Community » Motivation » FitClick Friends » 10 Accounting Basics You Need to Know to Run a Successful E-commerce Business

1. Get yourself accounting software
Don’t try to piece it all together using excel or a calculator.

Do yourself a favor and get accounting software. Freshbooks is marketed to customers who run e-commerce businesses.

freshbooks ecommerce

Or if you use Shopify, there are a bunch of accounting software apps you can get right in their app store.

accounting apps in shopify

Not sure what you want? Test out a free one. Or pick one with a 30-day free trial.

The best option will depend on your business and preferences.

If you’re shopping through the app store, make sure you’re picking a bookkeeping system.

Look for an app that will track sales, costs, and inventory.

Avoid apps that only create invoices or just provide reports. You want a tool that can do it all for you.

Whether you pick software through Shopify or go with something else, pick one that will sync directly to your e-commerce store.

It will make life a whole lot easier.

2. Track your cash flows
Step two: watch your cash.

If you don’t have a separate bank account for your business yet, get one.

You need to know that your business is making money. And the easiest way to see this is to watch your cash flow.

If you have more coming in then going out, you’re probably doing well, right?

You also should be watching the timing of money going out and coming in.

After all, what if all your bills are due tomorrow?

It won’t matter a whole lot if you have $1 million coming in next month if you can’t pay your employees until then.

Keep in mind any holds you have on your accounts.

What payment methods do you offer your customers? Do any of them place a hold on the money?

Is there a five-day delay from the time a customer pays to the time the money is in your bank? You need to know this when you’re figuring out when you’ll have money to spend.

Shopify offers a free template for tracking cash. You can easily create your own in excel.

shopify free cash flow template

Track what you expect to spend each week. Track what money you expect to come in each week.

If what you need to spend is more than your current bank balance plus what’s coming in, you know you’re about to have a problem.

Follow these tips to help improve your cash flow:

Don’t pay anything earlier than you have to. If it’s due in 30 days, pay it in 30 days.
Consider offering monthly payment plans or subscriptions to customers to guarantee money coming in.
Keep a reserve in your business bank account ‘just in case.’
Don’t overcomplicate it. You don’t need huge technical cash flow statements.
3. Determine how to count inventory
If you’re selling a service, then ignore this step.

Inventory is the product you sell or all the materials you use to build that product.

Don’t forget to include any costs for wrapping or packaging your product.

Decide what minimum volume of inventory you want to have on hand, and make sure you are tracking inventory so you can reorder before you pass this point.

The last thing you want is to run out of inventory and lose sales.

Why is inventory part of accounting basics?

Inventory equals money.

It’s money you spent to buy the stuff. Money you won’t make back until you sell your product.

And the money tied to your inventory can change while it’s sitting in your warehouse (or store, or apartment).

inventory accounting
If I buy 50 products at $100 each, and tomorrow the price shoots up to $150, my inventory is suddenly worth more.

But if the price drops tomorrow to $50, my inventory is worth less.

And watch out for ‘shrinkage’!

That’s when you suddenly have less inventory than what you’re supposed to.

You know you bought 50 products. You know you’ve sold and shipped 40.

You should have 10 left, right?

What if you only have 8 left?

That is ‘shrinkage.’

Maybe an item got lost, or stolen, or was ruined and had to be thrown out. There are lots of reasons it happens.

The good news is shrinkage is lower when you don’t have a physical retail store.

Warehouse shrinkage is actually pretty low. Typical shrinkage is less than 1% of your total inventory.

warehouse shrinkage

If you’re operating a business out of your home, it’s even less likely you will have shrinkage.

After all, you’re less likely to have someone steal inventory if you’re the only one around it.

It’s also a lot harder to lose inventory in an apartment compared to a huge warehouse.

That said, shrinkage can happen to anyone.

This is why it’s important to physically count inventory regularly. You need to know if you just ‘lost’ $100 worth of product and factor that into your accounting.

4. Understand your cost of goods sold
Cost of goods sold is the expense directly tied to the products you sold.

This is the inventory sold plus how much it cost to make that inventory.

Let’s say you sell one widget. Whatever it cost you for the parts plus whatever it cost to build it should be the cost of goods sold for that widget.

If the parts of the widget cost $50, packaging cost $10, and you paid

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