It’s easy to get bogged down in all of the different data and financial reports compiled while running an eCommerce business. Though you should always stay on top of your finances and work to make sense of the information at your disposal, it’s particularly important to understand profit and loss (P&L) statements and how they can help you build sustained growth and profitability in the eCommerce space. Naturally, a financial statement won’t magically make your eCommerce store more profitable, but it will give you a lot of the tools you need to understand how to cut costs and maximize profits.
From a seller’s perspective, the world of online shipping is rife with challenges and barriers that can significantly impact profitability. The convenience of online shopping for consumers often translates to higher return rates for businesses, particularly in popular sectors like fashion or electronics. However, processing returns, investing in digital marketing, and spending on a bevy of other expenses can definitely take away from your profits, to say nothing of the substantial costs associated with shipping and fulfillment. This is why acquiring accurate P&L statements — and actually understanding what the figures mean — is vital for running a successful eCommerce business.
But if this is your first time diving into P&L for eCommerce, you probably have a lot of questions. First and foremost, what is an eCommerce profit and loss statement? What kind of information does it provide about your business? How does P&L differ between eCommerce and traditional retail stores? Finally, how can you quickly generate accurate P&L statements for your eCommerce business in seconds?
In today’s guide, we will answer all of these questions and more, so let’s get started!
A P&L or profit and loss statement is a financial tool that documents and summarizes the revenue, costs, and expenses incurred by an eCommerce business over a specified period of time. It might be thought of as a combination of standard income statements and expense statements, both of which can help you understand the incoming and outgoing flow of funds. In most cases, an eCommerce P&L statement will include all of the following information:
● Revenue - The total income from goods or services sold over a particular period of time.
● Cost of Goods Sold (COGS) - The cost to acquire, manufacture, package, and ship goods to customers.
● Gross Profit - The revenue acquired from sold goods, minus COGS.
● Operating Expenses - The costs associated with running an eCommerce business, such as marketing and administrative expenses.
● Net Profit or Loss - The final profit or loss amount after accounting for all revenues and expenses.
Typically, an eCommerce business owner will look at a P&L statement to evaluate the financial health of the business for a given year or financial quarter. It can also be extremely useful to compare P&L statements from multiple periods to see how revenue and costs have fluctuated. Without P&L statements, you would be reliant on individual reports concerning revenue and expenses, many of which may not align very well or prove very useful.
In the section below, we’ll go into greater detail about the specific ways that eCommerce P&L is unique:
eCommerce stores have unique costs and revenue streams, especially when compared to traditional brick-and-mortar businesses. Here are just a few broader categories that can affect both income and expenses on an eCommerce P&L report:
● Digital Marketing - Digital marketing is a huge part of what makes eCommerce brands visible and viable. Some of the most common practices include Pay-Per-Click (PPC) ads, social media promotion, and affiliate marketing. While all of these methods can substantially increase revenue, they also come with their own expenses that must be documented.
● Platform Fees - eCommerce stores may use third-party platforms, often as a way to reach a larger audience of buyers or even fast-track payments and other daily processes. An eCommerce P&L statement may include things like Shopify fees, payment gateway fees through Stripe or PayPal, as well as SaaS subscription fees for inventory management tools (just to name a few).
● Web Hosting & Maintenance - Unless you manage your eCommerce store entirely through a third-party platform, you’ll need to have a website, which comes with its own costs. You’ll generally need to pay for web hosting, as well as other ongoing costs associated with security and maintenance.
● Customer Acquisition & Retention - This category will often include many of the aforementioned expenses, such as digital marketing and platform fees, insofar as they are directly linked to the acquisition and retention of customers. Customer Acquisition Cost (CAC) is the cost of acquiring a new customer, which may include special offers and discounts, while Customer Lifetime Value (CLV) is the projected revenue produced by a customer over their lifetime. CLV is often directly compared to CAC so that a business can evaluate the ROI for acquiring new customers and keeping them for the long term.
● Returns, Refunds, & Chargebacks - eCommerce shops often have higher return rates than brick-and-mortar retail stores. In addition to lost revenue, eCommerce businesses must consider the cost of processing returns, refunding purchases, and managing credit card chargebacks. Understanding how these deductions are documented for bookkeeping purposes is key to calculating net profit or loss accurately.
● Shipping & Fulfillment - Many offline businesses ship products to consumers, but for eCommerce businesses, shipping is a large part of the total overhead. Shipping costs can also vary substantially based on how they are managed. An eCommerce business may need to include packaging, postage, warehouse expenses, and/or third-party logistics (3PL) fees.
● International Operations - If an eCommerce business sells products or services to consumers overseas, there will be expenses related to currency conversions, international shipping, customs, duties, and even localized marketing.
If you don’t have a dynamic understanding of your eCommerce P&L statements, you may struggle to maintain a healthy bottom line over the long term. However, traditional P&L models fall short when accounting for the unique features and intricacies of eCommerce business. Fortunately, if you’re looking for an easily digestible eCommerce P&L report that still includes all of the information you need to have complete financial clarity, ConnectBooks is the answer.
ConnectBooks provides you with a comprehensive dashboard tailored to the specific needs of an eCommerce business. You can see every penny that’s coming into your business and every penny that’s going out. Moreover, you can actually get useful insights into the relationships between your revenue and various expenses. This way, you have a more complete view of financial performance, without having to dig through a hundred different documents.
With ConnectBooks, you can get detailed analytics and reports on every facet of your finances. Here is just a preview of the insights ConnectBooks brings to the table:
● COGS and ROI for individual products
● Gross and net profits
● Number of units ordered and sold over a specified period
● Ad spend and related marketing expenses
As you can see, ConnectBooks reconciles all of your sales and expense data to make it easier than ever to run your business.
Do you want to learn more about eCommerce P&L statements? If so, reach out to the experts at ConnectBooks today!
