The guide to inventory accounting for ecommerce startups
Welcome to Furey Helpdesk, where we cover topics that matter to early-stage startup founders. Our team answers questions to help founders lay the groundwork for building scalable accounting and finance operations.
In this edition of Helpdesk, we’re taking on inventory accounting. Inventory is a significant operating expense and source of earnings, so keeping accurate records is crucial for any business. For ecommerce startups, having a handle on the numbers is especially important as inventory values directly impact cash flow, cost of goods sold, and profitability.
What is inventory?
Inventory is anything your business buys in order to resell to customers. It includes both finished goods as well as goods in various stages of production—from manufacturing all the way to when an order is fulfilled. For most ecommerce startups, inventory covers finished products ready for sale, in addition to packing and packaging supplies, costs associated with storage, assembly, freight, shipping, and inventory loss. Because inventory values can change over time, it’s important to have a way to keep track of those changes.
What is inventory accounting?
Inventory accounting helps you understand the financial health of your business. Specifically, the value of inventory on hand, how much you have sold in a given period, and of course, cost of goods sold (COGS). Accounting for inventory ultimately requires assigning accurate values to sold and unsold goods at the end of each reporting period.
A reliable inventory management process is the necessary first step for inventory accounting. To accurately report and manage inventory, businesses need to have systems and processes in each of the following areas:
- Purchasing, receiving, and supplier payments
- Inventory counts and warehousing
- Payment processing and fulfillment reporting
Why is inventory accounting important?
- Inventory accounting is critical for determining accurate COGS, which is important for setting prices, understanding margins, and determining product viability.
- Accurate reporting is especially important for ecommerce startups looking to fundraise. Potential investors will always look at product margins.
- Inventory accounting provides reliable information for budgeting, modeling, and long-term planning.
- Inventory accounting ensures complete and accurate financial records, which is important for filing taxes, audits, and preparing for your next funding round.
What can happen without an accurate inventory accounting system?
- Without a good handle on inventory, you don’t know how much you have, what it’s worth, and how much you’re making.
- You won’t be able to answer basic questions like how much you're spending to make a product or what your gross margins are.
- Your business may experience a damaging loss of visibility, which can have significant consequences on profitability and survival.
Take charge of your inventory
Fast-moving startups, especially those in the ecommerce and DTC space, face a unique set of challenges when it comes to inventory. You need an agile mix of systems, tools, and processes to keep up with the numbers. But the right solutions can be hard to come by, and they’re usually not a one-size-fits-all. That’s where Furey comes in. Our team of experts helps you lay the groundwork for efficient, accurate, and scalable inventory processes tailored to how your business runs.
About Furey
Furey is the modern accounting firm setting the new standard for how work gets done. We build innovative solutions to help startups make smarter decisions and move forward confidently. With Furey, high-growth companies have the best guidance and the smartest technology so they can achieve more at every stage. Curious how we can work together? Get in touch at info@fureyfs.com.
