E-commerce accounting: How to forecast revenue vs. profit
Kaci Carson
November 03, 2023
Forecasting revenue and profit for e-commerce sales is critical in managing your online business. You may have heard the words revenue and profit used when talking about an income a business makes through sales. Even though words are often used the same way, it’s important to distinguish the difference between them.
In this article, we will talk about the differences in forecasting revenue and profit and how this can help both your business accounting and financial processes.
What is the difference between revenue and profit?
To understand how to use forecasting for both revenue and profit, it’s important to understand the difference between each of them. Revenue refers to the total amount of income that comes from sales of products and services. Whereas profit is revenue minus the costs involved in earning that revenue. This includes expenses in the areas of marketing, shipping, product and production costs.
Increasing revenue shows your ability to improve sales but profit is a measure of the financial health and can be a sign of the health of your business.
Revenue forecasting involves looking at trends in new and repeat customers to determine increases in sales over a period of time. But without also looking at associated costs, revenue targets can’t determine if growth will be sustainable over the long run. Profit forecasting factors in predicted costs and your desired profit to calculate income and set goals for development. Accurately forecasting and managing revenue and profit requires understanding each of them and how they apply to your business.
How to do a revenue forecast as an e-commerce business
To forecast revenue, start by analyzing historical sales data for the purpose of identifying any trends and fluctuations in your business. Look at how new customer acquisition as well as repeat customer purchase frequency and size change over time. It’s important to seek to remove any non-recurring or irregular sales from your analysis to focus on more sustainable streams of revenue.
Revenue = Product / Service Quantity x Sale Price
Based on sales patterns and customer lifetime value, set realistic goals for attracting new customers and encouraging sales from existing customers. Then, account for how any new products, marketing campaigns or partnerships may impact revenue growth. Consider changes in your target market or industry that could influence sales. With review of your revenue forecasting, analysis based on data, and a growth plan, you’re able to maximize your company’s potential to the fullest.
How to do a profit forecast as an e-commerce business
To forecast profit, you need to determine your total costs of generating revenue, which for e-commerce businesses include product costs, shipping, marketing, and other expenses. These represent the investment required to run your company outside of labor and inventory. To calculate your net profit, use the following formula:
Profit = Revenue – Cost of Goods
After calculating total costs, you need to set a target net profit margin or percentage based on your business model and industry standards. For most e-commerce companies, a net profit margin of 5-10% or more of total revenue is a healthy target.
Example of an e-commerce store profit forecast
Let’s say you run an online clothing store. In a given quarter, your store generated $300,000 in revenue from selling clothes and accessories. However, you incurred various costs such as inventory purchases, packaging, shipping, advertising, and website maintenance, which totaled $220,000.
To calculate your net profit, subtract the total costs from the revenue: $300,000 – $220,000 = $80,000. This makes your net profit for the quarter is $80,000.
To determine the margin, divide the net profit by the revenue and multiply by 100 to express it as a percentage: ($80,000 / $300,000) x 100 = 26.67%. So, your margin for the quarter is approximately 26.67%.
This means that for every dollar of revenue generated, you have approximately 26.67 cents of net profit. The margin represents the profitability of your e-commerce store and indicates how it generates profit after factoring in all the costs associated with running the online business.
With your profit margin target in place, you can then set specific goals for increasing revenue to achieve projected profits. Profit forecasting requires tracking both revenue and costs, then determining how each may change based on risks made. But with careful revision of forecasts based on actual financial statements, you’ll have a plan in place to help set and meet profit goals.
How to compare revenue and profit forecasts
When calculating your total revenue and profit it’s important to be aware of several different factors that have can change your revenue forecasting:
- Market shifts: Changes in the market can occur at any time but with diligent forecasting you may be able to catch the early signs of a rise or fall in activity or web traffic that has a direct result on your sales.
- Supplier changes: There may come times when you will need to coordinate a change in your suppliers either for more or less expensive materials
- Customer demand changes: Favoring a product over another based on trends and other factors.
- Economic impact: An incoming change in the economy can impact both people and businesses spending habits, talk of economic hardship can cause, it’s important to maintain awareness and gather reliable information of potential economic hardship.
- Changes based on season: As an e-commerce store owner you’re aware of the impact of mid year sales and also the impact of the Christmas and end of year where generally, e-commerce stores have a significant upward trend in sales.
Using accounting software for e-commerce forecasting
To get an accurate revenue and profit forecast for your e-commerce business, you will need to keep the most up-to-date data. This is made possible through an accounting integration. Through Amaka, the important sales data from your e-commerce platform gets synced with your accounting software, giving you access to real-time reports to assist you in reviewing and monitoring your forecasts.
You can also connect a forecasting tool to your accounting software to automate the forecasting process. For example, tools such as Float and Fathom both have the capability to forecast revenue and profit. These will be able to consider a range of factors when calculating forecasts, giving you a more holistic prediction.
Reviewing and monitoring forecasts
Consistently reviewing financial statements and forecasts is key to ensuring your e-commerce business remains on track to meet targets and growth goals. Monitoring sales and revenue reports as well as profit and loss statements helps determine if you are exceeding or falling short with what you forecasted for each period.
If revenue is coming in well below forecast, re-examine your customer acquisition and retention strategies to determine what obstacles exist that are inhibiting growth and make changes to efforts on the most profitable areas.
With frequent review and oversight of how revenue and costs are fluctuating in comparison to forecasts, you gain insights to guide important decisions for your business. Overall, consistent monitoring based on financial reports and forecast accuracy can be key to long term, sustainable growth for your business.
Key takeaways on forecasting e-commerce revenue and profit
In having an understanding of revenue and profit, your e-commerce business can prepare for many of the challenges businesses face. With the application of this information, you’ll not only maintain best practices for your business but also prepare for costs and in a way that protects your business from changes.