Accounting is a business necessity that most people find annoying. Most business owners would rather do just about anything else, instead of focusing on their accounting. But, honestly, there is no avoiding it. eCommerce is the fastest-growing retail market so if you want to run a successful eCommerce business, you need to understand the basics of accounting.
Track Your Cash Flow
Your business needs to make money. To understand how much money your business is actually making, you need to track your cash. A lot of ofCommerce businesses think they need to generate more sales to improve cash flow. This is sensible, but there are other ways to do this. The first thing to think about is reducing unnecessary expenses. Cutting down on even small costs can have a big impact on your finances. Put some strategies in place too for on-time payments.
You can also improve your cash flow by negotiating better terms with your vendors. Incentives like longer payment terms or discounts on additional purchases can free up extra cash flow for your business. Keep track with accounting software with DigitalSupermarket.
Determine Your Break-Even Point
Your break-even point is the number of units you need to sell to zero out your expenses and start making a profit. Working out your break-even point involves factoring in your costs, the price of the product, and the contribution margin.
To find your break-even point use the following formula:
Break-even Point = Fixed Costs/Contribution Margin
Where Contribution margin = Average Price – Variable Costs
If your break-even point is high, you might want to raise your prices or lower your variable costs. You can do this by increasing your shipping charges or using cheaper materials.
Balancing Your Finances
Use a balance sheet to track the long-term health of your company. The balance sheet is made by working out your total assets, total liabilities, and owner’s equity. Assets are anything of value that your business controls, such as your office equipment.
Liabilities are any debts that you owe to other people. Assets and liabilities are defined on a long-term and short-term basis. Your owner’s equity is the difference between your assets and liabilities.
You need a balance sheet because it can give you a bigger picture and can help you spot any inaccuracies in your income statement. If your income statement says your eCommerce business is earning profits, but your balance sheet says something else, it’s possible you’ve made a mistake somewhere.
Without an inventory, you don’t have anything to sell. However, too much inventory can have a negative impact on your books. This means it’s important that you keep your inventory in good order and decide what volume you need to have. You don’t want to run out of inventory or you risk losing sales, but having too much-unsold inventory hanging around can create a problem for your business too. Remember, it’s best to keep only what you need on hand, no more and no less.
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