As a business owner, you should be reviewing your financials every month. These reports are the pulse of your business. But what exactly are you looking for? Let's break it down!
Take a Look at the Big Picture
First of all, look at the big picture, starting with the P&L. Does the story from your numbers match your experience from your business? Whether you do the books, or you use a service like bookskeep, the first step in reviewing your financials is to ensure they make sense. Is your revenue in line with what your sales platforms are showing? Are your Cost of Goods Sold numbers tracking your revenue? If either of these are not tracking, dig into this report to try and understand why. The reason this review is so important is because your Gross Margin calculation comes from these components of your P&L.
Gross Margin calculation is the first and primary KPI (Key Performance Indicator) we dial in with our new service, Progress Masters Ecommerce Business Advisory Service. The calculation is (Gross Profit/Revenue) x 100. Gross Profit is Total Revenue - Cost of Goods Sold. You want to ensure that you are making money at this level because if you are not, you are setting yourself up for failure. The benchmark number you should be using is at least 30%. If you don't meet this number, then dig deeper to understand why you’re falling short. If your numbers are correct, then look at the gross margin of your top sellers. Over time, pricing can be reduced or costs can go up and what started out as a healthy product begins to be a drag on the business. If it is, take action quickly to eliminate that drain on funds.
Also take look at your Net Margin calculation. This is your bottom line, calculated as (net profit/total revenue) x 100. Before taxes, you should have a net margin of 10%. If you don’t, and your Gross Margin is good, then you have too much in operating expenses. Get ruthless and cut them.
Understand the Story of Trends
Now that you've got a handle on the big picture, start looking at trends. One data point doesn't always give us the full story. And while these numbers are historical, their trends can help us understand if we have an issue looming. From an overall perspective, ensure everything is tracking as it should. Are there spikes or gaps in spending or income? If so, do you know why? Are expenses going up or down? Do you know why? Do you need to take action to bring these back in line? Are revenues trending up? Yay! But what does that mean for your inventory turn or your staffing levels?
Finally, if you are working to improve any area of your business, you need to identify which accounts may be impacted by your improvement actions. What was the baseline for these accounts before you started your process? As you take action, how do these numbers change? Are you making the difference you expected? You may have specific measures that you're monitoring outside the financials system, but don't overlook the financials because if it doesn't show up there, your work may not be done.
Try Graphical Reporting with Progress Masters
With our new Progress Masters Ecommerce Business Advisory Service, we've been developing new reporting for clients to give them deeper insights into their financials. We are using graphics to do trend analysis because a picture tells the story so much quicker. What options do you have for visually monitoring your financials? If you find it challenging to digest the tabular data, then graphical reporting may be the answer for you. To learn more about Progress Masters, contact Bree@bookskeep.com. We start clients in the program every quarter and we would love to add you to our list of happy, financially savvy clients!
Interested in Profit First?
If your ecommerce business isn’t where you’d like it to be in terms of profitability, check out my book, Profit First for Ecommerce Sellers. It answers important questions about how to implement Profit First in an ecommerce business. Take control of your money and your business, and put Profit First to work for you!
You can also sign up for the Profit First for Ecommerce Sellers Online Course. As a Mastery Level, Certified Profit First Professional, I will teach you why Profit First works so well for ecommerce businesses and the particular challenges for businesses that have physical products requiring inventory management. You will learn how your behavior drives your money management habits for your business and how you can set up your business bank accounts to work with your habits.