Creating the Best Chart of Accounts for Your Amazon Business
A Chart of Accounts is pertinent for organization of your business. The chart of accounts will help you understand your numbers and manage your business more effectively. Financial statements are tricky and some of us spend many hours fussing over and trying to understand what we are looking at. Oftentimes, it is not a “you” problem, but rather an issue with the chart of accounts you're using. Accounting software always come with a "standard" chart of accounts, but that isn't always the best fit for your ecommerce business.
Don’t Fall Victim of Account Overload
Do not be afraid to break away from the "standard" and group your similar accounts. For instance, you might create an account for Supplies to cover cleaning supplies, and later one for Office Supplies for such things as paper, ink, and staples. Both types of items are needed for the support of your daily business operations. Having them separate will not be helpful in your reporting of expenses because in order to truly understand your office supply expenses, you will need to add the two numbers together. Supplies and office supplies can be housed together under one joint term, such as “Supplies." Save yourself a few headaches by combining these types of accounts in the beginning. Too many accounts in your chart of accounts can be overwhelming.
Learn to Work With Summary Reports
With the electronic accounting software we have today, the opportunity to drill down on your numbers and extract data to create a report or Excel file is endless. But the greater challenge is to create concise reports that will give you summary information in a meaningful way. In my past experience in a large corporate business, we limited our Chart of Accounts to about 20 expense accounts on the P&L. While that seems really small, it forced us to focus on the macro information needed to run the business. If the accounting department needed to do analysis on an account, they could drill down and sort by date, vendor, payment method, etc. But the owner of the business needed only to understand the big numbers and the direction of their movement in order to manage the overall health of the business. The same is true for you. As an ecommerce seller, while you do need to have the ability to dig down and get the very bottom of all your numbers, creating summary reports will give you the information you need to gauge the health of your business and identify areas to focus on to either improve or expand.
The Importance of Pulling the Right Numbers
There is no need to spend time pulling all the numbers. Focus on pulling the direct costs that relate to the product(s) you sell. Your gross margin is one of the most important numbers you should be monitoring. Be sure to have direct costs in accounts that are in the Cost of Goods section of your Profit and Loss Statement. When the numbers live in the statement, it allows your accounting systems to calculate your margin automatically. It is an incredibly important number, so we do not want any miscalculations.
Income and expenses that doesn’t really relate to your business should be listed in Other Income or Other Expenses. You don't want the income or expenses factored into the analysis of the Gross Profit and Net Profit.
The Right Chart of Accounts Can Handle the Heavy Lifting
As long as you are clear about the information you will need at the summary level, then leaving your accounting software to run all your calculations is safe. Build your chart of accounts structure and financial reports to give you that information easily each month. The software will easily allow you to dig in to the details when you need to, so try and avoid having the system generate pages of detailed information that you will then have to manipulate in order to create accurate reports. This is much more time consuming for you, and we all know how much extra time you have on your hands!
If your ecommerce business isn’t where you’d like it to be in terms of profitability, check out my book, Profit First for Ecommerce Sellers. It answers important questions about how to implement Profit First in an ecommerce business. Take control of your money and your business, and put Profit First to work for you!