Strategy Centre

The Ecommerce Profit and Loss Account

  
01 July 2016 14:12
  

The Ecommerce Profit and Loss Account

Migrating from selling solely through a bricks and mortar retail operation to selling online brings new opportunities to grow and expand sales revenues.

However, it also presents new costs to consider which can cause issues if not accounted for at the outset.

This article seeks to summarise the key additional financial questions a retailer will need to consider to sell online effectively.


Revenues


The areas to consider with regard to revenues include sales price, currency and VAT.

Sales Price

Selling online means that you will be competing with more than just the retailers in a distinct geographical area and this can mean that there is greater pressure on your sales price.

Retailers need to consider what effect competing on price will have on the gross margin versus the margin achievable on the wider, offline business.

Pitching too low could result in an overall loss for the sales channel. Pricing too high will mean sales opportunities lost to competitors.

Currency

To enjoy the benefits of global sales, ecommerce sites must seek to meet the demands of audiences in specific jurisdictions.

In addition to the obvious localisation of the site with language and marketing messaging, a key financial consideration is currency. Very simply, sales will convert at a much higher rate if the local currency is offered.

The solution could be as simple as a fixed rate conversion from the base price or a deeper solution that generates variable currency translation based on FX rates that track spot market rates.

Some merchant providers offer Dynamic Currency Conversion (DCC) which enables the retailer to collect payments in one base currency but giving customers the ability to pay in local currency. However this option is usually visible only on checkout pages.

The more common solution is to create multiple currency merchant accounts and settle the funds in an FX account with the retailer’s bank.

Compared with the High Street retail option, this will create additional administration for the retailer’s finance operation and increased banking fees.

VAT

Sales in different jurisdictions will bring additional VAT considerations as sales are now being made across multiple borders.

Companies could ultimately need to register for VAT in multiple countries, subject to levels of trade and the VAT threshold in operation in each country.

The best advice is to seek guidance from tax advisors with expertise in VAT management internationally.

When they have a clear understanding of what VAT should be payable on each cross border transaction, retailers need to ensure that the gross margin is sufficient to cover this liability.


Direct Cost of Sales


Factors involved in the area of direct costs include payment options, distribution, authorisation checks and digital marketing.

Payment Options

For the High Street retailer, as the use of cheques has declined, credit and debit card and cash now usually form the range of payment options.

To trade online, however, the retailer will need to offer a much wider range of payment options, including PayPal and country-specific debit card options such as Carte Bleu in France and iDeal in the Netherlands. There are a large number of significant payment mechanisms for specific countries.

Furthermore, in certain countries use of cards online is extremely low and retailers seeking to convert in those countries will need to accommodate the needs of their intended customer base. For example, more than 80% of transactions online in Russia are made by a cash solution unique to the Russian banking sector.

Retailers must therefore factor in the cost of processing payments (usually either a fixed cost per transaction or a percentage of the total payment), the cost of the payment authorisation service used to verify the payment in the first instance and any costs incurred in settling the funds when they have been processed by the merchant acquirer.

Distribution Costs

Retailers need to reach agreement on how the cost of placing their product in the hands of the customer is quantified and paid for.

Rather than a customer visiting the shop and taking what they want from pre-stacked shelves, retailers need to pay for packaging, postage and courier costs.

Company policy may decree that these are paid for by the customer, or consumed by the business, and analysis needs to be undertaken on the relative impact on sales and margins accordingly.

Authorisation Checks

Selling online means additional security checks need to be undertaken to minimise fraud.

3D Secure checks can be used but may result in a significant level of dropouts at the security stage of the checkout process.

Every business will, however, experience a level of chargeback fraud, namely a cost to the business resulting from the card owner requesting a reversal of the charge due to fraud.

Businesses need to weigh up the cost of policing and administering chargebacks with the impact on overall sales if the checks are overly stringent.

Businesses may also incur additional insurance premiums if high ticket or breakable items are regularly being transferred via post and courier.

Digital Marketing Costs

A new online business will face the decision of investing in digital marketing channel costs. These can range from pay per click advertising, affiliate commission costs, social media advertising, online and offline advertisements, email advertising and reward discounts.

A clear understanding of the CPA% of each sales channel is essential to ensure that gross margins attainable are not being overly diluted by the cost of acquiring each new sale.


General Overheads


General overheads include staffing, building costs, IT costs and finance costs.

Staffing

Incorporating an ecommerce channel into an existing retail outlet will create requirements for additional roles.

Staff will need to be available to despatch goods from warehouses and deal with customer service queries as they arise. An Online Operations Manager will likely be required to manage these functions as revenues grow.

The business will also likely need to buy in specialised expertise to cover digital marketing channels, website design and so forth. There are also the one-off costs of translating pages into other languages.

The changing needs of the business will also mean that a more strategically focussed and analytical CFO will be needed for the business.

Building Costs

Depending on the goods provided and the sales revenues targeted, costs will need to be invested in premises sufficient to house stock levels.

This will ensure that the business can carry stock levels sufficient to meet demand as sales increase — without which the business could end up having to cancel orders or spend time contacting customers to warn of delays.

IT Costs

New costs will invariably be presented via the costs of registering domains, potentially in numerous jurisdictions and with numerous variants of the same trading name.

Whilst individually these can be quite inexpensive, a larger portfolio will soon add up.

Further new costs will be the hosting costs of the website and SKU images. There may also be costs associated with system security, particularly PCI Compliance over the card data handled on behalf of customers.

Finance Costs

Ambitious companies will seek to establish an infrastructure that will allow fast scaling of the business and keep pace with aggressive marketing campaigns.

The company may be able to invest cash reserves in stock and premises to facilitate this, however it is more common for these to be financed via loan arrangements with banks, shareholders or third-party specialists in trade financing.

The costs of servicing these facilities should be factored into the overall P&L.


Conclusion


This article is in no way intended to be comprehensive — each business will have specific needs and above or below average costs in any of these areas.

However, we trust that the article has provided a flavour of the types of decisions that need careful consideration before launching your ecommerce site.

Note: The original version of this article was published in August, 2015.

Comments

Anonymous - Interesting article. The FD should be a core part of any eCommerce conversation. Their focus on numbers is key for success, but it is rare to see an FD play a key part in an eCommerce operation.
01 Jul 2015 19:22
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