The Importance of Bookkeeping for Ecommerce Businesses

Ecommerce is a booming business model.

On one side, shoppers love the idea of tailored products, specialized service, and fast shipping. On the other side of the ecommerce explosion sits the sheer number of tools allowing entrepreneurs to quickly set up shop and get products in front of buyers.

• Shopify
• Amazon
• WooCommerce
• Wal-Mart Marketplace

All of these (and more) solutions exist, often providing tools allowing anyone to start an online business.

This low barrier to entry creates a potential problem —Competition.

But in reality, the problem likely isn’t from similar stores. It could be yourself. Competition from other online retailers is as much of an issue as a company that isn’t set up for success financially.

The Biggest Issue Ecommerce Shops Face (Bookkeeping)

There are a number of issues that cause problems (some major) for online retailers. A couple of the big ones are:

• Manufacturing: Speed of response, cost of goods sold (COGS), and production capabilities. All issues that can stifle growth. Things like new product development and setting up reliable supply chains comes from good manufacturing relationships.
• Inventory: Yes, you get inventory from manufacturers. The two are closely related, yet not the same. Setting up the relationship and supply chain is one thing. But managing that inventory, understanding reorder points and which products make you the most money are all potential issues with your inventory.

Both of these problems, and many others, all circle back to a single issue that catches many ecommerce businesses off guard.

Bookkeeping.

Want better relationships with manufacturers? Good cash flow and the ability to increase order size gives you an advantage. Inventory management is also closely related to how well you manage your ecommerce finances.

The truth is, every aspect of your business is linked to bookkeeping.

• Ad spend
• Hiring/training
• Warehouse space

The list goes on and on. Each one is crucial to a growing organization and undeniably attached to how you manage your shop’s books. You likely already use a solution, like Xero or QuickBooks Online.

But alone, it’s not enough. Unless you take the time to ensure you’re taking full advantage of these financial tools.

5 Ways to Fully Utilize Bookkeeping in Ecommerce

1. A better understanding of your financials

It’s one thing to glance at a monthly report, see how much you sold, how much is in the bank and then go on about your business. Something else entirely is using your financial reports as an asset.

Here are a few of the ways to get a better grip on the fiscal health of your online shop:

• Cash flow: A detailed understanding of what came in, what’s going out, and the amount of liquidity you have is a game-changer.
• Accurate reconciliations: Keeping records is difficult, especially with high volume. Reconciliation, with a tool like A2X, makes this easier.
• Cash-on-hand: Similar, yet different from cash flow. Understanding how much cash you have in a given moment allows you to take advantage of opportunities when they arise (buy a competitor, bulk order for a discount, etc.)
• Return on ad spend (ROAS): Many ecommerce businesses use ads as the main driver of growth. Looking at the effectiveness of ads closely allows you to control the valves of that ad spend and see better profitability.

Proper accounting software: Cloud-based accounting software that can sync with a variety of apps and your bank account is essential for efficient bookkeeping. QuickBooks Online, and Xero are the two leading choices in this space.

With proper bookkeeping, it doesn’t take much to wrap your mind around the finances, if you compile the correct metrics into your regular reporting.

1. Making decisions based on your financials instead of just a gut feeling

What do you do with financial understanding? Use it to make the important decisions in your business.

It’s amazing how the right paths clear up with sound bookkeeping. Think about the tough choices you’re faced with on a regular basis.

• “We need more space…”
• “Have to order up before the busy season…”
• “Support times are up, we need two reps ASAP!”

Now, imagine being able to know the answer to the most common follow up question — Can we afford it?

No more decisions from the “gut feeling”. You’ll know when you can afford to move, when to stock up and how quickly you can afford to hire, all from clear bookkeeping.

1. Understanding your inventory/reorder points

If finances are the pulse of your ecommerce business, inventory is the lifeblood. Simply put, no product = no revenue.

However, some markets are finicky. Apparel, pop culture, and other popular categories change on a whim. For Example: Today, it’s “Baby Yoda”, tomorrow it’s “Tiger King”. Then, it’s something else entirely.

Most product types aren’t that fickle. But understanding the right time to reorder inventory and understanding how quickly some items are selling is something to keep in your books. It’s a means to understand which products sell consistently while others spike depending on things like:

• Time of year
• Popularity of subject matter
• Industry trends

1. Accurate COGS

When you order, say 1000 of one SKU, it’s pretty easy to understand how much you paid. If the total cost was $5000, then you paid $5 each. But things get tough when you:

• Expand the number of SKUs
• Have multiple orders for different SKUs
• Begin manufacturing certain products “in-house”
• Want to redesign your shop to be more mobile-friendly (Tip: Shopsheriff allows you to build a mobile-friendly Shopify store.)

If you’re seeing poor cash flow, particularly around times of order, getting an accurate COGS is vital to the continued health of your online business.

1. Understanding which products are most profitable

Understanding product profitability is powerful and relatively easy to understand. Take the cost of that particular SKU, average ad spend, conversion rate, and possibly even factor in your staffing costs.

And boom, you have your average profit per item. But this is more powerful when used in conjunction with other metrics.

Example: One product averages $20 in profit and another is $5.

Other factors to consider:

• Audience size: There may be a cap on the audience size who wants to buy the $20 profit item, but the $5 is fairly universal. Meaning you can increase the ad spend and get more overall revenue/profit from the lower-profit item.
• Timing: Does the higher profit item have staying power? If not, drive as much traffic until the “season” is over.
• Popularity: Having to clearance out products because it lost luster eats into that $20 profit margin. Consistent, profitable products are better than a unicorn.

It All Comes Back to Bookkeeping

Hopefully, you’re convinced that bookkeeping isn’t just an expense for your business. But really that’s up to you.

Continue to glance at your accounting solution for a few minutes every month. Or, track the right metrics and use your books as an asset to better grow your ecommerce business.