Financial Analysis for E-Commerce Businesses

Understanding where your money is coming from and where it’s going is crucial for any business. But financial analysis has a different meaning for online businesses. Why? You have so many more performance indicators to analyse than a brick and mortar business. 

Imagine you have a billboard on the side of a major motorway. If you see an uptick in sales, it’s difficult to link those sales back to the billboard. If you place a Google Ad, however, you can see exactly how many people clicked on it and then made a purchase. More information means more analytics. 

Financial analysis for e-commerce businesses ranges from tracking sales to analysing shipping costs and everything in between. Read on to learn more about eCommerce bookkeeping and more.

What is a financial analysis? 

Financial analysis is the process of evaluating all of your business financial transactions. You can do this for a few purposes. Some of the most common reasons an organisation will initiate a financial analysis include end-of-year reconciliation, determining solvency (do you owe more in debt than you have in assets?), and determining the general stability of the business. 

Financial analysis for e-commerce businesses may also be done to check for inefficiencies in shipping and advertising. A financial analysis can help you plot your future course and create the reports you need to attract investors. 

What are e-commerce KPIs?

There are lots of metrics available for online businesses, otherwise known as measurable components that can indicate success. For e-commerce businesses, these often include things like the number of ad impressions, cart abandonment numbers, and organic traffic. KPIs are key performance indicators — in other words, your most important indicators of success. 

Your financial analysis can reveal how you are performing using KPIs like average size order, profit margins, conversion rates, and new customer orders. 

How to get an overview of your business finances 

Current online bookkeeping starts you off on the right foot — inaccurate books can’t yield accurate analysis. So, make sure you are tracking your general ledger and using double-entry bookkeeping tof each transaction. 

Once you have your bookkeeping for e-commerce transactions in order, you can start figuring out what the numbers mean for your financial health and future. 

Key factors to consider during a financial analysis for e-commerce businesses include:

  • Sales by category: Figure out which of your sales categories and items are most popular. This allows you to make decisions on expanding your most lucrative categories with similar products and services. Likewise, you may want to discontinue your least lucrative products.
  • Average dollar spent per transaction: Are your customers spending just a few dollars per transaction? Determining the average dollar amount spent per sale helps to let you know if your future strategy should include encouraging add-ons and targeting customers with similar products for sale. 
  • Product margins: For e-commerce businesses, the cost of goods sold (COGS) includes things like Google Ad costs, email lists, and shipping. When you subtract your total costs from your revenue, you can determine your profit margin. E-commerce margins can be as high as 6.5%.
  • Shipping: Shipping costs are a part of your overhead that can’t be avoided if you’re selling physical products online. Are you paying too much? Your financial analysis can help to reveal if you’re paying more than average for shipping and handling. If you are, you can either seek shipping alternatives or consider increasing shipping costs for your customers. 
  • Returning customer orders: How many of your sales come from new customers vs. returning customers? Return visitors cost less per transaction, because you don’t need to put out a new ad spend to attract them. If you are only bringing in new customers, you may want to create a new loyalty program to increase retention. 
  • Inventory turnover: Your financial analysis can also reveal if you are managing your inventory in an efficient manner. Higher turnover rates are better, because they can mean you’re selling your items more quickly. This can help to reduce your storage costs and other fees associated with holding on to products (heating, cooling, inventory counts, etc.) 
  • Revenue: Tracking your income, or revenue, lets you know if you’re growing at a steady pace or not. While your revenue doesn’t represent your actual profits, it’s still a good indicator of whether your finances are headed in the right direction.  

Personalised financial advice is more important than ever when it comes to financial analysis for e-commerce. Not all online stores operate on the same margins or have the same needs. Having a dedicated online bookkeeper from Visory, or using CFO services, can help you analyse your financial state and make strategic moves for the future. 

Harnessing the Cloud: If cash is King, data is its Queen

A recent study found nearly half of Australian businesses are looking to increase cloud infrastructure spending in 2020, and 59 per cent now have ‘cloud first’ policies when it comes to making new investments[1].

Cloud accounting allows your business, its administration employees and advisers to access its financial information live from online servers, anywhere at any time, which helps your business make better choices as it can use ‘real time’ information to assist its decision making.

The power of data lies in both its timeliness and its ability to be tailored to the individual business. Raw data by itself is difficult, if not impossible to utilise effectively. However, by using integrated systems such as optical recognition, live bank feeds, and industry specific software that is linked to the core application, your business can start to approach the detail and data integrity of larger organisations.

By increasing your business’ level of data accuracy, you’re not only better positioned to meet your day to day compliance needs accurately and efficiently, but you’re also setting up your business to take advantage of the data at its disposal by summarising and presenting the data in ways that are specific and useful to your business.

The key to making the most of the data available to you is to delve into the key drivers of your business and the industry it operates in. The lead indicators of a coffee shop will differ to the lead indicators of a freight business, so it’s critical to narrow in on the data points that really make a difference in your business.

Once decisions have been made about the core drivers of your business’s success, most cloud systems will allow you to tailor reports to focus on selected data points, either from the core platform or from a linked industry-specific application.

Undertaking an analysis of the key trends you have identified across these data points can then be developed into a set of visual management reports that allow you to have a finger on the pulse of your business on a day to day and week to week basis.

Identifying the key business drivers and the underlying data flow that reports on them is a great foundation for building a reporting pack that helps you as a business owner analyse current trends and make solid decisions about future direction, quickly and accurately.

To maximise the return on investment in your cloud data, diarise time each week, and each month to review the reports that your cloud system produces for you to assess your performance against current goals and re-set goals and actions for the next period.

Lastly, never forget the maxim, ‘rubbish in, rubbish out’. Good data quality should not be taken for granted in the world of data integration.

For assistance identifying your key business drivers and implementing cloud solutions, please get in touch with our team.

[1] Australian IAAS Market Soars Beyond $1.3BN