How to start independent control of finances in online store
Ask your bookkeeper a question: “Why is there a loss in this month?” or “How much money the store needs for the next two months?”. If you do not receive the answer to the questions, then, most likely, you need to turn to financial accounting.
Why not to bookkeeping or tax accounting? Bookkeeping is a distribution of income and expenses according to the scheme specified by law. In other words, this is the daily documents accounting and strict reporting for the tax service.
Unlike bookkeeping, financial accounting reflects the nature of income and expenses, rather than their names in declaration. In other words, tax accounting is necessary for the state, financial accounting is necessary first of all for the business owner. To understand finances, you should not have several years of education, it is not a chart of accounts that is studied by heart.
How to begin
The very first report which all online stores face with is a cash flow statement. It is the easiest to prepare. We take the necessary period, for example, a week and a bank statement. Then distribute payments on income and expenses items.
Although owners of small online stores often compare only inflows and payments with a total amount, these expenses are commonly divided into three “streams”:
- Operational. Payments on the main activity of the store: purchase and goods sales.
- Investment. Acquisition of fixed assets.
- Financial. Everything that is connected with credits, financial inflows, shares.
In order to make a plan, we recall how much the store ought to give to contractors, then distribute amounts on expenses items, plan sales and look at the net difference between inflows and payments.
Negative closing cash in a plan is a signal that it is worth to revise money management: either to transfer and reduce a part of expenses or to think how to increase the income.
Structure of a cash flow statement
As practice shows, with growth in sales and with the exception of money on the account, stores are beginning to think more often about the profit and loss report (P&L). It shows how much profit or loss from the main activity was brought by the store for a certain period of time.
Main bullet points which are used in making P&L are revenue, gross profit and net profit. When making the report, revenue is reduced by expenses which actually arose this month. These are cost of goods sold, selling general and administrative expenses, financial expenses and taxes.
If the store has a financial activity, for example, credits, then it will be convenient to add operating profit in order to assess profitability of the main activity without influence of a financial one. Operating profit is equal to revenue, minus the cost of goods sold, selling, commercial and administrative expenses.
How to understand whether the expense is related to the cost of goods sold or not? One approach which can be used is expenses distribution on variable costs and fixed ones. If the expense grows with the increase in sales, then it is variable and connected with the cost of goods sold. If not, it is fixed and should be specified after the gross profit.
Having chosen the principle once, it is important to adhere to it in order to compare the plan with the fact and look at the dynamics for the necessary period.
Structure of P&L report
One should pay attention to the three points:
- Income and expenses are shown upon real emergence but not payment in P&L. For example, the store has made a prepayment for the warehouse rent for a year ahead. In the report, the sum is evenly distributed for 12 months, rather than is written down entirely as expense for January.
- Income and expenses should be reconciled with each other, as far as possible (matching principle). For example, in February the store launched an advertising campaign in social networks. But orders for this campaign began to arrive only in March. Therefore, expenses on ad should be reflected in March, as well as the income, otherwise the profit will be overestimated in one month, and, on the contrary, is underestimated in another one because of expenses which do not relate to this month.
- Acquisition of fixed assets and the principal is not reflected in P&L. For example, the store can have POS-terminals, credit issuance and repayment. Acquisition of fixed assets is a one-time monetary expense and these funds are used for several years. That is why, we show the sum for the terminals by uniform parts in the report during the service life. This is called amortization or depreciation.
The loan principal appears and disappears in bank account and does not influence the profit directly, unlike interest expense which business has to transfer to the bank.
Balance sheet is a report which is usually given at the accountant`s full order. It is a kind of a “snapshot” of what the store is in terms of assets and liabilities.
Asset is what brings us profit, liabilities are a source of assets financing. The balance is made on a concrete date, rather than a period of time, as P&L report or cash-flow statement. It is probably the only report which requires certain knowledge in accounting for its making up.
Which useful indicators from the reports on finances can be used by the store owner
In profits and losses:
- Net profit. The most important indicator for a businessman.
- Gross profit. Knowing it, the owner understands the maximum sum of fixed costs which he can afford himself. Or, on the contrary, knowing the size of fixed costs, one can determine how many goods to sell in order to cover the expenses by gross profit.
- Ratio of expenses to revenue. A peculiar indicator of inefficient spending — how many revenue shares are taken away by each expenses item.
- Share of each expense in total expenses. Helps to evaluate and get rid of big and inefficient costs.
- Data for calculating ROI (ROMI), bonuses to employees and efficiency of any investment in the store. For example, you need to evaluate investments in attracting a client. The majority of marketing specialists of our clients answered that they consider the effectiveness of advertising, dividing revenue into marketing channel costs and explain this by the fact that the channel fulfilled its purpose — attracted the customer. On the other hand, calculating ROMI from operating profit and seeing a low indicator, it is worth to think: maybe the channel attracts buyers, but something is wrong with the next stages of sales. For example, too high service cost, inadequate administrative spending, refusals and so on.
The faster customers’ turnover grows, the more important for them is receiving information at once, not waiting for the end of the accounting period. And along with the implementation of the new module, retailCRM makes possible for customers booking and receiving financial numbers when necessary. Therefore, it is more convenient to receive financial data along with the data on sales.
retailCRM system allows stores to enter data on expenses, prepare financial reports and calculate indicators of store’s profitability and efficiency on-the-go.
Calculating the efficiency of marketing activities in retailCRM
The most important thing in cash-flow is a closing cash at the end of the period. If it is negative, then you should understand from where it is. To do this, look at P&L and check accounts receivable and accounts payable in the balance sheet. Maybe the store gives to the contractor too big installment payment?
The most useful indicators for online store in the balance sheet are:
- Accounts receivable: how much money you should be given to for the sold goods.
- Accounts payable: how much money you should give to suppliers for goods and services.
- Stocks: how many goods lie in warehouse. The more goods are in warehouse, the higher expenses on their maintenance and the more “frozen money” which could be spent on the development of the store.
Of course, this is not a full information one can find in financial reports. Do not forget that, in addition to financial indicators, it is necessary to take into account specifics of conducting trade, market and customers.
But usually, if at least one of total indicators is wrong, it shows that the store may have problems. And financial accounting is conducted to show from where they have come from.