As an e-commerce entrepreneur, money flows in through your orders, but do you really know how much you keep in the end? Financial figures can be overwhelming, but understanding your profit is crucial for making smart business decisions. In this article, we discuss the difference between net operating income and net profit, why these concepts matter, and how to apply them to your webshop.
What is Net Operating Income?
Net operating income, also known as operating profit, is the amount remaining after covering all direct costs of running your business. This includes:
Cost of Goods Sold (COGS): Direct costs associated with producing or purchasing products.
Selling expenses: Such as advertising costs, shipping fees, and commissions to marketplaces like Amazon or eBay.
Platform and technology costs: Subscriptions for e-commerce platforms (Shopify, WooCommerce), payment gateway fees (Stripe, PayPal), and other technical services.
Return costs: Often underestimated, including returns, repackaging, and depreciation.
Other fixed costs: Warehouse rent, employee salaries, and software subscriptions.
Net operating income gives you a clear picture of how profitable your core activities are, without considering additional factors such as taxes and interest.
Example:
If your webshop has an annual revenue of €500,000, and your COGS and selling expenses amount to €400,000, your net operating income is €100,000.
What is Net Profit?
Net profit is the final amount remaining after deducting all costs, including:
Loan interest: If you have taken a business loan for inventory or marketing.
Taxes: Such as corporate or income tax.
This is the money you can withdraw, reinvest, or save as an entrepreneur.
Example:
Continuing with the previous scenario, with a net operating income of €100,000, if you pay €5,000 in interest and €30,000 in taxes, your final net profit is €65,000.
Why is this Important for Your Webshop?
Understanding both net operating income and net profit allows you to make better business decisions regarding:
Marketing investments: If you have a positive net operating income, you can safely allocate more budget to ads.
Inventory management: Rising procurement costs? Time to renegotiate with suppliers.
New product testing: With €100,000 in operating income, you can safely invest €20,000 in testing without risking financial stability.
Regular Financial Analysis is Key
Monthly review: Track key figures to spot problems early.
Quarterly review: Compare quarterly performance to identify trends.
Annual evaluation: Conduct an in-depth analysis for strategic planning.
Seasonal Factors in E-commerce
Compare periods to the same period last year rather than the previous month.
Peak seasons (Black Friday, Christmas) involve higher operational costs.
Build reserves during strong months to handle seasonal cash flow fluctuations.
How to Improve These Metrics
Increase Your Net Operating Income
Optimize purchasing costs by negotiating with suppliers.
Improve shipping strategies to reduce costs.
Reduce return rates by improving product descriptions and images.
Adjust pricing strategies to find the optimal margin.
Increase Your Net Profit
Optimize your tax position by consulting a tax advisor.
Refinance loans to secure better interest rates.
Invest in automation to reduce labor costs.
Practical Tools for Financial Insight
Consider using the following tools:
Accounting software: Exact Online, QuickBooks, or Xero.
E-commerce dashboards: Shopify Analytics, Google Analytics E-commerce.
Cash flow tools: Float or Agicap for forecasting financial situations.
Conclusion
The difference between net operating income and net profit significantly impacts your financial planning. Understanding these figures enables strategic decision-making to grow your webshop while maintaining financial stability.
