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Six finance function risks as you scale your ecommerce business

05 May 2021

Success for an ecommerce business means rapid sales growth, often on an international basis. With that success comes new challenges, particularly for your finance function and systems.

Businesses that scale fast need better access to management and financial information to react quickly to ever changing market conditions. This heightens the strategic value of the finance function and its ability to provide forward looking insight and analysis on a real-time basis.  

If finance leaders are to provide that insight, they need access to all relevant data from the range of systems and technology tools at their fingertips. However, ecommerce businesses in particular face challenges in linking and integrating multiple platforms to ensure there is a ‘single source of the truth’.

We have identified six key risks that ecommerce businesses face as they scale that will threaten their finance function’s ability to add strategic value.

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1. Poor integration of finance technology and other business systems

The primary focus for many ecommerce businesses will initially be on building a website and achieving successful integration with online marketplaces such as Magento or Shopify, as well as payment gateways. Management is understandably concentrating on the ability of the business to attract sales, fulfil orders and initiate the taking of payments. However, integration with finance and accounting technology systems is often overlooked. As a result, finance functions often have to access and upload the data they need manually. This is particularly challenging given the multiple sources of data – from multiple online marketplaces and payment gateways.

This is a particular concern when the business enters a period of fast growth, generating high volumes of transactions. A lack of integrated systems increases the risk of error in the finance information produced, and the potential for compliance breaches when preparing financial statements and submitting tax returns. Performing reconciliations between sales and bank receipts can be time-consuming. The finance function can also struggle to provide the KPIs and insights that management really needs including accurate gross profit margin, Stock Keeping Unit (SKU) profitability and return on advertising spend.

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2.Currency risks arising from cross-border trade

Many ecommerce businesses have exposure to international trade and activity from an early stage. That might involve taking payments from customers in multiple currencies or buying goods and services from foreign suppliers. However, ecommerce businesses often fail to think about how they are exposed to fluctuating exchange rates.

Failing to consider the best way to collect, convert and manage money globally can be a significant risk to ecommerce businesses down the line. Operating multi-currency bank accounts can avoid the need to always convert foreign currency receipts into sterling or relevant local currency. Foreign currency accounts can then be used to pay invoices received from overseas suppliers. Establishing a more sophisticated approach to currency management in such ways can reduce risk and preserve margins.     

3. Unmanaged exposure to unforeseen VAT and customs duty liabilities

As an ecommerce business scales rapidly, keeping track of all compliance issues can be difficult – particularly relating to VAT and customs duty. Recording VAT accurately needs appropriate systems and can present a challenge, even for businesses only operating in domestic markets. The international sales generated by many ecommerce businesses only adds to that complexity.

An ecommerce business may need to register for VAT in multiple countries, depending on the level and value of sales. If the business does need to account for VAT on sales and supplies made in multiple countries, it will require systems that automatically both collect and record VAT at the right percentage for the right jurisdiction. As well as preparing accurate VAT returns, potentially for multiple jurisdictions, the business needs to keep track of its liabilities to ensure it has sufficient cash to meet them when they fall due. You can read our latest insight on the impact of EU ecommerce VAT rules on UK retailers here.

The business will also need to carefully consider its import liabilities in the destination country; if the business is not established there (be it in the EU or elsewhere), the business will typically need a customs representative established in that country who is willing to be jointly and severally liable for the customs debt. For further information on VAT and Customs considerations, view our on-demand webinar series here.

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4. Poor visibility of inventory and integration with point of sales systems (POS)

Managing stock levels is a risk factor for ecommerce businesses, particularly when enjoying rapid growth in sales. Stock may be held in multiple locations and many ecommerce businesses work out of a third-party warehouse, relying on that party to handle the pick, pack and dispatch side of order fulfilment. This can leave the management team with limited visibility of stock levels and the optimal timing of stock purchases.

Achieving reliable stock valuations can also be difficult on a timely basis. ecommerce businesses in that scenario could benefit from introducing an ecommerce inventory management system to keep track of the location of all products and issue an alert when stock levels are low. Such a system also provides deep visibility into multiple warehouses, making it easier to manage sites no matter how far away from HQ they may be.

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5. Weak debtor management

Many ecommerce businesses develop a wholesale operation alongside direct online sales. This can deliver valuable additional revenue, but also creates new demands of the finance function in terms of debtor management. Strong cash flow from online sales can mask the problem of unpaid debts from wholesale buyers. Tracking debtor balances and chasing up overdue debts is a vital part of sound business and financial management. 

6. Failing to ’horizon scan’ and see the bigger picture

Many of these risks can be minimal when a business is small or only growing at a relatively slow rate. But the rapid scaling experienced by many ecommerce businesses makes them far more important. Management needs to look ahead, see the bigger picture and ideally prepare their systems in advance of rapid expansion. Finance systems that may be able to cope now could easily be overwhelmed in a fast growth phase.

Ensuring that finance systems are integrated, automated and fit for purpose gives the business a strong foundation. This is the best way for management to have access to reliable, up-to-date cash flow and financial information to plan next steps.  

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But what does good look like in terms of a robust, scalable and proactive ecommerce finance function?

If you're looking to maximise productivity from your finance function, visit our 'Rethinking finance function of the future' hub to access curated insights and case studies.

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