Running a successful e-commerce business isn’t just about making sales—it’s about managing your expenses effectively. When your expenses are under control, your profits grow, and your business thrives. Proper expense tracking ensures you can make informed decisions, avoid cash flow problems, and prepare for tax season. In this blog, we'll dive into the best practices for tracking your e-commerce expenses and offer practical tips to help you stay on top of your finances.
Why Tracking Expenses Matters
Expense tracking is one of the most important financial habits any e-commerce business can adopt. By keeping a close eye on where your money is going, you’ll:
Control Costs: Without a solid system, it's easy to overspend. Tracking your expenses helps you identify areas where you can cut back or invest more wisely.
Increase Profitability: Knowing exactly how much you spend in each category allows you to optimize spending and increase profitability.
Plan for Taxes: Tracking expenses ensures you’re ready for tax season, helping you avoid unexpected tax liabilities.
For example, say you spend $1,000 on shipping per month. By tracking this consistently, you can budget accurately and ensure you’re prepared for rising shipping costs during peak seasons.
Organize Your Expenses
Effective expense tracking starts with organization. Here are the essential steps:
Separate Business and Personal Expenses: This is foundational. Keeping personal and business expenses separate not only simplifies your bookkeeping but also makes tax time easier.
Categorize Expenses: Break down your expenses into categories such as inventory, shipping, marketing, and software. This helps you track how much you’re spending in each area.
Use Accounting Software: Tools like QuickBooks or Xero make organizing and categorizing expenses simple. For example, if you spend $200 on marketing ads, it will automatically categorize this expense for you.
Implement the Profit First System
One of the most effective ways to manage your expenses is by using the Profit First system, which allocates a percentage of your revenue to specific categories like profit, taxes, and operating expenses.
Let’s break it down: If your e-commerce store brings in $10,000 in revenue, you might allocate the following percentages:
Profit: 10% ($1,000)
Taxes: 10% ($1,000)
Owner’s Pay: 30% ($3,000)
Operating Expenses: 50% ($5,000)
This system prevents overspending in one area by ensuring your funds are divided and managed properly.
Automate Your Expense Tracking
Automation is a game-changer when it comes to tracking expenses. By syncing your bank accounts with accounting software and using apps like Expensify or Hubdoc, you can automatically capture receipts and categorize expenses. This saves time and reduces errors.
For example, imagine you spend $2,500 monthly on inventory and shipping. Automation tools ensure that these expenses are tracked without manual input, allowing you to focus on running your business.
Review Your Expenses Regularly
Tracking expenses isn’t a set-it-and-forget-it task. Regularly reviewing your spending helps you:
Identify Unnecessary Costs: Are you still paying for a service you no longer use? A quick review can uncover hidden costs.
Negotiate Better Rates: Are your shipping fees climbing? Reviewing expenses can help you negotiate better terms with suppliers.
Plan for Seasonal Trends: Seasonal fluctuations can impact expenses, so staying ahead by reviewing and adjusting your budget will save you from cash flow problems.
For instance, if you spend $1,000 monthly on shipping but notice it spikes to $1,500 during the holiday season, you can plan for this expense in advance.
Plan for Future Expenses
Expense tracking isn’t just about what you’re spending today—it’s about planning for tomorrow. Here’s how to do it:
Budget for Marketing Campaigns: If you plan to spend $2,000 on a holiday ad campaign, budget for that months in advance.
Plan for Taxes: Setting aside a percentage of your income for taxes will ensure you’re not scrambling to cover tax payments at the end of the year.
Anticipate Growth-Related Costs: Growth comes with costs. Whether it’s hiring a team or upgrading your software, planning for these expenses keeps your business on track.
Common E-commerce Expenses You Should Track
Some of the most common expenses for e-commerce businesses include:
Inventory: If you spend $5,000 on inventory, make sure it’s recorded under Cost of Goods Sold (COGS).
Shipping and Fulfillment: Don’t forget to track the cost of getting your products to your customers. For instance, if you pay $1,500 per month in shipping, that needs to be accounted for separately.
Payment Processing Fees: For every sale, you’ll pay a fee to your payment processor. If you collect $10,000 in sales with a 3% processing fee, that’s $300 you need to track.
Tracking Inventory Expenses
Inventory is one of the largest expenses for e-commerce businesses, and it’s crucial to track it properly. Use a dedicated inventory account to match the cost of inventory to the revenue it generates. For example, if you spend $6,000 on inventory in August but only sell $3,000 worth of that stock, the unsold inventory is an asset that should be tracked separately from sold goods.
Using open-to-buy (OTB) budgeting is a great way to manage your inventory expenses. This method allows you to plan how much inventory to purchase based on actual sales data.
Keep Track of Sales Tax
Sales tax is another area that can trip up e-commerce businesses. Here’s how to stay on top of it:
Set Aside Taxes from Every Sale: Make it a habit to set aside sales tax immediately after every transaction.
Use Tax Automation Software: Tools like TaxJar or Avalara can help ensure you’re calculating the right amount of tax and filing on time.
File and Pay on Time: Avoid penalties by staying ahead of deadlines.
If you collect $800 in sales tax this month, ensure that the amount is set aside and paid to the proper authorities on time.
Final Thoughts
Tracking expenses consistently and accurately is the key to sustainable growth for your e-commerce business. By using the strategies outlined here—organizing your expenses, automating processes, reviewing regularly, and planning ahead—you can maintain healthy cash flow and ensure your business is ready for future growth.
If you have any questions or need personalized help, don’t hesitate to reach out. Schedule a call with Jacob by going to https://www.jacobcurtiscpa.com/5-strategies-calendar. We're here to help you piece together financial freedom.
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