When your e-commerce business is growing, it’s easy to become absorbed in day-to-day operations. And as sales increase, it’s tempting to see your business account as an ATM. You’ve worked hard this year, so it’s only natural to feel you deserve a reward or two.
But before you spend those earnings, make sure you’ve asked some important questions about your success. We recommend starting with these.
Who wants to eat your lunch?
Companies that grow attract success. This is especially true for niche businesses that attract attention from private equity firms that follow consumer trends. When bigger players decide to compete for market share, they show up with more marketing dollars to spend. Since brand loyalty takes time to establish, you risk being outspent by companies with deeper pockets.
2020 is a case study for the e-commerce industry because we quickly saw the types of consumer goods desired by people who spent more time at home. As our lives recover, many believe that some trends will remain as consumers gain confidence and proficiency in online ordering.
As you interview your success, make sure you’re factoring in your future competition. Whether that means diversifying your offerings, investing more in marketing[VO1] , or getting serious about an exit plan, these decisions require strategic investments back into your company.
What happens when the dust settles?
When we talk with thriving e-commerce businesses, they’re not shy about their gains. However, for those who haven’t consulted their business and accounting advisors, few are prepared for their increased tax liability.
If your business has money in the bank, a strategy to reduce tax liability could come from early conversations with your accountant. Still, many businesses will take the increased sales revenue in 2020 on the chin. That’s a tough reality for a record-breaking year, but it can be the incentive to start a tax planning strategy that can grow with you.
Another important discovery to make about your 2020 wins centers around the reason for your increased sales. Were the gains purely circumstantial and may disappear when retail businesses in your industry recover? Would recent earnings be well-spent by acquiring a competitor or by drawing new talent to your team?
When do we make our exit?
Thriving e-commerce businesses naturally entertain visions of selling for millions of dollars. However, not enough of them have a plan for doing so.
Now is the time to start working on your exit plan. Is it in 5 years or 30 years?
When investors look at your business, there are certain things they’ll want to see. First, are your financials buttoned up and in order? No matter how much money you make over the years if you lack good record-keeping, your business will invite speculation around its overall worth.
Next, profit is just one important component when it comes to your business’s valuation. Retention of key employees responsible for your success and documented internal processes make you more or less attractive to future buyers.
With the extra money earned in 2020, smart e-commerce businesses should look upstream and drill down on internal systems that boost your company’s overall value.
Where do we go from here?
At the firm, we have a saying: “Tell me what you did, and I can be your recorder. Tell me what you want to do, and I can be your advisor.”
But once we optimize a business under current tax laws, there’s not much we can do to help our clients save money unless there’s a business change or favorable adjustment to existing tax laws.
The next way we can really help growing businesses comes from what and how to spend their increased earnings. Because the decisions you make here will cost or save you money in the future.
Do you really have a surplus, or do you need that cash to purchase your next round of inventory and make payroll? What should you look for in your next business acquisition? Should you be going after key talent in your industry?
Having a growth strategy and checking in with your business advisors before you make a big investment or change is just as important as yearly tax planning with your accountant. If you’re not getting regular accounting advice and your business is growing, find someone you trust who understands business financials and your short and long-term goals.
How are we weak?
Making lots of sales is fun. Finding out where your company is weak? Not so much.
Still, it’s one of the most important things you can do in 2021.
Taking a look at where your company can improve safeguards your future and may also lead to growth. And as discussed above, if your company isn’t prepared in this way you’re not only in trouble should you want to sell, you’re also in trouble should key employees leave the company.
Discovering your weaknesses now ensures you understand your challenges before coming face to face with them through employee turnover. And in many cases, if weaknesses are hurting employee satisfaction, it may even save you from turnover altogether.
Some of these insights require industry experts who can see what’s coming before you do. And by investing in consulting better systems or talent, you’re starting to think as big as your business.
More Money Doesn’t Have to Mean More Problems
If your company had an amazing year, go ahead and take a bow. You deserve it.
Next, make sure you’ve asked the right questions and have a plan. Whether you started 2020 as a growth-minded company or you’ve been thrust into growth by a surge in online sales, the key to next year and the one after that comes from a business strategy that hinges on planning ahead.
Conclusion
It’s important to ask yourself reflective, practical questions so that you can keep growing your e-commerce business. This will keep your vision clear, help prepare you for and navigate potential difficulties, and keep your business on track for success.
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If you are looking for outsourced bookkeeping services in Newport Beach, San Francisco, or Walnut Creek, California, consider WCH CPAs.