Dropshipping is a lucrative e-commerce business model that is growing at a pace 23.7% CAGR and is expected to reach market size of US$476.1 by 2026, according to Statista. The key to a successful dropshipping business is mastering the multilevel task of proper financial management.
It is therefore absolutely crucial to know your numbers so that you can grow your business and succeed in the ever-expanding dropshipping market. Here are 9 useful tips that will help you with all things financial.
The need for financial management
Poor cash flow and financial management drive more than 8 out of 10 new businesses. It is therefore imperative that you focus on managing your finances from the start.
Moreover, the essence of financial management lies in the ability to make informed decisions. These can relate to your current investments and your future plans.
Understand the different financing options
Most e-commerce and drop-shipping businesses will require you to pay for a website or platform, inventory, marketing, and shipping. You can research the following financing options to start your business:
- A business line of credit: This option includes a loan and a credit card. You can draw on a pre-approved financing amount and pay interest only on the amount you borrow.
- An e-commerce grant: You can complete e-commerce grant applications with local or international trade organizations for such options.
- Inventory Financing: You can search for lenders willing to extend credit on your inventory.
Learn accounting jargon
You need to understand these basic accounting terms to manage your money appropriately.
Balance sheet
It is an important term. You should keep a record of all your credits and debits for your business.
Account bookkeeping
This involves many tasks such as recording your expenses, preparing and sending invoices and paying employees, if necessary.
Big general book
The general ledger contains all the important information that the professional accountant may need to prepare financial statements, declare taxes or apply for a loan.
Trace and regulate cash flow
You have revenue from customers and you have expenses with vendors, e-commerce platforms, and shipping partners. The financial stability of a business depends on how you manage and plan for 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 similar perks to customers and suppliers can be an effective way to attract new businesses and build trust with them.
Choose your suppliers carefully
While pursuing a dropshipping adventure, be careful who you partner with for successful eCommerce order fulfillment. Perform credit checks on new leads and be selective about who you work with.
Skillfully set your margins
For this, you need to identify the best supplier who can provide the goods at a reasonable price, marketing and advertising costs and shipping costs that you must incur. You can set your profit margins based on these expenses to ensure your business thrives.
Use cloud-based accounting software
You can turn to technology for help if accounting gets a bit overwhelming. There are several cloud-based accounting software that can make bookkeeping easier for small and medium-sized businesses.
Keep up to date with the tax return
Different tax requirements apply depending on the legal structure of the business. Your dropshipping business is most likely a Sole Proprietorship, Limited Liability Company (Limited and Limited Liability), Limited Liability Company (LLC), or S-Corporation.
These types of businesses are “flow-through entities” for federal tax purposes and must pay income tax at 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 in the form of estimated income tax. IRS Schedule to avoid penalties and interest.
Manage your debts tactfully
Debt is an invaluable tool for starting and growing a small business, and the vast majority of small businesses will need some form of debt financing. There is, however, a thin line between having manageable obligations and debts that spiral out of control.
Create a provident fund. If you have money left over at the end of the month, add it to your savings account and make sure it still has a minimum balance.
Wrap
It’s important to have a consistent and effective financial management strategy at the heart of your dropshipping business. Tracking your e-commerce business finances shouldn’t be an afterthought. You need to be aware of the numbers and plan ahead for a booming business.
These tips will help you understand the steps for a solid strategy that includes all things finance. To properly manage the finances of your dropshipping business, remember to pay yourself a salary from profits, pay debt regularly, strategize for the future, and focus on return on investment.
Tim Robinson is Digital Marketing Manager at PACK AND SEND
