How brands can avoid these 4 financial pitfalls as they scale

As eCommerce brands scale from 7-figures to 8 and 9-figures, financial pitfalls are bound to arise. We asked some tenured eCommerce CFOs for their thoughts on what brands can do to avoid these common scenarios.

1. Poor inventory management 

A common obstacle brands encounter as they scale is poor inventory management. A lack of centralized visibility into items on hand can lead to stale inventory and stockouts, both resulting in missed opportunities for additional revenue.

Jeppe Lisdorf, Fractional CFO at Lisdorf International Consulting, LLC, chimed in about avoiding this:  “I've observed numerous companies, especially those experiencing rapid growth (with year-over-year rates of 200-400%), continue to purchase inventory without thoroughly analyzing its health. While a few high-performing products consistently sell well, the lower-turnover items tend to accumulate over time.

As a result, a significant portion of their inventory eventually comprises slow-moving or obsolete products, often with over 8 months of stock on hand. To avoid this, companies should implement robust inventory forecasting models, regularly review sales performance at the SKU level, and adjust purchasing strategies based on actual demand. Moreover, conducting periodic inventory health checks will allow them to identify slow-moving products early and take corrective action, such as running clearance promotions or reducing order quantities, to ensure working capital is allocated efficiently.”

‍By effectively managing inventory, brands can maintain a positive customer experience and ensure their inventory turnover remains healthy, product stockouts are reduced, and lost revenue is minimized.

2. Rationalization of overspending on marketing

Everywhere you look on social media, there’s another eCommerce influencer sharing screenshots of their marketing ad spend. While it can be compelling to spend a lot of money on marketing to get the brand name out there, it can lead to financial pitfalls if spending increases too quickly. Karsten Loose, Managing Partner at Karlon Group, had this to say about overspending on marketing:

“Another common pitfall I see is rationalizing overspending on digital marketing in the name of "seeding growth" or "building the brand." The truth is that digital marketing tends to get more difficult as a business grows, not less. So, a small, growing eCommerce company should set its marketing spend to a level that generates a healthy contribution profit, knowing that higher future spending will tend to bring diminishing returns.”

Leveraging data tools such as Saras Analytics or Daasity can ensure marketing, operations, and finance teams are on the same page with analytics from their ad accounts and their ERP.

3. Underestimating operational costs

As brands scale, a common challenge is underestimating operational costs. Some costs will see economies of scale as you grow, but others can arise that you might not have previously considered. Having an ERP like Fulfil to provide real-time visibility into company financials can help provide clarity into your operational costs as you scale.

Dave Gilbert, CEO at ProvenCFO, shared some advice about avoiding the underestimation of operational costs:

“You need to conduct regular, thorough assessments of all operational costs. This includes obvious expenses like inventory and shipping but also less visible costs such as customer service, returns processing, and technology infrastructure.

For example, on Returns management. As sales increase, so will returns. Optimize your returns process to minimize costs: Make sure your returns policy is easy to understand and clear. Restocking fees can bite you in the butt if you're not careful; make sure they are part of your analysis, and you know what happens as you scale. Also, analyzing return reasons can help you address product issues.”

See related: Best Practices in eCommerce Returns Management: Navigating the Aftermath of Holiday Shopping

4. Over-expansion

It can be tempting to start selling new products on different marketplaces, opening new retail stores, or exploring cross-border shipping to new countries. Before you do so, it’s important to ensure you don’t pursue this expansion too quickly.

Dave Gilbert, CEO at ProvenCFO, cautioned: 

“Expanding too quickly without adequate infrastructure can be harmful. Avoid diversifying too quickly into unrelated products or services. Make sure you have scalable infrastructure. Invest in technology and systems that can grow with your business; maybe opt for that more expensive ERP now. Ensure your supply chain can handle increased volume before expanding."

Here are some questions to reflect on before expanding globally: 

• How will you manage multichannel operations?
• How will you coordinate order routing across fulfillment centers?
• How will duties be paid for cross-border shipping?

‍

{{cool-component}}

‍

Moving forward

Understanding the top financial pitfalls eCommerce brands face and how to mitigate them is essential to preparing for success as an 8 & 9-figure brand. By having the appropriate infrastructure in place and proactively aligning on key decisions internally with relevant stakeholders, you can set your brand up for success at scale.