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.
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.