E-commerce businesses are rapidly growing and it’s important to make sure your accounting measures are fine-tuned.
Otherwise, you are going to remain a step behind and major issues will start to pop up. For those looking to optimize how their business is managed, it’s time to look at what works when it comes to e-commerce accounting.
Here are the six most important tips to implement as an e-commerce business.
Automate Your Accounting
The first thing a business owner needs to do is automate as much of the accounting as possible. For example, if expenses are being monitored, they should be going through an automated system. This will ensure everything is being recorded in a singular database rather than being written on paper.
Some business owners will look towards keeping receipts, which is okay, but it is not going to be a good option over the long-term.
Instead, your goal should be to automate as much of the accounting beginning with sales all the way to your bottom line.
Maintain Strong Inventory Record-Keeping Processes
This is a basic detail all businesses should think about as they figure out their finances. There is nothing worse than not knowing how your inventory is being processed and how much is available at any given moment. If you don’t have this information, how are you going to run a successful business?
You should be able to figure out how much inventory is available whenever you want to. It should be thoroughly recorded and there should be a system in place whenever an item is shipped.
In comparison to traditional businesses, it is even more important to have a rock-solid process in place for inventory record-keeping when it comes to e-commerce businesses. Since everything is being done online, you are going to have to make sure this part of your business is air-tight.
There is no reason to be in a situation where you have a blind spot when it comes to the inventory. Everything needs to be recorded from the moment a sale comes through to when the product is shipped. If there are gaps in this process, you are going to feel it as the business grows.
In some situations, this can undo all of your hard work as a business.
Monitor Your Gross Margin
Have you ever heard the saying “Revenue is vanity, profit is sanity and cash is king”?
Well knowing how much you make in sales is important but it really is only the tip of the iceberg when it comes to knowing the performance of your business. What you really should be interested in is your gross margin and ultimately your net margin.
Gross margin is the profit that you make after subtracting direct cost from your trading revenue. Getting this right is so important as it shows you the “Real Revenue” that your business is generating from each sale.
Common pitfalls businesses face when calculating gross margin are that they are incorrectly calculating cost of goods sold and classifying expenses that are direct as operating costs.
With cost of goods sold we commonly see that an over/undervaluing inventory on the balance sheet is the common culprit of an incorrect cost of goods sold in the margin. This is because if inventory on your balance sheet goes up cost of good sold will go down and vice versa.
As for incorrect allocation of direct costs we use this simple test: “Is the cost required to get product to customer and if you stopped operations today would this cost still be disbursed?”. If the answer is yes to both then it is most likely a direct cost.
Once you sort out calculating your margin correctly you will notice a big difference with your financial information.
Make Sure There is an Acceptable Return On Investment for Selling & Marketing Expenditure
When most think of Return on Investment the first thing that comes to mind is Return on Ad Spend on their Facebook, Google advertising or another type of advertising.
Here at Infinity22 we think that business owners need to look further into selling expenses as a whole and not just advertising to see the total return on investment. The reason why is that advertising is only one part of the sales and marketing process and the effectiveness of that needs to be monitored closely.
Our first suggestion here is to start collectively grouping your sales and marketing costs together so that when you analyse these costs collectively over a given amount of time you will be able to see the effectiveness they have
For example: you have a return on advertising spend of 10 time the value invested however if you were to also include the salary of the marketing manager this quickly drops to 2 times. Here we are not telling you to fire your marketing manager but definitely investigate to take a look into whats working and whats not. This may be an indication that your business is ready to invest more in advertising.
Our second suggestion is knowing what costs constitute selling and marketing expenses. Here you want to allocate or apportion at most any cost that is in relation to the sales and marketing profit center. Items the need to be classified as sales and marketing are as follows:
- Web development.
- Social media duties of virtual assistants.
- Graphic design for promotional activities.
- Salary of marketing staff.
- Market research costs.
- Sales & Marketing software.
- and any cost that is expended to generate additional sales for your business.
As soon as you implement the two above suggestions you will notice that your sales & marketing process will be easier to analyse for financial performance purposes.
Cash Flow Management is Key
Cash flow is an essential component of any e-commerce business due to the numerous moving parts involving in running a successful enterprise.
This means you want to make sure the funds are being managed the right way. Unfortunately, a lot of e-commerce businesses fail because they start hot and then forget to pay attention to their cash flow. This leads to bottlenecks in their operations before everything falls apart.
Make sure to understand how the cash flow is being managed from day one and pinpoint what needs to be done to keep this information on-hand whenever necessary.
Monitor Financial & Non Financial KPI’s
Your KPIs or “Key Performance Indicators” are going to have a tremendous role to play when it comes to understanding what’s working and what’s not. Each e-commerce business has this data coming in, but it’s important to make sure you keep track.
Examples of KPIs would be:
- Sales Target
- Customer Lifetime Value
- Customer Acquisition Costs
- Operating Expenses Ratio
- P/E Ratio
- Return on Assets
- Net Profit Margin Percentage
- Return on Equity
- And More – check out our article explaining what makes a KPI S.M.A.R.T. (What Is A SMART KPI And Can It Help Your eCommerce Business Model?)
These are just examples of what a business owner can start focusing on when it comes to fine-tuning their operations. If you are unable to pinpoint what your customer lifetime value is or what the return on equity comes out to be, you are going to remain confused as to why things aren’t working.
It’s important to have this information available in a matter of seconds when you need to make executive decisions.
E-commerce businesses are all about the details and it’s essential to keep track from day one. Whether it is expenses, revenue, or anything else associated with maintaining the business, you want to have this information readily recorded and available. If not, you are always going to be a step behind and that is not a good position to be as a business owner.
The world of e-commerce is rapidly changing, which is why quality accounting strategies are essential.
Here at Infinity22 we are ECommerce accountants helping businesses grow and add values to their online business through cloud and financial applications. If you are interested in seeing how we can help your business grow book a free strategy session here.