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Jul 9 2023
Financial Statements: List of Types and How to Read Them

What Are Financial Statements?

Financial statements are written records that convey the business activities and the financial performance of a company. Financial statements are often audited by government agencies, accountants, firms, etc. to ensure accuracy and for tax, financing, or investing purposes. For-profit primary financial statements include the balance sheet, income statement, statement of cash flow, and statement of changes in equity. Nonprofit entities use a similar but different set of financial statements.

Key Takeaways

  • Financial statements are written records that convey the business activities and the financial performance of an entity.
  • The balance sheet provides an overview of assets, liabilities, and shareholders’ equity as a snapshot in time.
  • The income statement primarily focuses on a company’s revenues and expenses during a particular period. Once expenses are subtracted from revenues, the statement produces a company’s profit figure called net income.
  • The cash flow statement (CFS) measures how well a company generates cash to pay its debt obligations, fund its operating expenses, and fund investments.
  • The statement of changes in equity records how profits are retained within a company for future growth or distributed to external parties.

Understanding Financial Statements

Investors and financial analysts rely on financial data to analyze the performance of a company and make predictions about the future direction of the company’s stock price. One of the most important resources of reliable and audited financial data is the annual report, which contains the firm’s financial statements.

The financial statements are used by investors, market analysts, and creditors to evaluate a company’s financial health and earnings potential. The three major financial statement reports are the balance sheet, income statement, and statement of cash flows.

 

Not all financial statements are created equally. The rules used by U.S. companies is called Generally Accepted Accounting Principles, while the rules often used by international companies is International Financial Reporting Standards (IFRS). In addition, U.S. government agencies use a different set of financial reporting rules.

Balance Sheet

The balance sheet provides an overview of a company’s assets, liabilities, and shareholders’ equity as a snapshot in time. The date at the top of the balance sheet tells you when the snapshot was taken, which is generally the end of the reporting period. Below is a breakdown of the items in a balance sheet.

Assets

  • Cash and cash equivalents are liquid assets, which may include Treasury bills and certificates of deposit.
  • Accounts receivables are the amount of money owed to the company by its customers for the sale of its product and service.
  • Inventory is the goods a company has on hand, which are intended to be sold as a course of business. Inventory may include finished goods, work in progress that is not yet finished, or raw materials on hand that have yet to be worked.
  • Prepaid expenses are costs that have been paid in advance of when they are due. These expenses are recorded as an asset because their value of them has not yet been recognized; should the benefit not be recognized, the company would theoretically be due a refund.
  • Property, plant, and equipment are capital assets owned by a company for its long-term benefit. This includes buildings used for manufacturing or heavy machinery used for processing raw materials.
  • Investments are assets held for speculative future growth. These aren’t used in operations; they are simply held for capital appreciation.
  • Trademarks, patents, goodwill, and other intangible assets can’t physically be touched but have future economic (and often long-term benefits) for the company.

Liabilities

  • Accounts payable are the bills due as part of the normal course of operations of a business. This includes utility bills, rent invoices, and obligations to buy raw materials.
  • Wages payable are payments due to staff for time worked.
  • Notes payable are recorded debt instruments that record official debt agreements including the payment schedule and amount.
  • Dividends payable are dividends that have been declared to be awarded to shareholders but have not yet been paid.
  • Long-term debt can include a variety of obligations including sinking bond funds, mortgages, or other loans that are due in their entirety in longer than one year. Note that the short-term portion of this debt is recorded as a current liability.

Shareholders’ Equity

  • Shareholders’ equity is a company’s total assets minus its total liabilities. Shareholders’ equity (also known as stockholders’ equity) represents the amount of money that would be returned to shareholders if all of the assets were liquidated and all of the company’s debt was paid off.
  • Retained earnings are part of shareholders’ equity and are the amount of net earnings that were not paid to shareholders as dividends.

Example of a Balance Sheet

Below is a portion of ExxonMobil Corporation’s (XOM) balance sheet for fiscal year 2021, reported as of Dec. 31, 2021.

  • Total assets were $338.9 billion.
  • Total liabilities were $163.2 billion.
  • Total equity was $175.7 billion.
  • Total liabilities and equity were $338.9 billion, which equals the total assets for the period.

Understand the Bookkeeping for Effective Financial Management

 

Income Statement

Unlike the balance sheet, the income statement covers a range of time, which is a year for annual financial statements and a quarter for quarterly financial statements. The income statement provides an overview of revenues, expenses, net income, and earnings per share.

Revenue

Operating revenue is the revenue earned by selling a company’s products or services. The operating revenue for an auto manufacturer would be realized through the production and sale of autos. Operating revenue is generated from the core business activities of a company.

Non-operating revenue is the income earned from non-core business activities. These revenues fall outside the primary function of the business. Some non-operating revenue examples include:

  • Interest earned on cash in the bank
  • Rental income from a property
  • Income from strategic partnerships like royalty payment receipts
  • Income from an advertisement display located on the company’s property

Other income is the revenue earned from other activities. Other income could include gains from the sale of long-term assets such as land, vehicles, or a subsidiary.

Expenses

Primary expenses are incurred during the process of earning revenue from the primary activity of the business. Expenses include the cost of goods sold (COGS), selling, general and administrative expenses (SG&A), depreciation or amortization, and research and development (R&D).

Typical expenses include employee wages, sales commissions, and utilities such as electricity and transportation.

Expenses that are linked to secondary activities include interest paid on loans or debt. Losses from the sale of an asset are also recorded as expenses.

The main purpose of the income statement is to convey details of profitability and the financial results of business activities; however, it can be very effective in showing whether sales or revenue is increasing when compared over multiple periods.

Investors can also see how well a company’s management is controlling expenses to determine whether a company’s efforts in reducing the cost of sales might boost profits over time.

Example of an Income Statement

Below is a portion of ExxonMobil Corporation’s income statement for fiscal year 2021, reported as of Dec. 31, 2021.

  • Total revenue was $276.7 billion.
  • Total costs were $254.4 billion.
  • Net income or profit was $23 billion.

Cash Flow Statement

The cash flow statement (CFS) measures how well a company generates cash to pay its debt obligations, fund its operating expenses, and fund investments. The cash flow statement complements the balance sheet and income statement.

The CFS allows investors to understand how a company’s operations are running, where its money is coming from, and how money is being spent. The CFS also provides insight as to whether a company is on a solid financial footing.

There is no formula, per se, for calculating a cash flow statement. Instead, it contains three sections that report cash flow for the various activities for which a company uses its cash. Those three components of the CFS are listed below.

Operating Activities

The operating activities on the CFS include any sources and uses of cash from running the business and selling its products or services. Cash from operations includes any changes made in cash accounts receivable, depreciation, inventory, and accounts payable. These transactions also include wages, income tax payments, interest payments, rent, and cash receipts from the sale of a product or service.

Investing Activities

Investing activities include any sources and uses of cash from a company’s investments in the long-term future of the company. A purchase or sale of an asset, loans made to vendors or received from customers, or any payments related to a merger or acquisition is included in this category.

Also, purchases of fixed assets such as property, plant, and equipment (PPE) are included in this section. In short, changes in equipment, assets, or investments relate to cash from investing.

Financing Activities

Cash from financing activities includes the sources of cash from investors or banks, as well as the uses of cash paid to shareholders. Financing activities include debt issuance, equity issuance, stock repurchases, loans, dividends paid, and repayments of debt.

The cash flow statement reconciles the income statement with the balance sheet in three major business activities.

Example of a Cash Flow Statement

Below is a portion of ExxonMobil Corporation’s cash flow statement for fiscal year 2021, reported as of Dec. 31, 2021. We can see the three areas of the cash flow statement and their results.

  • Operating activities generated a positive cash flow of $48 billion.
  • Investing activities generated negative cash flow or cash outflows of -$10.2 billion for the period. Additions to property, plant, and equipment made up the majority of cash outflows, which means the company invested in new fixed assets.
  • Financing activities generated negative cash flow or cash outflows of -$35.4 billion for the period. Reductions in short-term debt and dividends paid out made up the majority of the cash outflows.

Statement of Changes in Shareholder Equity

The statement of changes in equity tracks total equity over time. This information ties back to a balance sheet for the same period; the ending balance on the change of equity statement is equal to the total equity reported on the balance sheet.

The formula for changes to shareholder equity will vary from company to company; in general, there are a couple of components:

  • Beginning equity: this is the equity at the end of the last period that simply rolls to the start of the next period.
  • (+) Net income: this is the amount of income the company earned in a given period. The proceeds from operations are automatically recognized as equity in the company, and this income is rolled into retained earnings at year-end.
  • (-) Dividends: this is the amount of money that is paid out to shareholders from profits. Instead of keeping all of a company’s profits, the company may choose to give some profits away to investors.
  • (+/-) Other comprehensive income: this is the period-over-period change in other comprehensive income. Depending on transactions, this figure may be an addition or subtraction from equity.

In ExxonMobil’s statement of changes in equity, the company also records activity for acquisitions, dispositions, amortization of stock-based awards, and other financial activity. This information is useful to analyze to determine how much money is being retained by the company for future growth as opposed to being distributed externally.

Consolidated Statement of Changes in Equity, ExxonMobil (2021).

Statement of Comprehensive Income

An often less utilized financial statement, a statement of comprehensive income summarizes standard net income while also incorporating changes in other comprehensive income (OCI). Other comprehensive income includes all unrealized gains and losses that are not reported on the income statement. This financial statement shows a company’s total change in income, even gains and losses that have yet to be recorded in accordance to accounting rules.

Examples of transactions that are reported on the statement of comprehensive income include:

  • Net income (from the statement of income).
  • Unrealized gains or losses from debt securities
  • Unrealized gains or losses from derivative instruments
  • Unrealized translation adjustments due to foreign currency
  • Unrealized gains or losses from retirement programs

In the example below, ExxonMobil has over $2 billion of net unrecognized income. Instead of reporting just $23.5 billion of net income, ExxonMobil reports nearly $26 billion of total income when considering other comprehensive income.

Consolidated Statement of Comprehensive Income, Exxon Mobil 2021.

Nonprofit Financial Statements

Nonprofit organizations record financial transactions across a similar set of financial statements. However, due to the differences between a for-profit entity and a purely philanthropic entity, there are differences in the financial statements used. The standard set of financial statements used for a nonprofit entity includes:

  • Statement of Financial Position: this is the equivalent of a for-profit entity’s balance sheet. The largest difference is nonprofit entities do not have equity positions; any residual balances after all assets have been liquidated and liabilities have been satisfied are called “net assets”
  • Statement of Activities: this is the equivalent of a for-profit entity’s statement of income. This report tracks the changes in operation over time including the reporting of donations, grants, event revenue, and expenses to make everything happen.
  • Statement of Functional Expenses: this is specific to non-profit entities. The statement of functional expenses reports expenses by entity function (often broken into administrative, program, or fundraising expenses). This information is distributed to the public to explain what proportion of company-wide expenses are related directly to the mission.
  • Statement of Cash Flow: this is the equivalent of a for-profit entity’s statement of cash flow. Though the accounts listed may vary due to the different nature of a nonprofit organization, the statement is still divided into operating, investing, and financing activities.

 

The purpose of an external auditor is to assess whether an entity’s financial statements have been prepared in accordance with prevailing accounting rules and whether there are any material misstatements impacting the validity of results.

Limitations of Financial Statements

Although financial statements provide a wealth of information on a company, they do have limitations. The statements are open to interpretation, and as a result, investors often draw vastly different conclusions about a company’s financial performance.

For example, some investors might want stock repurchases while other investors might prefer to see that money invested in long-term assets. A company’s debt level might be fine for one investor while another might have concerns about the level of debt for the company.

When analyzing financial statements, it’s important to compare multiple periods to determine if there are any trends as well as compare the company’s results to its peers in the same industry.

Last, financial statements are only as reliable as the information being fed into the reports. Too often, it’s been documented that fraudulent financial activity or poor control oversight have led to misstated financial statements intended to mislead users. Even when analyzing audited financial statements, there is a level of trust that users must place in the validity of the report and the figures being shown.

What Are the Main Types of Financial Statements?

The three main types of financial statements are the balance sheet, the income statement, and the cash flow statement. These three statements together show the assets and liabilities of a business, its revenues and costs, as well as its cash flows from operating, investing, and financing activities.

What Are the Main Items Shown in Financial Statements?

Depending on the corporation, the line items in a financial statement will differ; however, the most common line items are revenues, costs of goods sold, taxes, cash, marketable securities, inventory, short-term debt, long-term debt, accounts receivable, accounts payable, and cash flows from investing, operating, and financing activities.

What Are the Benefits of Financial Statements?

Financial statements show how a business operates. It provides insight into how much and how a business generates revenues, what the cost of doing business is, how efficiently it manages its cash, and what its assets and liabilities are. Financial statements provide all the detail on how well or poorly a company manages itself.

How Do You Read Financial Statements?

Financial statements are read in several different ways. First, financial statements can be compared to prior periods to better understand changes over time. For example, comparative income statements report what a company’s income was last year and what a company’s income is this year. Noting the year-over-year change informs users of the financial statements of a company’s health.

Financial statements are also read by comparing the results to competitors or other industry participants. By comparing financial statements to other companies, analysts can get a better sense of which companies are performing the best and which are lagging behind the rest of the industry.

What Is GAAP?

Generally Accepted Accounting Principles (GAAP) are the set of rules by which United States companies must prepare their financial statements. It is the guidelines that explain how to record transactions, when to recognize revenue, and when expenses must be recognized. International companies may use a similar but different set of rules called International Financial Reporting Standards (IFRS).

The Bottom Line

Financial statements are the ticket to the external evaluation of a company’s financial performance. The balance sheet reports a company’s financial health through its liquidity and solvency, while the income statement reports a company’s profitability. A statement of cash flow ties these two together by tracking sources and uses of cash. Together, financial statements communicate how a company is doing over time and against its competitors.

 

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Kalinka Infotech 0 Comments
E-commerce
Jul 1 2023
Unveiling E-commerce: Exploring Types, its History & Example

Unveiling E-commerce: Exploring Types, Tracing its History, and Examples

What Is Electronic Commerce (E-commerce)?

Electronic commerce (e-commerce) refers to companies and individuals that buy and sell goods and services over the internet. E-commerce operates in different types of market segments and can be conducted over computers, tablets, smartphones, and other smart devices. Nearly every imaginable product and service is available through e-commerce transactions, including books, music, plane tickets, and financial services such as stock investing and online banking. As such, it is considered a very disruptive technology.

E-commerce

Key Takeaways

  • E-commerce is the buying and selling of goods and services over the internet.
  • It is conducted over computers, tablets, smartphones, and other smart devices.
  • Almost anything can be purchased through e-commerce today, which makes e-commerce highly competitive.
  • It can be a substitute for brick-and-mortar stores, though some businesses choose to maintain both.
  • E-commerce operates in several market segments including business-to-business, business-to-consumer, consumer-to-consumer, and consumer-to-business.

Understanding E-commerce

As noted above, e-commerce is the process of buying and selling tangible products and services online. It involves more than one party along with the exchange of data or currency to process a transaction. It is part of the greater industry that is known as electronic business (e-business), which involves all of the processes required to run a company online.

E-commerce has helped businesses (especially those with a narrow reach like small businesses) gain access to and establish a wider market presence by providing cheaper and more efficient distribution channels for their products or services. Target (TGT) supplemented its brick-and-mortar presence with an online store that allows customers to purchase everything from clothes and coffeemakers to toothpaste and action figures right from their homes.

Providing goods and services isn’t as easy as it may seem. It requires a lot of research about the products and services you wish to sell, the market, audience, competition, as well as expected business costs.

Once that’s determined, you need to come up with a name and set up a legal structure, such as a corporation. Next, set up an e-commerce site with a payment gateway. For instance, a small business owner who runs a dress shop can set up a website promoting their clothing and other related products online and allow customers to make payments with a credit card or through a payment processing service, such as PayPal.

E-commerce may be thought of as a digital version of mail-order catalog shopping. Also called online commerce, e-commerce is the transaction between a buyer and a seller that leverages technology.

The 6 Ways to Grow a Company

Special Considerations

E-commerce has changed the way people shop and consume products and services. More people are turning to their computers and smart devices to order goods, which can easily be delivered to their homes. As such, it has disrupted the retail landscape. Amazon and Alibaba have gained considerable popularity, forcing traditional retailers to make changes to the way they do business.

But that’s not all. Not to be outdone, individual sellers have increasingly engaged in e-commerce transactions via their own personal websites. And digital marketplaces such as eBay or Etsy serve as exchanges where multitudes of buyers and sellers come together to conduct business.

 

The U.S. Department of Commerce recognizes e-commerce businesses such as transactional sites, static content sites, online marketplaces, and auction sites.

History of E-commerce

Most of us have shopped online for something at some point, which means we’ve taken part in e-commerce. So it goes without saying that e-commerce is everywhere. But very few people may know that e-commerce has a history that goes back to before the internet began.

E-commerce actually goes back to the 1960s when companies used an electronic system called the Electronic Data Interchange to facilitate the transfer of documents. It wasn’t until 1994 that the very first transaction. took place. This involved the sale of a CD between friends through an online retail website called NetMarket.

The industry has gone through so many changes since then, resulting in a great deal of evolution. Traditional brick-and-mortar retailers were forced to embrace new technology in order to stay afloat as companies like Alibaba, Amazon, eBay, and Etsy became household names. These companies created a virtual marketplace for goods and services that consumers can easily access.

New technology continues to make it easier for people to do their online shopping. People can connect with businesses through smartphones and other devices and by downloading apps to make purchases. The introduction of free shipping, which reduces costs for consumers, has also helped increase the popularity of the e-commerce industry.

Advantages and Disadvantages of E-commerce

Advantages

E-commerce offers consumers the following advantages:

  • Convenience: E-commerce can occur 24 hours a day, seven days a week. Although eCommerce may take a lot of work, it is still possible to generate sales as you sleep or earn revenue while you are away from your store.
  • Increased Selection: Many stores offer a wider array of products online than they carry in their brick-and-mortar counterparts. And many stores that solely exist online may offer consumers exclusive inventory that is unavailable elsewhere.
  • Potentially Lower Start-up Cost: E-commerce companies may require a warehouse or manufacturing site, but they usually don’t need a physical storefront. The cost to operate digitally is often less expensive than needing to pay rent, insurance, building maintenance, and property taxes.
  • International Sales: As long as an e-commerce store can ship to the customer, an e-commerce company can sell to anyone in the world and isn’t limited by physical geography.
  • Easier to Retarget Customers: As customers browse a digital storefront, it is easier to entice their attention towards placed advertisements, directed marketing campaigns, or pop-ups specifically aimed at a purpose.

Disadvantages

There are certain drawbacks that come with e-commerce sites, too. The disadvantages include:

  • Limited Customer Service: If you shop online for a computer, you cannot simply ask an employee to demonstrate a particular model’s features in person. And although some websites let you chat online with a staff member, this is not a typical practice.
  • Lack of Instant Gratification: When you buy an item online, you must wait for it to be shipped to your home or office. However, e-tailers like Amazon make the waiting game a little bit less painful by offering same-day delivery as a premium option for select products.
  • Inability to Touch Products:Online images do not necessarily convey the whole story about an item, and so e-commerce purchases can be unsatisfying when the products received do not match consumer expectations. Case in point: an item of clothing may be made from shoddier fabric than its online image indicates.
  • Reliance on Technology: If your website crashes, garners an overwhelming amount of traffic, or must be temporarily taken down for any reason, your business is effectively closed until the e-commerce storefront is back.
  • Higher Competition: Although the low barrier to entry regarding low cost is an advantage, this means other competitors can easily enter the market. E-commerce companies must have mindful marketing strategies and remain diligent on SEO optimization to ensure they maintain a digital presence.

Pros

  • Owners can generate revenue semi-passively
  • Consumers can easily browse for specific products
  • Greater earning potential as there are no limitations on physical location as long you can ship there
  • Reduced costs assuming digital presence costs less than building, insurance, taxes, and repairs.
  • Greater marketing control, including data extraction from customers, targeted ads, and pop-up placement

Cons

  • Limited customer service opportunities as there is little to no face-to-face opportunities
  • Lacks instant gratification as customers must believe in a product before seeing it in person
  • Products can’t been seen or handled until delivered (can’t try before they buy)
  • Loss of revenue or income when websites go down
  • High reliance on shipping constraints
  • Higher competition due to lower barriers of entry and greater customer potential

Types of E-commerce

Depending on the goods, services, and organization of an ecommerce company, the business can opt to operate several different ways. Here are several of the popular business models.

Business-to-Consumer (B2C)

B2C e-commerce companies sell directly to the product end-user. Instead of distributing goods to an intermediary, a B2C company performs transactions with the consumer that will ultimately use the good.

This type of business model may be used to sell products (like your local sporting goods store’s website) or services (such as a lawn care mobile app to reserve landscaping services). This is the most common business model and is likely the concept most people think about when they hear the term e-commerce.

Business-to-Business (B2B)

Similar to B2C, an e-commerce business can directly sell goods to a user. However, instead of being a consumer, that user may be another company. B2B transactions often entail larger quantities, greater specifications, and longer lead times. The company placing the order may also have a need to set recurring goods if the purchase is for recurring manufacturing processes.

Business-to-Government (B2G)

Some entities specialize as government contractors providing goods or services to agencies or administrations. Similar to a B2B relationship, the business produces items of value and remits those items to an entity.

B2G e-commerce companies must often meet government requests for proposal requirements, solicit bids for projects, and meet very specific product or service criteria. In addition, there may be joint government endeavors to solicit a single contract through a government-wide acquisition contract.

Consumer-to-Consumer (C2C)

Established companies are the only entities that can sell things. E-commerce platforms such as digital marketplaces connect consumers with other consumers who can list their own products and execute their own sales.

These C2C platforms may be auction-style listings (i.e. eBay auctions) or may warrant further discussion regarding the item or service being provided (i.e. Craigslist postings). Enabled by technology, C2C e-commerce platforms empower consumers to both buy and sell without the need for companies.

Consumer-to-Business (C2B)

Modern platforms have allowed consumers to more easily engage with companies and offer their services, especially related to short-term contracts, gigs, or freelance opportunities. For example, consider listings on Upwork.

A consumer may solicit bids or interact with companies that need particular jobs done. In this way, the e-commerce platform connects businesses with freelancers to enable consumers greater power to achieve pricing, scheduling, and employment demands.

Consumer-to-Government (C2G)

Less of a traditional e-commerce relationship, consumers can interact with administrations, agencies, or governments through C2G partnerships. These partnerships are often not in the exchange of service but rather, the transaction of obligation.

For example, uploading your federal tax return to the Internal Revenue Service (IRS) digital website is an e-commerce transaction regarding an exchange of information. Alternatively, you may pay your tuition to your university online or remit property tax assessments to your county assessor.

 

The U.S. Census Bureau conducts estimates of retail e-commerce sales in the United States. In the first quarter of 2023, retail e-commerce accounted for 15.1% of total sales in the country, totaling roughly $272.6 billion. These figures are adjusted for seasonal variation.

Types of E-commerce Revenue Models

In addition to crafting what type of e-commerce company a business wants to be, the business must decide how it wants to make money. Due to the unique nature of e-commerce, the business has a few options on how it wants to process orders, carry inventory, and ship products.

Dropshipping

Often considered one of the easier forms of e-commerce, dropshipping allows a company to create a digital storefront, generate sales, then rely on a supplier to provide the good. When generating the sale, the e-commerce company collects payment via credit card, PayPal, cryptocurrency, or other means of digital currency.

Then, the e-commerce store passes the order to the dropship supplier. This supplier manages inventory, oversees the warehouse of goods, packages the goods, and delivers the product to the purchaser.

White Labeling

White-label e-commerce companies leverage already successful products sold by another company. After a customer places an order, the e-commerce company receives the existing product, repackages the product with its own package and label, and distributes the product to the customer. Although the e-commerce company has little to no say in the product they receive, the company usually faces little to no in-house manufacturing constraints.

Wholesaling

A more capital-intensive approach to e-commerce, wholesaling entails maintaining quantities of inventory, keeping track of customer orders, maintaining customer shipping information, and typically having ownership of the warehouse space to house products.

Wholesalers may charge bulk pricing to retailers or unit prices for consumers. However, the broad approach to wholesaling is to connect to buyers of large quantities or many smaller buyers of a similar, standardized product.

Private Labeling

Private labeling is a more appropriate e-commerce approach for companies that may not have large upfront capital or do not have their own factory space to manufacture goods. Private label e-commerce companies send plans to a contracted manufacturer who makes the product.

The manufacturer may also have the ability to ship directly to a customer or ship directly to the company receiving the order. This method of e-commerce is best suited for companies that may receive on-demand orders with short turnaround times but are unable to handle the capital expenditure requirements.

Subscription

E-commerce companies can also leverage repeating orders or loyal customers by implementing subscription services. For a fixed price, the e-commerce company will assemble a package, introduce new products, and incentivize locking to a long-term agreement at a lower monthly price.

The consumer only places an order once and receives their subscription order at a fixed cadence. Common subscription e-commerce products include meal prep services, agriculture boxes, fashion boxes, or health and grooming products.

Example of E-commerce

Amazon is a behemoth in the e-commerce space. In fact, it is the world’s largest online retailer and continues to grow. As such, it is a huge disrupter in the retail industry, forcing some major retailers to rethink their strategies and shift their focus.

The company launched its business with an e-commerce-based model of online sales and product delivery. It was founded by Jeff Bezos in 1994 as an online bookstore but has since expanded to include everything from clothing to housewares, power tools to food and drinks, and electronics.

Company sales increased by 9% in 2022 from the previous year, totaling $513.98 billion compared to $469.82 billion in 2021. Amazon’s operating income dropped from $24.88 billion in 2021 to $$12.25 billion in 2022. The company posted a net loss of $2.72 billion in 2022, compared to net income of $33.36 billion in 2021.

How Do You Start an E-commerce Business?

Make sure you do your research before you start your business. Figure out what products and services you’re going to sell and look into the market, target audience, competition, and expected costs.

Next, come up with a name, choose a business structure, and get the necessary documentation (taxpayer numbers, licenses, and permits if they apply).

Before you start selling, decide on a platform and design your website (or have someone do it for you).

Remember to keep everything simple at the beginning and make sure you use as many channels as you can to market your business so it can grow.

What Is an E-commerce Website?

An e-commerce website is any site that allows you to buy and sell products and services online. Companies like Amazon and Alibaba are examples of e-commerce websites.

What Is the Difference Between E-commerce and E-business?

E-commerce involves the purchase and sale of goods and services online and is actually just one part of e-business. An e-business involves the entire process of running a company online. Put simply, it’s all of the activity that takes place with an online business.

What Is an Example of E-commerce?

Dollar Shave Club offers customers personal grooming, health, and beauty products. Customers can opt for what product(s) they want shipped to them and can sign up for long-term memberships to have products sent to them on a recurring basis. Dollar Shave Club procures goods in bulk from other companies, then bundles those products, maintains membership subscriptions, and markets the products.

What Are the Types of E-commerce?

An e-commerce company can sell to customers, businesses, or agencies such as the government. E-commerce can also be performed by customers who sell to businesses, other customers, or governments.

The Bottom Line

E-commerce is just one part of running an e-business. While the latter involves the entire process of running a business online, e-commerce simply refers to the sale of goods and services via the internet. E-commerce companies like Amazon, Alibaba, and eBay have changed the way the retail industry works, forcing major, traditional retailers to change the way they do business.

If starting an e-commerce site is something you’re considering, make sure you do your research before you start. And make sure you start with a small, narrow focus to ensure that you have room to grow.

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Kalinka Infotech 0 Comments
Jun 30 2023
Competitive Advantage Definition with Types and Examples

What Is a Competitive Advantage?

Competitive advantage refers to factors that allow a company to produce goods or services better or more cheaply than its rivals. These factors allow the productive entity to generate more sales or superior margins compared to its market rivals. Competitive advantages are attributed to a variety of factors including cost structure, branding, the quality of product offerings, the distribution network, intellectual property, and customer service.

Key Takeaways

  • Competitive advantage is what makes an entity’s products or services more desirable to customers than that of any other rival.
  • Competitive advantages can be broken down into comparative advantages and differential advantages.
  • Comparative advantage is a company’s ability to produce something more efficiently than a rival, which leads to greater profit margins.
  • A differential advantage is when a company’s products are seen as both unique and of higher quality, relative to those of a competitor.

Understanding Competitive Advantage

Competitive advantages generate greater value for a firm and its shareholders because of certain strengths or conditions. The more sustainable the competitive advantage, the more difficult it is for competitors to neutralize the advantage. The two main types of competitive advantages are comparative advantage and differential advantage.

The term “competitive advantage” traditionally refers to the business world, but can also be applied to a country, organization, or even a person who is competing for something.

Competitive Advantage vs. Comparative Advantage

A firm’s ability to produce a good or service more efficiently than its competitors, which leads to greater profit margins, creates a comparative advantage. Rational consumers will choose the cheaper of any two perfect substitutes offered. For example, a car owner will buy gasoline from a gas station that is 5 cents cheaper than other stations in the area. For imperfect substitutes, like Pepsi versus Coke, higher margins for the lowest-cost producers can eventually bring superior returns.

Economies of scale, efficient internal systems, and geographic location can also create a comparative advantage. Comparative advantage does not imply a better product or service, though. It only shows the firm can offer a product or service of the same value at a lower price.

For example, a firm that manufactures a product in China may have lower labor costs than a company that manufactures in the U.S., so it can offer an equal product at a lower price. In the context of international trade economics, opportunity cost determines comparative advantages. 

Amazon (AMZN) is an example of a company focused on building and maintaining a comparative advantage. The e-commerce platform has a level of scale and efficiency that is difficult for retail competitors to replicate, allowing it to rise to prominence largely through price competition.

Competitive Advantage vs. Differential Advantage

A differential advantage is when a firm’s products or services differ from its competitors’ offerings and are seen as superior. Advanced technology, patent-protected products or processes, superior personnel, and strong brand identity are all drivers of differential advantage. These factors support wide margins and large market shares.

Apple is famous for creating innovative products, such as the iPhone, and supporting its market leadership with savvy marketing campaigns to build an elite brand. Major drug companies can also market branded drugs at high price points because they are protected by patents.

How Do I Know If a Company Has a Competitive Advantage?

If a business can increase its market share through increased efficiency or productivity, it would have a competitive advantage over its competitors.

How Can a Company Increase Its Competitive Advantage?

Lasting competitive advantages tend to be things competitors cannot easily replicate or imitate. Warren Buffet calls sustainable competitive advantages economic moats, which businesses can figuratively dig around themselves to entrench competitive advantages. This can include strengthening one’s brand, raising barriers to new entrants (such as through regulations), and the defense of intellectual property.

Why Do Larger Companies Often Have Competitive Advantages?

Competitive advantages that accrue from economies of scale typically refer to supply-side advantages, such as the purchasing power of a large restaurant or retail chain. But advantages of scale also exist on the demand side—they are commonly referred to as network effects. This happens when a service becomes more valuable to all of its users as the service adds more users. The result can often be a winner-take-all dynamic in the industry.

How Is Competitive Advantage Different From Comparative Advantage?

Comparative advantage mostly refers to international trade. It posits that a country should focus on what it can produce and export relatively the cheapest—thus if one country has a competitive advantage in producing both products A & B, it should only produce product A if it can do it better than B and import B from some other country.

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