Running a small e-commerce business means more than just selling products. It’s also about understanding your financial health.
As a small business owner, you should monitor specific metrics to make data-driven decisions, optimize performance, and achieve growth. While the numbers can be overwhelming, focusing on the right data can give you valuable insights into your performance and growth potential. This is where financial analysis services can be a game-changer.
They help businesses stay on the right path by interpreting the numbers and making data-driven choices. This blog post discusses six essential financial metrics that every small e-commerce business should track.
1. Sales Revenue
Sales reflect the total amount made before adjusting for any additional costs. It’s the cornerstone of your small business’s financial success. To calculate it, calculate the number of sold units times the cost per unit.
Monitoring sales helps you understand which products are popular and which aren’t. This further allows you to refine your logistics and distribution tactics accordingly. Break down your sales data by product, channel type, and seasonality. This segmentation helps identify trends and areas of improvement, ensuring you stay responsive to market demands.
The St. Louis Federal Reserve Bank reports that US e-commerce retail sales accounted for 16.0% of total retail sales in Q2, 2024. These sales experienced a steady growth since Q2, 2022, when it was 14.2%. In Q2, 2023, the number increased to 15.3% and reached 15.6% in Q4, 2023. This upward trend highlights the increasing reliance of consumers on online shopping. Thus, it is critical for small businesses to analyze their sales data to remain competitive.
Keeping an eye on your sales numbers also helps set realistic revenue targets. For instance, comparing current sales against previous periods can reveal growth patterns or declines, allowing you to adjust your approach promptly. However, remember, while increasing sales is important, it’s not the only factor in profitability.
2. Net Income
Net income, or profit, measures the total earnings after subtracting all expenditures, including overhead expenses, taxes, and interest. This metric is a vital marker of your business’s economic success.
Tracking net income regularly shows whether your business generates more money than it spends. Small e-commerce businesses should monitor this metric closely to identify cost-saving opportunities or areas that need more investment. A consistent review of net income can help you spot potential financial challenges early. This allows you to take corrective actions before issues escalate.
The US Small Business Administration (SBA) data reveals that nearly 1.5 million small new businesses opened between March 2021 and March 2022. However, Forbes reports that 20% of businesses fail within the first year and 50% fail within five. This high failure rate is due to financial challenges. Over 35% of startups shut down due to insufficient cash reserves. These figures highlight why small businesses should focus on net income.
3. Gross Profit Margin
It is the income share remaining after accounting for the cost of goods sold (COGS). This figure is crucial for understanding your business’s competency in manufacturing and selling products.
A high margin suggests you’re successfully balancing the manufacturing costs and pricing. To calculate it, subtract the cost of goods sold from your total earnings. Then, divide by your overall income and multiply by 100. To increase your gross profit margin:
- Negotiate better rates with suppliers,
- Reduce shipping costs,
- Consider raising prices on high-performing products
- Revising your pricing model
Regularly tracking this metric ensures you can quickly adapt your strategies to maintain a healthy profit margin, making your business more resilient.
4. Customer Acquisition Cost (CAC)
It is the total acquisition cost of a new paying customer. It’s a critical metric for small businesses, as a high CAC points to flaws in your advertising strategies.
Calculate CAC by dividing your combined marketing and sales spend by the volume of new subscribers generated in a given time frame. By tracking CPA, you can determine whether the marketing spend generates a reasonable return on investment. To reduce your CAC:
- Focus on organic marketing strategies
- Improve your conversion rate optimization
- Implement a referral program
By understanding your CAC, you can allocate resources more effectively and adjust your strategies to attract customers at a lower cost. Keeping your CAC low is a simple and effective way of ensuring that each new customer is profitable for your business. Shopify reveals that CAC varies across industries. For example, the arts and entertainment industry has an average annual CAC of $21. In contrast, the electronics industry spends about $377 per customer.
First Page Sage, a leading SEO company, notes that combining CAC with customer lifetime value (LTV) is most beneficial for businesses. Comparing these two factors gives you the CAC-to-LTV ratio. Ideally, e-commerce businesses should aim for a 3:1 ratio. A high annual ratio indicates that a business can invest more to grow its future market share. Likewise, a low ratio means the marketing strategies are falling short or attracting new customers.
5. Average Order Value (AOV)
It tells you how much the standard customer spends per transaction. Monitoring AOV helps you understand customer purchasing behavior and the overall sales performance of your store. Increasing AOV can directly boost revenue without needing to acquire new customers.
In 2023, Cyber Monday shoppers in the U.S. had some of the highest order values from popular retailers. Statista reveals purchases made from Shein and Walmart averaged $49 per order, followed by Target at $44, Amazon at $36, and Temu at $30. This highlights how AOV can vary significantly across platforms, reflecting different customer spending habits.
To determine the AOV, divide your total earnings by the volume of orders. To enhance it:
- Implement product bundling
- Offer free shipping thresholds
- Use upselling and cross-selling techniques
Interestingly, consumer spending fluctuated throughout 2023, with May seeing the highest average online spend of 135.81 dollars. By September, this number had decreased to 126.42 dollars, showing the impact of seasonal trends on AOV. A higher AOV means a larger profit per customer, resulting in higher margins. By consistently tracking it, you can refine these strategies and create a more profitable sales approach.
6. Year-to-Date (YTD) Net Operating Income
Year-to-date (YTD) net operating income shows the profitability of your core operations, excluding non-operational costs like taxes and interest. This metric gives a clear picture of your business’s operational efficiency over time, typically from the start of the fiscal year, i.e., January 1st.
For small e-commerce businesses, tracking YTD Net Operating Income is essential for comparing current performance against past results. It helps you identify patterns, assess ongoing profitability and budget, and make necessary adjustments. This ongoing analysis supports better decision-making and strategic planning.
While managing these metrics is crucial, you might be unable to do so as a small business. According to Fully Accountable, outsourcing financial analytics is one investment you can consider. It enhances your business’s understanding of these metrics by offering comprehensive data and research-based strategies. Their expertise can help you probe deeper into the data, identify subtle trends, and translate insights into actionable strategies to optimize overall financial health.
Commonly Asked Questions
Q1. How often should small e-commerce businesses review their financial metrics?
You should review your financial metrics at least monthly but weekly is much better. Regular audits help you notice trends and issues early. Remember, though, don’t get too wrapped up in daily fluctuations. Focus on overall patterns and use them to guide your business decisions.
Q2. What’s the difference between revenue and profit for e-commerce businesses?
Revenue is all the money you bring in from sales, while profit is the remaining amount after adjusting for expenses. Consider revenue as your top-line number and profit as the bottom line. It’s possible to have high revenue but low profit if your expenses are exorbitant.
Q3. How can small e-commerce businesses improve their cash flow?
Offer incentives for early payments, manage inventory smartly to avoid overstocking, and consider using accounting software for better tracking. Moreover, don’t forget to chase those overdue invoices. Every dollar matters when you’re operating a small business!
Conclusion
Remember, these metrics are merely a reference point. There are countless other financial metrics you can track, depending on your particular objectives. By understanding these key metrics, you’ll be better equipped to make better decisions, discover potential for improvement, and promote sustainable development.
Moreover, while these metrics are crucial, they’re most powerful when viewed together. Each metric provides a piece of the puzzle. However, it’s only helpful if you complete the whole picture, as it will guide you to success in the competitive e-commerce landscape. Start tracking these metrics today, and watch as your understanding of your business’s financial performance grows.
