How should e-commerce businesses track inventory costs?
The purchase price on your supplier invoice is just the starting point. True inventory cost includes freight, customs duties, tariffs, warehouse receiving fees, and any handling charges that get the product onto your shelf or into your fulfillment center. This is called landed cost, and getting it right determines whether you actually know your margins.
Most e-commerce businesses undercount costs because they track product purchases in one account and shipping or fulfillment in another. The financials show you made money, but you can’t tell which products are profitable and which are quietly losing money after all costs are accounted for. A product with a 50% markup might actually have a 15% margin once you factor in the $8 it costs to ship from your supplier, the FBA fees, and the poly bags.
Pick a costing method and stick with it. FIFO (first in, first out) works well for most e-commerce businesses because it matches the natural flow of inventory and keeps older costs from distorting your margins when prices change. Weighted average cost simplifies things if you’re constantly reordering the same products at slightly different prices. The method matters less than consistency. Switching methods mid-year creates problems at tax time and makes trend analysis meaningless.
Your inventory management system and accounting software need to talk to each other. If you’re selling on Shopify, Amazon, and your own website, inventory movements happen constantly. Manual reconciliation falls apart quickly at any real volume. The integration should update quantities and cost of goods sold automatically when orders ship.
Reconcile physical inventory to your books at least monthly. Shrinkage, damaged goods, and miscounts create discrepancies that compound over time. If your system says you have 200 units and you actually have 180, your balance sheet is overstated and your margins have been wrong for however long that gap existed.
Track inventory by SKU, not just in aggregate. Knowing your total inventory value is useful for the balance sheet. Knowing which products turn quickly and which sit for months is useful for running the business. Slow-moving inventory ties up cash and may need to be written down eventually. Fast movers with thin margins might be worse for profitability than slower sellers with better margins.
A Boca Raton fractional CFO can help you build reporting that shows true contribution margin by product after all costs. This changes how you think about pricing, promotions, and which products to keep in your catalog. The businesses that know their numbers at this level make better decisions about inventory investment and stop accidentally subsidizing unprofitable SKUs with profitable ones.
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