Key Metrics and Reports for all eCommerce Businesses
By Tracey Newman, Director at Bean Ninjas
If you are not regularly reviewing your eCommerce business key financial reports and metrics, you could be setting your business up for problems down the road. These financial reports can provide you with insights about your business’ profitability, and how it compares to other companies in your industry. Understanding and interpreting these critical statements and metrics allow you to make informed decisions about your business to achieve your goals.
In this post, we’re covering the top metrics and reports that all eCommerce businesses should evaluate on a regular basis.
The top metrics that all eCommerce businesses should know
These key metrics are all readily available in your eCommerce cloud accounting software and can help you evaluate the financial health of your eCommerce business, so you can assess and make decisions to keep your company profitable.1. Revenue
One key metric to know is your company’s revenue on a daily, weekly, and monthly basis. This information is readily available from your shopping cart such as Shopify, if you have one main sales channel, or an aggregator such as ShipStation if you use several shopping carts. Revenue is your business gross sales before subtracting any expenses.
Revenue is helpful to determine the financial strength of your company. It can highlight how well a business is at generating sales. However, it doesn’t take other aspects into account, such as operating efficiency.
2. Cost of goods sold (COGS)
The cost of goods sold (COGS) shows the direct costs associated with producing your goods, such as labor to make the goods and the cost of materials. However, it doesn’t include indirect (fixed) expenses like your sales and marketing team’s salaries or distribution costs.
Direct costs are variable costs - so the more your business sells, the more expense you incur. Examples of cost of sales in eCommerce businesses are cost of materials, inbound freight, merchant fees, and pay per click advertising.
3. Gross margin
Gross margin represents your business net sales revenue less cost of goods sold. The gross margin shows the sales revenue you retain after accounting for the direct costs associated with producing the goods you sell. Direct costs are variable costs - so the more your business sells, the more expense you incur. Examples of cost of sales in eCommerce businesses are cost of materials, inbound freight, merchant fees, and pay per click advertising.
The higher your gross margin, the more margin your business earns on each dollar of sales. Your gross margin can help you assess your production costs compared to your revenue and measure your efficiency. For instance, if your gross margin is low, you may explore the possibility of reducing supply or labor costs or whether you need to increase your price.
Gross margin also allows your business to do break even analysis and What If scenarios to work out target sales levels to achieve a targeted net profit figure.
4. Fixed Expenses
Fixed expenses are all other expenses for the business that are fixed in nature - i.e. these expenses stay the same no matter what the level of revenue achieved. Examples of fixed expenses are rent, office supplies, and administrative salaries.
5. Net Profit
Your profit is gross revenue less cost of goods sold and fixed expenses. It is important to evaluate your business net profit in the context of opportunity cost. This means, if you could put your time and energy into working in a paid job, or another business, would it be possible to earn a higher return performing those tasks?
6. Cash flow
A company’s cash flow represents the movement of money (cash and monetary asset equivalents) in and out of the business. Cash flow can be further categorized into cash flow from investing, financing, and operations. The money received by the business represents the inflows, and the money spent or withdrawn represents the outflows.
Ideally, the business will require a positive cash flow. This means the liquid assets are increasing and that the business will have some flexibility or buffer against any financial challenges. Additionally, understanding your cash flow can help you assess the amount and timing of how money enters and leaves your business.
Key Reports that all eCommerce businesses should look at
Several key financial statements help companies, creditors, and investors evaluate how financially sound a business is and the growth potential. Here are some critical reports that all eCommerce companies should review regularly.Profit and loss (P&L) statement
The profit and loss (P&L) statement summarizes the amount of money your business has earned or lost within a set period. It is also known as an income statement or statement of operations.
The P&L statement helps you summarize monthly, quarterly, or annual operations. You can assess your company’s risk and see where your money is going. This statement helps you evaluate the profitability of your business. You can use this statement to monitor areas where you’re generating revenue and also assess your expenses relative to prior periods or as a percentage of sales.
Balance sheet
A balance sheet shows a snapshot of how effectively a business is using its resources. The balance sheet presents assets, liabilities and shareholder equity as at a particular point in time.
You can use the balance sheet to evaluate to understand the liquidity and health of the business. You’ll also be able to examine how assets are financed and where the profits have been used to either invest in the business (we call this retained earnings) or withdrawn by the owners via drawings or dividends.
Cash flow statement
A cash flow statement is a record of all cash transactions, both inflows and outflows, during a set period. This report helps you assess whether all your revenue has been collected and enables you to see where the cash goes. This critical report helps a company understand the movement of cash in the business over a set date period.
Late payments from customers impact this statement since the inflow of cash will be less during that time. It also may not show all expenses if those expenses are not paid immediately or during the specified period.
Inventory forecast
When you sell goods and products, you need a clear understanding of your inventory, especially if your industry experiences changes in supply chains and customer demand. Inventory forecasting can help you assess whether you have enough product, so you don’t buy too much or not spend enough on inventory for your future needs. It’s not, however, simply deciding when you should reorder.
Inventory forecasting may involve:
- Using data and formulaic methods to assess trends for your goods over time
- Graphical, mathematical data to look for patterns in the sales cycle
- Customer input like market research or focus groups when data isn’t available
- Using past data for a quantitative forecasting approach to create models to predict future trends
Regardless of the method used, inventory forecasting can help you more accurately prepare for your customer’s needs while potentially saving you money on storing goods.
Metrics and financial reports help you better understand your business’s flow, overall health and can help you make fiscally sound decisions for your company’s future. Following these metrics and reports regularly will also help you create a complete financial plan and make solid decisions to ensure you achieve your business goals.