Mastering eCommerce Financial Statements: Income Statement, Balance Sheet, and Statement of Cash Flows
Introduction
In the fast-paced world of eCommerce, financial acumen is key to success. Understanding the three core financial statements – the income statement, balance sheet, and statement of cash flows – is essential. This blog post dives into each of these statements, explaining their functions, how to compare them, their interconnectivity, and how they can be used to boost your business’s profitability.
1. Income Statement: The Profit and Loss Picture
What It Is:
The income statement, often called the Profit and Loss (P&L) statement, shows your eCommerce business’s revenues and expenses over a specific period. This should be your first report to see your company’s health, and viewed as frequently as possible
How It Works:
It starts with sales revenue and subtracts the costs and expenses incurred, leading to the net profit or loss.
Key components include revenue, cost of goods sold (COGS), gross profit, operating expenses, and net income.
Comparing and Analyzing:
Compare income statements over multiple periods to identify trends in sales growth, expense management, and overall profitability.
Compare every item to percent of total income to view abnormal categories. These guidelines are subject to change depending on industry, but as a rule of thumb percent of income: returns should be less than 6%, advertising under 14%, COGS under 34%, other expenses under 18%. If you do that, you should be on track to a 5-15% net margin profitable business!
Analyze gross and net margin percentages to ensure they are where you want them to be.
Look at a company wide level, but also dive deeper into product groupings, and even individual product SKU profitability to make decisions on their price, and future order potential.
2. Balance Sheet: A Snapshot of Financial Health
What It Is:
The balance sheet provides a snapshot of your business’s financial standing at a particular point in time.
How It Works:
It lists assets, liabilities, and owner’s equity, balancing out in the equation: Assets = Liabilities + Owner’s Equity.
Key components include current and long-term assets, current and long-term liabilities, and owner’s equity.
Comparing and Analyzing:
Regularly review balance sheets to monitor changes in assets and liabilities, ensuring a healthy balance between what you own and owe.
Compare the balance sheet against other periods to view changes and assess if you are moving in the right direction.
Additionally compare all items to total assets as a percent and ensure nothing stands out larger than expected.
Do ratio analysis to determine the current ratio and debt to equity ratio. Read more about balance sheets here
3. Statement of Cash Flows: Tracking the Cash
What It Is:
This statement shows how changes in the balance sheet and income affect cash and cash equivalents.
Comparing and Analyzing:
It breaks down cash flow into operating, investing, and financing activities.
Helps in understanding cash inflows and outflows, crucial for day-to-day business management.
How It Works:
Compare statements of cash flows over different periods to identify cash flow trends and their impact on business operations.
Analyze to assess the efficiency of cash management, investment strategies, and financing decisions.
The Interconnectivity of Financial Statements
These three statements are interconnected and provide a comprehensive view of your business’s financial health.
The income statement feeds into the balance sheet, affecting owner’s equity and retained earnings.
The balance sheet provides the data necessary for the statement of cash flows.
Together, they offer a complete financial picture, vital for strategic planning and decision-making.
Using Financial Statements to Drive Profitability
- Strategic Planning: Use insights from these statements for budgeting, forecasting, and setting financial targets.
- Performance Monitoring: Regular analysis helps in identifying areas for cost reduction and opportunities for revenue enhancement.
- Investment Decisions: Understand where to allocate resources for maximum return.
- Risk Management: Assess and manage financial risks effectively.
Conclusion
Grasping the income statement, balance sheet, and statement of cash flows is crucial for eCommerce success. They provide the insights needed to make informed decisions, manage risks, and drive profitability. Regular review and analysis of these statements should be an integral part of your financial strategy.