E-commerce Financial Model: Inventory, COGS, and Cash Flow
E-commerce businesses face unique modeling challenges: inventory ties up cash, COGS fluctuates with suppliers, and growth often strains working capital. Here's how to build a model that captures these dynamics.
E-commerce financial models differ from SaaS models in one fundamental way: you have physical products. As part of your financial model, you must address the complexity around inventory, fulfillment costs, and working capital that software companies don't face.
The E-commerce Challenge
Fast-growing e-commerce businesses often face a paradox: growth consumes cash. You need to buy inventory before you sell it, and faster growth means more inventory investment. Your model must capture this dynamic.
E-commerce Model Structure
Core Model Components
Revenue Tabs
- Traffic by channel
- Conversion funnel
- AOV by segment
- Customer cohorts
Cost Tabs
- COGS by product
- Fulfillment costs
- Marketing spend
- Returns/refunds
Working Capital
- Inventory schedule
- Accounts payable
- Cash flow forecast
- Financing needs
Revenue Modeling
E-commerce revenue is transactional, so your model builds from traffic, conversion, and order value using bottoms-up revenue approaches.
Revenue Formula
Revenue = Sessions × Conversion Rate × AOV × (1 + Repeat Rate)
Traffic by Channel
| Channel | Typical CVR | CAC Range |
|---|---|---|
| Organic Search | 2-4% | Low (content investment) |
| Paid Social | 1-3% | $15-80 |
| Paid Search | 2-5% | $20-100 |
| 3-6% | Low (existing customers) | |
| Direct/Branded | 4-8% | Lowest (brand awareness) |
New vs. Repeat Customers
New Customer Revenue
Traffic × CVR × AOV. Higher CAC, typically lower AOV on first purchase.
Repeat Customer Revenue
Existing customers × Repeat Rate × AOV. Lower/no acquisition cost, often higher AOV.
COGS and Gross Margin
E-commerce COGS includes product cost, fulfillment, and shipping. Getting this right is critical because small margin errors compound at scale.
COGS Components
Product Cost
Manufacturing or wholesale cost per unit. Include inbound freight, duties, and landed cost adjustments.
Fulfillment
Picking, packing, and warehouse labor. Often $2-5 per order for 3PL, variable in-house.
Shipping
Outbound shipping to customer. Model separately from fulfillment. Consider free shipping thresholds.
Returns/Damages
Return processing costs and inventory shrinkage. Typically 3-8% of revenue for apparel, lower for other categories.
Contribution Margin Framework
| Line Item | Per Order | % Revenue |
|---|---|---|
| Revenue (AOV) | $75.00 | 100% |
| - Product Cost | ($22.50) | 30% |
| - Fulfillment | ($4.00) | 5% |
| - Shipping | ($6.00) | 8% |
| - Payment Processing | ($2.25) | 3% |
| = Gross Profit | $40.25 | 54% |
| - Customer Acquisition | ($25.00) | 33% |
| = Contribution Margin | $15.25 | 20% |
Inventory Planning
Inventory planning balances stockout risk (lost sales) against overstock risk (tied-up cash, markdowns). Your model should forecast inventory needs and working capital impact.
Inventory Metrics
Inventory Turns
COGS / Average Inventory. Higher is better. 4-6 turns common for DTC, 8-12 for fast fashion.
Days Inventory Outstanding
365 / Inventory Turns. How long inventory sits before selling. Lower is better.
Weeks of Supply
Current Inventory / Weekly Sales Rate. Target 8-12 weeks for most products.
Stockout Rate
Percentage of orders with at least one stockout. Target <2%.
Inventory Forecast Model
| Month | Beginning | + Receipts | - COGS | = Ending |
|---|---|---|---|---|
| Jan | $500K | $300K | ($250K) | $550K |
| Feb | $550K | $280K | ($270K) | $560K |
| Mar | $560K | $350K | ($300K) | $610K |
Seasonality Warning
Many e-commerce businesses do 30-40% of annual revenue in Q4. Your inventory build for Q4 happens in Q3, meaning cash goes out months before it comes back in. Use sensitivity analysis to stress-test different seasonality assumptions.
Cash Flow Considerations
E-commerce businesses can be profitable on paper but run out of cash due to working capital requirements. This is one of the common modeling mistakes—your model must track cash timing, not just P&L profitability.
Working Capital Cycle
Cash Conversion Cycle
CCC = Days Inventory + Days Receivable - Days Payable
Negative CCC means you collect cash before paying suppliers. Amazon's CCC is approximately -20 days.
Improving Cash Flow
- Negotiate supplier terms: Move from Net 30 to Net 60 or Net 90
- Pre-orders: Collect cash before manufacturing
- Inventory financing: Use inventory as collateral for credit lines
- Dropshipping: Eliminate inventory for some SKUs
- Faster turns: Better forecasting and demand planning
Running an E-commerce Business?
Eagle Rock CFO builds e-commerce models with inventory planning, cash flow forecasting, and unit economics analysis. Let us help you plan for profitable growth.
Get Started