P&L Basics
This accounting method records revenue when earned and expenses when incurred, rather than when cash is exchanged.
What is accrual accounting?
In e-commerce, this metric compares the total expected revenue from a customer to the cost of acquiring that customer, with a benchmark ratio of 3:1.
What is LTV:CAC (Lifetime Value to Customer Acquisition Cost ratio)?
This type of inventory accounting method records COGS only when products are sold, rather than when inventory is purchased.
What is sales-based (accrual) inventory accounting?
Merchant Cash Advances (MCAs) are often preferred by e-commerce businesses for their speed and flexibility, but they come at a cost due to their often extremely high effective version of this metric.
What is the APR (Annual Percentage Rate)?
A business entity that allows income and losses to pass through to its owners while requiring a reasonable salary for its members, with only wages subject to self-employment tax.
What is an S-Corporation?
This financial statement provides insight into a company’s profitability by tracking revenue, cost of goods sold, and expenses over a specific period.
What is a Profit & Loss (P&L) statement?
This key financial metric measures how efficiently a business converts inventory into revenue and impacts both cash flow and profitability.
What is inventory turnover?
Unlike FIFO and LIFO, this inventory valuation method smooths out cost fluctuations by averaging all inventory costs over time.
What is the weighted average cost method?
This type of financing is a loan where the repayment is tied directly to a percentage of your future sales, making payments vary with your revenue.
What is a Merchant Cash Advance (MCA) repayment structure?
This landmark Supreme Court case changed the definition of sales tax nexus, allowing states to collect sales tax from online businesses even if they have no physical presence in the state.
What is South Dakota v. Wayfair?
This metric calculates profitability by subtracting COGS from revenue, often used to assess pricing strategies.
What is gross margin?
This financing strategy allows e-commerce brands to raise capital without giving up equity but often comes with high fees and repayment terms tied to future sales.
What is revenue-based financing?
Inventory in transit and prepayments for future stock purchases should be classified under this balance sheet category.
What is prepaid inventory or inventory-in-transit?
This type of financing allows businesses to sell unpaid invoices to a third party in exchange for immediate cash.
What is invoice factoring?
A company’s ability to cover its interest expenses is measured by this ratio, calculated as EBIT divided by interest expense
What is the Interest Coverage Ratio (ICR)?
Unlike net income, this profitability metric excludes expenses such as operating costs and taxes, focusing only on direct costs of production.
What is the Contribution margin?
This metric, often used in subscription businesses, measures the percentage of customers retained over a period.
What is customer retention rate?
This inventory forecasting method accounts for past sales trends, seasonality, and lead times to optimize reorders.
What is demand-based forecasting?
Many e-commerce businesses rely on short-term financing for inventory purchases or working capital. This financing method, often used for seasonal or cyclical cash flow needs, can be secured by assets like inventory or receivables.
What is asset-based lending (ABL)?
This metric determines how long it takes to recover customer acquisition costs based on gross margin and new revenue.
What is the CAC payback period?
The IRS requires this financial statement to accompany tax filings when reporting COGS and inventory.
What is Form 1125-A?
This KPI measures how many days, on average, a company takes to convert inventory purchases into cash through sales.
What is the cash conversion cycle?
This inventory risk occurs when a brand orders too much inventory, leading to high carrying costs and potential write-offs.
What is dead stock?
This financial ratio, calculated by dividing total liabilities by total equity, helps businesses determine their reliance on debt versus owner investment.
What is the Debt-to-Equity (D/E) ratio?
To qualify for the QSBS tax exemption, a company must be structured as this type of entity, have gross assets of $50 million or less, and operate in an eligible industry.
What is a C-Corporation?