eCommerce businesses typically focus on increasing revenue, but reducing your overhead costs is an important factor in determining your profit. Software is an essential investment for eCommerce companies, but spending too much on software solutions will negatively impact your bottom line.
The key is to create the right software budget for your business.
But how do you know how much you should be spending on software?
In this post, we will dive into the process of determining your software budget. Read on to learn more!
The Importance of a Software Budget
Budgeting is fundamental to every business, especially an eCommerce business. You should set a budget for every major area of your business to ensure you optimize your earnings and keep your business running. Setting up and maintaining the correct budgets will keep your eCommerce business on track. While the software is very helpful for your daily operations, it still needs a budget. If you do not set or stick to a software budget, you may spend unnecessary money on software tools you aren’t using, and will not have enough resources to dedicate to other areas of your business. In the worst-case scenario, you could spend so much on software that you are no longer profitable.
Income vs Expenses
To set an accurate budget, you must calculate your income and expenses. Include sales revenue and all sources of income under your income section. For expenses, the first list of the set expenses you know you will incur. For example, consider the cost of employees, supplies, advertising, etc. Next, you must assess the difference between income and expenses. The difference represents your net income, and this will indicate how much money you have available to allocate to other budgets before losing profit, like your software budget.
Determine the Time Frame
You must decide on the time frame that your budget will cover. Many businesses eventually create annual budgets, but the time frame will depend on your experience. For startups, it is often smarter to set a short term budget, like one that covers three months or less. This way, you can adapt as you learn more about the market and your business operations.
Where You Are vs Where You Want to Be
Establish a baseline with the information of your eCommerce business as is. Consider your current software tools, your size, your spending habits, and how you use technology. Next, factor in where you want to be. How important is software to your growth and success? The eCommerce industry is very competitive and heavily relies on technology, so that is something to remember. Identifying the gap between where your eCommerce business is now and where you want to be will help you decide how to set your software budget.
Measure Your Results
Your budget will not (and should not) stay the same forever. Successful companies experience a rise in IT spend per employee, but a decrease in IT spend as a percentage of revenue. If your software budget is effective, it will help you increase your revenue. Therefore, when assessing your software budget, you should evaluate these three metrics:
- Revenue per employee
- Cost of IT per employee
- Cost of IT as a percentage of revenue
While the first two metrics should increase, the last should decrease. If this is not the case, then you are not spending your technology budget as effectively as possible.
Keeping Software Costs Down
Ultimately, your software budget should be a useful tool that helps you keep overhead down and spending in check. To keep up with competitors and please customers, you will need to invest in software solutions. However, your software spend does not have to break the bank. The software you invest in for your eCommerce business should help you run and grow your business, not take away from your profit. That’s why it is important to invest in comprehensive software solutions, like Listing Mirror.
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