Understanding the financial health, including profit margins, of your eCommerce business is an essential precursor to making informed financial decisions. It’s easy to get consumed by a daily sales number or overwhelmed with expenses, but analyzing profit margins is one of the most accurate ways to get the financial “big picture.” Plus, when making business decisions you’ll want to consider their impact to the bottom line. One of those business decisions could include inventory financing, so that you can fast track growth, keep cash flow healthy, and keep pace with demand.
Understanding what type of profit margin you need to measure
In order to understand which profit margins you need to be measuring, it’s helpful to have a clear idea of what they mean and why you’re analyzing them. Here’s an overview to get us started:
- Gross profit margin: To determine your business’s gross profit margin, you subtract the cost of goods sold (COGS) from your total revenue. The COGS will include any costs relative to the production or purchasing of your product and may include material, labor, and production overhead. When to use and why it matters: Analyze your gross profit margin to determine how easily you can convert your inventory into cash. With a low gross profit margin, you may not have the cash to put back into other costs of running your business. You can also use it as a benchmark to understand where profits are getting consumed the most. Additionally, when making production (i.e. purchasing materials, upgrading equipment, etc.) decisions, you should consider the gross profit margin.
- Operating profit margin: An operating profit margin represents how much revenue is left over after deducting expenses related to running your business such as rent, utilities, and salaries. When to use and why it matters: Looking at your operating profit margin will help determine if your revenue is enough to cover not only your cost of production but all expenses related to operating as well. Small businesses place a lot of weight on the operating profit margin, as they should. As you grow though, pay attention to where money is going to find ways to grow margins.
- Net profit margin: A net profit margin determines how much profit your company is making after all expenses – including bulk and irregular expenses such as taxes, interest, and other costs not directly incurred by business operations. When to use and why it matters: For an accurate assessment of overall profitability use the net profit margin. This is useful in determining your company’s ability to effectively manage expenses.
Calculating eCommerce Profit Margin
By understanding and assessing these profit margins, you have the power of making informed decisions in regards to the health of your eCommerce business.
Let’s demonstrate how that looks with a fictional business’s revenue and costs by subtracting relevant expenses from the total revenue, then dividing by total revenue and multiplying by 100 to get each percentage. For the purpose of ease, these hypothetical numbers will be nice and round.
Numbers used in example calculations below:
|Cost of goods sold (COGS)||$15,000|
|Rent, utilities, payroll, etc.||$10,000|
|Interest, taxes, etc.||$2,000|
#1. Gross Profit Margin = (Total Revenue – COGS) / Total Revenue x 100%
Example: (50,000 – 15,000) / 50,000 x 100 = 70%
#2. Operating Profit Margin = (Total Revenue – COGS – operating costs) / Total Revenue x 100%
Example: (50,000 – 15,000 – 10,000) / 50,000 x 100 = 50%
#3. Net Profit Margin = (Total Revenue – COGS – operating costs – additional costs) / Total Revenue x 100%
Example: (50,000 – 15,000 – 10,000 – 2,000) / 50,000 = 46%
Compare to industry benchmarks
By calculating your current profit margins, you can compare them to industry benchmarks to stay competitive and set goals for your business. For reference, NYU states that online retail averages gross margins of 41.54% and net margins of 7.26%. Understand the industry you operate within to set realistic goals. Plus, don’t underestimate the importance of efficient operations as they can impact profit margins more than you think.
Tips for boosting eCommerce profit margins
All of that may feel like information overload. What’s really important to know is how to boost your eCommerce profit margins. Larger profit margins are the key to success both online and in store.
Here’s a few tips to boosting eCommerce profit margins:
Increase the price of your product (without decreasing sales)
The simplest solution, raise your prices. This may be nerve wracking for some industries as the fear of customers not returning due to price hikes is real. For businesses with in-demand products, this is less of a concern. Keep in mind that even if you lose a small percentage of customers, you still have a chance to make up that revenue and then some – even with just a small price increase.
Customer loyalty programs (a mutually beneficial approach)
A loyalty program is often a points system that builds up with each purchase and can be applied as value towards a future purchase – increasing your revenue, without cheapening your product. Showing your customers that you appreciate their business is a sure fire way to get them to return. Plus, it’s easier to track their behavior with their consent and access to data that allows you to understand customer base better. In the future you can use this information to tailor marketing.
Increase the average order value (cha-ching)
This can be done in a few ways. Some common methods are offering a minimum order amount incentive such as free shipping, product recommendations during your customers checkout experience, upsell complementary products on product listings, offering bundle deals, and running promotions.
With increased sales, you’ll need to boost product inventory. Keep reading to find out how to support the growth.
Use inventory funding to meet inventory demands
Inventory funding can be astronomically beneficial for your business as it allows for production of more products than on-hand cash would allow. Plus, it keeps cash flow healthy. This means that your capital can go where you need it so that your business can grow.
Benefits of using inventory financing for eCommerce businesses
Besides increased cash flow, there are a number of benefits to using inventory financing for small businesses. These can include:
- Faster growth
- A chance to expand product lines
- Take advantage of bulk discounts from your supplier
Inventory funding can be the difference between excitedly riding the wave of eCommerce success and being overwhelmed by it.
How to apply for inventory financing
There are many sources to turn to when you need inventory financing. With our focus being on profit margins here, it’s appropriate to call out that inventory funding can cut into profit margins. So, how do you get affordable inventory funding? Kickfurther can help.
Kickfurther funds up to 100% of your inventory costs on flexible payment terms that you customize and control. With Kickfurther, you can fund your entire order(s) each time you need more inventory and put your existing capital to work growing your business without adding debt or giving up equity.
- No immediate repayments: You don’t pay back until your new inventory order begins selling. You set your repayment schedule based on what works best for your cash flow.
- Non-dilutive: Kickfurther doesn’t take equity in exchange for funding.
- Not a debt: Kickfurther is not a loan, so it does not put debt on your books. Debt financing options can sometimes further constrain your working capital and access to capital, or even lower your business’s valuation if you are looking at venture capital or a sale.
- Quick access: You need capital when your supplier payments are due. Kickfurther can fund your entire order(s) each time you need more inventory.
Kickfurther puts you in control of your business while delivering the costliest asset for most CPG brands. And by funding your largest expense (inventory), you can free up existing capital to grow your business wherever you need it – product development, advertising, adding headcount, etc.
Interested in getting funded at Kickfurther? Here are 3 easy steps to get started:
#1. Create a free business account
#2. Complete the online application
#3. Review a potential deal with one of our account reps and get funded in minutes.
Understanding your profit margins is crucial to the success of your eCommerce business. By calculating your profit margins, you can set goals for your business and move into growth mode. Inventory funding can be a game changer for eCommerce businesses, allowing for even faster growth.