So, you’re running a successful ecommerce business and you follow a number of operational key metrics – conversion rates, average order value, customer lifetime value, cart abandonment, and top product sold by unit.

Well, to help you better understand the financial side of your business, I wanted to briefly touch on a couple of key financial metrics you should also be following.

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The team at businessDEPOT has a wealth of experience and working knowledge around analysing financial metrics for ecommerce businesses.  If you’d like us to have a look at your numbers and help you through your business journey, you can get in touch with us at oneplace@businessdepot.com.au or give us a buzz on 1300BDEPOT.

 

 

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financial metrics

So, you’re running a successful ecommerce business and you follow a number of operational key metrics – conversion rates, average order value, customer lifetime value, cart abandonment, top product sold by unit.

Well, today we are briefly touching on a couple of key financial metrics you should also be following.

 

gross profit

First up is a simple one, gross profit. Now, fundamentally, this is a simple equation:

Gross profit = revenue – cost of goods sold – other direct costs

Where this can get tricky is ensuring that your cost of goods sold figure is accurate.

 

cost of goods sold

This goes deeper than just the invoices paid to suppliers over the course of a period, you need to make sure that you are accurately splitting the value of these invoices across the inventory you have actually sold this period, your cost of goods sold, and the balance you still hold in your warehouse, your inventory on hand. Simply:

Costs of goods sold = opening inventory + value of purchases – inventory on hand

Having accurate data here helps ensure we’re measuring the gross profit correctly. This is important as it lets us set prices at levels we know are covering the cost of that product, and at a level that is delivering enough margin to at least cover overheads.

 

stock turn

Next is stock turn. How many days on average does it take us to sell inventory and turn it back into cash?

Your business makes a profit by buying products for ‘x’ and selling them for ‘x + margin’, stock turn is a metric of how many times we can complete this process each year. The more times you can do this, the more profit you make. This can be represented as:

stock turn = costs of goods sold / average inventory value*

This measure also gives us some other insights into inventory buying decisions.

  • If the turn is too high, you may be holding on to outdated or hard-to-sell products. Should a sale be considered to move some of these items?
  • If the turn is too low, it can mean that not enough inventory has been purchased and held to meet demand, meaning sales are lost.

*average inventory value being equal to ‘[opening inventory + inventory on hand] / 2’

 

profit to free cash flow

Lastly, how good is our business at turning profit into cash? [Profit to free cash flow]

Most ecommerce businesses will have limited debtor days, so sales are transferred to cash in the bank almost instantly. However, if you’re a wholesaler, you will have a level of debtors and varying timeframes in which you will get paid.

Are you converting enough of your profit to cash in a reasonable enough timeframe to allow you to:

  • adequately replenish your inventory levels?
  • expand your warehouse?
  • invest in new product development?
  • and most importantly, distribute profit to owners?

These are questions you need to consider when analysing your profit to free cash flow figure.

 

general advice disclaimer

The information provided on this website is a brief overview and does not constitute any type of advice. We endeavour to ensure that the information provided is accurate however information may become outdated as legislation, policies, regulations and other considerations constantly change. Individuals must not rely on this information to make a financial, investment or legal decision. Please consult with an appropriate professional before making any decision.