The things that I wish someone had told me when I was the inexperienced CEO of a £50Million eCommerce business - Part 1

The things that I wish someone had told me when I was the inexperienced CEO of a £50Million eCommerce business - Part 1

Alternative Title - The role of Systems and Accounts in eCommerce Management

This article is intended to be useful to anyone who finds themselves running an online retail business taking hundreds or even thousands of orders a day through multiple channels, I wrote it from personal experience but also consulted others who have been there and done it and know of what they speak.

Introduction

When you run a small online retail business taking 10s of orders each day is quite possible for you to understand the business inside and out without having detailed financial information available because you're close to the purchases, the sales, the fees and the costs that the business incurs you can understand the details of the business performance at an intuitive level without having detailed information produced for you. Similarly at this size of business you probably understand the cashflow intimately checking the bank account multiple times each day and knowing what payments are due to go out and come in every day for the next few days.

All that changes once the business passes 200 or so orders per day with this kind of growth comes more staff more products and aspects of the business take on a life of their own, it's simply not possible to do everything that's critical to the business yourself when the number of transactions reaches this level.

To paraphrase W Edwards Deming management requires measurement, or to put it a different way you need to understand your business in numbers in order to manage it effectively. In practise what this means is that in addition to keeping up with the cash flow on a daily basis you need to check a detailed profit and loss account for your business at least once a week and it needs to be recent, ideally you should have the detailed P&L for last week by Wednesday of the following week. The reason for the speed is that if something has gone wrong you want to fix it quickly and if something is gone right you need to be able to double down and exploit the opportunity quickly, like last week's newspapers a P&L from 4 weeks ago can't tell you much about what's going on today.

It's really easy to keep your eyes fixed firmly on daily revenue numbers they can be very satisfying to watch but revenue numbers are deceptive when viewed in isolation, it's important to balance revenue and costs to properly understand the performance of your business and you can only do that by reviewing a P&L.

Furthermore, as the CEO of an online retail business it's really important that you understand the systems that run your business, the systems include of the sales channels that you use to sell your products, the systems that you use to manage stock, ship your orders and then the systems that you use to create your accounts. Sales channels alone are complex, you might sell on Amazon or eBay, Etsy, B&Q or Debenhams, in addition you will probably have your own web store running on Shopify, WooCommerce, Magento or EKM, there are over 50 channel options open to online retailers in the UK in 2023 And that number is only growing.

Each sales channel has its own metrics that affect profitability through the fees and commissions charged by the sales channel and other metrics that affect cash flow because of the payment terms that they enforce, you need to understand these and their effects in detail to run your business properly.

You should have a clear idea of how an order placed on any of your sales channels gets from the checkout to your warehouse systems so that it can be shipped to the customer, similarly you should understand how purchasing decisions are taken, how and when payments are made and the processes that that drive advertising and promotion commitments.

Lastly you should have a clear understanding of what's possible in terms of performance for each of the department's that make up your business with a weekly target for each department and a process for measuring the actual performance against that target. Note that I use the word target rather than forecast, in my experience  targets are a useful management tool, forecasts, by and large are fantasy.

The role of the finance department

The primary purpose of the finance department in an e-commerce business is to produce accurate and timely management information which the business owner or manager can use to take decisions about the business.

Hence, the key role in the finance department of an online retailer in my opinion, is the primary financial controller, the primary financial controller is the person responsible for producing the weekly accounts and presenting them to the management team. The financial controller must be dedicated hardworking and knowledgeable, they will usually be a fully qualified accountant with a good experience of e-commerce and the same full understanding of all the sales channels, payment methods and business systems as the CEO. As the business scales the financial controller will need additional support to complete all of the tasks that go into building a set of weekly accounts in a timely manner.

The role of the CFO

You may be surprised to hear me say that the financial controller is the key role in the finance department, what about the CFO? The job of the CFO is not to produce the weekly accounts it's to put the processes and procedures in place to ensure that the weekly accounts are produced correctly and on time and to ensure the appropriate targets are in place so that the success or failure of each of the departments can be judged on a weekly basis.

The CFO is an important part of the senior management team who can provide a useful insight into the consequences and risks of changes to the business, add a good CFO can help you to fund your growth and development or perhaps to get the best price for your business in a flotation or exit. I'm a big fan of fractional CFO's, bringing outside experience into the senior management team is often valuable and the CFO can be very expensive so why pay for more of one than you need?

Reviewing the P&L

Your weekly P&L should include all of your revenue and costs down to the level of contribution. If you'd like a template for an ideal P&L format for an e-commerce business reach out to me through the DM’s and I'll provide you with one I've used in the past.

It's really important that your P&L uses the same format each week, and that this week’s P&L is presented alongside the comparable figures for the last few weeks so that trends can be easily identified. A number of figures in the P&L should be presented both in absolute terms and as a percentage of revenue, for example marketplace commissions quoted as a percentage of revenue should remain relatively constant over the long term, similarly gross margin on sales.

Any significant variation from the long term trend either in terms of absolute value or percentage merits investigation as it may indicate a change in the nature of the business that will need to be addressed by management.

Additional information

if you sell on a large number of different marketplace platforms, it's really helpful to have sales revenue,  sales channel commission and other directly related costs for each of your sales channels broken out so that you can understand the real costs of each sales channel. This could affect your pricing decision for each sales channel, it's quite normal to sell at a higher price on the more expensive sales channels like Amazon than you do on a lower cost sales channel like your own web store.

You may also need to see weekly information on the performance of different promotional or advertising channels to properly judge the performance of your marketing team.

Why weekly accounts?

Creating weekly accounts is actually not significantly more difficult than creating monthly accounts it requires a rigorously defined process which must be followed by accounts stuff who understand their roles intimately and how to perform them in a timely manner, but it can be done in an e-commerce business of any size.

If you are competing with other businesses who are reviewing monthly accounts three weeks after the end of the month then you will react FIVE WEEKS faster to significant changes in the market by reviewing weekly accounts produced in a few days. I don't need to tell you that in e-commerce, a five-week head start on your competition gives you a huge advantage.

The role of systems

All of the information that is used to produce your management accounts on a weekly basis will come from a software system or systems, as the owner or manager of the business you need to understand how these systems work in intimate detail so that you can be absolutely certain that the information that they provide is accurate. It is in my experience a huge mistake to allow another member of the management team to take primary responsibility for systems and software, systems and software in a large e-commerce business are complex, but honestly if you're running a successful e-commerce business you ARE capable of understanding the systems, you just need to spend the time and effort to do it.

It's always possible to connect multiple systems together using API's but the data that is transferred through an API is often degraded as a result, because of this it's fair to say that in e-commerce having fewer systems is often better. While the goal of a single integrated system that handles all aspects of your business may be unattainable in practise it is a good idea to try and get as close to that as possible.

Help with systems and software

If you find yourself reading this and agreed with what I'm saying here but you don't know how to get started on improving the systems and software in your own e-commerce business, eTail Support is here to help. We can offer you a free systems check with no obligation to provide you with ideas on how you can improve your systems and software as a way to improve your profitability and growth reach out to me through a direct message all through the contact us page.