Last Updated on September 19, 2025 by Jason Andrew
Running an Ecommerce store can feel like a juggling act. Sales are flowing, campaigns are running, cash is moving in and out — but underneath it all is one big question:
“Are these sales actually profitable, or are we just pushing product out the door?”
If you’ve ever wondered:
– Why does my gross profit look amazing one month and terrible the next?
– Why is cash going out faster than it’s coming in, even when sales are strong?
– Why do I get different numbers from my accountant, ops manager, and my own spreadsheets?
…the answer is usually inventory.
Inventory is your biggest asset. It ties up cash, drives your cost of goods sold (COGS), and determines whether your margins are healthy or under pressure. And the way you account for it directly impacts how much trust you can put in your numbers.
We break it down into three parts:
- The methods available
- How to decide what’s right for your business
- The steps to put it into practice
1. The Methods Available
There are several ways to value inventory. But for Ecommerce Founders, two stand out:
FIFO matches how stock often physically moves. WAC smooths costs into one average, which means cleaner and more consistent reporting.
2. How to Decide What’s Right for Your Business
Here’s the decision point:
Put simply:
- FIFO is about real-world stock management.
- WAC is about clean reporting and scalability.
Why Expensing Inventory Correctly Matters
This is where many Founders get tripped up.
Inventory is an asset until it’s sold. If you expense purchases straight to COGS, your reporting goes sideways:
Gross profit gets lumpy.
Buy $50k of stock in Month 1, sell it steadily over three months. If you expense it upfront, your P&L shows:
- Month 1: -$40k loss
- Month 2: $20k profit
- Month 3: $20k profit
Reality? Gross margins were steady the whole way through.
Cash vs profit gets blurred.
Paying for stock is a cash outflow, not an expense. Treating it as COGS makes your P&L look worse than it is, which hides how your sales engine is actually performing.
Decisions get skewed.
Founders make pricing, marketing, and purchasing calls based on “margin swings” that are nothing more than timing errors.
The fix is simple:
- Record purchases as inventory (asset).
- Only move costs into COGS when the stock sells.
- That way, your Profit & Loss reflects the true cost of sales in each period.
The WAC Formula
Where:
- Total Cost of Goods Available = Opening stock value + Purchase costs
- Total Units Available = Opening units + Purchased units
That gives you a single “average cost per unit.” You apply it to both COGS and inventory on hand.
Example — Candle Business
If you sold 250 candles this quarter:
- COGS = 250 × $11.85 = $2,962.50
- Closing stock = 400 × $11.85 = $4,740
Example — Sneakers
After selling 150 pairs:
- COGS = 150 × $9.33 = $1,399.50
- Remaining = 150 × $9.33 = $1,399.50
New order: 100 pairs @ $12 = $1,200
- Units = 250
- Cost = $2,599.50
- WAC = $10.40 per pair
3. The Steps to Put It Into Practice
- Decide on your method. FIFO if expiry dates matter, WAC if you need consistency at scale.
- Clean your data. Start with accurate opening balances and purchases.
- Embed the discipline. Record inventory as an asset, expense it only when it sells.
- ⚠️ Don’t rely on spreadsheets. They break easily, create errors, and don’t scale. A proper inventory management system (IMS) like Cin7 or Unleashed keeps your data clean and gives you the visibility needed to make decisions with confidence.
- Leverage the insights. Once COGS flows correctly, your reporting becomes decision-ready. That means sharper calls on pricing, purchasing, and cash flow.
The Bottom Line
Inventory accounting isn’t just about compliance — it’s about clarity.
For Ecommerce Founders, the choice comes down to this:
- Use FIFO if expiry dates matter.
- Use WAC if you want consistency and scale.
Either way, treating inventory as an asset until it’s sold is what keeps gross profit steady and reporting accurate.
And once you trust your gross margins, you can make growth decisions with confidence — whether that’s scaling ad spend, expanding SKUs, or pitching to investors.
Next step: Want to know if your gross profit % is telling you the truth? Start by asking: When was the last time you trusted it?
