Why ‘Seller’s Discretionary Earnings’ is Critical for E-Commerce Sellers to Know About
E-Commerce sellers have a lot to pay attention to, particularly when it comes to financial metrics and statistics of their business.
Our partners at Seller Accountant say that the most important statistic to look at is “Seller’s Discretionary Earnings, or SDE. SDE is a measure of profitability that shows “the amount of cash the business generates that can either be distributed to the owner or reinvested into the business.” Knowing this number is vital to see a true picture of your business finances so you are able to maximize profitability.
SDE is the standard e-commerce term for “adjusted profit” and allows you to view that profitability through the lens of a buyer. This metric attempts to normalize different businesses to make more accurate decisions about how much a business is worth. SDE takes businesses that run very differently and gives insight into the profitability of a business at its core.
How it is Calculated
There are two ways SDE is calculated.
- “Net income plus “add back” expenses. Add-backs are considered to be expenses that the owner won’t likely spend on an ongoing basis.
- Gross profit minus any expense that will be required to continue running the company to maintain its existing SDE. For example, advertising costs, non-owner salaries, or contractor wages.
How To Improve SDE
One easy way to improve your SDE is to rid your business of expenses that don’t need to be in your business. Another way to improve SDE is to make sure your books are clean and expenses are clear. Expenses should be categorized by critical versus fixed expenses. When looking at expenses, it’s also important to distinguish between variable expenses versus fixed expenses.
Bottom line, the SDE formula can give you deep insight to “maximize your visibility into your profitability.”
If you’re an e-commerce seller interested in learning more about cash flow and profitability, reach out to one of our knowledgable Plastiq representatives at email@example.com to learn how we can help you take your e-commerce business to the next level.