As eCommerce businesses grow with a shift in consumer behavior to prefer online marketplaces, it’s important for online businesses to be agile and data driven. According to Hostinger's forecast, eCommerce sales could reach 23% of retail sales by 2027. One way to be ahead of the competition and efficiently run your business is by tracking the right financial metrics that impact business decisions. For instance, net revenue is an important financial metric that can help you determine your spending capacity or business expansion. Similarly, tracking the accuracy of similar metrics will help identify fraudulent transactions, maintain transparent accounts, and aid in smooth business operations.
In this blog, we’ll explore the most important financial metrics for online marketplaces and explain why tracking them is key to achieving sustainable growth and success in today’s competitive eCommerce landscape.
What are Key Financial Metrics and How to Calculate Them?
Key financial metrics are indicators that provide insights into the health of your online marketplace to guide decision-making. Missing out on tracking these metrics can lead to oversight of warning signs or inefficiencies, over-investments, or getting trapped in bottlenecks. Below are some of the crucial metrics an online marketplace should track.
Gross Merchandise Value (GMV)
It’s the total value of goods and services sold through your platform in a given period. A higher value indicates strong demand and indicates growth. This metric helps understand your growth trend in the market when compared to other brands..
Formula to calculate GMV:
Gross Merchandise Value = Selling Price of Goods X Total Number of Goods Sold
Here’s how Gross Merchandise Value is calculated — the primary source of GMV is taken from the marketplace sales data. It is then compared with the transactions and totals with payment gateway records, seller reports, and the inventory management system. The discrepancies are identified and investigated.
Cost of Goods Sold
Cost of Goods Sold or COGS is the total cost you’ve incurred in the production of a specific product or a service. This includes manufacturing costs, labor, shipping, and other overhead costs. It’s important for deriving profitability and inventory valuation. COGS is also used to analyze the brand’s efficiency in production.
Formula to calculate COGS:
Cost of Goods Sold = Beginning Inventory + Purchases - Ending Inventory
For an online marketplace, the COGS arrived at is compared with the totals mentioned in the income statement. Some common challenges specifically about reconciling COGS are:
- Incorrect costing methods to assign inventory costs.
- Discrepancies while calculating physical inventory and recorded inventory balance.
- Not recording obsolete inventory.
Net Revenue
Net revenue is the total amount you get after deducting discounts and returns from the sale you’ve made in a specific period. It is listed in the income statement and is an important metric to assess the company’s performance. Reconciling net revenue means comparing the amount listed in the income statement to the actual revenue earned.
Formula to calculate Net Revenue:
Net Revenue = Gross Revenue - Expenses
One common reason for discrepancies in net revenue reconciliation could be incorrect product pricing or providing unauthorized discounts. Mistakes in processing returns or issuing refunds could also be other reasons.
Tax Collection and Remittance
You collect tax from buyers and as a business, it’s your responsibility to ensure that the collected sum matches with the amount you’ve filed with tax authorities. You need to ensure accuracy to avoid legal penalties and complications. To reconcile tax collection and remittance, collect sales data, tax rate data, and tax remittance records.
Formula to calculate tax collection and remittance:
Total Taxes Collected = Sum ( Taxable Sales X Tax Rate)
The total taxes collected are then compared with the taxes remitted to the tax authorities. Some common reasons for discrepancies are:
- Failing to update tax rates when they change.
- Incorrect application of exemptions and credits.
- Intentional misrepresentation of tax amounts.
Vendor Payouts
In a procure-to-pay cycle, vendor payment is the last step. It is paying external vendors for the goods or services you buy from them. For an online marketplace, vendor payment reconciliation is crucial to ensure there’s no excess money sent out for outstanding payments. Reconciling vendor payments means ensuring the payments are made to vendors in the agreed-upon terms. Purchase orders, payment records, and invoices are compared with total account payables and cash or bank accounts.
Formula to calculate total payables:
Total Payables = Sum (Invoice amount - Discounts)
Some common reasons for discrepancies in vendor payout reconciliation are:
- Pricing issues due to incorrectly priced services or products.
- Quantity discrepancies result from differences in ordered quantity and quantity received.
- Disagreements between you and the vendor regarding payment terms.
Chargeback Rate
The chargeback rate is the percentage of transactions that are reversed and disputed by customers. A higher chargeback rate can impact business profits. Chargebacks cost you a small fee and a lost sale. They mainly occur due to returns and canceled transactions. To calculate the chargeback rate, you need transaction data and chargeback data.
Formula to calculate chargeback rate:
Chargeback rate = Number of Chargebacks / Total Number of Transactions
Some common reasons for discrepancies in chargeback rate reconciliation are:
- Differences in the customer details given in the chargeback and the original transaction.
- Non-compliance with card network rules.
- Errors in recording transaction amounts or dates of chargebacks.
Shopping Cart Abandonment Rate
You might have received emails or notifications when you forget to complete an online shopping transaction. For an online marketplace, cart abandonment has a huge impact on their business performance. It means the customer is not motivated enough to complete the product purchase. This percentage helps online retailers identify areas of improvement. To reconcile this, you need website analytics obtained from Google Analytics or Adobe Analytics and customer data obtained from CRM or your customer database.
Formula to calculate cart abandonment rate:
Cart Abandonment Rate = (1 - (Number of Completed Transactions / Number of Shopping Carts Created)) x 100
How to Improve Financial Metrics for Your Online Marketplace?
Manual reconciliation of accounts is a time-consuming and error-prone activity. As you scale and the number of transactions increases, you need a much more streamlined approach to this. Regular audits, data validation, and inventory management are crucial to make the reconciliation process accurate. Automating repetitive data entry can save time and also reduce errors. Another way to achieve process efficiency is by following agreed terms of accounting and following the principles of accounting.
Bluecopa can help you streamline this chaos. You can connect with multiple data sources to cleanse data to make it reliable and accurate. Bluecopa fetches data in real-time making it easier to track KPIs and to give you insights.
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