Transitioning from a brick-and-mortar to an eCommerce business opens up a slew of new opportunities for growth and revenue.
Along with that comes a list of expenses that you must account for from day one.
Whatever is said and done, every business is in it for the money! To be a successful business owner, you must understand your company's finances.
More importantly, you must keep track of your financials. P & L Analysis statement is a report card for your online business.
The profit and loss statement shows you how much revenue you have left after deducting all of your expenses.
At its core, the P&L, or Profit & Loss statement, is a report card for your online business.
The profit and loss statement shows you how much revenue you have left after deducting all expenses related to the sale of your products.
No, a profit and loss statement is not the same as a balance sheet. A balance sheet lists your eCommerce company's debts and assets.
On the other hand, a profit and loss statement shows your company's revenue and expenses over a specific period, such as monthly, quarterly, or even yearly, in some cases.
In other words, it outlines how well your company has performed and what problem areas you should be concerned about.
(Profit and Loss) P&L Analysis
How do you examine a P&L analysis statement?
Many people are intimidated by numbers, but with a few quick tips and tricks on where to look and why you'll feel confident and analyse statements like a pro in no time.
The following are some of the simpler items to examine in your P&L analysis statement:
One of the starting P&L analyses states this may seem obvious, but you should start by reviewing your sales because increasing sales is generally the most effective way to improve profitability.
If you notice a particularly good month, try to remember why so you can replicate it in the future.
- Revenue or Sales Sources
Another aspect of sales that you should consider is your income sources. Consider whether all of your sources of income make sense and are profitable for your company.
Are any of them excessively time-consuming with low-profit margins?
- The season
Seasonality refers to how things change depending on the season. This is visible in many aspects of a business, including but not limited to sales and expenses.
- Price of Goods Sold
Next, go over your cost of goods sold. Because these expenses are directly related to your product, it makes sense for the cost of goods sold to rise as revenue rises. The inverse makes no sense and should raise a red flag.
Furthermore, when reviewing the cost of goods sold, you can ask yourself, "Is there any way I can reduce these expenses?"
Finding ways to reduce your cost of goods sold will boost your bottom line and profit margin.
Net income is your profit, and it is one of the most important aspects of your business if you want it to succeed and last.
In most cases, you want to see a positive profit (also known as "in the black").
Some exceptions include when the company made a strategic investment during one period to reduce costs or increase sales in a later period.
- Profit as a Percentage of Sales (also known a profit margin)
Net income is your bottom line, but it's important to perform a quick calculation to determine your net income percentage so that you can establish a baseline and compare "apples to apples" across periods and companies in your industry.
Divide net income by net revenue and multiply the result by 100.4% to get net income as a percentage of sales.
Once you've calculated your net income as a percentage of sales for each period, you can use that data to determine whether your profit margins are increasing (usually a good thing), decreasing (usually a bad thing), or remaining constant.
Furthermore, once you've determined your profit margin, you can use this information to compare your profit margin to that of other companies in your industry.
To compare your profit margin to others in your industry, conduct a Google search for that data, or review a profit and loss statement (and perform the calculation discussed above) for a public company in your industry because their financial statements are publicly available.
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FAQs Related to Assess profit & loss in E-Commerce business
1. What income and expenses should you factor into your store's profit and loss statement?
Now consider the incomes and expenses that must be considered to arrive at either profits or losses.
You must account for the following items under income:
- Online sales of your products or services
- Additional funds, such as interest earned on bank savings
When it comes to costs, consider the following:
Price of goods sold:
These are the direct costs associated with the sale of your online products/services, such as shipping costs.
Any discounts you provide to your customers.
Rent and utilities, for example, are expenses that remain constant even as your sales increase.
These expenses, such as delivery fees or advertising costs, are bound to fluctuate based on your sales.
2. How do you calculate your eCommerce company's profit and loss?
When you're in the eCommerce business, it's critical to keep your company's pulse in check, which you can do by reviewing your monthly profits and losses.
Let's get started calculating your online business's profits and losses.
To begin, add up all of the revenue or income earned in a month and the expenses incurred in that month.
Then calculate the difference between the two.
Profits are defined as Revenue minus Expenses.
On the contrary, when your expenses exceed your revenue, it means that your business is operating at a loss. To get your business back on track, you'll need timely strategies to help you increase sales revenue.
3. What exactly is a metric?
Any quantifiable, consistently defined measurement of website performance is referred to as a metric.
Relevant eCommerce metrics include eCommerce conversion rate, average order value (AV0), cart abandonment rate, and traffic sources.
For a good reason, the list of eCommerce metrics is lengthy.
Google Analytics, social media, your online store, product pages, homepages, checkout, and shopping carts are all rich data sources that capture quantifiable data, ready for your interpretation and trend measurement over time.
4. What exactly is a KPI?
The acronym KPI stands for a key performance indicator.
While all metrics have value, a KPI is especially important to monitor because these are the numbers you use to track growth.
While site visits may be necessary, your key performance indicator (KPI) could be the orders themselves.
A handful of critically important numbers are typically used to evaluate you.
These are your key performance indicators.
5. What are some important metrics for running a successful online store?
- Rate of email click-through.
- Acquisition expense (CPA).
- Organic traffic for acquisition.
- Participation on social media.
- Conversion rates from micro to macro.
- Order value on average (AOV).
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