How to Prepare for Q4: Financial Planning for Ecommerce Success

The marketing and sales team are putting together what they think the outcomes are going to be based on marketing activities. The finance team is going to go in and validate that. We're going to look for things like, how are they modeling new customer acquisition, how are they modeling returning customer revenue, and is there weirdness in their models? The finance team is better at looking at models than the marketing team sometimes.

So things that I'm going to look at is, is the sales growth in Q4 in line with what's in the rest of the year? Is the growth in line with what we saw last year? And if it's a lot more, does it make sense? How are they going to have that step function growth? If it's a lot less, why? Those are the type of things that I'm going to look at.

1:08 Reading the calendar

Finally, I'm going to look at the calendar and say, have they considered the calendar? Good marketers usually do this, but have we considered the models against what the calendar allows us to execute?

So let's look at 2024 as an example for calendar planning. Q4 2024 is really interesting because Thanksgiving falls on November 28th, so it's one of the shortest holiday seasons that you're going to have in a calendar year.

Now, one of the things you have to note is, historically November and December can equate to as much as 20 to 30% of a consumer product business's sales. According to the National Retail Federation, from 2018 to 2022, on average 19% of sales came in November and December. Your percentage of sales may vary. It depends on the product. Is it a giftable product? How seasonal is it? Is there a lot of traction and pull through? It may be higher, it may be lower.

Now, another example of looking at the calendar is, 2024 is a US presidential election. There's going to be a lot of distractions. There's going to be a lot of nervousness around what the economic policies are going to do, and that may impact sales, and you have to factor that in accordingly.

So in this example, each year brings a unique macro-economic situation, where the economy's at, what unique events are going on, and how those are going to play into the sales and marketing plan.

2:15 Q5 and demand capture

One thing that businesses should consider in Q4 is the concept of Q5, or quarter five, which is known as the time between Christmas and New Year's. This timeframe presents an opportunity to redeem gift cards, exchanges, and unique sales, and when approached properly can provide a little boost at the very end of the year.

Now, one word of caution. Q4 is best used for demand capture, not demand creation. Let me go into that. If you've built up your customer base, you can monetize it through low cost marketing, like SMS, email, even postal service or direct marketing towards existing customers. Because everyone is advertising during this time, it can be expensive to do demand creation, where you're going out and finding new customers. It's best to monetize your existing customer base, not create a new one. Plan wisely.

3:04 Inventory planning

With the sales forecast in place, inventory planning comes next. The key is to get inventory right. You don't want too much, but you also don't want too little. Too much and you have cash tied up. Too little and you're losing the sales opportunities.

Use historical data plus your sales plan plus forecasting tools to get it dialed in. This process just takes time to get better and better.

Typically, holiday inventory orders are made in late spring or early summer. Part of this inventory planning is to make sure that you're going to get it produced and delivered on time, so you want to coordinate closely with your manufacturers.

3:37 Cash flow and credit

Because of this inventory need, cash flow management is critical. Holiday season requires a bigger inventory order, plus you may have additional marketing and possibly even additional staffing.

Get your lines of credit expanded or set up early, beginning of the year. Ideally this will allow you to purchase inventory without straining your cash resources. In addition to lines of credit, you could explore short term loans, factoring, or terms with your manufacturer to help you get through that season.

4:02 Pricing and discounting

Next, let's talk pricing and discounting. Q4 is the season of deals, but you want to make sure that you strike the right balance. Too high and you're losing margin. Too low and you're not going to drive those sales.

According to Digital Commerce 360, in 2023 the average discount was 27%. This was higher than they'd seen historically. Your business is unique, so you need to use a discount strategy that works for you. But remember, too much, you lose profit. Too little, you lose sales. The ideal pricing strategy is competitive, motivating to the consumer, and profitable.

4:32 Returns

Next, let's talk about returns. With higher sales come higher returns. According to Shopify, retailers could expect returns as high as 15 to 30% during the holidays. Ouch.

It's as much an operational strategy as a finance strategy, but you'll want to look at ways to reduce the amount of returns. Start by looking at your return data before the holiday season to determine why customers return it, and fix those problems. Decreasing return rate could be better product imagery, a clear return policy, better customer support. Anything you can do to decrease returns will usually increase profitability.

If you'd like help with financial planning for your ecommerce business, reach out to LedgerGurus in the link in the comments. And if you like this video, go ahead and like it. Ask me a question in the comments, share it, and subscribe to this channel for more content like this.