This guest post is brought to you from our accounting-savvy friends at InDinero
We all realize pretty early on in life that if we don’t learn from history, we’re doomed to repeat it. With that in mind, most businesses are quick to understand that assessing historical performance can provide the best guidance in making better future decisions as an organization grows.
Depending on the goals you’re measuring, eCommerce companies use data from various sources to track and evaluate their performance such as website analytics platforms or customer relationship management software. However, aside from evaluating their bottom line, when it comes to tracking success metrics, businesses tend to underutilize their financial statements and reports.
Whether it’s choosing between multiple vendors, determining pricing, or increasing operational efficiency, financial reporting will give your eCommerce business provide a foundation for confident decisions.
Generating Success Metrics for eCommerce Goals from Your Accounting Reports
Like any ambitious entrepreneur, you have goals for your improving business. After all, the harsh truth is if you’re not evolving with today’s market, you’re dying. To uncover the right financial insights for turning those aspirations into reality, you’ll need to familiarize yourself with three go-to reports:
- Cash Flow Statement – A comprehensive view of how your business operates, where it’s making money, and how you make choices about expenses
- Balance Sheet – Two-sided chart with three components: your assets (or what you own) on one side and your liabilities and equity (aka what you owe) on the other
- Profit and Loss (P&L) Statement (aka Income Statement) – A snapshot of your business’s revenue, costs, and expenses during any given period of time
Read this post for more about these three essential financial statements for measuring business performance
With just these three statements, you can uncover highly coveted takeaways and apply your own business savvy as a primary decision maker. Here are a few common retail business goals and the prescribed metrics to start tracking and reports to find the data you need.
If your goal is to increase efficiency and spend wisely:
Track Inventory Turnover and Cost of Goods Sold (COGS) using your Balance Sheet and P&L
As a retail business you’re selling tangible goods, so you’ll need to hold inventory to fulfill those orders. When measuring the turnover rate of that inventory, you can see how often it gets sold or used in any given time period (day, month, year, etc.).
To calculate inventory turnover costs for the year, you must divide your cost of goods sold (COGS) by your average inventory. You can determine your COGS by adding up the associated asset costs on your P&L and will find your average inventory as reported in the current assets section of your company’s balance sheet.
Using this report, helps your business identify gaps in revenue generation and their causes, such as overstocking merchandise, product line deficiencies, or missed marketing opportunities. Generally speaking, you can use this equation to tie sales returns to production costs and inventory allocation.
If your goal is to set pricing that is both competitive and lucrative:
Track your COGS, CAC, and LTV using your P&L
When you’re setting pricing you need to ensure the amount you charge is aligned with the value you provide and the return you need to make a profit on each customer. For the latter, Stitch Labs identifies three major costs you should look into when analyzing the ROI of your business activities. These are all expenses you’ll uncover using your P&L statement and they should absolutely be factors that directly affect how you determine your price:
- How much does it cost to purchase/make this item? (COGS)
Your COGS are the specific costs for the materials that make up the products or goods your business sells. Ultimately, if the product sale price doesn’t cover the costs associated with production, generating a profit will be practically impossible.
- What does it cost to market/sell this item? (Customer Acquisition Costs, aka CAC)
To the same point, you must consider and cover what you spend to increase sales. Determining your customer acquisition cost (CAC) means pulling together all of the costs associated with generating interest in your solution through marketing and converting leads into new customers, as well as current subscriber/customer retention or return buyers.
In their Ultimate Guide to Scaling a Retail Business, Stitch Labs also reinforces the idea that when it comes to running a healthy retail business with a lucrative pricing model, you should consider whether you lifetime value of a customer (LTV) is going to exceed this CAC. By tracking your customer lifespan, you can judge whether a CAC that’s higher than your initial customer spend is justified by their potential to return.
- What does it cost to deliver your offering?
Finally, as an online retailer, you have to consider certain logistical odds and ends associated with the goods you sell. This includes what you need to pay in order to fulfill orders and ship them to your customers. More often than not, these will be activities you outsource to multiple solutions. So keeping an eye on what various vendors charge and doing a little competitive analysis will help you make decisions and negotiate good rates. After all, the lower you can keep these prices while maintaining quality service, the larger you profit margin or the more competitive your pricing can be.
“There are 17 different ways we could spend money on shipping. With a better handle on our accounting, we can categorize and group it in a clean way it helps us understand and make choices.” – Noah Dentzel, co-founder & CEO of Nomad Goods
If your goal is to secure growth capital and/or debt financing:
Determine your EBITDA Margin and Quick Ratio using your Balance Sheet, Cash Flow Statement, and P&L
When meeting with lenders and investors you can quickly set yourself apart from the rest of their investment opportunities by demonstrating you’re a numbers-focused business with a few key financial details in your back pocket. This will help you develop a common interest by speaking to their end-goal–securing a return on their investment.
Measuring operational performance with your EBITDA Margin:
EBITDA is an acronym for Earnings Before Interest, Taxes, Depreciation, and Amortization. Businesses determine their EBITDA margin by manually pulling each figure from their P&L and subtracting the total value spent on operating costs from their overall earnings to find the difference. This figure shows the actual fiscal growth for that time period and can then be compared to prior periods—month over month, quarter over quarter, year over year, etc.
This is a great accounting term to have in your arsenal before you start fundraising. Investors look to this report for an authentic peek into your business’s profitability after factoring out all the expenses associated with actually running it.
Assessing your liquidity using the Quick Ratio:
Knowing your business’s liquidity will help you know how easy it will be for you to pay off any short-term liabilities and obligations such as loan payments. While tech and manufacturing companies use the current ratio to assess their liquidity, companies that hold inventory as eCommerce businesses do would want to use the Quick Ratio.
Like the current ratio, the quick ratio uses the ratio of a business’s current assets over their current liabilities. However, the quick ratio first subtracts the existing inventory from the company’s current assets before comparing with its current liabilities (all found on the business’s Balance Sheet). This more conservative calculation accounts for the fact that assets, like inventory, are not as easy to liquidate.
Lenders and investors will use this information to evaluate the risk associated with your business. Additionally, you can use this information along with your Burn Rate and Cash Runway to establish the longevity of your business if you were to cease to generate income at any point.
Ultimately, your company’s bookkeeping and budget say so much about how you’re prioritizing your spending and using good judgment. By paying attention to these key performance indicators, you can demonstrate that you’re in the business of spending money to make money. A skill that impresses even the most skeptical financiers!
Accessing Financial Data Your Business Can Rely On
Of the roughly 30 million small businesses that exist in the United States today, it’s estimated that fewer than 10 percent have up-to-date and accurate accounting information. That means the vast majority of businesses cannot produce reliable financial statements. On the one hand, this means they’re unable to assess the economic success of their business, but this also leaves them susceptible to audits, fines, and other penalties that come along with compliance related issues.
When a business can readily access genuinely correct financials they gain the knowledge needed to make confident business decisions and–perhaps most importantly–the peace of mind to focus on growing a business and building amazing products.
Understanding your financials on a deeper level is an important step in becoming a smarter, more data-driven business. With these reports and metrics under your belt, you’re on the right track!
“Without the right tools we wouldn’t have felt confident to take on global sales channels in places like Thailand, Poland, and the Philippines. Now that we have this [accounting] system, we’re able to take on pretty much any sales channel that we want.” – Brian Hahn, co-founder & head of product at Nomad
Got a question about a specific report or metric you’ve been looking for?
Shoot it to me in the comments below!
About the Author
Melissa Hollis is a content marketer with a passion for startups and small business. She enjoys waking up every day and getting the chance to rethink the obvious and enable the dreams of aspiring entrepreneurs. You’ll find her untangling the complicated tax code and nerding-out on business budgets on blog.indinero.com.