Essentials of Profit & Loss Statements: A Beginner's Guide for E-Commerce

Business leaders need to track the money going into and out of their organization to ensure it remains viable, particularly in a competitive and unpredictable economy.

There are various documents an entrepreneur or CEO can create to assess the financial standing of their venture, from gross profit and gross margin statements to revenue analytics.

One of the most valuable tools for the e-commerce financial team is the profit and loss (P&L) statement.

What Is a P&L Statement?

A profit and loss statement is a report designed to highlight the revenue and expenses of a company over a specific period. It can help to determine whether you're increasing profit margin in e-commerce and whether your operational expenses are rising to unmanageable levels.

Why Is a P&L Statement Important?

A P&L statement is valuable for several reasons, but the primary benefits for e-commerce companies fall into three main categories:

1. Decision Making

With your profit and loss statement, you can examine how your business has performed at certain times and determine situations that led to improved or reduced revenue growth, even highlighting things like the best products for big profit margins in 2022 and 2023.

Conducting a profitability analysis for your e-commerce store can help you to make better decisions about what your business should do next.

2. Proof of Profitability

A P&L statement also provides a chronological record of your company's increasing rate of success. These records provide clear information about a company's ability to generate different kinds of profit margins.

This can help companies looking to attract the interest of investors or apply for business loans. It can also be helpful when you're gaining the trust of important clients who might not be sure whether to do business with you.

3. Tax Filing

Updating your profit and loss statements regularly, alongside other financial documentation, will help to ensure you have all the information you need to complete your business tax returns.

P&L Terminology Explained

It's important to understand the terminology related to the components of a P&L statement. While the exact elements of a P&L statement may differ from one business to the next, the record will often include the following:

• Top line revenue Your P&L statement will start with a record of how much revenue you've collected within a specific time (known as the top line). Once you have your top line numbers, you can extract various costs to get your "bottom line" or net income.
• Expenses incurred A profit and loss statement will highlight all the costs of doing business, including operating expenses, interest, tax expenses, costs of goods sold, and any extraordinary one-time fees.
• Bottom line income Your bottom line income outlined in the profit and loss statement highlights the amount of money made by your business after all expenses have been removed from your revenue.
• Realized profits and losses The realized profits and losses on your P&L statement compares your total revenues to your total costs and expenses. This shows your company's ability to increase profit, either by reducing costs or increasing sales.

A Simple P&L Analysis Method for E-Commerce

The easiest way to create a profit and loss statement is using specialist accounting software. There are tools that can manage the entire process for you by continually analyzing incoming revenues and outgoing expenses.

However, if you're not using accounting software, you can create your profit and loss statement by following these seven steps:

Step 1: Calculate Revenue

You'll need to collect all the information you have on the revenue received by your e-commerce business. You can obtain current account balances from account receivable balances and your general ledger. You'll need to include all the revenue from the time frame you're calculating your P&L statement for, even if you haven't received this revenue through collection yet.

Step 2: Examine the Cost of Goods Sold

Calculating the costs of goods sold is crucial to a profit and loss statement for any e-commerce business model.

For instance, if you're selling clothing online, you'll need to add up the materials and supplies used to make those garments. If you're selling services, you'll need to consider the cost of the time spent by your employees when providing the service.

Step 3: Subtract Your Costs From Your Revenue

Subtract the cost of goods sold from your revenue. This will give you your gross profit.

Step 4: Track Operating Expenses

Calculate your operating expenses for keeping your business running, such as rent, travel, equipment, and payroll. These will all count as "losses" in your business which you'll need to subtract from your revenue.

Step 5: Subtract Your Operating Expenses From Your Gross Profit

Take the price of your operating costs away from your gross profit to gain your "operating profit" amount.

Step 6: Add Any Additional Income to Your Operating Profit

If you have other income not included in your current revenue, such as interest, dividends from investments, or other sources of money, you can include them here. This will give you your EBITDA (earnings before interest, taxes, depreciation, and amortization).

Step 7: Calculate Interest, Depreciation, and Taxes

Calculate any interest, taxes, and depreciation costs, and subtract them from your EBITDA to gain your "net income" or net profit. This will serve as your bottom line for your P&L report.

P&L Statements: A Golden Opportunity for E-Commerce

These seven steps are simple to follow, but are also essential for the key insights generated by a P&L statement. Keeping a close eye on your profit and loss statements as an e-commerce business can give you excellent insight into your business growth and improve your chances of attracting investors. It can even offer insight into opportunities, like boosting profit through the localization of e-commerce websites or increasing revenue with trending products.