Most eCommerce founders focus on efficient customer acquisition and conversion as their primary objectives. But the truth is inventory management is the backbone of every retailer.
You might have an amazing brand and vision, but it’s hard to stay in business if you have no stock to sell, or if you’re selling at a loss.
That’s why stock control is one of the most important parts of running an eCommerce business. Knowing what you have in stock at all times allows you to make decisions around when to purchase more stock, how much is appropriate to carry in stock, and even helps with pricing your product.
In your company’s start-up phase, you can usually get away with managing stock in a spreadsheet. It’s a frictionless, cheap way for you to kick off and start making sales. The downside is it’s a very manual process.
Once your budding eCommerce business brings in more than $300k of revenue, however, you should explore implementing an inventory management system (IMS).
In this article:
- What is an inventory management system (IMS)?
- How an IMS talks to your accounting management system
- What does the best practice setup look like?
- What IMS do you recommend?
- Scale your business the right way
What is an inventory management system (IMS)?
As the name suggests, an IMS helps you manage all things inventory related. This piece of software sits between your Sales and POS platform and accounting system.
An IMS also integrates with external partners, like your logistics and fulfilment providers (3PL) and external commerce platforms, such as Amazon.
How an IMS talks to your accounting system
An IMS feeds two types of financial data into your accounting system: your sales and revenue data, and your Cost of Goods Sold (COGS) and inventory purchases data.
Once integrated into your accounting system, all of the sales, inventory purchases and COGS accounting will be completely automated – so long as you set it up correctly, that is!
For a best practice set-up, refer to the below diagram. We advise this style of set-up for every e-commerce business as it saves a tonne of duplicate processes with automation.
If your IMS software is not integrated with your accounting system (which is actually quite common), your accountant or bookkeeper will need to manually process the COGS and inventory purchases data.
Inventory purchases should be entered into accounts payable, just like your ordinary bills. COGS, on the other hand, will need to be recognised via a journal entry, by taking up the opening and closing stock.
It’s important that your bookkeeper and accountant understand how to technically account for inventory and COGS, considering:
- Pro-forma invoices and
- Inventory in transit
If the accounting is incorrect, you will find that your gross profit margins in your profit and loss analysis will be very up-and-down on a month-to-month basis.
What does the best practice setup look like?
So, what should your best practice ecommerce accounting software stack look like? Ideally, something like the below diagram.
As you can see, we have the IMS as the central touchpoint for all of your software systems and tools. You want an IMS that speaks to Shopify, your accounting software, your order fulfilment and management system. This IMS also manages wholesale orders, purchase orders and even marketplace orders.
In the end, you want to have the right tools and software in place that support your business, speak to one another and give you a clear, accurate picture.
What IMS and software tools do you recommend?
A question we are frequently asked is “which IMS tool do you recommend?”, and the honest answer is… it depends. (Sorry, but it’s true.)
There are stacks of IMS software and tools available to choose from. Each IMS offers slightly different functionality and integrations, but fundamentally they do the same thing, and that’s manage your inventory.
There are loads of variations and one size IMS does not fit all. That said, there are four main players to research and explore: Dear Inventory, Cin7, Unleashed and TradeGecko.
To find one that is right for your business’ specific needs, do your research and consider speaking with a specialist integration and business systems consultant. They will point you in the right direction and help you implement this in your business correctly.
If you don’t have an IMS, or you have one that is not integrated with your accounting system, you may need to consider other tools to automate the sales income directly from your eCommerce platforms.
Scale your business the right way
Laying the foundations of your eCommerce accounting software stack is important to help you run your business and accurately understand your company’s financial position.
As a founder, the last thing you want to do is scale losses and poor processes.
If you’re looking to scale your business on solid foundations, reachout to us here at SBO Finance for a complimentary review of your accounting software stack.