QuickBooks Online Products and Services eCommerce Deep Dive

QuickBooks Online tracks your products and services in the Sales menu alongside All Sales, Invoices, and Customers. If you’re an eCommerce company you sell products and services online. You’ll want to study this QuickBooks Online products and services deep dive to get a better understanding of how this works.

Even if you don’t want to be an accountant, knowing this will help you get better at managing your business. To manage your business better, you will want to understand your basic financial statements; the Balance Sheet and Profit and Loss. Learn how QuickBooks Online products and services work, and you will have a clearer picture of how your transactions should impact these financial statements. Then you’ll know when something doesn’t look right, and you’ll know where to look to find the root of the issue.

Most importantly if you are the eCommerce business owner you will be able to have a more intelligent conversation with your accountant when you know your financial statements don’t look right.

Do your sales on your income statement not look right?

Is the inventory number on your balance sheet not lining up with what you think you have in your warehouse?

This is where you’ll want to go to research why. Then you’ll either confirm that the information is correct, or you’ll find out what’s wrong and fix the issue.

QuickBooks Online products and services are the digital version of what is in your warehouse or on your shelves.

If you sell light bulbs on Amazon, then you need a product for that in QuickBooks Online.

What is a SKU anyway?

You probably sell all different kinds of lightbulbs. For each different kind you need a Stock Keeping Unit number, or a SKU.

You’ll need a name for each product. If you need to distinguish by color or size or any other feature, you may need a separate SKU for each variation.

Here’s how to decide if you need a separate SKU or not. Think in terms of how you want to track the quantity you have in stock. If you would need to know how many you have of an item with one variation of a feature vs another, then it’s a separate SKU. If you don’t care, then use the same SKU. You can always change this later if you find you made a mistake, so don’t get too hung up on it, and always err on the side of keeping it simple.

QuickBooks Online products and services give you the ability to track all of this information, and there are some other important things to consider.

When you purchase inventory you own it. It helps to think of it as though you may never sell that item. That’s why it is not an expense when you buy it. It goes on your balance sheet, and we call it “Inventory.”

When you sell inventory, four accounts are affected:

  • Sales
  • Cash or Accounts Receivable
  • Inventory
  • COGS (Cost of Goods Sold)

How Transactions Flow through QuickBooks Online Products and Services

The inventory you bought moves out of inventory (on the balance sheet) because you no longer own it. You sold it to someone else.

That inventory cost, becomes cost of goods sold (on the income statement), which is ‘like’ an expense, but it is actually called “contra-income.” This means it “goes against” income.

Hopefully we sold that inventory for something more than we paid for it. That “Sales” amount minus the COGS is your gross profit.

If you’re an eCommerce company, then you probably don’t have accounts receivable. The sale is made and cash (ultimately) is received albeit through some credit card processor with a few days delay.

Let’s say that you perform some “service” on the product before you ship it out. Maybe your light bulb goes inside some sort of casing, like the edison light that sits on my desk:

QuickBooks Online Products and Services eCommerce Deep Dive

The Services part of QuickBooks Online Products and Services

If you charge for this service (let’s say if it is some real custom work) then that will be a service item. You don’t purchase this item, so there is no inventory or COGS associated with it. If you pay someone outside (non-employee) then the cost of that service will be in your outside services account. If an you or an employee does it, then it is in the Payroll Expense for your company.

A service item is assigned an income and an expense account (if you pay someone outside for it). There is no inventory account to assign.

Now you have all of the pieces to set up QuickBooks Online Products and Services.  

When you set up an inventory part, you will need the following at a minimum:

  • Name
  • SKU
  • Sales / Income Account
  • Inventory Account
  • COGS Account

You will likely also want to include a description, but not necessarily. Especially for eCommerce, your descriptions will be on your website or sales channel.

Your Master SKU List

There has to be a mapping somewhere between the SKU’s.

There can only be one SKU per product. If your sales channels have different SKUs for the same product (and this is common) you will want to maintain a list somewhere that maps the Sales Channel SKU to the SKU in QuickBooks Online.

In QuickBooks Online there absolutely has to be one SKU per product. That’s why I like to call this the “Master SKU.”

You may be thinking that you use an app for your eCommerce business that keeps track of this. I would not rely on that. Apps make mistakes. Keep a list. Use that list to keep your app in check.

Two products that are great for tracking your Master SKU list are:

Now let’s take QuickBooks Online products and services a step further.

When you really understand how QuickBooks Online Products and Services work, you can get creative.

Lets say your customer prepays you? You want to invoice for that prepayment. This means you’ll want an item called something like “Prepayments.” But above we discussed that these items are linked to an income or expense account.

Here’s a secret: You can choose any kind of account to link to, where you normally link to an income account. If you get a prepayment, it is a liability. All you need to do is create your “prepayments” item and link it to the liability account instead of an income account.

Watch the video above to see what this looks like, and then check out Tracking And Managing Inventory In QuickBooks Online.

For more on the prepayments aka Customer Deposits check back for an upcoming post on Customer Deposits in QuickBooks Online.

Improve Inventory Turnover Improve Cash Flow

Inventory Turnover

Your inventory turnover is another lever you can pull in order to improve cash flow. Easier said than done? Of course. So instead of making excuses about how hard it is, let’s look at how to get it done! Let’s improve inventory turnover so we can improve cash flow.

Get CashFlowTool.com

The very first thing you will want to do is count your inventory. I am often shocked at how many eCommerce companies I start with, and when I ask them when was the last time they took inventory I get that deer in the headlights look.

Counting Your Inventory

You can’t improve inventory turnover if you don’t know what you’ve got. There are other reasons for taking or counting your inventory. Counting your inventory gives you an opportunity to see what may not be salable anymore. Or if something is getting too that point.

Once you get a count, you give it to someone like me to post the inventory adjustment in QuickBooks Online. Now we have accurate inventory and Cost of Goods Sold numbers to work with. This is important.

Blow out old unsalable items

Want to bring in some cash quickly? Improve inventory turnover right away? Take all of your older inventory that isn’t selling off the shelf. Put in on a clearance shelf. Analyze that stock and figure out what your raw cost is. Just what you paid for it. No point in worrying about logistics or any other tangent costs.

Blow that inventory out. Even if it means taking a loss. You likely paid for that inventory a long time ago, and anything you can bring in for it now is better than $0.00.

Run a sale, offer coupons, and send out emails to your customers. Get rid of that stuff.

There is a cost to keeping it in the warehouse. Once you clear that stuff off the shelves you have more room to stock the stuff that IS selling.

Two ways to improve inventory turnover in order to improve cash flow

Bleed your inventory

This is the simple thing that you have more control over. Bleed your inventory levels down. If you are selling more than you are buying, that has a direct and positive impact on cash flow. It’s simple math. You are tying up less cash in inventory, therefore more of what you bring in stays in the bank because less is going out to buy inventory.

You can only do this for so long of course. Eventually you have to buy more inventory.

While bleeding your inventory levels, you will want to analyze how much of each product you need on hand, and what the appropriate reorder point and quantity should be. The goal is to keep just enough so that you never have to back order something. Nothing should sit on the shelves for more than 30 days in most cases. The exception might be really high value / high profit items. These will need to be there when ordered. Orders will be less frequent. Maybe as little as once or twice per year, but the profit on these items for even one or two sales per year, justifies their shelf space and then some.

The idea behind bleeding inventory, similar to blowing out unsalable inventory is to keep a closer eye on what sells well vs what doesn’t. The more often you can turn over a SKU (Stock Keeping Unit) the better your cash flow.

The strategy here is to bleed your inventory that doesn’t sell as well and stock up on what does. If an item sells twice as much as anything else, then it should take up half of your shelf space (in theory).

The point is to be strategic about your shelf space. Large retailers like Walmart analyse how many times revenue needs to be turned over per linear foot of shelf space. If you want what these guys have, you have to do what they do.

Increase Sales Volume

This is where you say, “tell me something I DON’T already know Nerd!” This is also the easier said than done part, but here’s the thing.

Stop saying, “easier said than done” and start thinking about how to do it.

  • Online advertising
  • Social media
  • Email campaigns
  • SEO

This means spending time and money. Welcome to business 101. You spend time and money on advertising and marketing and you generate sales.

If you have items that aren’t selling well, but you know they sell well elsewhere, then work on your SEO. Look at the descriptions on those items. Change them. Try different ideas until they start selling more.

Run some searches on your own products as though you were your own customer. See who comes up on top and analyze their descriptions. See what they are doing that is working where yours aren’t.

Most importantly get some guidance. Find people who are where you want to be and ask for help. People who aren’t directly competing with you, but who do well on Amazon and elsewhere.

Marketing and advertising is an art. You need someone who knows this. Someone who knows how to keep altering the mosaic until the picture comes together and the means results. All of a sudden something that wasn’t working before pops. You hit that tipping point, and now you’re scrambling to get orders fulfilled.

That’s when you know it’s working.

Watch the video above and post your comments and questions below.

eCommerce – Profit Margin, Gross Profit, & Markup Explained

Every business wants to make a profit. For an eCommerce business to do this properly you’ll need to understand the dynamics of selling inventory and that means you’ll need to understand profit margin, gross profit and markup.

The Profit Margin Calculator from the video can be purchased in our shopping cart:

Want the Profit Margin Calculator? Click to Purchase

Smaller businesses are faced with a challenge that larger businesses do not have. The owner is not necessarily an accounting professional and as a small business may not have the resources to have a controller on staff. One of the classic mistakes people make when starting a small business is that they don’t do the right financial planning for it. They set out to charge the going market rate for something and fail to take into account that they may not be able to compete if other companies are already buying and selling similar products in large volume. This doesn’t mean they shouldn’t go into business. It means that the dynamics need to be considered and used in making important decisions about how to structure things.

If you are going to sell a product and compete with some big companies out there then I have essentially 2 choices.

The first one is to sell a high end version of the product thereby justifying a higher price compared with the “mass produced” lower quality products.

The second choice is to get enough start-up capital to be able to purchase enough inventory so that the unit cost is low enough to be competitive.

There are obviously other options in between the two so it is just a matter of getting creative. You will still be left with the same decision in the end.

How do you price your product?

If you don’t have a market research department and a CFO, this is going to be up to you as the entrepreneur to figure out. People have asked me how businesses get themselves in a situation where they aren’t making enough money even though the sales are there, and this is why – always lack of planning.

There are essentially 3 kinds of businesses out there– those that sell products, those that sell services and those that sell both.

Serviced based businesses are a little simpler business model because you don’t have the elements of inventory, process cost, and related analytics with respect to cost, markup, selling price, gross profit, and gross profit margin. There are also inventory carrying costs, and inventory tracking and management costs. Then if you are selling retail you need to become concerned with Sales Taxes which are an added bookkeeping cost in terms of capturing, reporting and payment.

When companies sell products they are faced with a challenge.

How to price the product? How much is it worth and is that enough to cover the costs directly associated with either production (if we are involved in manufacturing them) or procurement if we are simply purchasing something for resale. The difference between what you sell it for and those immediate costs is of course the Gross Profit (in terms of dollars).

Then the Gross Margin or Gross Profit Margin is the percentage of Gross profit Dollars to Total Revenue (or selling price). So the gross profit percentage looks at the Gross profit dollars in relation to total selling price.

Gross Margin = Gross Profit ÷ Total Selling Price

Then there is the Markup percentage. This is in a way the flip side of the Gross Profit Margin. It looks at the cost in relation to profit. This is calculated as the gross profit divided by the cost.

Markup = Gross Profit ÷ Cost

The trick to this is not just to make a gross profit. There has to be enough gross profit to pay for all of your overhead costs (office expenses, utilities, payroll, marketing etc..). Then hopefully after all of that there is still something left over so that we have a Net Profit.

So here’s the simple recap on gross and net profit:

Total Selling Price – Cost of Goods Sold = Gross Profit

Gross Profit – Overhead = Net profit.

So what is considered Cost of Goods Sold vs. Overhead?

The true definition of cost of goods sold are all costs necessary in order to get the products ready for sale.

The classic question is whether or not Freight is considered cost of goods sold. The answer is yes and no!

Freight In is the cost I pay to have the goods delivered to me before I’ve sold them. This is considered part of Cost of Goods Sold.

Freight Out is the freight I pay to ship my goods to my customer. This happens after the sale is made which means it is NOT a cost incurred in getting the products “ready” for sale so it is considered a selling, general, & administrative expense or overhead.

Now how do you price your product?

As indicated above and In the simplest forms there are 2 basic selling models. Either charge a lower price = lower profit margin and generate a high sales volume, or (the high end model) charge a high selling price = higher profit margin and lower sales volume.

You may be in a situation where every deal is different based on what you negotiate and it also may be more complex than just being able to choose from among the 2 models described above.

Many businesses use a margin calculator to figure it out.

You will need to have an idea of what you expect your sales volume to be. You also need to have an idea of how much your overhead is. This way you can back into the calculation based on expected sales volume.

Using a very simple example if I know conservatively I am going to be able to sell 1000 products and my overhead is $10,000 then I need to be making a gross profit of $10/unit just to break even.

Then if my cost of goods sold is $3,000 (for 1,000 products) I need to sell them for a total of $13,000 to break even.

Next I need to factor in how much profit I want to make and that may be determined for me based on fair market value.

If the “going rate” for my product is $20, then I can charge that and gross $20,000, pay my $3,000 cost and $10,000 in overhead and have $7,000.
That may or may not be a good deal for me – it really depends on how much effort I have to put in to generate that sales volume combined with what I need to net monthly.

What do you need to net monthly?

This is where my theory breaks off from the traditional.

Traditional financial professionals will mostly say you need one expert on business finance and another on personal. I disagree completely. This is why.

As a business owner you need to look at your personal expenses – mortgage, car payments, insurance, food- the works. If $7,000/month is enough to cover it than this business model works.

If $7,000 is not enough then you need to revise the model by charging more for your product.

If this means you are charging more than market you need to work out how you are going to justify that.

The easiest thing to do is make sure that you are providing superior service. People will pay extra for good service and in this day and age most companies fall real short in that area (my opinion of course).

So all you really need to do is make sure your company is really there for the customer and you can charge over market.

Wait! There’s More!

You can play around with the variables to see what you can do in terms of cost, selling price, gross profit, markup, and gross profit.

There are many free margin calculators on the web, which will do the simple calculation for you. You can enter your cost, and revenue and see the profit margins. Some that I found will even let you play around with some of the variables, but the one most important one to me I could not find anywhere.

The scenario is that you are looking at your cost, selling price and related gross profit and markup and now your prospect comes to you and says that your total price for the 1,000 products he or she is about to purchase is outside of their budget.

Your proposed selling price for the 1,000 units was $20,000 ($20/each) and they had really only budgeted for $15,500.

Now you want to be able to drop the total selling price to see one of two things – either the reduced quantity I need to sell them, or the reduced gross profit margin.

No margin calculators that I found on the web let you do this. Then you might be looking at the variables and you may know that you want your gross profit margin to be somewhere between 30-40%.

You want to be able to enter the cost per unit, selling price per unit, and the quantity, but then go and adjust the Gross profit margin % to keep it in your range and see the resulting total selling price. Again none of the web based calculators are this dynamic.

Based on this I developed something that is easy to use that works.
The result my Profit Margin Calculator.

It is designed in MS Excel, but you don’t need to know anything about Excel to be able to use this very easily.

It lets you start by entering the basics and then you can move into any of 5 different scenarios that change what you can enter and what gets calculated.

This way you can look at lowering the total sales price to get a lower quantity OR look at lowering the total sales price to get a lower gross profit (so your customer gets a better deal).

Watch the video above to see what this looks like.

Analyzing Inventory in QuickBooks Online

Analyzing Inventory in QuickBooks Online

Once you know how to track and manage inventory in QuickBooks Online you’re ready to start analyzing inventory in QuickBooks Online.

This means we’re going to look at some reports.

There are two key reports you are going to want to start looking at:

  • Inventory Valuation Summary
  • Sales by Product / Service Summary

As the titles suggest, the valuation summary gives you a look at what you have on hand (what you own). The Sales by product shows you what is selling, but it also gives you some very useful data – The COGS, Gross Margin and Gross Margin % for each product.

Analyzing Inventory in QuickBooks Online – Inventory Valuation Summary

This is where you look to see what you have in inventory. As the business owner you have a very good and reliable sense of whether or not this looks right.

  • Export the report to Excel or Google Sheets.
  • Right away you can start cleaning things up from this report.
  • The first thing I do is sort it by quantity. Look for the negative quantities. This could suggest we’re missing purchases? Or PO’s didn’t get turned into bills? Were those bills paid? If so we need to find those payments, and see how they were recorded, if not to the bills.
  • Next check the 0 quantity items. Look at the items. Is there anything here that you know you have stock in?
  • Then go right down to the items with the largest quantities. Does this look right? Should you have this much stock in these items?

It’s a bit subjective, but in my experience the business owner has a really good sense of what does or doesn’t look right. You know your products, and you have a sense of what sells and what doesn’t.

If the quantities do look right, you might want to look at the items you have a lot of stock in.

What is the turnover rate on these items? Are you at risk of overstocking? Should you run a promotion and blow out some of that inventory?

It may be fine. You may be stocking up for your busy season. There is no right or wrong answer on this stuff. Analyzing inventory in QuickBooks Online is about looking at it with an open mind. Don’t assume it’s right, and don’t assume it’s wrong. The goal is to make sure we can explain it, whichever way it goes.

Analyzing Inventory in QuickBooks Online – Sales by Product / Service Summary

  • I also dump the sales by product / service summary into Excel (and then convert it to Google Sheets).
  • Next I add in a column that calculates the COGS/unit for each item. It’s a good double check. As a business owner you will know when one of these doesn’t look right. I wouldn’t. That’s why it takes the accountant AND the business owner to analyze this stuff properly.
  • Sort it first by Quantity. You want to see what your top selling item is.
  • Then sort it by Gross Margin %. You want to see what your most profitable item is.

In the video here you’ll see that I’ve identified several items with a high profit margin but low sales volume. These are the products we want to sell more of. Higher sales volume on these products will translate to more dollars right to the bottom line.

This is just a start, but it should give you a very good start at analyzing inventory in QuickBooks Online. Even if this is all you did each week / month, you will be on top of things.

In this market you have to be fast, and you have to stay ahead.

Analyzing inventory in QuickBooks Online means looking at reports. In order for the reports to be useful, your data needs to be timely and accurate. That means good bookkeeping all around.

Not sure if your bookkeeping is there? Want help getting this analysis going for your eCommerce company? Contact us. Let’s get the conversation started!

Tracking and Managing Inventory in QuickBooks Online

Tracking and managing inventory in QuickBooks Online

Tracking and managing inventory in QuickBooks Online means we need to know what it cost us to get that inventory ready for sale so that when we sell it, we know how much gross profit we made on that item.

When you’re done here, check out Part 2 – Analyzing Inventory in QuickBooks Online

Buy low, sell high!

Wait! That’s not inventory, that’s stocks? Or is it?

When you think about it, it’s the same idea. I buy a product at one price and my hope is to sell it at a higher price.

It’s more than what you paid for the item. It’s the shipping to get it into your warehouse. Any other costs incurred to get that product on the shelf in a warehouse ready to ship once it’s sold.

Until the product is sold YOU own it. This is why it is classified as an asset. Inventory sits on your balance sheet until it’s sold.

Once inventory is sold it moves, at cost from the inventory asset account to the Cost of Goods Sold (COGS) account.

At the same time of sale, you recognize the revenue (what you sold it for) and then you get paid – cash in the bank!

Any expense you incur after this is no longer cost of goods sold. It’s a selling expense. For example if you pay for shipping to deliver the product to the customer. That’s not COGS. It’s a selling expense.

If you sold that inventory for more than what it cost, you now have that revenue in the income section of the income statement. The cost of goods sold is also now on the income statement (transferred over from the inventory asset).

The difference is your gross profit.

Divide that gross profit by the income and that is your gross profit percentage.

Divide the Gross Profit by the COGS and that is your markup.

If you’re an ecommerce business owner or anyone who sells inventory these are some of the numbers you need to know.

Your Products

In QuickBooks Online your products are listed in the products and services area. This area of QuickBooks Online is the virtual shelf. All of the products you sell sit here.

Each product in QuickBooks Online has to be unique. In other words, you might have 3 versions of the same product on your sales channels for SEO purposes, but those all need to map back to a single item in QuickBooks Online.

The distinguishing feature in QuickBooks Online is the Product Name. You would think it would be Sku also, but in QuickBooks Online you can have duplicate Sku’s. I would never recommend this, but QBO won’t stop you.

The first thing you’ll want to do in QuickBooks Online is set up your products. It’s a pretty simple form to fill out. I highly recommend setting up a master sku list before doing this. The master sku list will allow you to lay it all out in a spreadsheet format, so you can make sure you have all of your products listed. This also lets you map (where applicable) multiple versions of the same item on your sales channels, to the single item in QuickBooks Online that they go with.

Inventory (you own your products)

This is the key to understanding how tracking and managing your inventory in QuickBooks Online works. When you buy it, you own it. It’s an asset, it lives on the Balance Sheet, and it’s called, “Inventory.”

Your inventory will stay there until you either sell it, or throw it away. We take inventory counts in part to get the right quantities of the items we have in stock. The other reason we take inventory is to identify inventory that isn’t going to sell. When that happens we write it off. This is the danger of overstocking your inventory.

If you buy 100 items at $5 each, then you have $500 of inventory in stock. That’s what you own. When you sell it, you move the cost from inventory to Cost of Goods Sold (COGS)

Cost of Goods Sold (COGS)

Initially this is what it cost you to buy the product. So if you buy 100 items at $5 each, then you have $500 of inventory in stock. When you sell that inventory, your cost of goods sold is the quantity you sold times $5.

Important!

QuickBooks Online tracks your inventory on what is called FIFO basis. That means First In, First Out.

So if you bought 25 of an item at $4.50 each, and then 75 of that item at $5.00, QuickBooks Online will track it accordingly.

The average cost of your inventory is $4.88/unit. On reports you will see it reflected at average cost, but when you record a sale, the COGS on that sale (and the amount taken from inventory) is based on FIFO.

The first 25 items you sell will be costed at $4.50. The next 75 at $5.00.

Watch the video so see what this all looks like.

Then check out part 2:

Analyzing Inventory in QuickBooks Online