Stage 1- E-Commerce Business Fundamentals
A stage one business is like a freshman transitioning into sophomore year. You may remember this transitional period where you probably realized you were no longer unfamiliar with navigating the halls but still didn’t recognize every room. You may have avoided the senior hallway for fear of getting shoved around, or because you felt you didn’t belong there.
Similarly to that high school experience, stage one businesses feel that they are familiar with the business structures but are having a hard time navigating the processes within that structure. They may be aware of all the accounting issues present but can’t figure out who, or what questions to ask to get help, so they avoid asking for help.
We categorize Stage 1 product-based businesses as companies with $100,000 gross revenue or those in business for one year or less. We have found at Stage 1 companies struggle most with prioritization and money management. At Clearinity, our Stage 1 clientele come to us needing to know where to invest their efforts.
We help them look to our three cornerstones of business; people, processes, and technology. In these three dimensions of business, we find that the structures of each have core fundamentals that will guide each stage to success. When in balance, these three dimensions create a scalable business.
In the first dimension of Process, the stage one business is usually paying attention to similar but slightly more granular details of where a stage 0 business is focused. The legal structures to begin your business are in place but may still need legal processes completed. Also, your sourcing, selling, storing, and tracking may have some organic organizational structures appearing.
At this stage, you may have reached the point of having enough information on your inventory and assets to finally invest in business insurance. Although we strongly encourage basic general liability insurance before you even begin to sell products, we understand that sometimes this isn’t a reality. When you have reached this stage, business insurance is mandatory and will begin to ensure your business’s long-term success.
There are diverse types of insurances you can acquire for your business. They each serve a different purpose and may not apply to every person in stage one. Some of the types of insurances we should become aware of are:
Auto & Home Insurance Riders
Business Interruption Insurance
Employment Practice Liability
Errors and Omissions Insurance
Product Recall Insurance Rider
Inland Marine Insurance
Key Person Insurance
Business Overhead Expense Insurance
If you have already invested in business insurance, then maybe you now recognize the importance of a legal safety net, such as a lawyer or trademark on your business. It is essential to start implementing your legal resources before you are in trouble to maintain your business operations if a problem ever arises.
Additionally, having a legal security net will ensure you continue to become successful and scalable as they will help navigate contracts for vendors, investors, and eventually, contractors or employees.
By now, you have an established relationship with your vendor or manufacturing warehouse that provides your inventory. How is it going? Have you had trouble communicating? Do you know your vendor’s process? These are the questions you should be asking yourself. Once you have identified answers to these questions, begin to document your process for buying or sourcing your inventory.
Standard operating procedures or SOPs are documents that outline the step by step instructions that occur in routine processes. SOPs aim to provide efficiency, quality output, and have a way to measure performance. They also reduce miscommunication and provide clarity around expectations.
It is essential to start creating SOPs around your buying processes as it helps identify opportunities to improve and create a streamlined process. Focus on tasks that you know are “set,” such as putting a product on the website. You probably will not have time for full SOPs, but writing down the smaller, set tasks allows you to begin to outsource.
SELLING: Marketing your product
You have successfully chosen your marketplaces. It is time to advertise and increase sales. At stage one, you still have the flexibility to move marketplaces. Now is an excellent time to figure out who your target audience is and identify the customer clientele that you are attracting on each platform. Do they match? If not, what could you be doing differently to market to the audience you want? Maybe your customers access a different marketplace more often? If you need to make a change, now is a good time to do it.
STORE- Warehousing guide
The garage, basement, and storage shed in the backyard are beginning to grow smaller in available space. You now need to consider storage options but have no idea what those options may be. Let us introduce you to them.
Internal Warehouse- This would be a warehouse space or even a second office space that you acquire strictly for your business and your team.
External Warehouse- This is a public warehouse, open to many different businesses to store their inventory short or long term. These warehouses own their equipment and manage their operations. External warehouses store your products but do not ship.
3PLs or Third Party Logistic Companies- These are warehouses that allow you to store and ship your products from one location. They typically have a large warehouse team servicing your business, as well as several others. They allow you to manage your inventory with the help of a team you might not have been able to afford and brand your shipping. There are several things to consider when operating with a 3PL company: do they accept returns and what is their shipping turn around time.
Amazon FBA- This is a service amazon offers to pick, pack, and ship your products out. However, your products ship with Amazon’s branding. They require higher service fees and often lack communication. On the other hand, Amazon FBA allows quick shipping times and includes a return policy and process, whereas a 3PL might not.
TRACKING- Accounting terms for the Stage 1 Business
Are you tracking your purchase orders and the cost of goods sold? Do you know why it’s important to be tracking these? In stage one, you should become familiar with accounting terms and reports. Some accounting terms we find important to define are :
Cost of Goods Sold
Profit & Loss Statement
Cash Flow Statement
Gross & Net Profit
Purchase Orders and Cost of Goods Sold are not typically a stage 1 concern, but again, this makes scaling your business effortless in the long run. A purchase order is a legal binding document that is typically offered by the buyer to the seller. It states the type, quantity, and prices of the product purchased. These are important to your business’ health as they offer the opportunity to evaluate the cost of goods and fees from your vendor, ultimately allowing you to make informed decisions.
Cost of goods sold consists of the direct expenses of producing a product and may include the cost of acquiring your product materials, labor, and manufacturing overhead costs. These are important to acknowledge and track in your accounting process as it offers insight into how you should appropriately price your products to ensure you are making a profit. It also allows you to write some things off for taxes as a business expense.
At a minimum, you will need to ask your vendors to give you an actual itemized invoice so you can parse the data later on.
In a Stage 1 business, you are most likely the sole controller of sourcing, marketing, operations, and accounting. There is a transition period in stage one that starts to require a small team. Let’s discuss what departments need staff now. Should you hire contractors or employees?
Focus your attention on expanding your marketing and accounting departments. Marketing and accounting will begin to require more time and guided effort. Most likely, your sourcing process and maintaining the relationship with your warehouse will still be your responsibility for quite some time.
Deciding between contractors or employees is your choice. When it comes to taxes, contractors will be the easiest to navigate as they handle paying taxes on their wages. On the other hand, hiring contractors means you must be ok with having them set the hours. Employees offer a bit more control from a business owner standpoint but often require more leadership and a more intensive payroll system.
Technology is all around us, but we don’t always need it. Stage 1 businesses are advertised to and enticed to jump on technology platforms to help with accounting, marketing, and inventory processes. Sometimes, the reality at this stage is; those technologies just won’t do any good without the proper knowledge on how to implement them.
At this stage of business, you are most likely calling your vendors or emailing for products when you need them. Your marketing efforts may have grown from word of mouth to social media, but you are still managing the Facebook page, or Instagram account yourself whenever you have time. Your warehouse probably doesn’t need to integrate an inventory management system quite yet. Additionally, your outsourced storage may be handling the technology systems for you. So that leaves accounting.
Accounting at this stage still may be in your head, in a notebook, or based solely on your bank account numbers. Getting accounting moved to spreadsheets helps when you are at a stage that could accommodate an online accounting system.