You probably didn’t start an e-commerce business for the number crunching. But in order to run a sustainable, profitable e-commerce business it’s vital that you know your numbers, which is why we’ve created this e-commerce accounting guide.
Whether you choose to outsource your bookkeeping to an accountant or not, it’s good to become familiar with these common e-commerce accounting definitions and what they mean for your business.
The accrual accounting method
There are a few different methods of bookkeeping; the most common being cash and accrual. For businesses that deal with inventory, it’s best to go with an accrual accounting method. E-commerce accounting with an accrual method is a little more complicated than other methods of accounting.
Essentially you need to record sales when they occur, not when you receive the cash. The same goes for expenses. This method can give you better forecasting data so that you can understand the long-term impact of inventory purchases and sales.
Cost of Goods Sold (COGS)
Cost of goods sold is another important metric to measure in e-commerce accounting. To gauge whether or not your products are profitable, you’ll need to know how much you paid to buy and sell them. By calculating your product price minus the COGS you’ll be able to determine your gross margin. Bear in mind, this figure is not the same as your business profit.
Another aspect of e-commerce accounting to be aware of are your gross margins. Margins are different from business to business and product to product. It’s important to know your margins so that you can adjust your business strategy accordingly.
In order to calculate your marginal accurately you need to understand the costs associated with selling your product. Once you know your margin you can then work to reduce your expenses to increase your gross margin.
Expenses can be fixed (like tax and interest) or variable. Variable costs are costs that change as the quantity of your products change. They have to be calculated differently to fixed expenses in your e-commerce accounting.
To work out the total of your variable expenses you’ll need to times the quantity of products produced by the variable cost per unit.
As your business grows and production of your product increases, look for opportunities to renegotiate your variable costs with manufacturers. By keeping your variable costs low, you can protect your margins.
A business with lower variable costs will likely be more profitable than a business with high variable costs.
Let us take care of your e-commerce accounting, so that you don’t have to
As an e-commerce business owner, you have enough on your plate running your business. Here at infinity 22, we’re all about freeing up your time by doing the number crunching.
We are specialists in accounting and taxation, with years of experience providing expert advice and services so we can be sure we save you the most money possible! Give us a call today for more information on what we can do for you.