Let’s face it, understanding financial statements can be tricky. To many ecommerce businesses, reading a financial statement is like trying to read a foreign language you’re not well-schooled in. You almost need a translator to explain the various classes, categories, and columns!
Oftentimes, this is not a problem of you simply not understanding, but more so an issue with the chart of accounts you’re using. Accounting software always comes with a “standard” chart of accounts, but that isn’t always the best fit for an ecommerce business.
This is where a good ecommerce bookkeeper can be extremely helpful. To be able to communicate your financial position effectively, your bookkeeper must speak ecommerce. And the unique dialect of ecommerce bookkeeping begins with the chart of accounts, set up specifically for your ecommerce business. The choices you make building and organizing your chart of accounts will shape your entire business.
A Chart of Accounts is crucial for the financial organization of your business, especially when selling on Amazon. The chart of accounts will help you understand your numbers and manage your business more effectively. Let’s take a look at what makes a good chart of accounts for ecommerce businesses.
Do not be afraid to break away from the “standard” and group your similar accounts. For instance, you might create an account for Supplies to cover cleaning supplies, and later one for Office Supplies for such things as paper, ink, and staples. Both types of items are needed for the support of your daily business operations. Having them separate will not be helpful in your reporting of expenses because in order to truly understand your office supply expenses, you will need to add the two numbers together. Supplies and office supplies can be housed together under one joint term, such as “Supplies.” Save yourself a few headaches by combining these types of accounts in the beginning. Too many accounts in your chart of accounts can be overwhelming.
At bookskeep, all of our clients are given our custom chart of accounts for ecommerce sellers. These accounts are crafted to capture all the revenue from each channel as well as the fees that correlate. This allows your reporting to be more detailed, accurate, and to have the ability to make confident financial decisions based on your numbers.
With the online accounting software we have today, the opportunity to drill down on your numbers and extract data to create a report or Excel file is endless. But the greater challenge is to create concise reports that will give you summary information in a meaningful way. In my past experience in a large corporate business, we limited our chart of accounts to about 20 expense accounts on the P&L. While that seems really small, it forced us to focus on the macro information needed to run the business. If the accounting department needed to do analysis on an account, they could drill down and sort by date, vendor, payment method, etc. But the owner of the business needed only to understand the big numbers and the direction of their movement in order to manage the overall health of the business. The same is true for you. As an ecommerce seller, while you do need to have the ability to dig down and get the very bottom of all your numbers, creating summary reports will give you the information you need to gauge the health of your business and identify areas to focus on to either improve or expand.
The Right Numbers
There is no need to spend time pulling all the numbers. Focus on pulling the direct costs that relate to the product(s) you sell. Your gross margin is one of the most important numbers you should be monitoring. Be sure to have direct costs in accounts that are in the Cost of Goods section of your Profit and Loss Statement. When the numbers live in the statement, it allows your accounting systems to calculate your margin automatically. It is an incredibly important number, so we do not want any miscalculations.
Income and expenses that don’t really relate to your business should be listed in Other Income or Other Expenses. You don’t want the income or expenses factored into the analysis of the Gross Profit and Net Profit.
The Right Chart of Accounts
As long as you are clear about the information you will need at the summary level, then leaving your accounting software to run all your calculations is safe. Build your chart of accounts structure and financial reports to give you that information easily each month. The software will easily allow you to dig into the details when you need to, so try to avoid having the system generate pages of detailed information that you will then have to manipulate in order to create accurate reports. This is much more time-consuming for you, and we all know how much extra time you have on your hands!
The bottom line is that you need to create a custom ecommerce chart of accounts to properly account for every penny that you earn. To legally recognize all your revenue, you can’t just use the number that hits your bank account. Obtaining all the detail, every nickel and dime, makes all the difference, especially to the IRS. And learning the language of ecommerce can be easy if you have the right translator (aka ecommerce bookkeeper) and start with the basics of a solid, ecommerce chart of accounts.
Interested in Profit First?
If your ecommerce business isn’t where you’d like it to be in terms of profitability, check out my book, Profit First for Ecommerce Sellers. It answers important questions about how to implement Profit First in an ecommerce business. Take control of your money and your business, and put Profit First to work for you!
You can also sign up for the Profit First for Ecommerce Sellers Online Course. As a Mastery Level, Certified Profit First Professional, I will teach you why Profit First works so well for ecommerce businesses and the particular challenges for businesses that have physical products requiring inventory management. You will learn how your behavior drives your money management habits for your business and how you can set up your business bank accounts to work with your habits.
Check out all our ecommerce accounting and profit advising services here!