5 Best Practices to Navigate E-commerce Financial Statements

The e-commerce industry thrives on data, and financial statements comprise a large portion. But analyzing these reports could feel like deciphering a foreign language, especially if you're from a non-accounting background.

Don’t worry; this blog explores 5 key practices and additional useful information for handling your ecommerce financial statements. Let’s dig deeper and understand how to manage your e-commerce business's finances like a professional.

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What Are E-commerce Financial Statements?

E-commerce financial statements detail your company's income, expenses, assets, and liabilities. Overall, they provide a complete view of your company's financial condition and operations.

You can use these financial statements to monitor your business’ performance and assess its financial health.

Types of Financial Statements for E-commerce Businesses

E-commerce businesses usually use two types of financial statements: income statements (profit and loss statements) and balance sheets.

Here’s a detailed picture of each:

1. E-commerce P&L Statement

The income statement, known as the profit and loss (P&L), sums up your company's earnings and expenses during a given period. It presents your profitability by showing revenue from product sales minus direct and indirect expenses incurred in operating your online store.

An e-commerce profit and loss statement should have details about:

• Revenue: The entire income earned from the sale of your products
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• The cost of goods sold (COGS): Total of the direct expenses incurred in purchasing, shipping, and import duties for your products
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• Gross profit: Estimated by deducting COGS from revenue to figure out your first profit after accounting for direct product costs
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• Operating expenses: Indirect costs incurred in running your business (marketing, advertising, rent, employee salaries, and administrative costs)
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• Net income (profit): Obtained by subtracting operating expenses from gross profit. It represents your overall profit or loss for the specified period

2. Balance Sheet

A balance sheet shows how profitable your business is at a certain point in time. It is divided into three categories: assets, liabilities, and shareholder equity.

• Assets: These are the resources controlled by your company, such as inventory, cash, receivables (unpaid customer payments), equipment, and investments.
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• Liabilities: These include accounts payable (due payments to suppliers), loans, and accrued expenses.
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• Shareholder equity: It is determined by subtracting all liabilities from all assets, and represents the ownership position of the company's shareholders. It also represents the store’s net worth.

An in-depth balance sheet analysis can provide key insights into your business’s financial health. You can identify potential liquidity difficulties, understand how your assets can be used to finance your operations and debts, and much more.

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How to Make the Most of E-commerce Financial Statements

For e-commerce companies, financial statements help direct their growth strategies, investment security, and fiscal health.

That said, here are some important tips for leveraging your e-commerce financial statements like a professional:

1. Maintain Your Business Budget

Remember, financial statements serve as a blueprint for your company's finances.

These records outline your revenue and expenses so you can compare your actual performance to the budget you prepared previously.

Here’s how:

• They detect places where you may be overspending, identifying potential budget leaks.
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• They can also find areas where revenue streams are falling short of expectations.

By analyzing the disparities, you can make informed budgetary decisions like - tightening your belt in some areas or looking into ways to increase money from underperforming streams. Ultimately, the idea is to guarantee your expenses align with your business objectives, keeping you on track for financial success.

2. Stay Up-to-Date with Taxes

Your e-commerce business's financial records serve as the cornerstone for accurate and legally compliant tax filing.

These statements guide you through the process of identifying expenses and income significant to your tax calculations. For example, do you know the different taxes and fees you’re liable to pay as an Amazon FBA seller?

By carefully checking your statements, you can put each transaction into the appropriate tax category so you only pay what you owe. This measure ensures that your tax returns do not contain errors, which could otherwise cause hefty penalties and delays from the Internal Revenue Service (IRS). 

3. Distinguish Between Returns and Chargebacks

Let’s look at how returns and chargebacks differ:

Returns

Customers often initiate returns directly with the e-commerce business. This happens when they are displeased with the product and wish to swap it for a new size/color, or simply have changed their mind. 

When you receive the returned product, you evaluate its condition and refund the consumer, usually via the original payment method. This process typically gets recorded in your company’s internal system and does not involve the buyer's bank.

Chargebacks

In contrast, chargebacks go through the customer's bank. The customer often disputes the transaction directly with their bank, claiming improper charges, fraudulent behavior, or non-delivery of the merchandise. The bank then launches a formal dispute process, like removing funds from your company’s account and crediting them back to the customer. You need to submit proof and communicate with the bank to fight the chargebacks.

You should pay close attention to both chargebacks and refunds, as they both have an impact on your e-commerce business’s financial health.

Here’s how:

• Returns increase your cost of goods sold (COGS) because those items are no longer available for immediate sale. Thus, by accurately recording the returns, you can better control inventory levels and spot possible overstocking/understocking problems.
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• Chargebacks, on the other hand, lower your revenue and may involve additional fees. They are usually recorded in the income statement as a different line item. Analyzing chargeback trends can help you find areas for improvement, including fraud prevention, product/service issues, or customer service to reduce their incidence and secure your merchant account. 

4. Practice Accurate Recordkeeping for Your E-commerce Store

Detailed financial record-keeping is the foundation of proper accounting, as it ensures transparency, accountability, and informed decision-making.

Here’s how accurate records can benefit your business:

• Financial records include all your income sources, such as employee salary & your business profits, and expenses.
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• Financial statements created based on these records help you identify problems in your bookkeeping.
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• You can detect missing entries or anomalies by comparing income and expenses on the statements to your bookkeeping records.
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• Analyzing financial statements over a period also helps you identify trends in income, expenses, and profitability, among many other benefits.

Note: Most successful e-commerce stores outsource their bookkeeping services to professional service providers, as it helps them save time, lower costs, and improve financial reporting.

5. Track and Analyze Your KPIs (Key Performance Indicators)

E-commerce financial statements do way more than just reflect revenue and expenses. 

They empower you to calculate your business’s key performance indicators, such as gross profit margin, inventory turnover ratio, and customer acquisition cost. These KPIs provide useful insights into multiple facets of your company. Here’s how:

• Gross profit margin: Shows the percentage of income left after deducting the cost of items sold, reflecting how well the pricing strategy works. 
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• Inventory turnover ratio: Analyzes how frequently your inventory is sold and replaced, revealing potential overstocking or understocking issues. 
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• Customer acquisition cost: Indicates how much it costs to bring on a new client. 

These metrics help measure how well your company's advertising campaigns are performing. 

7 Important Financial E-commerce Reports

Financial reports give useful insights into your company's performance, identify areas for improvement, and guide strategic decision-making. 

Here are seven key financial reports for e-commerce businesses:

1. Profit Margin Report

The profit margin report evaluates how profitable your goods and services are. Analyzing this report provides useful insights into your pricing strategy, cost management strategies, and the business's general financial health.

The profit margin report uses the following formula:

Profit Margin = (Net Profit/Revenue) x 100%

Remember, a higher profit margin reflects a more successful business model in which revenue greatly exceeds expenses. Similarly, a lower profit margin may indicate places for improvement. This includes enhancing pricing methods, lowering costs, and looking at higher-margin product options.

2. Cash Flow Statement

The cash flow statement shows how much money comes in and goes out of your e-commerce business over a period. It divides the financial flow into three main activities:

• Operating activities: Comprises funds earned by day-to-day business operations like product sales and cash payments for expenses.
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• Investing activities: Includes funds used to buy or sell long-term assets.
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• Financing activities: Cash received or paid through financing sources, such as loans, share issuance, and dividend payments.

3. Inventory Report

An inventory report is a complete breakdown of your current stock levels, including quantity, cost, and value for every product. 

• You can avoid stockouts, which lead to lost sales and disgruntled customers, by using the report to identify products with low stock levels.
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• You can also avoid overstocking, which wastes valuable capital and increases storage expenses.
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• Historical inventory data can also help you identify products with high and low turnover. You can use this data to guide future purchases and focus on high-demand products.
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• Lastly, it provides the information needed to calculate the Cost of Goods Sold (COGS).

4. Profit and Loss Report

The Profit and Loss Report, aka the Income Statement, is a key financial report for e-commerce vendors. It gives an in-depth analysis of your e-commerce company's profitability over a period, usually a month, quarter, or year.

The P&L report calculates key performance indicators (KPIs) such as gross margin, net income, and operating expenses as a % of revenue. It also shows whether the company is profitable or losing money by checking the difference between total income and total costs. Using this data, you can make profitable decisions and pinpoint areas for improvement.

By comparing P&L reports over time, you can spot trends in your e-commerce business’s spending and make necessary changes. This helps manage costs and allocate resources more effectively.

5. Balance Sheet

The balance sheet's core idea lies in this equation: 

Assets = Liabilities + Owners Equity

This equation assures that the entire value of your assets is always equal to your liabilities plus the owner's equity.

Routinely evaluating the balance sheet helps gain useful insights about your company's financial health, including:

• Liquidity: Your ability to meet short-term financial obligations
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• Solvency: Your ability to meet long-term financial obligations
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• Financial stability: Your e-commerce business's total strength and stability
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• Debt levels: The number of liabilities compared to owner equity, which provides insights into financial risk

6. Paid Marketing ROI Reports

Paid marketing ROI reports provide useful information about how successfully your advertising budget is spent. It also helps understand whether your marketing activities give a positive return.

These reports usually include the main metrics listed below:

Cost per Acquisition (CPA)

This indicator shows the average cost of acquiring a new customer through your paid marketing efforts.

Here’s the formula to calculate your CPA:

CPA = Total acquisition cost / No. of customers acquired 

Customer Lifetime Value (CLTV)

It is the expected revenue from a customer throughout their association with your e-commerce brand. By comparing your CPA to your CLTV, you can see if your paid marketing campaigns are profitable or not. 

Here’s the formula to calculate your CLTV:

CLTV = Customer value x Average customer lifespan

Conversion Rate

It shows the percentage of visitors who complete a desired activity, i.e., making a purchase, after clicking on your paid adverts. A greater conversion rate indicates your advertisements entice and drive potential clients to convert. 

Here’s the formula to calculate your conversion rate:

Conversation rate = Total no. of conversions / Total no. of unique visitors x 100

Return on Ad Spend (ROAS)

It shows the total income generated for each dollar spent on advertising.

Here’s the formula to calculate your ROAS:

ROAS = Revenue attributed to ads/Costs of advertising

7. Customer Acquisition Report

The customer acquisition report provides valuable insights into the success of your marketing and sales activities in obtaining new customers. Analyzing this report helps make informed decisions about improving your client acquisition efforts and expanding your customer base.

This report usually includes metrics such as:

• The number of new consumers obtained, providing an overview of your client base's growth.
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• Customer acquisition cost (CAC), i.e. the average cost of acquiring a new customer. It helps understand the effectiveness of your marketing budget.
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• Customer acquisition source refers to the channels (such as social media, email marketing, and paid advertising) through which you acquire new consumers. You can figure out which channels attract new clients the most.
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• Customer lifetime value (CLTV), which shows how profitable your customer acquisition efforts will be in the long run.

How to Optimize E-commerce Accounting

Proper e-commerce accounting allows you to correctly manage your income and expenses, make informed financial decisions, and comply with tax rules. 

However, e-commerce accounting can be complicated with data overload from numerous sales channels, inventories, and payment methods. That said, here are a few tips for optimizing your e-commerce accounting.

1. Use Accounting Software 

Investing in specific e-commerce accounting software improves data collection, automates operations like invoicing and bookkeeping, and simplifies financial reports. With automation, you can zero in on growing your business while reducing accounting errors and saving time.

Look for software that works easily with your current sales channels and payment processors.

2. Improve Inventory Management

By managing inventory accurately, e-commerce businesses can manage costs and fulfill orders more effectively. Implement a permanent inventory system that tracks inventory in real time. This way, you can detect inadequate stock levels and avoid stock-outs.

3. Keep Up with Tax Laws

To avoid fines and maintain financial stability, you must understand and abide by all applicable tax laws. Research the tax rules for your location, product category, and sales volume. Consult a tax professional for help and ensure compliance.

4. Pay Special Attention to Your Cash Flow

Keep a regular eye on your cash flow for insight into the money coming in and going out. This supports your decision-making when it comes to financial budgeting, advertising costs, and inventory purchasing.

5. Review Financial Reports Regularly

Financial reports include income statements, balance sheets, and cash flow statements. These provide important insights into your company's performance and indicate possible areas for improvement.

However, collecting data from multiple sales channels and getting insights from it manually can take hours. On top of that, if you don’t have any accounting knowledge, you might misinterpret some data, which can impact your business adversely. 

Link My Books is an accounting automation software that integrates with your e-commerce channels, collects the data, and automates your entire bookkeeping process. Our user-friendly software makes bookkeeping effortless and offers useful financial insights.

Sign up for a free trial now and accurately account for your e-commerce sales.

Frequently Asked Questions (FAQs)

Before we wrap up, here are some of the most frequently asked questions online about e-commerce financial statements:

What is the Significance of Operating Expenses in E-Commerce Financials?

Operating expenses (OpEx) are the ongoing costs of running your e-commerce business. Although these expenses are not directly related to the manufacture of commodities, they are still necessary for daily operations. 

Higher OpEx leads to less profit for your e-commerce business as the gap between sales and operating costs increases. Lower OpEx, on the other hand, means more profit because you're spending less to keep things going.

What Role Does Cost of Goods Sold (COGS) Play in E-Commerce Accounting?

Cost of Goods Sold (COGS) refers to the direct costs involved in the things you sell. It comprises the costs of purchasing raw materials, production, and transportation. 

COGS is a key metric in accounting, and the aim should be to minimize it without harming your operational efficiency or deteriorating product/service quality. Companies can determine their gross profit by subtracting COGS from their sales revenue.

What Are the Key Differences Between Cash and Accrual Accounting in E-Commerce?

• Cash accounting tracks income only when it is received and expenses only when it is paid. Although easier, this approach may not give you a clear view of your financial situation.
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• Accrual accounting captures income and costs when they incur (regardless of when they’re paid or due). This strategy delivers a more accurate depiction of your financial performance but can be more difficult to manage.

How do Inventory Management Practices Affect E-Commerce Financial Statements?

Inventory management strategies greatly impact an e-commerce company's financial situation. 

Here's how:

• Inventory management guarantees precise COGS computation, which gives better visibility of your profitability.
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• Inventory management guarantees precise COGS computation, which improves comprehension of profitability.
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• Overstocking stifles cash flow. In contrast, under-stocking causes lost sales and revenue potential. Proper inventory management promotes balance.

Conclusion

Understanding KPIs, using the right tools, and keeping yourself informed are necessary for handling your e-commerce financial statements.

However, the whole process can be quite daunting for you if you don't have any accounting knowledge. Not just that, even for professional accountants, managing and reporting finances manually for multiple clients is extremely overwhelming. One minor error and all your effort gets wasted.

Link My Books offers a bookkeeping tool for e-commerce sellers and accountants to automate the entire bookkeeping process. With us, you can make data-driven decisions to drive your business ahead without spending hours figuring out taxes or collecting data from multiple sales channels.

So why wait? Schedule a demo with us, and we'll show you how we can help you create accurate financial statements.