Having organized finances can mean the difference between sinking or swimming for businesses that sell online. If you sell physical goods, you probably have an inventory-based business. One of the biggest reasons ecommerce businesses fail is that they don’t know how much they’ve spent on unsold inventory.
To avoid these problems that cause many ecommerce sellers to close up shop is to keep a well organized chart of accounts.
The Chart of Accounts: What is it and why does it matter for ecommerce sellers?
The chart of accounts is a list of the individual accounts that make up a company’s general ledger . It is basically a summary of all your transactions. As you can see in the below example from QuickBooks Online, there are over 9 accounts in this chart of accounts.
SOURCE: DUMMIES.COM
Within the chart of accounts, you should find a balance sheet of assets, liabilities, owners’ equity, revenue, and expenses. Let’s go over these and see how they apply to ecommerce sellers:
- Assets : cash, accounts receivable, and physical assets like inventory and equipment;
- Liabilities : accounts payable to suppliers and service providers, taxes, salaries etc.;
- Equity : stock or shares in a company owned by the owner/partners and any other investors;
- Revenue : the amount of money being brought in through sales;
- Expenses : costs and spending over a specific time period, with a special focus on the cost of goods sold (COGS) .
Let’s get down to the nitty-gritty and see how you can actually apply the knowledge from the accounts listed above.
Calculate Profitability
If you subtract COGS from revenue, it will show you the gross profit of the sale. Then, if you divide the gross profit by revenue, it will show you the gross margin. Gross margin is a key indicator for online sellers because you can see how much money you actually made after a sale compared to the cost of the product. The higher the better!
Here is the calculation in a bit more digestible visual:
Source: INVESTOPEDIA
Calculate Cash Flow
For ecommerce companies, cash flow can be more important than profit. See, when you sell a product for more money than you paid for it, you’ve made a profit. But, until the money actually arrives in your bank account, your profits haven’t been converted into cash yet.
Obviously, a reliable cash flow lets you pay bills when they’re due. But, it also helps improve your forecasting when it comes to making business-related purchases and investments.
Cash flow statements are divided into sales, investments, or loan categories. Sales rule the ecommerce landscape, and for the online seller, cash flow statements show how changes in the balance sheet are affected by sales.
Up-To-Date Chart of Accounts
Updating your chart of accounts in real time shows where your money is coming from and where your payments are going. It’ll also help expose cost and inventory problems that cause trouble for online sellers. If it’s well made, a chart of accounts makes it easier to manage your finances; if it’s disorganized, inaccurate information can lead to inefficiencies that trip up business growth.
For small and medium-sized businesses, Quickbooks Online is the bookkeeping tool of choice, and it integrates seamlessly with ecomdash inventory management software to create an integrated accounting system for your business. Sales and inventory valuation are synchronized from your general ledger and chart of accounts into clear-cut financial statements, making your financial reporting headaches a thing of the past.
Adjust to your business realities and plan for the future
Knowing what sells and what doesn’t in real time lets you plan ahead and adjust your business model to the dynamic and ever-changing online market. A well designed chart of accounts will make financial reporting easier and more effective. With a more organized approach, you will know what is going on in your business, which optimizes the decision-making process. Your chart of accounts will give insights to effectively manage your sales and inventory to maximize the selling potential of your business and stay one step ahead of the competition.
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