Most financial trouble doesn’t arrive all at once. It builds slowly.
A margin slips by a point, ad costs creep up, vendors get paid a little later each month.
None of that feels urgent in any single month, which is exactly why it gets missed.
Then, by the time it does feel urgent, it’s usually at crisis level.
The warning signs for this live in the reports most of us only skim through.
On your P&L, watch whether your gross margin is holding steady or declining, whether your operating expenses are growing faster than your revenue, and whether your advertising cost is creeping up as a percentage of revenue.
On your balance sheet, watch whether your bank balances are growing or shrinking over time, whether your total liabilities are increasing, and whether your accounts payable is growing, which means you’re taking longer to pay your vendors.
Look at how the bank balances and the liabilities move together.
If your cash is growing and your liabilities are growing right alongside it, that cash growth may not be real, it may just be funded by debt.
Check each number month over month, and compare it to the same month last year.
One month tells you very little, but the direction over several months tells you a lot.
You don’t have to track them all at once either. You can pick the one you’re most worried about or interested in and start from there.
If you’d like help making sense of what the numbers are telling you, we can help.
Cyndi
Quick Summary
- Financial trouble in an ecommerce business usually builds slowly through small monthly changes that are easy to miss.
- On the P&L, watch for a declining gross margin, operating expenses growing faster than revenue, and ad costs rising as a percentage of revenue.
- On the balance sheet, watch for shrinking bank balances, rising total liabilities, and growing accounts payable.
- If cash and liabilities are rising together, your cash growth may be funded by debt rather than profit.
- Compare each number month over month and to the same month last year. The trend matters more than any single month.
Frequently Asked Questions
What are the financial warning signs in an ecommerce business?
Key financial warning signs include a declining gross margin, operating expenses growing faster than revenue, advertising costs rising as a percentage of revenue, shrinking bank balances, increasing total liabilities, and growing accounts payable.
What should I look for on my P&L?
Check whether your gross margin is steady or slipping, whether operating expenses are outpacing revenue growth, and whether your ad spend is taking a bigger share of revenue each month.
What should I look for on my balance sheet?
Watch whether your bank balances are growing or shrinking, whether total liabilities are increasing, and whether accounts payable is rising, which signals you’re taking longer to pay vendors.
How can cash grow while my business is in trouble?
If your bank balance and your liabilities are rising at the same time, the extra cash may come from borrowing rather than profit. Comparing the two together shows whether your cash growth is real.
How often should I review my financials for warning signs?
Review them monthly. Compare each number to the prior month and to the same month last year, and focus on the direction over several months rather than any single result.
Related reading: Why Is My P&L Showing Profit When There’s No Cash in the Bank? | Revenue Is Growing but Where Is the Cash Going?
