Welcome to part 3 of our summer series, where we’re diving deeper into the financial strategies that ecommerce businesses need to succeed. Last week, we focused on understanding your cost of goods sold (COGS) and improving margins to maximize profitability. If you missed it, check out part 2 here. Today, we’re shifting gears to look at those “below-the-line” expenses—overhead costs that don’t always get the attention they deserve but can significantly impact your bottom line if left unchecked.
Understanding Overhead Costs
While revenue and COGS get most of the spotlight, overhead expenses are equally important to monitor. These include everything from rent and utilities to software subscriptions and professional services. Even though these costs aren’t directly linked to your products, they still play a crucial role in determining your profitability. Mismanaging these expenses can quietly erode your margins, making it harder to achieve your financial goals.
One effective strategy is categorizing and separating these costs on your P&L statement. For instance, your ecommerce-specific tools, such as inventory management software or marketing automation platforms, should be listed separately from general business expenses. This makes it easier to track where your money is going and simplifies the process when you’re ready to sell your business. Investors and potential buyers often prefer a clear breakdown of these categories, and having them organized from the start makes this step much smoother.
Keeping Control Over Ecommerce-Specific Tools
As your ecommerce business grows, it’s easy to accumulate subscriptions and services that overlap in functionality. Regularly auditing your software stack is crucial. Ask yourself: Are you using all the features of a particular tool? Could a single, comprehensive solution replace multiple overlapping services?
Eliminating redundant tools is a simple but effective way to cut costs without sacrificing functionality.
Additionally, separating these ecommerce-specific tools from general subscriptions can be advantageous when preparing your financials for a potential exit. Not all expenses are treated equally during a valuation, so having these costs clearly defined can make a significant difference.
Why Overhead Needs Constant Attention
While essential, overhead costs often don’t directly contribute to revenue generation. Expenses like travel, office supplies, and professional services can add up quickly if not regularly reviewed. This is why it’s essential to examine these categories more closely and ensure that every dollar spent is justified.
For example, legal and accounting fees might be necessary, but are you getting the best value for your money? Similarly, contractors hired for specific projects should be evaluated periodically to ensure their work is delivering results. If not, it’s time to assess whether these costs still provide value.
Troubleshooting Low-Profit Margins
If your profit margins are tighter than expected, a deep dive into your overhead costs is an excellent first step. Look for any wasteful spending, duplicated services, or underutilized tools. While cutting these costs can provide some relief, it’s essential to understand that significant margin improvements are more likely to come from optimizing higher-impact areas like COGS and marketing efficiency.
This is why a comprehensive approach is necessary. Analyzing your P&L from top to bottom lets you identify the real bottlenecks. In many cases, the root cause of poor profitability is not in the overhead but in misaligned margins or ineffective marketing strategies. However, you must monitor these costs carefully to avoid small leaks that could grow into larger issues over time.
Streamlining for Success
By paying close attention to your overhead, you can create a leaner, more efficient business model that leaves more room for growth. Reducing unnecessary expenses, renegotiating service agreements, and optimizing your software stack are all steps that can make a big difference.
If you’re looking for expert guidance on managing your financials and unlocking greater profitability, Seller Accountant specializes in helping ecommerce brands achieve their financial goals. Connect with us today, and let’s explore how we can help your business reach its full potential.
For more insights, be sure to catch the full podcast episode here.