E-commerce business has undergone significant changes in recent years. Consumers expect to be able to easily purchase products and services online, and especially due to the pandemic, even traditional B2B companies had to rethink how to conduct sales in digital channels.
At the peak of the boom, many e-commerce businesses experienced rapid growth due to the surge in demand caused by the pandemic and external financing. However, as the cost of money has risen, the equation has become more challenging, at least if cash flow hasn’t been given attention. For example, the valuation of the rapidly growing and internationalized Swedish e-commerce star Babyshop was 2100 million SEK in 2021, but a year later, the company was in reconstruction. Similarly, significant changes in demand have caused significant cost-saving needs in domestically rapidly growing e-commerce companies.
The metrics of e-commerce business can be simplified into two parts: sales and financial metrics (for simplicity, we’ll skip factors like product management, supply chains, etc.).
- Sales metrics in e-commerce can be numerous, but often the 4K rule is used: visitors, conversion, average order value, and margin (with sub-metrics). By tracking these, a general overview of the sales funnel can be formed.
- Typical financial metrics include inventory value, working capital tied up in operations (e.g., by product category), turnover rates, and reasonable margin and cost tracking structures from the income statement.
However, a well-led company talks about common business metrics: the growth engine works when the entire organization understands the current state and goals of the business. This is the essence of financial management culture at its best.
As we wrote earlier, understanding cash flow is one of the most important things for an e-commerce entrepreneur because it combines information about revenue streams, expenses, financing, and investments, along with people and actions, enabling business operations.
From a cash flow perspective, it’s essential to understand, for example, how to speed up inventory turnover (visitors, conversion) with the best possible margin (customer acquisition cost in different channels, sales margin by product/category) so that capital is released from inventory for growth (working capital, investments). Growth rockets may have focused solely on revenue growth, leading to a structural profitability problem in the organization, capital tied up in inventory, and increased financing costs eating up the remaining cash flow.
Managing e-commerce business is a multi-optimization problem, where transparent monitoring aims to support better holistic understanding and decision-making at all levels of the organization. Single metric optimization, on the other hand, can be dangerous. For example, sales conversion can be both too low and too high. Too high sales conversion could mean, for example, that we’re not advertising enough – which is rarely the CFO’s first recommendation, but it could improve cash flow. If an ecommerce manager’s only goal is to increase revenue without understanding cash flow and capital turnover, the company may collapse due to growth.
Although the e-commerce entrepreneur’s business environment is constantly changing, the laws of business and finance have not changed. A good, transparent, and forward-looking culture that focuses on understanding customers and the business constantly creates the conditions for growth.
Authors:
Sampo Hämäläinen is an investor and board member at Finaly. He has also founded Columbia Road, a consultancy specializing in e-commerce with 150 employees, and Vuono Group, specializing in digital efficiency and automation.
Sampsa Rönkkönen is a CFO and founding partner at Finaly. He has served as CFO in numerous companies and has been instrumental in building financial management culture in e-commerce business as well.
