How Your Accounting Team Unlocks Shopify Sales Profitability

"Can I just review the profitability of my Shopify sales within Shopify itself?"

We get this question a lot, and the answer is one of those “yes-and-no” type responses. Allow us to explain.

There’s no disputing that Shopify is the go-to platform for entrepreneurs venturing into online retail. Most of our product-based clients use it for their direct sales and their website, and we don’t blame them.  

It has simple tools for handling orders and shipping, a clean store layout, and many easy-to-use dashboards and reports.   It simplifies the setup and management of an online store–all great things.  

When it comes to more advanced methods to track profitability, we recommend not relying solely on Shopify sales reports.  This is where the accounting process will step in. 

What Do We Report and Why?

Before we go too deep into each reporting scenario, here are a few examples of items we will want to understand when assessing the health of a product.  

By “health”, we mean profitability and velocity aka its sale movement.  When you create a product, the goal is to do so with minimal expenses to get it ready to sell.  The next step is to sell it quickly and sell a lot.  Then your goal is to set up a system to easily make more products and continue to grow the amount sold at an exponential rate.  

To achieve this goal, you need to understand the profit of each product, how quickly it sells, and your total sales.

To monitor this, some of the KPIs we will asses are gross profit margin, operating profit margin, and contribution margin.  

Once we have a handle on this data, we can forecast what is needed to support a growing business and maintain profitability.  If things are off, streamlining costs helps create more profitability can help.  The streamlining comes from focusing on more profitable sales channels, cutting costs, or both.  

This is the very high-level version.  A starting point to optimizing these KPIs is to understand and analyze the costs associated with the creation and sales of these products.  This brings us to the cost of goods sold and margin analysis.

Why Do We Care About Margins by Sales Channel?

If you are just now joining the cost of goods sold and margin analysis party, here is the short version.  To understand how to become a profitable company and grow your business with profitability in mind, you must know your cost of goods sold to optimize your expenses and widen your margins.  

For accurate margin analysis, you need to know the profitability by sales channel to optimize each. This ultimately helps them become more profitable versions of themselves.  Typically, a direct-to-consumer storefront, like Shopify, will be a more profitable channel because it has fewer steps and fees associated with selling your product.  This is compared to selling wholesale, where more steps are involved, chargebacks can happen, and you sell at lower, wholesale rates.  

Leave The Profitability Analysis to the Accounting Team

From an accounting perspective, the limitations of only using Shopify reporting for profitability analysis will appear rather quickly, especially if you are looking at it through the eyes of an accountant specializing in COGS. 

While the platform provides valuable insights such as discounts, shipping income, and gross margins, it does not capture the complete financial picture. This is not a “Shopify” problem per se, it’s more of a detail integration challenge.  

To get the most accurate data, it is best to use a classic accounting method of applying all of the costs associated with the sale of each item to your reporting. When you know the finite details, you are in a position to make better decisions moving forward.  

Example Costs That Can Fall Off The Radar

What are these additional costs not making it to the Shopify report dashboard?  It’s mainly the added fees or steps along the journey to get your product made, shipped, and paid for outside of Shopify.  

For example, excluded costs can be:

• Fulfillment through third-party logistics (3PL) providers:  You sell your product on Shopify, but are they housed in your garage and processed by you?  Probably not.  They are likely being housed and sent from a 3PL that has its own set of charges per item.  Even if you are fulfilling them yourself, are you calculating your time, supply, and travel expenses for each order?
• Credit card fees processed outside of Shopify: If payment is processed through the App, then you will see any charges associated with them in the dashboard.  When you make a new order manually or take a payment at a trade show or outside of the App itself, and click “Record Payment” for the item, there may not be the added cost included.  What if you had a big order and invoiced through your QuickBooks account?  Were there any fees associated with the transaction?  Think about PayPal fees, Stripe, and other payment integrations for selling your products when considering this piece of the puzzle.
• Shipping fees to customers.  In a perfect Shopify world, you would print labels through the App and send them that way.  For larger e-commerce brands, they typically use an additional fulfillment provider like ShipStation to manage large quantities of orders in one place.  While it syncs with the App, there won’t be a record of these additional charges in the Shopify report.
• Advertising expenses.  Understanding the costs associated with advertising your product to earn sales is another expense that can eat into margins when not tracked.  Are you advertising through social media?  Print ads in trade magazines?  Using paid influencers?  Keep all of these in mind when calculating the bottom line of your D2C channel.
• Discounts.  If you give out free products in exchange for advertising or find yourself in a situation where you are using promos or discounts through your store, it may not report the revenue from these discounted sales accurately.  These zero-dollar sales should be excluded from any reporting so it doesn’t show “phantom” orders.  These are more of an advertising expense and should be shown there.  They will also incur the same type of costs mentioned earlier like shipping, fulfillment, etc, and be technically losing money as there is not an immediate, direct sale to cover these expenses.  Their “sales” are more of a delayed revenue that would be seen as a result of the new brand awareness they create.  

To truly grasp the overall success and profitability of your Shopify sales channel (and your products overall), your best bet is to rely on classic accounting methods and look beyond the reporting within the system.

This entails integrating data from various sources to calculate gross revenue, discounts, product costs, logistics expenses, credit card fees, advertising expenditures, and other direct costs. Only then can metrics like gross margin, operating profit margin, and contribution margin be accurately assessed.

For More Accurate Financial Reporting, Take The Holistic Approach

While Shopify serves as a valuable starting point for understanding your sales revenue, achieving a more accurate understanding of profitability requires a holistic approach. This is where services like those offered by Accountfully come into play, providing clients with the tools and expertise to navigate the complexities of financial analysis in e-commerce.

The Bottom Line

While Shopify offers valuable insights into sales performance, it's essential to look beyond its limitations to fully understand profitability in your e-commerce channels. 

By adopting a holistic, classic accounting approach to financial analysis, entrepreneurs can make informed decisions to drive their product businesses forward.  It is the understanding of the nuances of this financial analysis that is key to long-term success.