Inventory management for e-commerce businesses can be hard enough on its own and trying to figure out how to make sure numbers are correct in your accounting system can be even harder. In this article, we’ve teamed up with Unleashed Software, an inventory management software, to break these processes down and make them easier to manage.
The more your business grows, the seemingly more difficult it becomes to keep inventory levels accurate. The earlier you can tackle this area, the better. We’ll explain the cost of goods sold, how to sync it to your accounting system and the tools you need to streamline inventory management.
What is the cost of goods sold (COGS)?
Cost of goods sold or COGS is an important metric for all retailers, regardless of whether you’re a brick-and-mortar or e-commerce store. COGS can be considered the wholesale price of a product. It includes the cost of the materials, labour and operations. When calculating gross profit, you minus the COGS from revenue.
Understanding your COGS is important for a few reasons. To run a profitable business, you need to use your COGS when deciding on pricing strategies and marketing. It also impacts your cash flow forecasting and management. Finally, having an accurate COGS is crucial for tax time since you only pay tax on your gross profit.
Sync your COGS to your accounting system
Your inventory valuation is important in determining your income statement (COGS in particular), balance sheet and cash flow forecasting. If there’s a mistake early on, it will likely carry on and ultimately impact your own, or your accountant’s, ability to develop business insights.
By using one of Amaka’s accounting integrations, your COGS are automatically synced from your e-commerce store to your accounting software. For example, from Shopify to Xero. This is calculated by summing up the product costs for all orders made on a day. In the case of a refund order, the integration will capture this information and make necessary adjustments.
How does inventory management impact your accounting?
Misconfigured accounts or taxes and poor data entry can lead to vital order details being missed or captured incorrectly. This can then create incorrect records in all integrated systems. If this data is being used to drive your financial reports, your ability to make informed decisions becomes jeopardised.
Constantly writing off expired stock is a big drain on a business’s bottom line. For instance, a baker who keeps six months’ worth of eggs in stock at any one time would soon go out of business. Likewise, they would have limited capital available for other important expenses such as buying new machinery, or employing more staff. And on the flip side customer loyalty will quickly be eroded if there are too few eggs on hand to fulfil a new order.
Finally, an invisible, but very common effect of poor inventory management is the huge amount of time it takes to complete what are basically non-value-adding administration tasks. For example, reconciling your day’s orders with your current stock levels can take hours if not it’s not automated. And this goes for despatching goods, purchasing new stock, and planning production runs. All of these activities are core components of a proper inventory management system.
For these reasons, implementing a modern inventory management system is virtually a necessity for a business if it is to grow beyond a certain size.
How to avoid common inventory management problems
The two main problems businesses run into with inventory management are having too little – or else too much – inventory.
If you’re not maintaining enough inventory to fulfil an order – either an immediate sale or else an order for a product that you manufacture – it’s a serious problem for your business. A stock-out as this is known can see your customers simply take their business elsewhere. Or it can see a valuable long term relationship undermined through late or partial fulfilment.
The flip side of this situation – holding too much inventory – comes with different downsides. The most obvious is running out of warehouse space or paying for more than you need. In terms of finance, a major issue is the amount of capital tied up in inventory, hence why accountants have such a vested interest in inventory efficiency. Plus, holding too much stock sees you run a greater risk of inventory obsolescence. This is a particular issue in industries that see products go quickly out of date – for example, consumer electronics or products with a limited shelf life.
A strong inventory system will help you monitor both of these risks through features like automatic reorder points, central visibility of supplier lead times, and live stock value and stock age reports. In Unleashed, we track all the costs you pay in order to have a unit of stock in your warehouse (purchase price, tax, freight, customs) and measure it against the Average Landed Cost.
Finally, another pain point is the issue of expiry and wastage. Food and beverages in particular must be carefully monitored to avoid wastage, and manage any recalls due to contamination. This is made easy through batch tracking features that allow you to use up your oldest stock first – or even run a promotion to shift goods that would soon otherwise have to be written off.
Connect an inventory management system
Completing a stock take prior to going live with a new inventory management system is essential. We can never stress enough how important this step is. It’s also important to ensure you understand what transactions affect your stock figures as well as the implications of these transactions for all other systems you have integrated.
As e-commerce businesses expand, the number of products increases and stock becomes stored in more than one location, having an inventory management system becomes more important. Unleashed integrates with major accounting software providers, meaning numbers are always up-to-date, no matter what platform you’re looking at.
Key takeaways on e-commerce inventory management
Inventory management isn’t always an easy battle but it’s one that must be fought. Making sure your inventory levels are well-balanced and accurate is absolutely critical for better decision making in your business. Fortunately, e-commerce store owners now have a range of apps available at their fingertips to make the processes involved easier.