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Case study of an online store profit and loss

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Why read this? : We go line by line through our first online store profit and loss. Learn the key financial measures you should track when selling online. Read this to help inform the assumptions you make when building your online store profit model.

One of the hardest tasks when setting up your own online store is writing your financial plan. You have to answer tough questions. How many customers you’ll get. How much they’ll spend. What your pricing, promotional and cost plan will look like. And how long before you’re profitable.

They’re tough because until you start selling, you can only make educated guesses at the answers. But you need this plan to secure the resources you need to launch.  

Our online store business model guide shows how to answer many of these questions. How to estimate the number of customers to do an e-Commerce forecast, for example. Which costs should be in your online store profit and loss. And how to keep an eye on your profit levels. 

Financial planning is hard work

Many people find this financial planning hard work, especially before they start selling.

It’s very conceptual and numbers-driven. Not everyone’s an accountant, or financially minded.

All those numbers and spreadsheets can be a grind to work through if they’re not your thing. 

We’ve worked on many online store profit and losses. The only good news is the more you do them, the easier they get. 

5 piles of coins with the word aargh written over the top of them

What helped us a lot was using real numbers. Real numbers make the financial plan come to life. It gets you into the concrete detail of how much you’ll sell, and how much it’ll cost.

So this week, we share the first online store profit and loss we ever wrote. With a bit of editing (to protect the store owner’s anonymity), we thought it’d be useful to talk through an actual e-Commerce financial plan. Based on real numbers, you can review this online store profit model to help you build your own e-Commerce financial plan. (See also our e-Commerce forecasting article for more on the actual results). 

Online store business model – example profit and loss

The profit and loss can look intimidating at first. There’s a lot of information. But take it one step at a time, and it’s not as hard as it looks. 

Remember, it’s just a logically organised table of columns and rows.

You don’t need to look at them all at once. 

Read the numbers like you read the words on this page, one at a time. Link the numbers together to work out the story they’re telling you.

Online store business model - A table with 12 months of data and key parts of the profit and loss account including net sales, gross profit, net profit, volume and other assumptions

Start with the column and row headings

The first column has all the elements of the profit and loss – sales, costs and profit, broken down into smaller elements. The other columns are month by month for the first year and a 12-month full-year (FY) summary in the last column. 

Each row has a separate element of the profit and loss, starting with gross sales and ending with the net online store profit. In simple terms, the top starts with how much sales money you bring in. You then subtract all the costs of selling. You finish at the bottom with how much you’ve got left – the profit. 

On this page, we also have 2 sets of assumptions. 

First, the volume assumptions. That’s the number of units of each item we thought we’d sell. 

Then, the cost assumptions. We used percentages as most of these assumptions were variable costs. Variable costs vary depending on how many units you sell. The more you sell, the more you pay e.g. for the cost of making the product, or for storing and shipping it. Our main fixed cost (a payment you make no matter how much you sell), was the cost to set up and maintain the store website.

Online store profit and loss models will differ

Of course, for your online store profit and loss, you plug in your own numbers. Each business will have different numbers, but the shape and layout of the online store profit and loss should be similar.

The numbers here are more than 5 years old. They came from a business which already sold via traditional retail channels but was new to selling direct-to-consumer (D2C)

Overall, we forecast we’d only make a modest profit in year 1. We assumed slow initial sales and covering all our start-up costs. But by the end of year 1, the store’s making $10k+ profit per month, which would put it in a healthy financial position going into year 2. 

Of course, what your online store profit and loss looks like depends on your business context. 

A brand-new player with an unknown product will take longer to get going. A first-year loss wouldn’t be unusual. It takes time to grow an e-Commerce business.  

For this example, customers already knew the brand. That helped speed up the process. The brand was known, it was the D2C store which was new. We assumed innovators and early adopters would be our main year 1 customers. This gave us a good idea of the potential number of customers in the first 12 months. 

As we walk through the model, don’t get too hung up on our numbers. Listen to how we thought them out, then think about how you’d do the same thinking with your financial and marketing data

Step 1 – Forecast gross sales

We start with gross sales. Gross means the absolute dollar value from the sale, with no deductions. It’s the summed total of the number of units sold multiplied by the price paid.

In our example, we assume the price for all units is $30, the recommended retail price. (Multiply units sold each month by $30 to get gross sales). 

The units sold came from our sales forecast. We used the reasonable assumption approach to do this. (see our e-Commerce forecasts article).

Sale sign in white on a red window with outline of a person walking past in the background

The reasonable assumption forecast

We based the sales assumption on the number of visitors to the brand website and assumed a low initial conversion rate of 0.01% in month 1.

Over time, as more customers get more familiar with the store, we increase the conversion rate. It’s at 2% by the end of the year. 

Was this reasonable? 

Well, 2% is an accepted “average” conversion rate for online stores. (See our freaking out accountants with D2C article for more on this). 

Your man looking up towards the ceiling

It’s reasonable to assume you won’t immediately convert 2% of visitors when you launch the store. It could take up to year to hit that level. 

We also factored in we’d be advertising the store. Brand adverts would highlight the store in TV advert end frames, and at the bottom of print adverts, for example. This would build trust and awareness faster.

To keep it simple in this model, we only show 2 products in the volume forecast here. In reality, that store had around 10 products. For the profit and loss though, you only need the summed total for all the products. This example is just to show how the calculations behind the total gross sales numbers work. 

Initial sales will be low

For example, we expected Sku 1 to sell more than Sku 2. We also assumed the first few months’ sales would be low. Why? Well, it takes time to build trust and awareness. Customers have to get used to the idea of buying products directly from you. Few stores take off rapidly from launch. Most are slow builds. 

In this example, we forecasted sales of only 80 units in total in the first 3 months. $2,400 in value. That’s less than 2% of the full-year forecast. But we assumed many of those early customers would come back and buy again. And they’d tell their friends about it. Conversion rates would grow with the cumulative impact of our marketing efforts. By month 12, the forecast reached 2,000 units a month.

This slow to start but grow faster later is a common sales shape for new stores. We knew it wouldn’t follow this exact shape, and expected month-to-month fluctuations, but it was our best estimate before launch. 

We’d expect to oversell against this forecast some months and undersell other months. There might have been seasonal swings in demand we didn’t know about, for example. We may have optimised when and how we spent our advertising dollars, as we learned which channels worked best. 

But until we started selling, we wouldn’t know these things.

In this model, we also assumed no price discounting. That came down to our e-Commerce positioning. On that brand, it was more about quality and service, not being a cost leader. So, no price promotions. (Which also kept our traditional retailers happy as we didn’t compete on price). 

Step 2 – Subtract deductions to work out net sales

Deductions are costs of selling which go to other parties before you subtract your own costs. 

If you sell via a retailer, it’s often called the retailer margin. But when you sell direct, it works differently. 

In this case, we had to pay a 10% sales tax rate. Money paid to the government on what you sell. 

Plus, we had to cover credit card and payment gateway fees. We also had to allow for extra costs like returns and refunds. 

Person holding 6 hundred dollar bills in front of them which have been set alight

(see our online store business model guide for more on these). 

In this case, we combined all these selling costs to reach a combined 4%, which is on the high side. So, for months 1 to 6, 14% of our gross sales number is the deduction. That’s the 10% sales tax + 4% selling costs. It comes off the gross sales and gives you the net sales number.

However, we assumed once sales took off, we’d get a better deal on the fees. Payment gateways often offer volume discounts, for example. The more orders you put through them, the smaller the percentage they take per order. In this case, as sales increased, we assumed in months 6 to 12, we could reduce the selling fees to 3%, so the total deductions drop from 14% to 13%. Still that 10% sales tax (no volume discount or negotiation on that), but a better payment selling fee percentage. 

Step 3 – Cost of Goods, Warehousing and Delivery

Next, we subtracted all the costs to make, store and deliver products to the customer.

As per our online store business model guide, these are all variable costs. They vary in direct relation to the number of products sold. Cost of Goods varies widely between products and categories.

As a rule of thumb, you want your selling price to be at least 3x your cost of goods. This gives you enough ‘space’ in your online store profit and loss to cover all your other costs, and still make a profit.

Woman wearing a check shirt, yellow hard hat, protective goggles and gloves in a factory setting working on a piece of metal equipment

Given the unit numbers in this model were low, we assumed the Cost of Goods percentage would stay constant for the first year at 30%. 

Economies of scale

However, we could have factored in a better cost of goods percentage if we’d sold more.

This would be based on what’s known as economies of scale. 

These are savings which come as you sell more and spread the costs of production across more units.

For example, you negotiate a better deal from suppliers on raw materials because you put more business their way. You do longer production runs which reduce the cost of goods per individual unit. 

Interior of a warehouse showing high shelving and main aisle

Warehouse and delivery costs also have a heavy variable element. There may be some fixed costs such as rent, utilities or staff. But, for simplicity in this model, we kept both costs variable. In general, the more you sell, the more it costs you to store and ship those products. 

Longer-term, and with enough sales, you can reduce these variable costs. You negotiate better deals with suppliers. But, these deals take time to agree. In this model, we assumed a modest saving of 3% overall in warehousing and delivery charges from month 6. That was a 1% reduction in warehousing costs and 2% on delivery costs.

Step 4 – Advertising, Development and Overheads

The final set of costs are all fixed costs. These are indirect costs you pay for, no matter how many units you sell. 

For example, marketing costs like advertising. You have to invest in advertising and digital media to drive traffic to the store. You’d assume a largish spend to launch the store. And, then regular support each month to attract new customers. 

So, in this example, we spent $3k on the launch (1,000% of our month 1 sales). And then we kept our monthly advertising spend at a percentage of our forecast sales.

We started at 20% of sales, and gradually rolled it back to 10% of that month’s sales by month 12.

For newly launched stores, this would be a common shape of advertising spending. You’d expect 20% advertising / sales to drive significant growth.

Instagram post saying No Network cables? Thank Dr John O'Sullivan and the team at CSIRO - with a picture of a woman wearing a T-shirt that shows a WiFi symbol and the words Australian Invention

Once you’re more established, 10% advertising / sales is a more common level of investment for steady growth. For bigger online stores with a loyal customer base, the percentage of advertising / sales can drop to around 5-7%.

The development costs here are fixed costs and came in 3 bursts – in months 1, 6 and 12. They were mainly to cover the online store website build and to cover updates and adding new features. 

We’ve known stores which cost far more than this, (especially when done by a marketing agency), and stores that cost far less, (for example, our own shop cost nowhere near this). This cost is mid-range as far as setting up a store goes. 

Finally, overheads were the people costs for the store. Store sales needed to cover the salary costs of the people who worked on it. There were no direct full-time employees on the store, only a project team created from other teams in the business. But we had to allow for paying the cost of those people’s time.

Net profits

That of course leaves us with the most important line. The net profit. How much you make after you’ve paid for everything. 

With a start-up store like this, you can see in several months, there’d be a monthly loss – especially when we had to pay for development costs. But even with those, we could show the online store profit would be positive over the year. Cumulatively there’s a small profit ($2,360) overall.

But in year 2, the financial story would be much better. There would be far less development cost, for example. And we’d start the year with monthly numbers of $60k+ in sales and $10k+ profit. 

If it stayed at that level for all of Year 2, you’d be looking at $720k sales and $120k profit for the whole year, a big improvement on Year 1. And a more attractive finance story as far as your D2C business case goes. 

Conclusion - The online store profit and loss

This online store profit model got us over the line with the finance team to launch the store.

It was a lot of work to build the story, but that story built confidence in the D2C plan. Confidence is important when selling in your business case.

When you show a clear financial plan, it builds confidence your store’s going to work. It helps you overcome many barriers to e-Commerce.

Once we launched, and got details of actual sales, costs and profits, we updated the profit and loss each month. 

Online store business model - A table with 12 months of data and key parts of the profit and loss account including net sales, gross profit, net profit, volume and other assumptions

Were we on track? How good were our assumptions? Did the store deliver the number of customers, the costs and the profit it promised? 

In reality, we easily beat this forecast. Customers were more open to online shopping than we expected. This helped quieten the sceptics who said it wouldn’t work. Once they saw it made money, everything got easier.

Check out our online store business model guide for more on e-Commerce financial planning. Or get in touch if you need help getting your online store profit and loss into good shape. 

(Note : This article also features in our review of our most popular lessons from 2022).

Photo credits

Counting cash : Photo by Sharon McCutcheon on Unsplash

Coins in small piles (adapted) : Photo by Ibrahim Rifath on Unsplash

Sale : Photo by Justin Lim on Unsplash

Man looking at ceiling : Photo by Anton Danilov on Unsplash

Money on fire : Photo by Jp Valery on Unsplash

Factory Worker : Photo by Chevanon Photography from Pexels

Warehouse (adapted) : Photo by Ruchindra Gunasekara on Unsplash

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