Whether you’re in the five or eight-figures, budgeting correctly is part of successfully scaling an ecommerce business. You have to set your target to hit it.

But like everything else in life, you get out of your ecommerce budget what you put in.

Often, I meet ecommerce founders who are solely focused on their marketing department—their advertising creative, ad spend, and return on ad spend. Though your marketing budget matters, it’s but a small piece of your overall budget.

So, here we are in Q4—the best time to build your budget for next year. Your end-of-year sales are planned out, and the new year is right around the corner.

While you think about how to scale your business and budget, I recommend answering the following questions to ensure you set your new budget up to succeed.

(And if you’re reading this in the summer, know these questions are evergreen and will come in handy at your next budget review or when Q4 comes around again.)

1. Do You Know Your Actuals?

Ecommerce budget planning should always begin with identifying your actuals from the past year.

I don’t just mean revenue here. And I don’t just mean your bank account balance. I’m talking about your gross margin and contribution margin. I’m talking about your total freight expense and the discounts you offered. I’m talking about how much you spent on marketing software, customer service, ads, agencies, and every business trip.

And I mean on an accrual basis—not cash.

Accrual means recording your revenue and expenses when your transactions happen, even if the money hasn’t moved yet. Cash means recording these transactions when the coin goes through.

Cash accounting is the easier of the two, but it provides little decision-making capability. Accrual accounting gives you a more accurate view of your company’s health by accounting for accounts payable and receivable.

In ecommerce, the key to getting accrual right is COGS (Cost of Goods Sold). Where revenue is your total sales, COGS is the entire cost of acquiring your products and sales. The higher your COGS, the lower your gross profit.

Now, don’t worry. This article isn’t about accounting.

But often, founders want to skip ahead to making big growth goals without knowing their financial history. And the reality is that where we’ve been helps inform where we’re going.

2. What Small Goals Make Up Your Large Ones?

Your larger goals for revenue and total profitability lay the foundation for your budget, but you need to separate them into smaller, actionable steps. If you hope to improve gross margins by 5% next year, what smaller levers will you change to make it happen?

Will you decrease discounting or return rates? Will you continue offering free shipping on orders over $100? How will freight processes and expenses change?

Be specific with your goals—big and small—for effective budgeting and tracking.

And don’t skimp on doing the analysis (or delegating it to someone) to determine if those smaller levers will actually move the needle. For example, if refunds and returns are already low (say less than 5%), decreasing them is unlikely to make a big impact on your gross margin.

3. Has Your Budget Been Sanity Checked?

It’s easy to create a budget in a vacuum—and much harder to communicate your budget to someone else. But you’ll have to do it anyway.

Generally, ecommerce owners are better at marketing and product management than finance, and that’s okay. You can’t be great at everything. But that is why you should have someone like your mentor or CFO peer-review your projected revenue growth, profit growth, and sustainability.

In fact, the larger your business, the more eyes you should involve.

Revenue Growth

Whether you shoot for 20%, 30%, or 50% revenue growth is pretty subjective. No one is holding your feet to the fire or forcing your hand. It’s more about your ambition and risk tolerance as an owner.

But, you should sanity check your growth goals. I commonly see founders start with a very ambitious growth goal that they have to pare down later in the year.

If you’ve never grown by 50% in a year, is it realistic to expect that now? It may be, but only if you have an expansion plan that’s capable of getting you there.

Profit Growth

Along with revenue, you should make sure your profit goals are grounded. What I mean by that is your net income percentage goal.

Again, start with your actuals from last year. Were you 5% profitable? Did you lose money?

If you lost money, a great place to start is breaking even. If you broke even, a realistic net income percentage target could be 2.5%.

What works for you will depend on the size of your ecommerce business. As a giant company with razor-thin profit margins, every half of a percent or even quarter of a percent is meaningful. As a smaller business, the difference between 2% and 3% isn’t as significant.

Sustainability

I would also caution you not to set your targets too high on the net income side. While 20% profitability may be possible, it often means you’re not investing enough in your business.

When it comes to ecommerce, 20% to 25% profitability usually isn’t sustainable.

A CRM can help you predict the expected lifetime value of a customer to help you determine how much you’re willing to spend to acquire new customers and keep old ones.

4. Do You Have the Cash to Support Growth Goals?

Having enough cash to support your goal to scale is crucial to one, meeting that goal, and two, not growing so fast that you run out of money altogether.

To determine if you have the cash you need, evaluate what you have and divide it among your goals. A common challenge for ecommerce founders in this area is inventory.

If you plan to grow by 50%, you may need 50% more inventory—and that’s inventory you have to order ahead of time, anywhere from 2 to 3 to 6 months out. The longer your lead time, the worse the cash crunch. In the name of acquiring the cash you need, it’s worth looking to negotiate with suppliers before running to a bank or alternative lender.

If you, your CFO, or your accountant determine that your growth goals are too ambitious, take the time to modify your profit goal or the steps you planned to reach it.

Ultimately, you want room to spare, including cash on hand for emergencies and unexpected opportunities.

5. Have You Set a Process to Manage and Monitor?

Budgets rapidly fall apart when there aren’t processes in place to manage and monitor them.

The upper echelon of businesses will take a month or even a quarter to complete their budget, and when they do, they have multiple department heads responsible for their respective portions. This process involves several strategy meetings, but creates accountability throughout the company.

When it’s time to review, you can compare what you’ve planned against your actual income and expenditures. Regular budget reviews allow you to spot problems early on, celebrate milestone successes, and adjust to keep goals on track.

Periodically, download your profit and loss statements from your accounting software and compare the big numbers: sales, COGS, ad spend, contractors, and so forth. There’s a tendency to focus on smaller items like subscriptions and apps, and though all of those should be canceled if you’re not using them, it’s the bigger buckets that matter most.

Be sure to take into account any unexpected events or changes in your business, industry, or the economy. If something doesn’t match up, confirm it’s not a data blunder, and evaluate why. If a change needs to be made, make a plan to follow through.

Reviews should be done monthly or, at minimum, quarterly, and the best way to make them happen is to commit time on your calendar now. If you’re a small business and don’t have the time, you’ll want to budget for a part-time accounting service.

Bonus Round: Is Your Ecommerce Budget Visible to Your Team?

Generally speaking, a successful budget involves multiple people throughout your organization. And if you have departments, every department should have a leading member involved in the budget to look out for that department’s needs.

I find that different departments have different requirements to run efficiently, and someone from that department is best equipped to share what those needs are—as well as which tools or services aren’t worth paying for any longer.

Outside of budget creation, there is also value in sharing your company’s budget with your employees. You don’t have to reveal the entire budget or payroll, but you can share the pieces relevant to their roles.

Doing so creates a sense of shared ownership, helps clarify to your team what you expect of them, and encourages them to help you make next year’s budget go further.

Visit Ecom CFO for more resources on how to effectively manage and share your ecommerce budget.