5 Key Financial Metrics to make sure your online store is performing

Guest Post: Finance

5 Key Financial Metrics to make sure your online store is performing

At We Grow Businesses we help our clients to grow their small businesses as quickly as possible. In the 12 months to August 2018, our clients increased turnover by just over £1m, and increased net profit by just over £500k.

Here are some of the key metrics that we used to achieve those results, applied specifically to e-commerce businesses.

1. Cash

As the old saying goes, cash is king. Cash is simply the amount of money you have in your bank account(s) at a given point in time.

Something like 80% of businesses fail due to cash issues. The chances are, if there is a problem in your business then we will see the symptoms of it in your cashflow.

So what is a good cash balance? In an ideal world, we like to see one to three months of cost coverage in your bank account. So, for example, if your business has total costs of £10,000 per month, we would like to see between £10,000 and £30,000 in your bank account at month end.

If you’re a VAT registered limited company, we would like to see your cash balance net of VAT and corporation tax – we want to see what your true working capital position is – not an artificially inflated position.

In e-commerce businesses, one of the biggest challenges we come across is stock. The timing of when you pay for your stock can have a huge impact on your cash position. The further we can push back in time the point when you pay your suppliers, the better. The earlier your customers pay you, the better.

2. Transaction Volumes

Transaction Volumes

By tracking transaction volumes over time we can learn a lot about how the business is behaving.

Transaction volumes give us an idea of whether marketing spend is working, e.g. a pay-per-click campaign. We can also learn which products are selling quickly, and which are slower moving.

E-commerce platforms like Shopify provide a great deal of information to allow you to analyse transaction volumes and associated metrics. There’s one word of warning here – try to keep things simple. There is so much data available nowadays that it is easy to get caught in the ‘paralysis of analysis’. We find that one or two simple metrics are more effective than lots of detail.

3. Gross Profit Margin

Gross Profit = Revenue – Cost of Sale. For example, if you have sales of £100, and it cost you £40 to buy the goods that you sold, then your gross profit would be £100 - £40 = £60.

Gross Profit Margin is just gross profit expressed as a percentage of revenue. So, £60 / £100 x 100 = 60%.

It is crucial that you make a sufficiently big gross profit margin on the products you’re selling in your store. If you’re paying too much for your stock and/or selling your products too cheaply, then you’re shooting yourself in the foot.

Gross profit margin varies from one industry and product to the next, so we don’t specify exactly what this should be. However, in an ideal world, we do expect to see this trending up over time.

4. Net Profit Margin

Your store will have operating expenses – expenses that stay relatively static from one month or year to the next – for example your accountancy fees or rent.

Net Profit = Gross Profit – Operating Expenses. Net profit margin is just net profit expressed as a percentage of revenue.

Say our business above had operating expenses of £30, then its net profit would be £60 - £40 = £20. £20 as a percentage of £100 is 20%, which is the net profit margin.

In an ideal world, we like our clients to achieve between 20% and 40% net profit margin. This strikes a good balance between delivering a decent profit for the business owner, reduces the chances of cash issues, and suggests a good level of investment to continue growing the business.

We recommend that you analyse your operating expenses closely using accounting software, like Xero, and confidently cut costs. Generally speaking, any expenditure where the return on investment is uncertain should probably be cut.

5. Average Sale Price

Average Sale Price

If you divide your revenue by your transaction volume then you’ll get your average sale price.

This simple metric is crucial for sustaining and growing your revenue. It helps us to understand what is going on if transaction volume is up but revenue is down – and vice versa – for example.

Naturally your product mix and prices will change over time. Generally speaking, across your business as a whole, we want to see average sale price trending up as you exploit your niche and move towards premium pricing.

About The Author

We Grow Businesses have some fantastic tools for analysing your business, benchmarking it, and giving you logical and evidence-backed support to grow your business. With a strong focus on the financials, we achieve the results listed above.We offer a free health check to give you a taster of what it’s like to work with us. Find out more by clicking here.

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