When you create an e-commerce business, it’s crucial to focus on profit and growth. However, there are a variety of things to consider here. You want to ensure that the company generates a lot of profit, while also understanding how this will affect your business in the long run. There are a few important aspects to think about here, as you will notice below.
What is a profit formula, and why does it matter?
The profit formula is very easy to understand. The idea here is that you take the selling price, you deduct the inherent costs related to acquiring and selling, and you are left with the profit. Naturally, you always want the profit to be as high as it can be, if possible.
The different types of profit formulas explained
You can usually find different types of profit formulas, as follows:
- The gross profit formula is the total revenue minus the cost of goods sold.
- Average profit formula is the total profits / how many years of profit you are covering.
- Operating profit margin formula is the (operating profit/total revenue) x 100.
- Operating profit formula covers the gross profit minus the operating expenses.
- Profit percentage formula is the (profit/cost price) x 100.
How to choose the right formula for your business?
It’s very difficult because every company has its own different requirements and expectations when it comes to profits. A lot of the time, the best way to choose a profit formula is to just see what matters the most to you. Some companies are more about the operating profit, others want to see the average profit obtained over a few years. While others just want to focus on current profit margins.
Common profit formulas used in financial reporting
Some of the most common profit formulas are the current profit, the profit percentage, average profit, operating profit margin and gross profit, along with net profit, of course.
Gross profit formula vs. net profit formula
Gross profit is the total revenue minus the cost of goods sold. In the case of net profit, you have the total revenue, from where you remove the total costs and any indirect costs. Naturally, a lot of companies will focus on the gross profit when sharing data, because the gross profit will always be higher than the net profit. Yet when it comes to real growth, you always want to focus on the net profit, or the take-home profit.
Contribution margin formula and its role in pricing
The contribution margin formula covers (revenue-variable costs)/revenue. The reason why this matters is because you get to see how profitable an item really is, and whether you are pricing it adequately. If the current price per product is not great and you’re not receiving a lot of sales, then that can become an issue. But with the contribution margin, you will have a much better understanding of the ROI!
How to automate profit calculations in WooCommerce?
WooCommerce offers a variety of ways to expand with plugins and features. And you may want to use that type of tool in order to figure out profits and see what’s better and more suitable for your e-commerce website’s growth. The reality is that you want to automate profit calculations because it can help identify when an item is not profitable. And once you do that, it becomes much easier to narrow down what type of calculations are easier to do, and where you are getting the most value.
Using ProfitBlue to track financial performance
If you want to track the e-commerce website financial performance, a tool like ProfitBlue is very effective. It allows you to narrow down the financial performance of your site, see what products are selling well and which ones might not provide the ROI that you are looking for. It’s extremely important to ensure that you have exceptional financial performance, or at least an upward trend. And with ProfitBlue, that becomes a lot easier to manage.
Best practices for accurate profit analysis
- Agile forecasting is excellent, very effective, and it can give you the means to focus on profits in the long term, without having to deal with any major downsides.
- Advanced data analytics can be used to study each individual product’s performance, which in turn can help narrow down which items need the most marketing.
- Sensitivity analysis can help you see what products bring the most attention, which items are not as popular, etc.
- Automating some routine FP&A-related tasks can be extremely helpful, and it can bring in an outstanding return!
Closing thoughts
When it comes to profitability, you always want to understand the formulas that help you calculate it, and ensure that you avoid situations when you’re in the red. A lot of the time, companies take a while to become profitable, so you have to be extremely careful. But once you do that, analyze data and make the necessary changes, it will be much easier to study the inherent profits!
