Closing your books at month end means you find out about a margin problem 30 days after it starts. Stacy Walker puts numbers on that delay. A business bleeding $3 per order across 150,000 orders loses $450,000 before anyone notices, and a candle maker who missed a tripled wax cost gave up $180,000 over six months. An inventory management system recalculates COGS as orders and purchase orders move through it.
Inventory & COGS
Get Real Time Sales Insights with an Inventory Management System
4 min
Transcript
0:00 Why real time COGS matters
Have you ever wondered if an inventory management system can give you real-time insights into your ecommerce accounting? Hi, I'm Stacy with LedgerGurus, and I'm going to tell you how you can get the insights you crave from an inventory management system, or an IMS.
Accounting with an IMS gives you a real-time look at your COGS. A good tool will push orders over with COGS calculated per day, or even per order. The benefit of this is you get quicker information around your profitability. When you don't use an IMS, you're generally getting your information at month end or into the next month, which delays your ability to react to whatever information you're receiving. When you have a good IMS, it allows you to get real-time data, making it possible for you to make critical adjustments throughout the month.
0:44 The cost of waiting for month end
So let's look at a quick example. Imagine you're selling 5,000 orders per day. If we take 5,000 orders and times that by 30 days in the month, you end up with 150,000 orders. Now pretend you're selling negatively because of sales channel fees. For each of those 150,000 orders, you're losing $3 per order. If you are relying solely on month end financials, you are now 30 days behind the game. In this scenario, that means a loss of $450,000 during the month because you didn't have the real-time data you needed to run your business.
1:19 The candle business scenario
Let's look at another potential scenario. Pretend you own a candle business, and not only do you sell candles, but you also manufacture them. In this scenario, your business is purchasing things like containers, fragrances, wax, etc. You have been tracking all of your inventory costs per SKU in Shopify since you began the business, and this seems to have worked fine, but in the last six months, you can see that profits are tanking and you don't know why. So you hire an ecommerce accountant to dig through the financials and try to find the solution for you.
It doesn't take long for that new ecommerce accountant to find the problem. In Shopify, you have your COGS listed as $5 per candle, and that makes sense when you consider how much you paid for wax last year. But this year, the cost of wax has tripled, taking your profits per item from $20 down to $10. Because tracking your costs in a spreadsheet is virtually impossible, you missed the price increase and now you are six months down the road. You have sold 18,000 candles in the last six months and now have lost out on $180,000 worth of profits.
2:27 How a real inventory tool keeps COGS current
Shopify is an awesome selling tool, but let's remember, it is not an inventory management system. A great tool will manage your COGS so well that you'll know quickly if a cost increase warrants a price increase as well.
You might wonder, how does a tool do this? Well, all purchase orders and sales are going through the IMS. Therefore, the tool is constantly updating the cost of goods sold numbers to keep them accurate. This holds true regardless of whether you're doing a LIFO, FIFO or average costing method.
That's a wrap on one quick and dirty reason to have an inventory management system for your ecommerce business. If you would like our help choosing an inventory management system, please contact us through the link below. If this video was helpful, like it, leave a question in the comments and subscribe to our channel for more ecommerce accounting tips.