24.08.21

P&L For Marketplaces And Big E-commerce Business

The e-commerce model gives opportunities for scaling and income increase. Still, this model has many expenses such as digital marketing, maintenance of IT platform, staffing provision, and logistics. Successful activity is possible under the income and expenses control and regularly monitor financial. P&L can help to display effectiveness in terms of income and expenses. What kind of report is it, and how could it help e-commerce business owners with financial control?
P&L as the tool for financial control in e-commerce
All types of businesses have to keep income and expenses accounting to control financial flows. Though, often, accounting can't explain quarterly losses and plan the budget for the next 2-3 months. But financial accounting can do this.

First of all, it is essential for business owners but not for auditing government agencies. P&L report is one of the main financial reports. Unfortunately, it's not the first thing that marketplaces and online stores take into account. The stable profitability and loss ratio analysis must be in every e-commerce business, especially when business is scaled and sales are growing.

This indicator makes it main reports are required to be in online business:
Balance — consolidated statement of financial and property status. It reports about assets and obligations and is compiled on a specific date.
Cash flow — report that shows how much money a business obtains and spends for a specific period.
And, finally, P&L (profit and loss) —shows the final amount of income and expenses for the specific period.
P&L is a more informative report as it can evaluate the performance of the main activity. For instance, Cash-flow doesn't take into account the company's debts. Not all incomes received to the account can be spent. After the payment of taxes and repayment of the loan, the sum can reduce in many times. P&L displays an accurate picture of profit and loss.

You shouldn't be restricted by the P&L report only. For example, you can see a profit in documents but not in the account. It's because you will receive this income in 2 weeks or more. But it has already been indicated in documents beforehand. But what if taxes payment has to be done tomorrow? The company gets a "Cash Gap" (CG) when profit is only on paper. It shows the importance of Cash-flow and P&L reports.
How to create P&L for e-commerce
Cash-flow shows balances and receipt of funds, and P&L — revenue and profit. The first one is easier to build. When you have the bank statement for the reporting period, it is easy to post amounts by item and calculate the ten differences between receipts and payments. Even the negative result helps to make conclusions about money management effectiveness can be done.

Fundamental values in P&L are revenue, gross and net profit. The expenses are deducted from the revenue for the specific period (cost of goods, administrative, commercial, and financial fees, taxes). You can add the values list with operating profit if it excludes economic activities influences on the primary one. Then the cost of goods is deducted from the revenue. It is a variable indicator increasing with the growth of sales, and administrative, commercial expenses.

What P&L that have to be taken into account by online-retailer in the report:
Incomes:
  • Online sales of goods and services;
  • Additional funds, for example, interest received from savings in the bank.
Expenses:
  • Cost of goods — direct expenses from sales of goods;
  • Discounts for clients to increase their loyalty;
  • Fixed expenses, independent from sales growth (office rent, utilities, etc.);
  • Variable expenses, depending on the sales volume (delivery or advertisement costs).
Business costs are combined in large-scale groups: operating – for workflow organization (rent, utilities); investment – a purchase in long-term operation (terminals in delivering points for customers); depreciation expenses – wear, loan repayment, and taxes.

Expenses list can look like: purchase of goods (purchase «bespoke,» can be done with buyer's prepayment), IT-maintenance (hosting, technical support, connection payment), warehouse and office rent for improving the company status in front of buyers, salary for all team members, taxes, web promotion depending on the product type, market competition and seasonality.

P&L for retail can be expressed in 6 tables in Excel:

  1. Budget: sales, margin (price minus goods cost), operating costs, salary, transport, and rental costs.

  2. Sales, margin, and losses: sales by product groups, including a margin for each.

  3. Operating cash: operating costs, including salary, transport, rental, utility costs, IT, marketing, insurance, equipment, business trips of employees.

  4. P&L: depreciation (decrease in property value as it wears out).

  5. Salary: all staff costs according to staffing table.

  6. Data and constants: rent and utility payments — per 1 sq.m. store (office, warehouse), payroll taxes.
Online-business has to show income and expenses, not upon payment but as it arises (example: rental prepayment should be distributed throughout all paid periods); make sure that income and expenses consort with each other (example: if advertisement launched in January, and you got the first orders in February, you should write down expenses on February); reckon investments in fixed assets (example: the amount of equipment purchase is distributed during the entire period of operation).
P&L analysis: how to define the effectiveness of online-business
A few indicators can reflect financial effectiveness. They are calculated based on the financial report and are known as the EBITDA formula. The calculation remains unchanged, no matter what standards you take as a basis (IFRS, RAS, UR(S)A, GAAP).

Formulas for EBITDA calculation:

Direct way: sales revenue - costs without depreciation, interest on taxes.

Reverse way: net profit + Taxes + Percentage to be paid + Depreciation

A positive result doesn't show business success. After payment of all interest, taxes, and depreciation, it is possible to get zero or even minus. The negative result shows operational losses. It is necessary to analyze indicators. It assesses the business profitability and its ability to cover costs.

Important indicators of P&L for online-store:
Net profit — a profound indicator of the report (without other incomes and expenses). It shows the financial result to the owner in terms of the difference between revenue and expenses.
Gross profit — shows the maximum amount of fixed expenses. This indicator makes it possible to define the number of goods for sales to cover costs with gross profit.
Share of each expense in the number of costs— shows high and ineffective costs. It helps to reduce or exclude inexpedient expenses.
Expenses versus revenues — reflects a percentage of income that consumes certain expenses. The ratio of operating expenses to sales revenue allows valuing the expensiveness of company activity.
The primary purpose of an e-commerce business is to generate stable financial flow: it must cover organizational costs and part of the head office expenses and reimburse depreciation. Otherwise, company existence has no sense. P&L helps to value and deduce about business effectiveness. Complete financial picture simplifies the management of the online trade business, either marketplace, small online store, or a combination of the online store and retail chain.

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