How to Model Ecommerce Business Financially?

How to Model Ecommerce Business Financially?

When starting an eCommerce business, you need to have a sound financial model in place. This involves creating a Cash flow statement and a Profit-and-loss statement. A Balance sheet and Assumptions sheet are also very important, and you need to be sure that your costs do not exceed your revenues. 

(Looking for digital marketing & analytics expert? Contact us today!)

Profit-and-loss statement 

When you start an eCommerce business, one of the most important reports that you need to have is your Profit and Loss Statement. It shows how much revenue you generate after all expenses and depreciation. This statement is different from your Balance Sheet, which only shows assets and liabilities. It reveals revenue and expenses over a time period. 

Profit and loss statements are used to measure profitability and assess cash flow capacity. An eCommerce business has a high volume of transactions, and each sale involves costs. While you receive a lump sum of money from a sale, you also need to understand all of the expenses that go into that payout. In order to determine your COGS, use a cloud accounting system like A2X, which posts journal summaries of transactions to your cloud accounting system. 

Cash flow statement 

If you run an eCommerce business, a cash flow statement is a must-have tool. This statement details the in and out-flow of cash in and out of your business, as well as your non-cash investing and financing activities. Understanding cash flow can help you make better decisions about your business. 

Having a healthy cash flow position is important for the success of your business, as it allows you to grow while keeping expenses low. You can improve your cash flow by reducing expenses and cutting non-essential ones. You can also try to relocate operations so that you can cut overhead. 

Balance sheet 

A financial model is a tool that helps you understand the potential profitability of your online business. An effective financial model includes assumptions about the marketing funnel and cost of goods sold, and it also accounts for variable expenses. A fixed cost sheet includes costs that are independent of sales, like salaries and warehouse rent. A variable cost sheet, on the other hand, includes costs incurred when you sell inventory. These costs can include shipping costs, product costs, and sales commissions. 

The first step in creating a financial model is identifying your top-line assumptions. This information will affect the structure of your document. For example, you might need to include information about your first month in business, your product portfolio, and whether your business is a manufacturer or a sole proprietorship. You should also include a cash flow statement. 

Assumptions sheet 

To model your eCommerce business financially, you’ll need an assumptions sheet. The assumptions sheet should be the first tab in your spreadsheet. It contains the variables that all the other tabs reference. You may want to roll up some of these variables for ease of calculation. As you type the numbers into the assumptions cells, remember that all the other cells are based on your assumptions. Assumptions vary according to the type of business you are running. 

You’ll want to structure your assumptions in a way that makes them easy to change later. You can also label them to make them more understandable. There are multiple ways to organize assumptions, but it’s best to have them listed on one sheet to make them easily accessible.