You created a product, found a target market, and listed it on Amazon, Shopify, Etsy, eBay, or your own online store.
You ran ads and sold a few at first, then more and more. Sales keeps on increasing. You buy more inventory. You try to manage your cash flow from going tight. You are now on the habit of waiting for that deposit to sit nice on your bank account. Then spend on expenses necessary for your business to keep rolling every month.
You found a dashboard that shows a lot of information about your seller reports and how your business is performing on a daily, weekly or monthly basis. You keep on looking, and looking…trying to understand what those numbers mean.
You made predictions and forecasts, and made yourself ready to catch that anticipated increase in sales, prevent inventory levels from getting low, and estimated how much money will go to your wallet in the end.
But as time goes on, you are encountering issues with your estimates and predictions, your cash flow is tight, and your financial records a mess.
You sit back and ask yourself, Am I doing the right thing? Am I looking at the right information? Are those numbers real?
Running an eCommerce business is so much exciting, challenging, and can be very rewarding.
But in order to make it stable and grow bigger than you have expected, you should be looking at the right things, at the right information, and the right numbers.
To help you understand your eCommerce business, you need updated, accurate financial records to look at. Done in a way, specific to the needs of an eCommerce business.
5 eCommerce Accounting Essentials
1. Proper Breakdown of Amazon / eCommerce Sales, and Fees.
Unlike service based businesses, eCommerce Sales is a lot of things. You cannot consider the amount deposited to your bank as your Sales or Income.
Depending on what eCommerce platform you are in, it can be more complex or more simple than the other.
Amazon has a lot of Fees, Refunds, Reimbursements, Receivables, and Payables or Clearing accounts. Shopify can have different payment methods that further complicates the fees you need to account for.
2. Proper Accounting for Cost of Goods Sold
The concept of Cost of Goods Sold can be a tricky part. There are several pieces you need to group together to get accurate unit costs which you will multiply with the units sold per product.
I have created a separate article on Simple But Accurate Ways to Calculate COGS
A2X can help simplify the entering of COGS per settlement or payout, but you still need to compute the correct unit costs manually.
3. Proper Accounting for Inventory Purchases and Manufacturing costs
A common mistake I saw with a lot of eCommerce businesses books is charging inventory purchases directly to Cost of Goods Sold, even charging prepaid manufacturing costs.
When you buy inventory, these are products not yet sold so they are assets you are holding.
Once the inventory is sold, then it becomes part of your direct costs of sale – termed COGS.
If you have 3rd party manufacturer and pays them in advance before production, that amount is a prepayment. A current asset account for prepaid inventory, this amount should be monitored as how it is getting completed when the manufacturer actually does the creation of the products, which sometimes can take several months.
Aside from inventory ready for sale, and prepaid inventory, there are in-transit inventory, in-warehouse inventory, unlisted or not sellable inventory. Proper accounting needs to be done for all of them.
4. Proper Accounting for eCommerce Direct Costs
Selling on eCommerce platforms is easier than creating your own online store. But, because you are using their platform, you need to pay for their services and use of the platform.
These costs of selling on eCommerce platforms are direct costs that should be accounted for as part of Gross Profit computation.
eCommerce platform fees will eat a lot of your Income. Like for Amazon, there are a lot of fees getting deducted from your Sales before you get your settlement deposit.
For Shopify, there will be fees getting deducted from your payouts.
Accounting for these fees properly is essential for you to see the revenue generation power of your business.
5. Proper Choice of Accounting Software
There are a lot of times where I encountered clients who are a big fan of seeing their Sales Orders, Returns, Reimbursements, etc, and even inventory movements inside QuickBooks Online. They usually use Apps to sync them to QBO.
This is a big No! No! For an eCommerce business, tracking these level of detail is not ideal to be done inside QuickBooks Online. You are using an eCommerce platform with more powerful tracking and reporting capabilities, use it…don’t cram your accounting software with too much Sales, Customer, and Inventory data.
When it comes to syncing accounting information from your eCommerce platform to QuickBooks Online, we recommend you use A2X to do that. It’s simpler and more accurate! It will save you a lot of time and headache which will make paying for it a lot worth it.