Understanding your cost base
In this next series of articles, we’ll be looking at the various funding methods that you can use to grow your online business. But first, we need to establish what the funding requirement may be if things go well. There’s no point in getting halfway across the ocean and running out of fuel!
If you are reading this, then the chances are you have already made the decision to start an online business, or you already have one up and running. We won’t be looking at funding the startup phase but we should re-emphasise the need for some kind of plan before you launch your project.
It’s true that the barriers to entry for starting an online business are very low, and the costs for a start-up can be very modest. You don’t even need to be a digital expert. Signing up for a Shopify account and choosing a ready-made theme from a reputable and experienced partner is probably the most important decision you’ll make in the early stages. Look at a theme provider’s track record and make sure the theme you choose fits the products you are selling. Verify that the provider has a good support record and, like any other online purchase, check out the feedback from other users.
Then you have the ‘time phase’; buying a quality theme can cut weeks off the process, but you still have to spend some time making your site as good as you can. In previous articles we’ve looked at methods of driving traffic to your site and at how to expand your sales as fast as possible – and if that works you need to make sure you have the funds available to keep it going.
Sometimes the growth of your business can become self-funding simply by continuing to plough the profits back into the business. But don’t confuse profitability with generating cash. Eventually, the two things become completely synonymous, but in the early stages, it’s entirely possible to be very profitable and still have no funds to grow at the speed you wish.
So the first thing to do is to make sure you understand your fixed and variable costs. In basic terms fixed costs are what it costs to ‘open the doors’ every day.
- Establishment (everything associated with premises). So for example, if you are running the business from home then they will be very low. But what happens when you run out of space in your garage?
- Fixed Labour – staff costs you have to pay even if you don’t sell a single item. If it’s just you working in the business then you may be able to work salary-free for a while, but that’s not sustainable in the long term – so be realistic.
- Other fixed costs – these can be things such as insurance, software licences or loan interest,
Variable costs are the ones you can control, and some directly follow the level of trade
- Marketing – services such as PPC, advertising, sponsorship or exhibitions don’t support sales revenues directly and can be varied by you. However, commissions and affiliate fees a truly variable and do follow sales revenues.
- Variable Labour – staff costs that increase as you sell more, such as the number of people doing the picking and packing and logistics.
- Delivery costs – entirely variable according to the level of shipments
So, which are the costs that may mean you need to raise more funding? There are likely to be three areas:
Establishment - you may need to make an investment in premises and associated costs before you have the revenue to cover those costs. The costs of moving people and stock can be significant - so you should consider taking on premises that are larger than you need otherwise you may be moving again pretty soon!
Marketing – by its nature, the costs of marketing will come ahead of the results. How far ahead depends on your market and the success of your strategies. But the chances are you’ll need to keep spending money before you see the sales revenue.
Stock – so much depends on your chosen market and the methods by which you acquire your stock. We’ll be spending a lot of time on this issue later in this series, but it’s probably the single, most important area of managing your cash requirements.
So before you start to look at the potential sources and methods of growth funding, have a good look at your cost base and make sure you understand where and when the pressures will come.