As the entrepreneur of several eCommerce businesses, I’ve learned a thing or two about the unexpected and rapid growth that can come your way. If there’s one certainty in this journey, it’s that scaling up brings new challenges. But worry not, because in this blog post, I’ll be your guide to mastering the essentials that will help you have a clear head around what’s going on with your business. I’ll break it down into four essentials for forecasting that’ll ensure your business safe and steady growth, allowing you to rest easy at night.
This blog post will cover:
- 13-week cash flow forecast
- Marketing calendar
- LTV (Lifetime Value) based forecast
- Weekly dashboard
As an eCommerce business owner, you probably know your unit economics and essential metrics well. However, how do you ensure effective cash management that keeps your business safe and steady over a long period of time? The answer lies in the 13-week cash flow forecast.
What is a 13-week cash flow forecast?
A 13-week cash flow forecast is a tool businesses can use to optimise their cash management in the short term. Similar to a regular cash flow model, it tells you how much cash you have today while charting the daily cash inflows and outflows. The key difference is the shorter time frame, providing precise insights into your immediate cash flow situation.
What does this mean for you?
Put simply, it will help you to project cash movement and avoid cash flow issues.
Now, you might wonder, where do you begin?
Building Your 13-Week Cash Flow Forecast: A Step-by-Step Guide:
- Start with a template
No need for complex formulas. Begin with a simple template that covers three key aspects:
- Initial Cash: The money in your accounts.
- Cash Inflows: All income sources, including sales and investments.
- Cash Outflows: This includes expenses like inventory, staff salaries, and your office space.
- Set your starting point:
Pick your starting date and note your bank balance on that day.
- Estimate income:
Estimate how much money you’re expecting from your customers.
- Project expenses:
Start with week one and estimate payments for twelve weeks. Include bills, payroll, and debts.
- Ending cash balance:
Update the “Ending Cash Balance” each week. It is what’s left after inflows, and outflows, giving you a glimpse of what’s available for the next week.
- Account receivables and payables:
“Accounts Receivable” represents money owed to your business, while “Accounts Payable” – money your business owes. Managing these involves recording existing and new transactions with their due dates to forecast upcoming payments and receipts.
- Keep it fresh:
Update your forecast weekly. Extend the chart by one week and delete the first week, so you always have a view for the next 13-weeks.
Another key tool that you can’t forecast without is a marketing calendar.
What is a marketing calendar?
A document that visually displays the details of upcoming marketing projects and their place in a company’s timeline. It is typically created quarterly, monthly, or weekly and updated regularly to reflect any changes.
What does this mean for you?
A well-planned, detailed marketing calendar leads to accurate revenue and inventory projections. This ensures you won’t run out of stock during important sales or events.
What do you need to know?
- Maintain a one-year plan but always keep updating it.
- Identify key dates and events like new product launches, sales, and special days.
- Take into account cultural events that happen annually like Cyber Monday or Black Friday.
- Think about which SKUs (Stock Keeping Units) they’ll impact, and their expected results.
This will help you to stock enough and ensure every marketing event meets or beats your revenue goal.
You’ve followed the steps and put your 13-week cash flow plan into action, considering the impact of future marketing events. Now, you can predict, adapt, and elevate your business’s finances. But here’s the twist: how do you determine the right amount to invest in your business’s growth without pushing it to the edge? Forecasting financials at the earlier stages of your business is hard. However, you can project that on your LTV based forecast.
What is LTV Cohort analysis?
LTV cohort analysis derived from Lifetime Value and Cohort Analysis. It looks at how people spend money over time and groups them by when they started buying.
It has three core components:
- Paid Customer Acquisition: This involves revenue generated from new customers through paid marketing channels.
- Organic Customer Acquisition: This component includes revenue generated through unpaid channels like word-of-mouth, referrals, social media, etc.
- Returning Customer Revenue: So over time you are able to forecast how many of those customers come back.
What does this mean for you?
It will allow your business to accurately predict customer value over time and make informed decisions about customer acquisition and organic growth.
Implementing LTV Cohort Analysis:
By inputting key business data into this, you can generate an insightful forecast. However, forecasting financials at the earliest stages of your business is hard. I prepared some steps that will help you to navigate these elements effectively.
- Gather data:
Begin by collecting historical data on customer transactions, including their first and later purchases. Keep track of how much they spent and how often they made purchases.
You can gather this information at Shopify in the ‘First time returning customer revenue report’.
(Analytics -> reports -> search -> look for FIRST -> ‘First time vs returning customer sales report’)
When analysing this report, prioritise revenue figures over just order counts, as these are the key aspects of understanding your customer value. Keep an eye on how revenue changes for both new and repeat customers as your total revenue increases.
- Estimate Lifetime Value with limited data
So, how can we take this historical data and use it to project out the future? Even if your data is limited due to business growth, you can utilise the Lifetimely tool to estimate the lifetime value of your customers.
While many businesses use repeat purchase percentages as a key metric, it’s more suitable when your company has reached a steady state. For growing businesses, this approach can often be misleading.
To estimate future customer value with limited historical data, study repeat purchase behaviour using cohort analysis, instead. This means understanding how customer value changes over time by looking at past orders and seeing how customer value increases beyond their first purchase.
- How to do it?
- Begin by looking at customers who initially spent 100% of their Average Order Value (AOV) on their first purchase.
- Next, analyse how their spending behaviour changes over the following months. This helps you understand if their spending increases or decreases over time.
- Based on their spending patterns in the subsequent months, project how much these customers will be worth to your business over an extended period.
- By doing this analysis, you generate charts that illustrate how the value of these customers evolves over time. This provides visual insights into their changing worth to your business.
- Finally, calculate averages to see how the value changes over time for customers who start with a 100% AOV on their first purchase.
This might not be exact, but it can give you some sense of lifetime value well before you actually see a full customer lifetime, which can help in accelerating decisions about marketing and customer acquisition.
- Refine strategies:
By analysing LTV through cohort analysis, you can project how much revenue a customer is likely to generate over their entire relationship with your company.
This empowers you to allocate resources more wisely. Use LTV based forecasts to fine-tune your marketing, sales, and retention strategies. Focus on cohorts that display higher growth in customer value and identify ways to enhance value for other groups.
Now with these forecasts at your hands, you can predict, refine, and strengthen your financial strategies, guiding decisions about acquiring customers and growing your business.
Finally, wrap it up by setting up a weekly dashboard.
What is a Weekly Dashboard?
This dashboard acts as a projection, allowing you to track your progress and measure how you’re performing against your set targets. It provides you with real-time visibility into the health of your business and helps you find your way as your business grows.
What does this mean for you?
By tracking key metrics, you will have real-time insights and assess the risks and cash flow for business growth.
What key metrics to track?
While people will usually tell you to keep an eye on different metrics and total revenue charts, the real focus should be on two core metrics: new customer revenue and returning customer revenue. These are the essentials for managing and projecting business growth.
Your weekly task is to track money from new and returning customers, and costs for attracting and retaining them. To help you do this effectively, consider using a weekly dashboard template that uses these metrics.
Now you have four forecast tools that will ensure your business safe and steady growth.