This past week I had the opportunity to visit with 30 hard-working ecommerce sellers at an Amazon Seller Retreat. I had a blast reviewing their accounting books and giving them suggestions. One question that came up several times was "Do I need Inventory Lab and Quickbooks or Xero?" It's an easy answer - Yes! Let's dive into why both Inventory Lab and accounting software are both needed.
First, what can Inventory Lab do that Quickbooks and Xero can't do? Inventory Lab is great for listing your products directly with Amazon and for tracking your product costs and inventory levels. By syncing directly with Amazon, they can give you up-to-the-minute sales and stock information. Inventory Lab can also give you profit and loss information about the overhead or business expenses that aren't product-related, as long as you input that information directly. There is a huge time savings using software like Inventory Lab, especially for those with numerous SKU's.
How about Quickbooks and Xero; how do they factor into the equation? These are accounting software programs and provide both an Income Statement, also known as a Profit and Loss (P&L) Statement, and a Balance Sheet. Accounting software typically connects to the bank and credit card institutions. They do not directly connect to Amazon Seller Central. The reason you need an accounting system is it will track your financial data based on banking information that is reconciled or balanced back to a bank statement. This reconciling or balancing is your way of knowing your information is accurate.
The balance sheet provided by accounting software is also an incredibly important statement that many sellers overlook. The reason it is important is that it shows you a financial picture over the entire life of your business, whereas the P&L is only looking at the business for the current year. Your balance sheet will show your working capital (which is your current assets less your current liabilities) which is both a measure of liquidity and efficient use of capital. Compared to your prior year, or prior month, it will show you if your assets and/or debt are growing. Finally, for this discussion, it will allow you to see your inventory balance based on your financial activity; what you have paid or owe suppliers.
Here is how we recommend you use Inventory Lab and your accounting systems together. Use Inventory Lab to list your products and ensure that you get your product costs correct in your Inventory Lab listing. It will be important to your accounting records, as I will discuss below. Use your accounting software to keep up with your financial information. We suggest a modified cash approach to tracking your inventory, which means as you pay for your inventory, record it as an Inventory Asset (a balance sheet account) in your accounting software. Then at month end, in your accounting software, record a journal entry that moves the value of the product you sold from your Inventory Asset account (a balance sheet account) over to your Cost of Goods Sold (COGS) account (a P&L account). Inventory Lab makes getting this information easy by pulling the Profit and Loss report and noting the COGS amount for the month you are recording. By accounting for your product purchases and sales in this way, you can always understand your profitability by looking at your P&L report, because you have matched the sales information with the product cost information. This is critical for understanding your Profit Margin also known as Gross Margin.
There are some pitfalls to watch. First, to ensure your financial data is accurate in your accounting system, you must reconcile back to your bank and credit card statements. Downloading and coding
transactions is not enough. Errors will not be caught unless you reconcile. Second, ensure that you keep your Inventory Lab cost information up to date. “Set it and Forget it” is NOT an option. Your prices change, and you may select sea vs air shipping on one order. Your prep center pricing may change. Take the time to keep all your systems up to date by reconciling and updating the information. This is vitally important as you evaluate your gross margin. Take the time to compare your Gross Margin information from Inventory Lab with what your financial system is reporting. They may never be exact because they are approaching the information from two different directions, however, they should be close. If not, then ensure your accounting books are reconciled and then dig into how your product costs are listed in Inventory Lab.
One final best practice I'd like to share is that if you record your COGS each month, then every quarter compare your actual Inventory Asset account value from your balance sheet with your inventory value in Inventory Lab. Over time these values may get out of sync with lost or damaged goods never actually being removed. If you have your books up to date and your costs from Inventory Lab and your accounting systems have been tracking, then you need to make a journal entry to "true up" these two values. At the retreat I just participated in, one of the sellers had to make an $80,000 entry to get his inventory amount correct. It was a huge hit to his gross margin and his bottom line.
Using both Inventory Lab and an accounting system properly, you are set up to run your business like a business and know your numbers! You can calculate your Gross Margin and track it to ensure your business is on the profitable path. To learn more about this topic, Kim McCaffrey from Inventory Lab and I recently did a webinar on this subject. If you would like more tips to ensure profitability, check out my book Profit First for Ecommerce Sellers. It is available now!