The Revenue & Expenses Of Ecommerce↘
Understanding the revenue and expenses of ecommerce can be daunting if you’re not sure what you’re looking for, but as you can imagine, getting your figures right is a fundamental aspect of running a successful business.
So, for today’s article, we are going to be taking a look at how new merchants on the block can begin to interpret their store’s revenue and expenses.
Let’s kick things off with cash flow, the basic principle of receiving funds through branded product(s) and/ or service(s):
Cash Flow 💸
As we're sure you've gathered, cash flow is an essential element of running a business and it is not limited to physical banknotes or loose change that you might find at the bottom of your wallet.
Essentially, cash flow is an umbrella that covers a variety of currency formats;
- Cash In Hand: This includes; undeposited cash collections, customer’s checks, bank drafts and money orders.
- Cash In The Bank: This includes; demand deposits, checking accounts and savings accounts.
- Cash Funds: Last but not least, a cash fund is regarded as money that has been set aside for small expenses in the form of petty cash and payroll funds.
So, now that the nuanced meaning of cash has been made clear, it’s time to discuss the true definition of ‘cash flow’:
Understanding Cash Flow
To truly understand the definition and functionality of cash flow, it’s important to know that each business cycle requires a series of earnings and expenditures. These are known as ‘cash inflows’ and ‘cash outflows’.
In a nutshell, a cash flow is the net balance of the figure that remains after deducting the outflow from the inflow and as a business owner, you’ll either have a positive or negative cash flow.
A positive cash flow will indicate a higher amount of cash receipts than cash payments however, higher cash payments will result in negative cash flows.
Are you with us so far? We hope so because things are about to get a little more complex.
See, Cash flow is not a measurement of profitability which means that having a positive cash flow will not guarantee that a particular business will be a profitable one. Naturally, the same logic applies when a company has a negative cash flow.
So, just because a business isn’t generating enough income at one time does not mean that it will go under.
Many merchants may be surprised by this, but it's all thanks to the sufficient workings out of the cash flow system that allows many businesses to stay afloat during times of hardship.
The Importance of Cash Flow 💰
The truth of the matter is that no matter how stable the economy is, business is unpredictable, which makes well-timed and relevant financial reporting extremely effective when it comes to understanding the health of a business.
As a result, any financial reports created will need to provide both detailed and adequate information for the owner(s) of a company to be able to make strategic forecasts that will benefit the brand's growth.
If you’re wondering what your store’s cash flow statement should include, we’d say that the report should cover:
- Liquidity: A store’s ability to receive funds and pay bills when necessary.
- Solvency: A store’s ability to settle long-term debts and financial obligations.
- Flexible Flows: A store's ability to adapt to changing circumstances and opportunities.
- Future Flows: How future variables such as fluctuating prices could impact the company's bottom line if they came into fruition.
It is important to note that an agile business is built and supported by four key pillars that are required when it comes to creating financial reports.
These key pillars are as follows; the Balance Sheet, the Income Statement, the Statement of Other Comprehensive Income and the Statement of Cash Flows.
Understanding Revenue and Expenses
Start-up owners must know how to account for all business transactions, especially when it comes to their store’s expenses and company revenue. This process of recording and managing finances is called bookkeeping.
Merchants can either run their books manually or turn to a form of accounting software to simplify the process.
The income statement (a formal statement that displays a company’s financial performance for a certain timeframe) is the first factor that should be considered to fully comprehend the revenue and expenses of a business.
To simplify the bookkeeping process, we’d recommend managing a business and its income via Shopify Balance.
Essentially, Shopify Balance allows Shopify merchants to make smarter business decisions by keeping track of their financial incomings and outgoings.
Store owners will also be able to gather a clear perspective when it comes to the financial health of their business by receiving access to personalised charts and graphs. This can be found within the ‘Finances Overview’ section.
Calculating The Company Revenue 🖩
On the other hand, the company revenue is regarded as a measure of a store's earnings which have been attained through selling goods and/ or services.
Store owners tend to pay more attention to this figure more so than any other within an income statement as this number determines how well a business is doing.
However, the revenue of a business does not equate to its total income, as the total income (also known as gross income) includes both revenue and gains:
- The Revenue: The sum of money a business has generated from selling its products and/ or services.
- The Gains: The sum of money a business has generated from additional activities outside of selling its products and/ or services.
The Revenue Calculation Formula
Many companies tend to calculate their revenue by using the following simple formula(s):
Units Sold x Average Price and/ or Amount of Customers x Cost of Unit
Taking an in-depth look at a store’s gross revenue is of interest to many merchants as this figure reveals how much the business has generated.
However, we believe that merchants should pay just as much attention to their store’s net revenue, as this figure reveals how much money would remain after the expense of sold goods has been accounted for.
The Net Revenue Calculation Formula 🔢
Once the sum of costs to; create, market and sell a product has been subtracted, the final remaining figure is known as ‘net revenue’.
An easy way to calculate your net revenue is by following this formula:
Net Income = Revenue - Profits
Remember that the net profit and revenue are directly related, whereas expenses and profit are inversely related.
Understanding and Calculating Expenses
Every business has its expenses and there are several types that store owners will be expected to manage. Expenses are, to put it simply, the cost of running a business.
For instance, think; materials, hardware and software (or rent for a brick and mortar store), alongside; marketing efforts, employee paychecks and more.
Here are some of the biggest expenses that should be tracked:
- The Cost of Goods: The amount paid to the supplier in exchange for materials and labour needed to create the product(s).
- Distribution Costs/ Selling Expenses: The; shipping, insurance and marketing costs.
- Administrative Expenses: This includes; utilities, salary expenses, legal, financial and office maintenance costs.
- Other Expenses: Costs such as this could include unpredictable expenses such as tax penalties and repair expenses.
- Tax Expenses: The sum of tax owed during a specific period.
To calculate the total expenses of your business, simply add these categories together.
Optimising The Revenue and Expenses of A Business 🙌
To be able to increase the net profit and revenue whilst reducing the expenses of a business is known as optimisation and while this sounds like a status that every brand should hope for, it is tough to achieve.
So, we have compiled a list of how online businesses can increase their chances of success with the help of optimised company revenue and expenses:
N0.1: Pay Attention To The Data
Real-time analytics walk hand in hand with multiple benefits, one of the biggest being that problems can be anticipated before they arise. A word of warning to the stores who do not take advantage of data to mitigate problems - it’s likely that you’ll end up doing a lot of damage control in the future.
For instance, if your inventory management system indicates that you are about to run out of a product before a big sale event (such as Black Friday or Cyber Monday) you might want to consider analysing data to place orders ahead of time.
We believe that data should be seen as a company-wide asset because when the right people have access to relevant data, they will be an essential aspect of running an efficient business whilst reducing; costs, time and wasted resources.
N0.2: Nurture Employee Skills 🤹
When an employee’s skills are matched with their responsibilities, store owners will see a huge improvement in the way that a business operates, especially where employee morale is concerned.
Then, once a team’s strengths and weaknesses have been identified, merchants should do their best to help their ranks to grow and evolve their skillset, as it is a lot more expensive to hire and train new team members than it is to invest in a current workforce.
N0.3: A Digital Marketing Strategy
The traditional forms of marketing cannot forecast trends as fast as digital marketing strategies can, therefore digital marketing not only allows online businesses to reach more customers outside of their local radius, but ecommerce software also provides merchants with an edge in regards to how they can best meet their customers’ needs.
So, if you’re ready to pursue new digital marketing avenues, here is a list of the strategies that we would recommend:
- Email Marketing: It is estimated that 64% of small businesses rely on email marketing to reach their customers. Email marketing can be used to inform new and existing customers of; product launches, sales and discounts.
- Video Marketing: According to Wyzowl, around 87% of marketers believe that sharing videos provides their business with a positive return on investment (ROI). In 2022, there are countless video marketing tools such as Vimotia and Videowise that make this channel both effective and affordable.
- Social Media Marketing: Being consistent on social media pays off as 57% of consumers follow brands to stay up-to-date on new products and services.
Analysing product data will enable merchants to discover the current trends in the market which can be utilised to influence future product launches.
If you are thinking of launching a new product, we’d advise taking the time to research competing products and customer experiences. With this data, store owners can create products that better suit their customers’ needs, thereby increasing customer satisfaction and company revenue.
The Importance of Company Revenue and Expenses
Here at Karmoon, we understand that every business begins with the goal of making a profit and staying in business.
We believe that strategic marketing and smart industry operations will increase the likelihood of healthy revenue and reduce business expenses.
Therefore, it is important to understand the status of your store’s finances, which means spending some time with the numbers.
We understand that this isn’t one of the most exciting parts of running a company, however, it is one of the most fundamental components
So, that’s it for today’s article. We hope that you have found our guide to understanding the revenue and expenses of a business useful.
If you’re actively looking to work with a Shopify agency designer or developer to assist you with your business, we’d love to hear from you. Get in touch to get started!