The E-commerce Inventory Cycle Lives on the Balance Sheet. Many business owners place too much emphasis on the Profit and Loss. Let’s take a look at what you’re missing.
If you are selling inventory but you are not also an e-commerce company then you should be working towards becoming an e-commerce company or else work on your retirement planning.
If you are running an e-commerce business, then the inventory cycle is the most important thing. Buy too much, or the wrong products, and you lose money. Don’t buy enough of the right products and you can lose money. As an e-commerce business owner your job is to find or make the right quantity of the right products and sell them for a profit. Ensuring your success starts with making sure you have an understanding of The Inventory Cycle.
This is accounting for e-commerce with QuickBooks Online – The Inventory Cycle.
Inventory can get very complex, but for this article, I’m going to stick with the simplest version of it.
- Place an order with a supplier.
- Send a pre-payment for that order.
- Receive that order along with a bill.
- Sell the inventory.
- Pay the bill from the supplier.
In the middle of all of this, there are some reports to analyze. If you can follow the flow of funds throughout the process outlined above, you will have a good understanding the reports. With that in hand, you will know when something doesn’t look right.
The balance sheet is the most important report here because that’s where almost all of the inventory activity takes place.
Let me explain the financial impact of these 5 steps in the inventory cycle:
- Place the order – enter a purchase order – nothing happens on any financial reports
- Send a pre-payment for the order – cash goes out (or a charge on the credit card). All activity is on the balance sheet. Reduce cash or increase a credit card balance / Increase an asset (prepaid Inventory)
- Receive the order – create a bill and close the purchase order – all activity is on the balance sheet. Increase to inventory / increase to accounts payable.
- Sell the inventory – Activity is on both Balance Sheet and Profit and Loss
- Reduce Inventory (Balance Sheet) / Increase Cost of Goods Sold (Profit and Loss)
- Increase Sales (Profit and Loss) / Increase cash or accounts receivable
- Pay the Supplier – All balance sheet – Decrease cash, decrease accounts payable.
Notice how MOST of the activity in the Inventory Cycle is on the Balance Sheet. So it’s pretty important to understand what is going on there. This way you know where to look and how to troubleshoot when things don’t look right.
When was the last time you took a good look at your balance sheet? How does it look?
With a better understanding of the accounting side of the inventory cycle, you will have better answers to the original questions:
- Which products are the right products?
- How many do you need to maintain in stock?
- How many to buy?
- When to buy?
If you want to manage your e-commerce business effectively, then you need to manage your inventory cycle very closely. Then everything else falls into place.
In the video above, I am going to record all of the transactions in the inventory cycle. As I record each of them, I am going to show you how the transaction impacts the balance sheet and / or the profit and loss.
Want more help? Get a 1:1 with me.
Also check out my course called, “Accounting for E-Commerce Businesses with QuickBooks Online”