5 HELPFUL TIPS FOR SUCCESSFUL E-COMMERCE ACCOUNTING

Accounting is one of those painful necessities you need to do to keep your business going. Many find it boring and would rather discuss expanding their service offerings, but let's face it, you can't avoid the inevitable. eCommerce is the fastest growing market and is projected to hit over $5 trillion in sales this year. If you want to run a scaleable company, you need to understand eCommerce accounting basics. Many aren't as complicated as you'd think, and once you know the basics, you'll understand what your numbers are trying to tell you.

What you need to know to manage your e-Commerece Accounting

1. Calculating the Break-Even Point

Your break-even point is when your revenue equals your expenses. When you hit your break-even point, your profits are zero, but you're able to cover the costs associated with sales generated. Calculating your break-even point involves factoring in all costs (fixed and variable), product price, and your contribution margin. The contribution margin is the value obtained after you subtract your variable costs from the selling price. To calculate your break-even point, use the following formula.

Break-even Point = Fixed Costs/Contribution Margin

Where Contribution margin = Average Price – Variable Costs.

If your break-even point is extremely high, you can raise prices or lower your variable costs by increasing your shipping chargers or using cheaper materials.

2. Cost of Goods Sold

Your COGS (cost of goods sold) is incurred from the production of goods you sell, including direct labor costs and materials used in production. Expenses incurred during the distribution and sale of goods is not included in this calculation. While calculating your COGS can be difficult, especially if you bought raw materials at different prices and are paying different production salaries. The best way to approach this is to use the weighted average method or the specific identification method.

Tracking your correct COGS numbers is essential for your business since these figures plan a critical role inaccurate financial reporting. Incorrect COGS numbers will automatically reflect a higher or lower gross profit on your income statement and lead to false conclusions about your business's net income.

3. Track your Cash Flow

The purpose of any business is to make money and know exactly how much money you're making, but you need to watch your cash. While many companies think that gaining more sales will improve cash flow, this isn't the case. The first step to healthy cash flow is to reduce any unnecessary expenses; cutting down on these types of expenses can significantly impact your expenditures. You also need to consider creating strategies for on-time payments, and remember to be careful with the credit terms you offer your customers. Unless they buy your products regularly and have a good credit history, it is best to take payment upfront.

Another tip to improving cash flow to negotiate better terms with your suppliers, longer payment terms, bonus goods, or discounts on bulk purchases can free up cash flow for your eCommerce business. You can also look to negotiate returning goods that go unsold after a certain period.

4. Managing Inventory

Your inventory includes good used for the sale, along with the raw materials you use to create the goods. Unnecessary inventory buildup can impact your liquidy and reflect poorly on a balance statement. Therefore, it's imperative that you keep your inventory in check and decide the minimum volume that you want to keep. A good rule of thumb here is to keep only as much as you need. You don't want to run out of inventory (as you run the risk of losing sales), but you don't want excessive amounts that go unsold and cost you money.

There are also the idea and question of price fluctuations. If the market price shoots up, your inventory may have more value than it did the day before; the influx can also happen. A good eCommerce company needs to have a high rate of inventory turnover to thrive.

You must also consider inventory shrinkage (when you lose a portion of your inventory due to theft or damage). It's essential you physically count all of your inventory to keep track of your losses from shrinkage. Since eCommerce companies usually operate out of warehouses, the chances of shrinkage are low.

5. Prepare Your Balance Sheet

The balance sheet is mainly for tracking your company's long-term health and seeing how it is doing. The balance sheet is created by calculating your total assets, total liabilities, and owner's equity. Assets are considered anything of value that is under the control of your business, like cash, inventory, office equipment, or accounts receivable. Liabilities are the debts owed to others. Both can be defined on a long or short term basis. Your owner's equity is the difference between your assets and liabilities.

Your balance sheet is crucial because it provides essential insight into your business's bigger picture, along with any inaccuracies in your income statement. Remember that your balance sheet is only correct if your assets = liabilities +owner's equity.

If you're confused on what to do you can always outsource.

To achieve long-term success in the eCommerce industry, you must get your accounting operations up to par. If hiring an internal accounting department feels too expensive, you can always consider outsourced accounting, which can greatly reduce the cost of hiring and get you a team of experts at a fraction of the cost. Suppose your company has crossed $1 million in gross revenue or is getting close to that mark. In that case, likely, having a basic Bookkeeper who is only using QuickBooks is no longer sufficient for your operations. Relying solely on accounting software will also prevent you from making real-time financial decisions for your company.

As an eCommerce company, your main focus is to sell your product; eCommerce accounting is not apart of that task. We recommend to do what you do best and outsource the rest. An outsourced accounting team allows you to achieve so much more by providing a deep dive into your business numbers.

If you would like more information on the benefits of outsourced accounting and help decide if it is right for you, reach out to an outsourced accounting expert to weigh the pros and cons of an outsourced team.