Drop shipping is a lucrative ecommerce business model which is growing at a CAGR of 23.7% and is expected to reach the market size of US $476.1 by the year 2026, according to Statista. The key to a successful drop shipping business is mastering the multi-layered task of managing the finances appropriately.
This makes it absolutely crucial to know your numbers so that you can grow the business and succeed in the ever-expanding drop shipping market. Here are 9 useful tips that will assist you with all things finance related.
The Need for Finance Management
Poor cash flow and financial management cause the failure of more than 8 out of 10 new businesses. So it’s imperative for you to focus on handling your finances from the get-go.
Moreover, the essence of finance management lies in being able to make informed decisions. These can be regarding your current investments and future plans
Understand Different Financing Options
Most ventures in ecommerce and drop shipping will require you to pay for a website or a platform, the inventory, marketing and shipping. You can seek out the following financing options for jumpstarting your business:
- A business line of credit: This option has an integration of a loan and a credit card. You can draw on a pre-approved amount of financing and pay interest only on the amount you borrow.
- An ecommerce grant: You can fill out applications for an ecommerce grant with local or international commerce organizations for such options.
- Inventory financing: You can look for lenders willing to give you credit against your inventory.
Learn the Accounting Jargon
You must have an understanding of these basic business accounting terms to manage your money appropriately.
Balance Sheet
This is an important term. You have to maintain a record of all your credits and debits for your company.
Bookkeeping
It involves numerous tasks like noting your expenses, making and sending invoices, and paying employees, if any.
General Ledger
The general ledger has all the important information that the professional accountant may require to make financial statements, file taxes, or apply for a loan.
Trace and Regulate the Cash Flow
You have income from customers and you have expenditures with suppliers, ecommerce platforms and shipping partners. Being financially stable as a business depends on how you handle and plan for the negative cash flow.
Etch Out Clear Payment Terms
You can monitor your cash flow by choosing the appropriate payment terms. The idea of extending credit, free shipping and other such perks to customers and suppliers may be an effective way to attract new business and build a trusting rapport with them.
Choose Your Vendors Carefully
While pursuing a drop shipping adventure, be careful who you collaborate with for successful ecommerce order fulfillment. Conduct credit checks of the new prospects and be selective about who you work with.
Set Your Margins Deftly
For this, you need to identify the best supplier who can provide the goods at a reasonable price, the cost of marketing and advertising, and the shipping charges that you have to incur. You can set your profit margins based on these expenses to keep your business affluent.
Use Cloud-Based Accounting Software
You can turn to technology for assistance if the accounting gets a little overwhelming. There are several cloud-based accounting software that can make bookkeeping easy for small to midsize companies.
Keep Up with Tax Filing
Different tax requirements apply, depending on the legal structure of the company. Your drop shipping company is most likely a Sole Proprietorship, Limited Liability Partnership (Limited and Limited Liability), Limited Liability Corporation (LLC), or S-Corporation.
These types of businesses are “pass-through entities” for federal tax purposes and need to pay an income tax for the owner’s personal income tax rate. If you expect to owe more than $1,000 in income tax in a given year, you should pay it as estimated taxes on the IRS’s schedule to avoid penalties and interest.
Manage Your Debts Tactfully
Debt is an invaluable tool for beginning and growing a small business, and the great majority of small enterprises will require some form of debt financing. There is, however, a thin line between having manageable obligations and debts that are spiraling out of control.
Create a contingency fund. If you have money left over at the end of the month, add it to your savings account and make sure it always has a minimum balance.
Wrapping Up
It is important to have a congruent and effective financial management strategy at the heart of your drop shipping business. Keeping up with the finances of your ecommerce business should not be an afterthought. You have to be aware of the numbers and plan ahead for a soaring business.
These tips will help you understand the steps you need to take for a sound strategy that includes all things finance-related. To appropriately manage your drop shipping business finances remember to pay yourself a salary from the earnings, pay the debt regularly and strategize for the future and concentrate on the return on investments.
Tim Robinson is Digital Marketing Manager at PACK & SEND