eCommerce Profit Forecast: Plan Now for a Profitable Year

As an accountant, I was trained to look backward at what has happened to ensure I understand the financial history. However, as a Mastery Level Profit First Professional, I look forward.

eCommerce businesses, like any business, need to be looking ahead. While understanding the past can inform our thinking, our clients want to get better at predicting the future. Following the eCommerce profit forecast process outlined below will help you prepare for the financial year ahead.

eCommerce Profit Forecast Steps

Take a look at your data from last year and consider what you want to happen in the year ahead. I spend the most time trying to understand the income projections. Once I have that complete, I work on the Cost of Goods Sold and the Operating Expense section of the P&L on an aggregate level.

Let's Start with Income

I look at my income accounts and determine the growth trend month by month for each account. So, if you sell on Amazon, how much did your sales change from January to February, to March, and so on?

I also suggest that you compare Amazon sales in January of the prior year to the most recent January; how much did that change? This may get a little tricky after you hit the months when the pandemic impacted sales, so use your best judgment to learn from the comparison.

Based on your review, answer these questions to forecast your income:

What can I expect for income each month for each account I track, based on the history?

I call this a baseline forecast. You might want to forecast a dollar amount month by month, or you might want to apply a percentage growth to your past years’ income. Either way is fine. You want to be able to have confidence in how you derived the numbers.

What products will I retire? How much will that impact my numbers?

Reduce your baseline by the sales of these retired products starting in the month you retire them.

What new products will I introduce? How much income can I expect to receive from these sales?

Think about the month-by-month income increase as your product gains traction. Increase your baseline by this amount starting with the month you introduce the product.

Related Reading: 7 Amazon Seller Resolutions

Next Up, Cost of Goods Sold (COGS) and Cost of Sales (COS)

What was the ratio of your Cost of Goods Sold to your income last year? To get a good number, you will want your books clean and use a modified cash or accrual method. This will allow you to easily see how Cost of Goods relates to your income.

Typically, the types of expenses in the COGS account will be moving the cost of your inventory off the balance sheet onto the COGS account based on the products sold or written off because of damage or returns and the direct cost of shipping in the month that is occurring.

Sometimes we see clients include Cost of Sales in their Cost of Goods Sold total. COS expenses include merchant processing fees, Amazon FBA costs, and the like. Understanding the relationship between COGS and Income is important because it gives you your gross profit margin. Gross Profit is calculated as follows:

Sales - COGS (including COS) = Gross Profit
Gross Profit Margin is (Gross Profit / Income) x 100

Multiply the baseline income amount you have forecast by the Gross Profit Margin to calculate your baseline COGS number for next year.

Using the COGS baseline, how will the products that you retire impact this number? What gross margin do you anticipate for the new products you are introducing? Take the new product income and multiply it by this gross margin to determine the costs anticipated with the new product sales.

Finally, Operating Costs

This is your office space, advertising, software subscriptions, payroll, insurance, etc. Determine the ratio of these expenses to your income from last year. This will be calculated by totaling all operating expenses (you should be able to find this total on your P&L) and dividing it by total income x 100.

Once you have your percentage, you can apply it to your baseline. You can also apply it to the products you're retiring and reduce the forecast by this amount. And conversely, apply the ratio to your new product income and increase your operating expenses baseline by this amount.

Forecasting — There’s Something for Everyone

If you love numbers, you can get into the details of forecasting each account on your P&L and you'll have great fun seeing how your numbers compare month by month.

If you don't love numbers, like most of our clients, spend your energy on your income numbers. Who doesn't like to think about sales? Then use the ratios to help you understand the rest.

Taking the time to make these projections now will allow you to get a better handle on the relationships these numbers have in your business. Once you understand the relationships and the role they play in your eCommerce profit forecast, you can tighten up and improve your ability to see the future. Wishing you a peaceful and profitable New Year from your friends at bookskeep!