Understanding Inventory & COGS

E-Commerce businesses have the unique challenge of managing inventory and tracking the cost of goods sold (COGS), and the processes can be complex and time-consuming. To ensure efficiency and profitability, however, your e-commerce business must keep accurate records of inventory and COGS. This blog will discuss best practices for managing inventory and COGS for your e-commerce business.

For Starters — What is COGS?

COGS is the direct costs associated with producing and selling your product. COGS is a crucial calculation for your e-commerce business and can give you important insight into how to increase profitability. For e-commerce businesses, COGS includes the expenses directly related to the product’s sale. 

What Direct Costs typically go into COGS?

  • Product Costs

  • Import Duties and Customs Fees

  • Packaging Costs

  • Seller & Merchant Fees

  • Manufacturing/Production Costs

  • Shipping

Tracking COGS

Accurately tracking COGS is essential to determining your e-commerce business’s profitability. Here are some best practices for monitoring COGS:

  1. Include All Direct Costs: Include all direct costs associated with the production and sale of a product in your COGS calculation. Direct costs include the cost of the product, shipping, packaging, and any other expenses directly related to the product’s sale. To accurately determine COGS, we must calculate each unit’s portion of the total purchase price for all aspects of developing that product for sale, including the single unit’s shipping cost and discounts!

  2. Use Consistent Accounting Methods: Consistency is critical when it comes to accounting. Use the same accounting methods when tracking COGS to ensure accuracy and consistency in your record-keeping. If you’ve had the opportunity to read our last blog, you know that we insist our clients use the accrual method of accounting. 

  3. Keep Accurate Records: Keeping accurate records is crucial to tracking COGS. Detailed logs allow us to track the fluctuation in COGS as inventory is purchased/sold and give insight into when you may need to increase your prices. Be sure to keep detailed records of all costs associated with the production and sale of a product, including invoices and receipts. 

Tips for Managing Inventory

Inventory management is critical for e-commerce businesses because it directly impacts cash flow and profitability. Here are some best practices for managing your inventory:

  1. Set Par Levels: Determine your minimum and maximum inventory quantity. Setting par levels ensures you always have enough inventory to meet demand while avoiding overstocking, which can lead to cash flow issues.

  2. Implement a System: An inventory management system tracks inventory levels, costs, and sales. An effective inventory management system can help you make data-driven decisions, avoid stockouts, and reduce carrying costs.

  3. Conduct Regular Audits: Conducting regular inventory audits helps ensure that your inventory records are accurate. It also lets you identify discrepancies between your inventory records and stock levels.

Conclusion

Managing inventory and tracking COGS are essential to the success of your e-commerce business. You can improve your business’s efficiency and profitability by implementing best practices for inventory management and COGS tracking. As your business grows, consider working with a professional bookkeeper to help manage your inventory and financial records to ensure that you are on the right track.