7 Common Financial Blind Spots That Cause Profit Loss in Ecommerce

According to Business Insider, 82% of small businesses fail due to cash flow problems, highlighting the critical impact of financial blind spots in 7- and 8-figure brands.

But many of these problems are actually avoidable.

Take, for instance, the ecommerce store that didn't account for seasonal fluctuations in demand, leading to overstocked inventory and tied-up capital. Or the online retailer who overlooked the true cost of customer returns, gradually eroding their profit margins.

Even seemingly small oversights, like underestimating shipping costs or failing to track the effectiveness of marketing spend, can snowball into significant financial hurdles - which can be catastrophic, especially in an often-narrow-margin space like ecommerce.

Furthermore, most of these problems creep up slowly, often going unnoticed until it's too late.

The good news is that with the right knowledge and tools, you can identify your business' financial blindspots and fix them before they get worse.

Warren Buffett once said, "Accounting is the language of business."

So let's start learning to speak it.

Financial blindspots refer to areas within your financial operations that you may not be fully aware of or are not monitoring closely. These blindspots can be likened to hidden risks or missed opportunities that go unnoticed until they cause significant issues. It's not about what you're doing wrong; it's about what you're not seeing. Addressing these blindspots requires a shift in focus and awareness, helping you uncover and mitigate potential pitfalls that could be eroding your profitability without you even realizing it.

Where Do Financial Blind Spots Come From?

Brand founders and operators, especially in the incredibly dynamic space of ecommerce, must keep close tabs on a long list of moving parts. This task is particularly challenging where organizations don’t have an army of financial experts to help out (like most ecommerce businesses.)

Naturally, as all brand founders and operators are still only human, some business metrics inevitably get overlooked.

And among that long list of metrics to monitor, certain ones are more prone to neglect—oversights that can seriously erode your profits.

Below is a list of such metrics—the ones founders and owners tend to neglect more often—and how this can negatively impact your business. We added a hypothetical illustration for each one so it would be easier to understand and, maybe, relate to.

1. Gross Margin:

Gross Margin - defined as the percentage of a company's revenue after subtracting COGS (Cost of Goods Sold - the direct expenses such as labor and materials.) - is a basic, crucial metric to follow closely. Still, many ecommerce business owners focus solely on revenue, neglecting to track their gross margin accurately. This oversight can lead to significant profit erosion in cases where you might be selling more, but not necessarily profiting more.

The Hypothetical Illustration: Gross Margin Oversight

Example: A popular online retailer specializing in handmade jewelry saw a surge in sales after launching a new collection. However, despite the increased revenue, they noticed that their profits were not growing as expected. Upon closer examination, the company discovered that its gross margin had decreased significantly. This was primarily due to rising material costs (the price of precious metals and gemstones used in their jewelry had increased substantially) and inefficient production processes (where quality control issues and production delays resulted in higher labor costs and waste.)

Result: Despite a 25% increase in sales, a 10% decline in gross margin meant that the company was earning a lower profit on each unit than before, erodeing overall profitability.

2. Contribution Margin:

Beyond gross margin, the contribution margin is crucial for understanding the incremental profit earned for each product sold. This metric helps in analyzing the profitability of individual products after deducting variable costs, ensuring that each sale contributes positively to your bottom line.

The Hypothetical Illustration: Contribution Margin Confusion

Example: A specialty coffee retailer introduced a new line of premium products, promoted by a saugt-after influencer - confident that higher unit prices would lead to greater profits. However, they failed to calculate the contribution margin for each item, not realizing that variable costs associated with these products - such as increased marketing spend - were eating into their profits.

Result: The premium line ended up generating only minimal profit, as the high variable costs left little contribution margin to cover fixed expenses.

3. Tracking Operational Costs:

From software subscriptions to payment processing fees, the hidden operational costs of running an online store can easily slip under the radar. Failing to track these costs accurately can result in unforeseen revenue challenges, quietly eroding your profit margins.

The Hypothetical Illustration: Subscription Costs

Example: A small fashion boutique signed up for various "essential" ecommerce tools and plugins. They didn't track these accumulating costs, which silently grew to eat up 8% of their monthly revenue.

Result: Unexpected overhead cut their profit margin by nearly half.

4. Customer Acquisition Cost (CAC):

How much are you really spending to acquire each new customer? Inaccurate tracking of CAC is a financial blind spot for many DTC brand owners, leading to critical revenue loss. Understanding and optimizing this metric is essential for sustainable growth.

The Hypothetical Illustration: Ad Spend Trap

Example: A fitness equipment seller dramatically increased their social media ad spend, resulting in a 50% boost in website traffic. However, they failed to track conversion rates accurately. The influx of non-converting traffic led to higher hosting costs and wasted ad spend.

Result: Despite increased sales, their profit margin shrank by 20% due to disproportionate marketing costs.

5. Inventory Turnover:

Poor inventory management, such as incorrectly calculating inventory turnover, can end up tying up your capital in slow-moving stock or lead to stockouts of popular items. Both scenarios can significantly impact your cash flow and customer satisfaction, making it essential to monitor this aspect closely.

The Hypothetical Illustration: Inventory Imbalance

Example: A seasonal decor shop, riding high on strong holiday sales, invested heavily in inventory for the following year. They failed to analyze past sales data properly and overestimated demand.

Result: Excess inventory tied up 40% of their capital, forcing them to slash prices and operate at a loss for two quarters to free up warehouse space.

6. Return Rate:

If you're not tracking your return rate and the associated costs, you could be in for a nasty surprise. High return rates can severely impact your profit margins, turning seemingly successful sales into costly mistakes.

The Hypothetical Illustration: Increase in Returns

Example: An online furniture store experienced a surge in sales but failed to account for the true cost of returns. With a 20% return rate and free return shipping, they were losing money on one in five sales.

Result: What looked like a promising quarter one from gross sales standpoint turned out to be a dissappinting from net sales POV.

7. Shipping Costs:

Underestimating shipping costs or failing to optimize your shipping strategy can lead to unexpected expenses that cut into your profits. Accurate tracking and management of shipping costs are crucial to maintaining healthy margins.

The Hypothetical Illustration: When Discounts > Shipping

Example: An electronics retailer offered steep discounts on high-end laptops to boost sales. They saw a 30% increase in revenue but didn't realize they were selling at a loss due to overlooked shipping and handling costs.

Result: A 15% drop in overall profits despite higher sales.

What is The REAL Cost of Your Financial Blind Spots?

It's not hard to see how these financial blindspots can lead so many SMB ecommerce brands to close their doors.

Some of the hypotheticals we presented here are bigger than others, and not all of them are devastating. But they add up, creep up, catch you by surprise, and can often be the one last straw.

While a single oversight might seem minor, continuous financial blind spots over months or years will eventually lead to significant revenue loss and financial instability.

The Solution

It starts with tracking the key financial metrics mentioned in this article (and a few more. Ask your Fractional CFO about them. Don't have one? We can help!).

But whatever you do, remember that becoming an expert at speaking the "language of business" is no less critical for your brand's success than any other aspect.

And, while most DTC and multichannel brand founders are business- and marketing-savvy, only few are also "accounting-savvy." In case you’re not one of them, we advise you to consider finding a way to learn that language sooner rather than later.

Solutions like Finaloop can help you track the financial chokepoints in your business. “I wasted so much time and money trying to figure out Quickbooks and was so frustrated by how overcomplicated it was,” our friends at Sunnie, the food and beverage services company, told us about their experience using Finaloop and of the importance of having all your financials available, accurate, and easily readable.

All founders need that visibility so they know exactly how well their business is doing and what needs to be improved. In other words, they crave that level of control so they can speak accountant fluently.