To Solve the conflicts between marketing and finance, it’s not working by only relying on the software that consists of the data. Even though the data consists of both sides. You must still hear many whys on a daily basis. The key challenge is they have their own position to perform. One is for growth, and the other is for cash flow. Originally both parties should work very closely in practice, however, this is the reality we are facing every day.
In this article, I would talk about eCommerce news & myth about why both parties are not happy with each other. By the end of this article, you can learn my points of view about what they are considering differently, and the approach to work better together.
- What Indicators Should be Considered in an eCommerce Business Plan
- Marketer Consideration – Growth and Asset
- Finance Consideration – Cash Flow and Valuation
- How Both Functions Can Collaborate Better
Marketing vs Finance – What Indicators Should Be Considered in an eCommerce Business Plan
As a marketer, standing from a company point of view is the first thing first. It’s for the purpose to prepare a business plan and forecast a convincing sales number and operating cost. Please don’t get me wrong. This is not only for the startup corps, but also it’s better to better understand other division partners in an MNC corp. And this business plan basically can in a way correlate to the financial income statement, cash flow statement, and balance sheet statement.
The term is short for the earnings before interests, taxes, depreciation and amortization. The formula should be like this.
EBITDA = Sales or GMV - Operation Costs (asset investment, product inventory, advertising, payment, etc)
Or you can use net income plus the rest of taxes, interest, etc
EBITDA = Net income or net profit + Interests + Taxes + Depreciation + Amortization
In the eCommerce section, GMV can represent the sales. That is the number before deducting the asset investment cost, operation, commission, advertising costs, etc. EBITDA represents the earnings after deducting those costs from a marketing and operation perspective.
Also, operation costs can include advertising costs, inventory refurbishment, partner commission, website development, new product launch, PR, wages, etc. Some of them belong to variable costs. For more details, please check out the other article – 7 variable costs in the eCommerce.
We always mention the product profit margin in eCommerce marketing. It is the signal of a transaction that is profitable or not. However, that profit margin percentage normally excludes plentiful parts of operation costs, and interests, taxes, and depreciation.
Net income deducts the interests, taxes, depreciation. Basically, the formula is:
EBITDA - Depreciation - Interest - Taxes
This number is directly correlated to the cash flow number. It’s pretty important that cash inflow is greater than cash outflow in the end. Otherwise, the business is not profitable.
Funding and Investment
Funding is inevitable in operating a business. In particular, you aim to expand the business to a bigger scale or enter more markets. When talking about funding, it must be correlated to financial assets and financial liabilities.
Net financial position or NFP indicates the overall company’s financial position. For example, we got funding from a private equity investment company. So the business liquidity and the current financial debts within a certain amount of period are important to understand clearly. In a way, the bigger the net financial position is, the less cash flow result in it would be. That’s not good.
Also, CAPEX or capture expenditure matters to the digital marketers or growth hackers. It’s because CapEx is funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, technology, or equipment. As a marketer, we have many ideas to invest in new technology. For example, it can be the CDP platform. Being said that, it deducts the cash flow from the financial perspective. How marketers can prove the cash inflow would be larger than outflow in the coming 5 years. It’s the thing.
In eCommerce marketing, either crowdfunding projects or BAU campaign activities, cash inflow and cash outflow are critical to us. It tells us what’s the minimum amount of sales goal we have to achieve.
Marketing vs Finance – Marketing Consideration – Growth and Asset
Marketers basically are caring about growth and branding. In a way, branding is serving growth. It’s because branding is diluting the importance of pricing and creating the loyalty between the product and customer purchase decision. And branding is a kind of intangible asset. Coca-Cola never feared losing all its factories. It’s because Coca-Cola is already a black and sweet beverage with the caffeine icon for consumers.
Sales performance must be the first primary consideration
First thing first, the KPI of the annual goal is 1 million USD. This is the starting point we formulate the strategies of channels, data, and content. It’s aiming to achieve 1 million USD. Where are the low funnels, top funnels? What are the viral content and most engaging content to educate customers to purchase? What is the budget allocation?
To be honest, initiating the new channels and new digital approaches must have a risk premium, although finance teams might not be happy if the prediction and risk management proposal is not scientific and calculated in place. In fact, these sections need both parties’ effort.
Operation cost strategy and optimization are the key routines to marketers
The operational optimization strategy is usually aiming to achieve the best ROI by buying from low or deducting inefficient investment. For example, Google would sunset a broad match in search engine marketing or SEM. For SEM marketers, it must become a key routine to adjust the strategy. It’s because match type is a way to optimize and achieve the best spending efficient frontier, or best ROI. It looks like a very tiny and minor example, but in fact, this mindset and marketing sense can roll out to any piece of operation and marketing scope of work.
Last but not least, the intangible asset investment is to deploy for future growth scalably.
PR, influencer marketing, brand and content marketing, digital tech software investment are basically the inevitable elements in every marketer’s marketing plan. Unfortunately, this kind of investment has two cons.
First, they are not direct performance marketing. It means it doesn’t make sense to rely on the intangible asset investment to increase eCommerce store transactions. At most, they can assist the transaction happening. Then, from the finance perspective, it decreases the cash inflow, which means it’s impacting the cash flow and creating instability.
Being said that, they are critical for marketing communication and eCommerce success. It’s because this investment can present the business in a better position than other sellers, and dilute the pricing sensitivity. Also, it can provide more communication materials to partners, and engage with buyers. It does help increase organic margin contribution in the long term.
Marketing vs Finance – Finance’s Consideration – Cash Flow and Valuation
To the eCommerce finance officer, cash inflow larger than outflow must be one of the keys focuses in the work agenda. Products are the blood of any eCommerce business. Continuously stock replenishment and new product launch require a company with a healthy cash flow status. And if you are doing cross-border eCommerce, the platform payout schedule, country taxes, and duties, payment is also the other element to affect cash flow.
Funding, Cash Inflow schedule, and Investment
Finance is handling and determining how to spend money efficiently and smartly. For example, now the business decides to launch a product. It’s because it’s critical to keep launching new products and find more winning products in eCommerce. For the finance officer, they need to clearly calculate how much to invest and when the investment can return and when can start earning profit. Also, they are considering whether the business needs to invest by themselves 100%. For a more visualized case, please refer to my other article about crowdfunding.
eCommerce sellers might not be able to receive the buyer payment immediately. I think B2C might be better. If the business is also running a B2B model, payout schedule nerves finance a lot. It’s because payout on time or not is directly affecting the cash inflow. Once the cash inflow is affected, it might affect the next bills.
Thanks to Covid 19 pandemic, eCommerce is in the spotlight of the private equity investment sector. As a Finance officer, enterprise value is a key indicator to understand the current position of a business and formulate the funding strategy. The strategy is to increase the risk safety and decrease the loss of risk with the risk premium.
In the enterprise value, discounted cash flow and terminal value are two key elements. So that’s why the finance officer’s always challenging marketing strategy is impacting the cash flow. Also, the growth rate is too low. The reason is these elements are important to investors.
Spending and Optimization
Inventory purchase is a frequent term you might hear in the team. Either you sell locally or sell globally, inventory purchase is scientific work that requires well-organized. It’s because you are not willing to see stocking redundancy or stocking insufficiency. What’s more, these two elements are affecting the cash inflow when cash outflow is increasing. This is a dangerous situation for eCommerce sellers.
Also, if you are selling globally, taxes and duties matter as well. Net income is determined by taxes and duties. Working with merchandisers to optimize the taxes and duties cost is indispensable in any eCommerce business. It ensures the business entities and fulfillment are the best efficient frontier in operation.
Marketing vs Finance – How Both Functions Can Collaborate Better
Conflicts and arguments come from misunderstanding primarily. From my point of view, marketing and finance officers should work together closely, if we like to see the business operation in a healthy format. Below are two points for both functional divisions.
To Marketers – Thinking from a Business and Operation Perspective
Spending money to enhance the communication with the target customers is absolutely right. How to invest and spend money is also a scientific subject in marketing and eCommerce.
Meanwhile, you need to admit that marketing is one part of a business, and financial health is the key indicator to keep a business growing. So, as a qualified marketer, the first thing first is to strategize how to increase sales and lower your side operation cost. The indicator can be ROI or profit margin or ACoS. In the end, it aims to increase the EBITDA, or the formula is GMV – operation cost.
Secondly, you start practicing an investment expected holding period mindset and prepare a business plan for proposing the needed marketing budget. This can digitalize how much the investment is and when is the terminal value of this investment. In the end, it can elaborate to the finance officer when the cash inflow can be greater than the cash outflow of content, influencer, software, PR investment.
To Finance Officers – Must Understand the Power of Branding and How to Measure
Finance officers would be happy to see if the marketing team can drive sales growth month by month, year by year. Meanwhile, it’s perfect to see the spending from the operation is not increasing with the same percentage of growth. To them, it implies that the profit margin is increasing.
Unfortunately, market competitions are not distilled and the market competition environment is changing. To keep the cutting edge of a business, the investment to dilute pricing sensitivity and increase work efficiency is critical.
Branding is a powerful way to bundle customers with your business in a loyal format. What’s more, it’s a way to attract more partners and also investors along the way. If the challenge is how to predict the outcome in a numbered format. Finance officers can propose a prediction template to require marketers to fill in. These template numbers can support the investment rationale and outcome in the coming period.
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