In this lesson, we discuss how to construct and evaluate basic e-commerce profit and loss statements. This is especially helpful for companies or individuals who are trying to start a new e-commerce business or who are trying to add sophistication and financial diagnostics to an existing business.

1. Introduction to e-commerce
Financials
Lesson 1 – The Basics

2. e-commerce Financials | Introduction
e-commerce Financials
When starting an e-commerce business, the very first thing that needs to be done is to create a
financial roadmap for the enterprise. Without this roadmap it is very hard for an e-commerce
operation to get started let alone thrive or even survive.
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The major elements that one needs to consider include
1) Creating A Revenue Forecast
2) Understanding Business Costs
3) Profit & Loss Statements (P&Ls)
4) Working With An Accountant
5) Constant Refinement
We will discuss each of these in this presentation

3. e-commerce Financials | Creating A Revenue Forecast
The first step is to create a revenue forecast.
The revenue forecast in the table above is completely arbitrary and shows a steady doubling from
$1 million in the first year of operation to $16 million in year 5. 100% growth for 4 years after a
start-up is fairly hard to achieve (as is generating $1 million in the first year of an business) but it is
useful for illustrative purposes.
The forecast is further broken into 3 different brands or divisions. This is for companies who have
multiple distinct brands or business units that are joined into a common forecast that shows how
the different channels combine to create a total sales forecast. Many companies will only have a
single channel but this is to show how you would combine them.
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4. e-commerce Financials | Creating A Revenue Forecast - Diagnostics
Revenue Forecast Diagnostics
By including metrics like the expected average order value, you can estimate the number of orders
your business will be fulfilling in a year or in a month.
The above example assumes a constant number of orders each month. This is unlikely for most
businesses that have seasonal variations, however showing it this way allows you to ask questions
about your company’s ability fulfill a certain number of orders in a given month. Sometimes, a high
order forecast will immediately cause you to wonder if your organization can handle the volume.
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5. e-commerce Financials | P&Ls
We start the review of e-commerce P&Ls
by selecting a revenue target. In this
case, we will be evaluating a business
with revenues of $1 million (USD).
Although it is labeled as the first year of
business, it could be any year. However,
it is important to realize that all of the
numbers presented in this P&L
discussion are pro forma in nature and
the actual numbers and percentages for
a real business will be based on the
dynamics of that particular business.
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6. e-commerce Financials | P&Ls
This is a full-year P&L for a typical e-
commerce business. It looks complicated (and
it is), but we will review each aspect of it in the
coming sections.
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7. e-commerce Financials | P&Ls - Revenue
The first thing you will notice is that the we have the full-year summary information at the left and
far right, and in-between we have the quarterly P&Ls. Ideally, you will go even deeper and create
monthly P&Ls that will summarize up to quarterly P&Ls, but for this lesson, we are showing only the
quarterly and year totals to keep it simple.
In this full-year example you will see that we have started off with our assumption of $1 million in
total gross revenues. This is money that comes into the organization from the sale of goods and
services. This is then netted down by returns and then increased by revenue from shipping and
handling charges. These 2 values will be different for every business.
It is also important to note that there are different sales loads for each quarter. This is because
most online businesses have some kind of seasonality to their order flow. It is critical to understand
these seasonal revenue highs and lows since fixed costs will result in some quarters losing money
and other producing outsized profits.
The key is to understand these peaks and valleys and to manage your business so that you make a
profit by the end of your fiscal year.
First, we will look at the revenue portion of the P&L
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8. e-commerce Financials | P&Ls - Revenue
Gross revenue is then netted down by Returns & Allowances and then increased by revenue
from Shipping and Delivery that is charged to consumers. These 2 values will be different for
every business. For instance, some businesses endure very high rates of return while others
do not.
As for Shipping and Delivery income, this is different for every business as well. In some
businesses, adding this source of revenue directly offsets the postage and warehouse fees
that are incurred in shipping product to end consumers. For other businesses, these charges
are not expressly stated (i.e. free shipping), but are rather baked into the selling price.
Once you have factored in these 2 variables then you derive your Total Income line.
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9. e-commerce Financials | P&Ls – Cost of Goods
Cost Of Goods Sold
Cost of Goods Sold (cost of your products or services) is usually the largest cost item in an e-
commerce P&L. In this case, we have used a cost of 40% of revenue but this will vary by company.
Controlling this cost and making sure that it fits your P&L is critically important and ultimately
determines what your retail selling price will be.
It is important to note that we are showing the final cost of the goods as they sit in a warehouse in
the market that they are to be sold in. There are many elemental costs that are built up to get to this
final cost including the materials cost, cost to manufacture, tooling costs and the delivery charges to
get the products into a domestic warehouse. We are ignoring these costs in this presentation
because the costing of goods and services is an entire discipline unto itself.
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10. e-commerce Financials | P&Ls - Cost of Goods
Fulfillment Costs
The Fulfillment Costs are as follows:
Freight In:
The cost to have the goods shipped from the manufacturer to the domestic warehouse where they
will be fulfilled to end consumers.
Freight Out:
The cost to ship the products to end consumers (UPS, Fedex, UPS, DHL, etc.)
Warehousing
Warehousing represents all of the costs needed to store the merchandise and then to pick, pack
and ship it to end consumers. Warehousing costs can be very complicated since it involves the
amount of space required to store the merchandise, the duration of that storage, and the costs to
pull the inventory from the warehouse, box it up, apply a label and have it picked up for delivery to
the consumer. Warehousing costs are a critical component of an e-commerce P&L and you need to
study these in-depth when starting out in a new business and in any ongoing business. 10

11. e-commerce Financials | P&Ls – Gross Profit
Gross Profit
The Gross Profit is the money that remains after subtracting the cost of the products and the cost to
get them to consumers from the total revenue. Creating a Gross Profit line is considered so
important because it represents all of the funds remaining to pay for marketing and business
overhead once the product has been sent.
In this example, Gross Profit is 44% of revenue.
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12. e-commerce Financials | P&Ls - Expenses
Advertising
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For marketers, one of the most important expense categories is Advertising & Promotion. In today’s
digital marketing world there are many different ways to advertise including Google AdWords,
affiliate marketing, e-mail marketing, SEO, social marketing, etc.
When you build a P&L you can include line items for all of the channels that you use. However, for
a top line P&L like this, you can just include the major categories like we have and leave all of the
complex details of your marketing plan to a separate planning tool.
The key is to force your advertising to fit within the confines of your overall P&L. When you have
loaded all of the other costs into your P&L, advertising is usually the last thing to address. These
other costs and your target profit percent will determine the remaining amount you can use for
advertising. For many categories of manufacturers, 6% is a target advertising load, however each
business is different and yours will have its own dynamic.

13. e-commerce Financials | P&Ls - Expenses
Other Expenses
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Computer & Internet Expenses
EDI fees need to be considered if your company is going to be selling through third party retailer
websites that require EDI integration for transmitting order and inventory data and that require third
party integrations. There are also other miscellaneous computer-related expenses that can be put
in this category.
Insurance Expense
Most U.S. firms need general liability insurance and this needs to be accounted for.

14. e-commerce Financials | P&Ls - Expenses
Salaries
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Salaries are another critical cost element that needs to be accounted for properly. The example
above is greatly simplified in that it shows just one line for the salaries/costs for each employee. In
fact, the detail behind each is much more complicated if we take into account health insurance,
bonuses, raises, etc. Again, these need to be dealt with separately so that we can show the total
employee cost in this high-level P&L.
Another important point to make is that this is one of the cost categories that is fixed over time,
which is why you will see them represent different percentage cost loads depending on the revenue
level.
As we discussed at the beginning, most businesses have high and low seasonal demand for their
goods and services. As a result, some months will produce a profit and others will produce a loss.
As long as you make your expected profit by the end of your fiscal year you will be fine.

15. e-commerce Financials | P&Ls - Expenses
“Other Expenses”
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In any business there are a variety of miscellaneous costs that need to be budgeted for and
accounted for. The costs above include some of the back-office costs that most internet businesses
will experience. They key is to account for them and manage them tightly.

16. e-commerce Financials | P&Ls - Expenses
Trade Show & Travel Expenses
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Some businesses need to budget for trade shows and travel expenses.

17. e-commerce Financials | P&Ls - Expenses
Expenses & Income
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When all of the revenue and costs are loaded you will finally be able to see what the expected
profitability of your enterprise is.
In this business, the expectation is that 70% of the revenue will be generated in the 3rd and 4th
quarters. This is typical for many consumer products companies.
The 4.5% Net Ordinary Income (pre-tax profit) may seem low but it’s not bad for a first year
operation. A closer look at costs and higher revenue in future years will increase this.

18. e-commerce Financials | Final Thoughts
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This has been intended as just an introduction to the way to think about an e-commerce P&L. If
there is one thing you need to take away from this is that financials are incredibly important, have
lots of moving parts and are pretty complicated.
If you have full-blown finance and accounting team then you should be in good hands. If not, then
you NEED a good bookkeeper and accountant to help you deal with these issues.

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