Ecommerce P&L with example

How is the P&L of Ecommerce structured and why it’s important to do it right. For fashion ecommerce managers and digital directors it is essential to know in detail every single line of the income statement.

The income statement or P&L of ecommerce gives the managers a picture of the ecommerce health state, it answers some essential questions for example:

  • Did we make a profit last year? Are we planning to make a profit?
  • Are revenues increasing or decreasing vs Last Year (LY)?
  • How much is our Gross Profit Margin?
  • How much are we spending in Logisitcs, Shipping, Customer Care?
  • How much are we spending in Marketing?

As you can see, the P&L of Ecommerce gives you answers to some very important questions. The ecommerce P&L also answers questions regarding the trends of your ecommerce, for example:

  • This year our gross margin decreased by 5% vs LY
  • Last year our averaged discount increased from 10% to 12% vs Previous Year (PY)
  • Next year the cost of shipping is expected to increase from 5% to 6% on net revenue 

Differences in ecommerce P&L from company to company

It is important to understand that there is no single way for writing an ecommerce P&L, as it depends on the financial standards that we follow. Even at an accounting level there are different standards that companies can use and, depending on the standard used, the formatting of the income statement of the e-channel commerce or other channel may be different.

The important thing is to maintain consistency on how we calculate the revenue and cost items in the ecommerce P&L from one year to another, this allows to highlight trends in performance indicators over time that are consistent with each other. For example, if we calculate the cost of goods sold in one way in one year, we must calculate it in the same way the following year to be able to compare it. Here some more examples:

  • This year our gross margin decreased by 5%
  • This year our averaged discount increased from 10% to 12%
  • This year the cost of shipping went up from 5% to 6% on net revenue 

Ref. https://www.accountingtools.com/articles/2017/5/5/purchase-price-variance

E-commerce P&L terms, KPIs and Acronyms

  • Gross sales or gross sales: these are sales before returns and before taxes Value Added Tax (VAT) or (Sales Tax) or duties.
  • Net Sales: Gross Sales minus Ecommerce Returns
  • Bottom line: Net profit or EBIT
  • COGS: Cost of Goods Sold
  • Standard cost: it is a way of calculating the cost of goods sold based on the cost of the product components: cost of the material used + cost of processing = cost of the product.
  • Depreciation of warehouse products: each product tends to lose value if it is not sold and remains in warehouse for a long time. For this reason, conventions and practices are defined for the devaluation of warehouse products. These values are entered as costs in the income statement of the ecommerce channel.
  • Tracking e-commerce sales: gross sales vs. net sales
  • Very often sales in e-commerce are called with the English term Sales or Revenue to which the prefixes Gross and Net are added.

How to manage an ecommerce P&L and make it profitable

When you manage and ecommerce website or you own a business that sells online you need to have very clear how the P&L of Ecommerce is structured. Controlling every single line of the ecommerce p&L is essential to ensure the profitability of the ecommerce channel.

In this article we describe the essential cost centers that need to be accounted for and that determine the profitability of your digital ecommerce. You also find an example of ecommerce p&l the illustrates all the profit and cost items.

The calculation of e-commerce sales with the standard cost + mark-up method

If we calculate gross sales with the standard cost + mark up method, for example, we can accurately estimate sales before discounts. While if we calculate sales based on the collection we lose information on the discount applied.

The income statement of the e-commerce channel generally looks like this:

Gross sales = standard cost or industrial cost * mark-up
Industrial cost$50
Markup3
Sale price $150
Total units sold in the period (e.g. one month) 1,000
Gross turnover$150,000
– Discounts -$15,000
Gross sales net discount $135,000
– Returns
-$35,000
= Net sales $100,000


Reporting of returns in the ecommerce P&L

E-commerce returns can be reported in two ways:

  • by the date of receipt of the return in the warehouse or
  • by the date of issue of the invoice or sales receipt.

The first approach does not require estimating the quantity of returns that will be received in the period, as the returns are recorded in the accounting system after the physical receipt of the product. While with the second method it is necessary to estimate the returns that will be received after the expiry of each tax reporting period. This is called accrual.

Let’s take an example to explain this second method of calculating returns which is the most accurate: imagine you are managing an e-commerce of physical goods, let’s say fashion products, you are on December 1st and you decide to extend the return period for all orders received from 1st to 31st December to the end of January of the following year. By doing so you are in effect influencing the operating result of e-commerce by artificially reducing returns for the current period by moving them to the first quarter of the following year.

My operational recommendation is therefore to calculate the average return rate of the site and apply the average return rate in the calculation of returns when closing the balance sheet of the e-commerce channel.

The e-commerce income statement, a simplified model.

Sales
– Gross sales 1,000,000
– Returns 150,000
= Net sales 850,000
Costs
– Cost of goods sold (COGS) 250,000
Gross Margin 600,000
Direct costs
– Human resources 100,000
– Content production (photography, descriptions, etc.) 50,000
– Technology platform 50,000
– Marketing 100,000
– Logistics 100,000
– Payments 20,000
Operating margin (EBITDA) 180,000
– Depreciation and Devaluations 50,000
Profit before tax (EBIT) 130,000

The costs of e-commerce

The calculation of COGS Cost of Sold in e-commerce

From an accounting point of view, the cost of goods sold is any cost directly related to the product sold, i.e. we are talking about a cost that occurs only if the product is sold.

For the correct calculation of the cost of goods sold we must take three factors into consideration:

  1. E-commerce buying: the fixed assets of products that we purchase and allocate on the e-commerce warehouse with the aim of selling them over the course of one or more seasons and their degree of depreciation
  2. COGS are costs when we sell products and are revenues when we receive returns. This is a fact, you just need to remember to calculate them correctly.
  3. If the availability of goods that can be sold on the e-commerce channel is not allocated exclusively to the e-commerce warehouse but is the sum of several warehouses, the cost of goods sold cannot be calculated on the value of the e-commerce purchase or order.

Which costs should be included in the cogs in the income statement?

A possible rule is to follow the costs directly linked to the sale of the product, therefore the raw materials used and the cost of the labor used to create the product. But what do we do with credit card fees and sales commissions? These are also expenses that only occur if a product is shipped, but are generally reported lower in the e-commerce income statement.

The general practice is to report sales commission expenses lower in the income statement, because if we included all sales expenses in the cost of goods sold (COGS) we would obtain a lower gross margin. If you are a listed company, having a significantly lower gross margin than your competition can create valuation problems.

In conclusion, the best way to determine the components of the cost of goods sold is to look at what the leading companies in the sector do in the reference market and ask for information from the auditing companies (auditors) who will be able to give sufficiently clear indications and leave the choice up to you. where to place some cost elements. Once this choice has been made, it is best to maintain it for several accounting periods to have the possibility of making year-on-year comparisons and determining trends.

For further information: Steve Bragg podcast episode 323 the cost of goods sold

What we didn’t consider

Fixed costs and variable costs –> projection
KPIs such as average discount rate
VAT and taxes
Indirect costs: business costs such as offices, accounting, general management

Capital investments in e-commerce

Capital investments are often considered less important than operating costs, but that’s not how it works in e-commerce.
Analysts often look at the EBITDA i.e. they stop at the level of operating costs to determine the sustainability of the income statement of the e-commerce channel. This means that investments in infrastructure are overlooked, for example the creation of the e-commerce platform, are considered below EBITDA and therefore only fall within the calculation of EBIT otherwise known as profit before taxes and interest on capital.

In e-commerce, unlike physical bricks and mortar channels, investments in infrastructure are continuous because technology continually evolves, therefore you need to look at the EBIT to really understand the financial sustainability of an ecommerce.

Ecommerce Revenue streams or “channels”

Direct to Consumer (DTC) E-commmerce

DTC ecommerce is your brand website, usually it’s a brand.com website or localised e.g. brand.co.uk. This is your main domain on which is installed an ecommerce platform

Digital Wholesale Ecommerce

The relationship with e-tailers such as Net-A-Porter or Yoox. When you sell at wholsale price and in bulk to retailers or etailers that resell your products

Marketplaces

Are multibrand websites where you show your products and you benefit from the traffic present on the marketplaces to increase the visibility and reach new customers. Examples are Farfetch, Zalando, Miinto, but also many retailers and etailers have implemented the marketplace model on their website. This means that some websites are both etailers and marketplaces e.g. Breuninger, Galeries Lafayette, Yoox.

Digital in store

With the integration of online and offline channels, also called omnichannel, you can sell digitally from you phisycal store. You can use story telling apps on mobile phones, in this case there is an interaction with the sales personnel of the store, or you can install kiosks in store where the customers can order digitally from the store.

Flash Sales

Flash sales are events online with a duration of a few days when the customers can buy with a high discount. These websites are for example Veepee or Privalia or Best Secrets. It’s a good solution for brands who need to sell out remaining stock from the past season that is still in good conditions to be sold but it’s not suitable for the official stores.

Cost centers

Digital Supply Chain

The digital supply chain is the activitiy that consist in the creation of the photos, videos, descriptions, translations of the products.

Logisitics

The logistics is typically the wharehouse where you stock your merchandise, it can be directly operated by the brand or a service that you rent, in this case is a Third Party Logistics 3PL. In the logistics cost we also include the transportation inbound and outbound.

Cost of Technology

Ecommerce needs serval technological applications that need to be integrated to manage all the data flows: products, stock, prices, orders, customer data.

Cost of Goods

Costo of Goods Sold is the first “cost item” that you find in the ecommerce P&L, the Net Revenues – the costo of goods sold determines the Gross Margin which is an essential KPI for the profitability of fashion brands.

Legal and Administration

The costs that are not specifically generated by ecommerce such as the cost of top management, finance and administration and HR are spread over the profit centers in a proportional manner. For example the cost of Administration is divided by Retail, Wholesale and Ecommerce department proportionally to the revenue generated by each sales channel

Cost of Personnel

Ecommerce teams are made of few or hundreds of headcounts depending on the size of the business. Typically you have an Ecommerce Manager or Director and you have a Store Manager, a Buyer, a Visual Merchandiser, a Graphic Designer, an Operations Manager to oversee Logistics, Customer Service and Operation, you may have an IT person within your ecommerce team and one or more Customer Service operators.

Digital Marketing

Digital Marketing is one of the essential investments that need to be made to sell online, the investment in Digital Marketing is essential to generate traffic. While in bricks and mortar stores the traffic is generated by the location, online you need to invest in digital marketing to create traffic. You can invest in paid traffic for example advertising or you can create content the organically attracts visitors, this is also called content marketing.

Ecommerce P&L Example

This is an example of a full profit & loss statement for an ecommerce that sells fashion products. You can notice the profit and cost centre structure on the left. In the first 4 lines of the P&L you have the P&L Items that determine the Net revenue or Net Sales: Gross Sales (Sales) – Discounts (Sales Discounts) – Returns in Value (Sales Returns).

Ecommerce P&L Example

E-commerce financial terminology

  • Top-line: revenues or sales
  • Bottom line: net profit or EBIT
  • COGS: Cost of Goods Sold or cost of goods sold
  • Standard cost: it is a way of calculating the cost of sales based on the cost of the components of the products: cost of the material used + cost of processing = cost of the product.
  • Gross sales: sales gross of returns and sometimes even gross of VAT (VAT)
  • Devaluation of products in stock: each product tends to lose value if it is not sold and remains in stock for a long time. For this reason, conventions and practices are defined for the devaluation of products in stock. These values are entered as costs in the income statement of the ecommerce channel.

Differences between company and company

It is important to underline that there is no single way to schematize (report) financial activities, even at the accounting level there are different standards that companies can use and, depending on the standard used, the formatting of the income statement of the e- commerce or other channel may be different.

The important is maintain consistency from one year to the next so you can view trends over time – trend – of the performance indicators – that they are consistent with each other. For example, if we calculate the cost of goods sold in one way in one year, we must calculate it in the same way the following year in order to be able to compare it.

Ref. Https://www.accountingtools.com/articles/2017/5/5/purchase-price-variance

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