasting, and accounting for all transactions within an organization.
Lately, there has been a shift from manual processes towards more automated or digital systems where information management happens in real-time. This shift is called digital finance. It has resulted in the development of new products such as cloud-based Finance as a Service software, Robo-advisors, or even smart contracts, which are used to track transactions, among other things.
In large, the finance function can be classified into three parts:
- Long-Term Finance – This refers to finance of investment that’s three years or more. Among the sources of long-term finance include share capital, owner capital, debentures, long-term loans, internal funds, and more.
- Medium Term Finance– This is financing done between 1 to 3 years; this can be sourced from bank loans and financial institutions.
- Short Term Finance – For the first year, a business may need to consider various methods for raising funds such as overdrafts from banks, commercial paper (a short-term debt instrument issued by corporations), receiving advances from customers, and issuing trade credit.
Finance Function Objectives
The finance function has various objectives, and they are as follows:
- Investment Decisions – It is the finance manager’s responsibility to make sound investment decisions that generate revenue, profits, and save costs. Investment decisions should be made by a person who understands how to bring in more money for the company while racking up savings wherever possible.
- Financing Decisions – When a company decides how to finance its business, it should consider short-term and long-term debt arrangements. They also need to decide on the mixture of equity and borrowing that works best for them.
- Dividend Decisions – Business owners must carefully consider how frequently they pay out cash dividends to their shareholders. They also face a dilemma of whether or not to retain profits for future growth—this return can either be paid through higher dividends, share repurchase, or reinvested back into the company (through acquisitions).
- Liquidity Decisions – Liquidity is the ability of a business to pay off its short-term debt obligations. This requires having enough cash on hand and maintaining adequate savings to avoid becoming insolvent or failing to make payments, such as vendor invoices.
The Finance Function Risks When Scaling an eCommerce Business
While scaling their operations, eCommerce businesses can leave themselves exposed to certain finance function risks. These risks can come from poor integration of financial technology and other business systems, weak debtor management, or a lack of visibility, and more. To avoid these pitfalls, businesses should look into their current processes to identify the areas that require improvement. They need to ensure they are taking all the necessary steps to minimize the risk of their finance function.
Poor Finance Technology Integration With Other Business Systems
Many eCommerce businesses focus on building a website and achieving integration with online marketplaces such as Magento or Shopify, along with payment gateways. However, these initiatives also have the risk of becoming distracting from other important aspects to scaling an eCommerce business, such as managing finance function risks during this time of growth.
While management is arguably concentrating on the ability of their business to attract sales, fulfill orders and initiate payments, they fail to integrate with finance and accounting technology systems. Given the multiple sources from which finance functions must retrieve data, tasks such as manually uploading and accessing that information are incredibly challenging.
Entering a period of fast growth generates many potential risks relating to finance, one being a lack of integrated systems. This lack increases the risk for errors in financial information and poses a compliance issue when preparing financial statements and submitting tax returns. The finance function can struggle to provide the KPIs and insights that management needs, such as accurate gross profit margin, Stock Keeping Unit (SKU) profitability, and return on advertising spend. This is because they face various challenges, including time-consuming reconciliations between sales and bank receipts.
Getting Operational Transactions into the Accounting System
The finance function can also struggle to get operational transactions into the accounting system in a timely manner. This holds true especially during peak periods such as Black Friday or Christmas, where eCommerce businesses are under pressure to fulfill orders and meet deadlines for financial reporting, all while making adjustments related to refunds or lost shipments.
They tend to be unable to upload sales transactions in a timely manner due to slow upload speeds. The finance function must also manually reconcile invoices and credit notes, making it difficult for them to meet their deadlines when the volume of transactions is high.
Not having access to real-time financial data will impact how your organization performs during periods of peak activity such as Black Friday or Christmas. In addition, the finance function cannot complete their tasks promptly, which impacts your organization’s reporting capabilities.
Lack of Visibility Into The Terms of Contracts
The finance function can also struggle with a lack of visibility into the terms of contracts if eCommerce businesses do not clearly understand which payment terms they are offering. It is challenging to provide accurate cash forecasts and communicate this information to management if their performance is below expectations.
Another risk that might arise from a lack of visibility in contracts is the risk of your finance function failing to control credit and cash flow. This may result in late payments or penalties, which could be avoided if eCommerce businesses were more aware of their payment terms, especially during periods of peak activity.
The finance function can also struggle with a lack of visibility into the terms of contracts if eCommerce businesses do not understand which payment terms they are offering to their customers.
Correlating Revenue Statistics With Spend Statistics
The finance function can also struggle with correlating revenue statistics to spending patterns, especially during peak periods. This is because they find it challenging to correlate the data due to poor integration between their sales and marketing systems (SMS) and back-office functions, including Point of Sales (POS), inventory management system, eCommerce store, and accounting applications.
This is because they struggle with correlating data, making it difficult for them to provide accurate cash forecasts and communicate this information to management if performance is below expectations.
Business owners looking to scale eCommerce business operations may struggle with rising overhead. They tend not to have an accurate understanding of how many employees they need during peak periods which can impact their cash flow due to additional costs such as overtime payments and potential penalties for late deliveries, among other things.
This lack of a clear understanding of what size the finance function needs to be can also impact the quality of their reporting capabilities because they may not have enough employees with the necessary skills or experience. This is why it’s vital for business owners looking to scale eCommerce operations. Understand that scaling your finance function requires more than just hiring additional accounting staff. Ensure you are equipped with financial technology that can support your growth.
To provide a solid foundation, finance systems should be well integrated, automated, and in line with the business’s objectives. Good financial planning requires access to accurate information that management can depend on. Consero helps eCommerce businesses manage their finances and make decisions that drive growth in the long run. Our company is regarded as a reliable partner that can take your finance team to the next level without disrupting your other business systems and processes. Feel free to request a demo today!