How to Perform a Profitability Analysis for Your Shopify Store?
An accurate profitability analysis will give you important information on how your store is actually performing so you could make improvements to your business’s profits and losses.
So in this article, I’ll talk about everything you need to know for how to perform a profitability analysis for your Shopify store.
Why is doing profitability analysis important?
If you do it properly, a well-thought-out profit analysis report will give you a 360-degree view of your store’s actual performance in making profits and any elements that influence your profits.
And from the findings in your analysis, you can identify the parts where you’re doing good and map out the areas where you need to improve.
Therefore, if you want to find growth opportunities and round up your bottom line, I suggest you do your profitability analysis frequently.
Methods of Profitability Analysis
There 2 main methods to perform your store’s profitability analysis – via ratio or break-even analysis.
Because each method involves different metrics and each metric is meant to play a different role, I highly suggest you do both methods to have a clearer understanding of how your store is actually performing.
Method 1: Ratio Analysis
Ratio analysis analyzes both margins and returns ratios. The ratios are examined both individually and in comparison to industry expectations.
Margin ratios concern profit margins at various levels, whereas return ratios concern how well a corporation uses its resources to produce money.
In general, the larger the ratio, the better.
Gross Profit Margin = Gross Profit / Sales
Operating Profit Margin = Earnings Before Interest & Tax (EBIT) / Sales
Net Profit Margin = Net Income / Sales
- Gross Profit Margin is the amount of your sales revenue minus the cost of your goods. The ratio assesses how successfully you manage stocks and product manufacturing costs. It is also used to assess your company’s capacity to pass on the cost of goods to your consumers.
- Operating Profit Margin is another margin ratio that is used to measure how well you’re managing your business.
- Net Profit Margin is the most commonly used margin ratio and is the percentage of net income to sales. This ratio takes into account net income after deducting all your business expenses.
Return on Assets = Net Income / Total Assets
Return on Equity = Net Income / Total Sharehoders’ Equity
- Return on Assets (ROA) is a return ratio that shows your capacity to create profits from given assets
- Return on Equity (ROE) is a return ratio that shows how much money your company has made for your investors
Method 2: Break-Even Analysis
Your break-even point is the point where your costs equal your revenues. At your break-even point, you’re neither making a profit nor losing money. And that’s why the break-even point (BEP) is widely used as a safety metric to measure how much you need to earn at least to keep your business operating.
Handy tips to do your profitability analysis successfully
Doing profitability analysis isn’t as easy as you might think.
But don’t worry! I’ve got you covered with 4 tips so you could carry out a proper profitability analysis and make improvements based on your analysis.
Tip 1: Learn from your past data
After you’ve completed the calculations for your latest figures, remember to review your profit levels from past years and quarters.
Although your present figures may appear to be satisfactory on hand, you need a benchmark to compare them to. By comparing your current data to your prior performance, you’ll be able to determine if you’re on the right track and what areas you can improve on.
Tip 2: Compare yourself to competitors in the same niche
Comparing your profit and losses over different time ranges is not enough. To make sure you’re doing fine, you need to put yourself and your competitors on the same scale too.
So always research your industry ratios so you can know where you are compared to where you want to be in your niche.
Tip 3: Take action on your findings
If you can create an accurate profitability report, spend time analyzing your own findings. Afterward, brainstorm with your team all the abnormal ups and downs that you can fix and improve on.
Tip 4: Use a profit-tracking solution
There’s nothing wrong with tracking your profit and losses with Google Sheets. However, performing a profitability analysis using Excel or Google Sheets requires you to collect data from many different sources – which makes your analysis report error-prone and time-consuming.
So to perform a profitability analysis with accuracy, you need a good tracking solution, which I’ll cover right below:
4 best profit-tracking apps – do your profitability analysis with ease
I’ve tried tons of profit-tracking solutions, and here are the 5 apps that bring me the best experience ever!
1. TrueProfit – True Profit Calc & Analytics
The first solution I’d love to bring to today’s list is TrueProfit – a tool I’ve used for over 3 years. This app pools all my costs, expenses, and revenues in one place and automatically updates the latest data any time there are any changes.
By tracking my store’s crucial metrics like all profits & losses, Customer Lifetime Value, ad spend, etc. I could have a better view of how my store is actually performing and the areas I can improve.
- Track all profits and losses with automatic updates to show your store’s true profit in real-time
- Sync ad spends from Google, Facebook, Instagram, Twitter, Amazon, etc. to show you your ad spend and ROAS on each ad channel
- Show you your best selling products and most frequently bought together combos
- Calculate Customer Lifetime Value, Cost to acquire a customer so you know which product lines and customers groups to invest in
- Fast and amicable customer team. I once had a technical issue with importing my COGS data and they helped me through it step by step
Price: From $19.95/month. 14-day free trial
2. Profit Calc – Profit Calculator & Auto Syncing
Profit Calc is another reliable Shopify profit tracking tool that helps you track your store profits fast and accurately. What I like about this tool is that the dashboard is easy-to-use with all the data beautifully visualized for you.
Just like TrueProfit, it can automatically sync with your Google, Facebook, and Bing ads, as well as other advertising channels, to cover all of your ad spendings in profit estimates.
- Calculate shipping costs for each country.
- It has a Chrome plugin that allows you to sync your AliExpress orders as COGS
- It automates the calculation of credit card fees and transaction charges.
- The app includes a monthly expense tracker, allowing you to identify and eliminate needless spending in order to enhance cash flow.
Price: $29.95/month.15-day free trial
3. SimplyCost ‑ Profit Tracking
SimplyCost is one of the best profit-tracking apps on this list. The app allows you to calculate your store’s crucial metrics with high accuracy.
What is great about SimplyCost is that it has a lot of valuable reports that break down your costs, revenues, and profits by different products, vendors, POS locations, etc.
More importantly, if you’re on a budget, perhaps this app is made for you since it only comes with one pricing plan at $4.99 per month.
- Add cost price to your Shopify store
- Automatically calculate your profits and losses
- Import your data to the app fast and with no error
- Break down your costs and revenues to have a better understanding of your store’s important metrics
Price: $4.99/month. 14-day free trial.
4. BeProfit ‑ Profit Tracker
If you’ve done a bit of research, you’ve probably heard of BeProfit. This is one of the most popular profit-tracking solutions on the Shopify App Store. The tool offers an all-in-one analytics dashboard so you could manage and closely monitor all your earnings and expenses.
The app does a nice job of converting complicated data into simple charts and graphs so you could digest them more easily.
Plus, the app also comes with seamless integration with all ad platforms to show you how effective your ad performance is.
- Accurately calculate profits and losses in real-time
- Track all your expenses in one place
- Beautiful charts and graphs
- Track ad spends seamlessly to know your ROAS
- Calculate your Customer Lifetime Value
Price: From $25/month. 14-day free trial. Free plan available.
Above is everything you need to know in order to do a profitability analysis properly. Though you may need to spend some extra time analyzing your company’s crucial metrics, your effort will eventually pay off if you know how your store is actually performing and where you could improve to round up your bottom line.