There’s a lot to learn when you start selling online, particularly when it comes to the financial side of the business, and it can be quite easy to get confused between all the different accounting terms. To run a successful ecommerce business you need to be keeping an eye on your sales and your cash flow across each platform that you sell on. We take you through some of the key ecommerce business metrics that you need to be working out and show you how you can use them to improve your business.
1. Profit margins
What is it?: Your profit margin is the difference between how much you bought a product for and how much you sold it for - how much money you have made on top of what you paid for each product you sell.
How is it calculated?: If you buy mugs from a supplier for £2.00 per mug (unit), and you sell each one for £5 then your profit margin would be:
Price sold for - Price bought for = Profit margin
£5 - £2.00 = £3.00
To calculate this you’ll need to take the prices you paid from your supplier invoices, and the amount you sell your items for.
Why it’s important: Your profit margins will give you an idea of how much money you can make on each item you sell. However, it doesn’t take into account any other costs of running your business.
2. Turnover (/Revenue)
What is it?: The total amount of money that your business takes, without subtracting any expenses like stock, rent or staff wages. Your business's turnover is the total of all your sales from the different ecommerce platforms that you sell on for a certain period of time.
How is it calculated?: For each product you sell you need to multiply the number you’ve sold in a certain time period by the price you charge, to work out your turnover for that item. Then you’ll need to add the total turnover for each item you’ve sold together, including across different platforms.
If you sell your mugs for £5 each, and you’ve sold 250 on eBay, 350 on Amazon and 200 on your own website in a month then your month’s turnover would be:
Number sold x Price sold for = Turnover
(£5 x 250) + (£5 x 350) + (£5 x 200) = £4,000 turnover.
Why it’s important: It’s good to work out your overall turnover for your business, but it also might be useful to work out your turnover for each platform that you sell on as well, so you can tell which is taking the most money. Unless your business receives income from other sources on top of sales, then your turnover will be the same as your Gross Sales - a total of all the money you’ve taken.
Turnover is also known as Revenue.
3. Net sales revenue
What is it?: The total amount of money that you take from sales with any reductions and refunds taken off. This doesn’t take into account the cost of buying stock or any other expenses involved with running the business.
How is it calculated?: If out of the 250 mugs you sold on eBay you had to refund three and you had to discount another by 10% because it was chipped, then your Net Sales Revenue is:
Turnover - Returns/Reductions = Net Sales Revenue
eBay: (£5 x 250) = £1250.00
Amazon: £5 x 350 = £1750.00
Own website: £5 x 200 = £1000.00
£1250.00 + £1750.00 + £1000.00 = £4000.00 (turnover)
£4000.00 (turnover) - £15.00 (refund) - 0.50p (discount) = £3984.50 Net Sales Revenue
Why it’s important: The difference between Gross and Net Sales will tell you if you’re giving a high number of refunds or losing a lot of stock.
4. Gross income (Gross profit)
What is it?: Your company’s total turnover (income/sales) minus the cost of the products that have been sold. This is different from your profit margin which tells you the amount you make on each item that you stock, Gross income will tell you the profit you have made across all different products you've sold.
How is it calculated?: Once you’ve worked out your company’s revenue for a certain period of time, you then have to take away the cost of each item that was sold.
If you’ve sold 800 mugs at £5 each across eBay and Amazon, and you bought the stock for £2.00 each then your Gross income is:
Turnover - cost of goods sold = Gross income.
(800 x £5) - (800 x £2.00) = £4000 - £1600 = £2400 gross income
Why it’s important: Your gross income is a good way of seeing whether your sales will cover your costs, and it’s the most important factor in achieving a good net profit.
5. Net profit (Net income/Net loss)
What is it?: The amount of money that you actually make after you’ve deducted all your business expenses and costs.
How is it calculated?: For an ecommerce business, your expenses are likely to include: buying stock, paying for postage and packaging, paying marketplace and payment processing fees, rent for storage and employee wages.
Turnover - expenses = net profit
£4000 - £1600 (cost of goods sold) - £500 (p&p) - £300 (fees) - £300 (rent) = £1300 net profit
If the amount is positive it’s a net income, if it’s negative then it’s called a net loss.
Why it’s important: Net profit (or loss) is the most important indication of whether your online shop is profitable, you need to be making money so that you can continue to run and grow your business.
If you’re selling across multiple ecommerce channels and struggle to keep an eye on how each one is performing, Zenstores Insights enables you to track your sales across different platforms. You can use it to identify which products, channels and customers are driving the growth of your business, and which areas could be improved.
Find out more about Zenstores Insights here.