Six accounting Principles to run a Profitable E-Commerce Startup In India

You don't have to be an accountant to start an e-commerce business in India. You'll be ready to set up an well organized business accounting system to help you run a profitable e-commerce startup once you've become aware of few accounting concepts.

1. Startup Accounting

As you start your e-commerce startup, brush up on your basic e-commerce accounting skills. Accounting software can generate journal entries and financial statements, but properly configuring it necessitates a working knowledge of these fundamental concepts.

Accounting for e-commerce business entails more than just accounting procedures. You must, for example, select an inventory accounting method and either the cash or accrual basis of accounting.

Pay close attention to cash flow in the early stages because of all the costs associated with starting a business. Monitor the cash flow statement in your accounting software and perform bank reconciliations on a regular basis to keep your business afloat before sales begin.

Once you've mastered the fundamentals of accounting, you can progress to more complex topics like financial forecasting to assist you in developing a realistic growth strategy.

2. Cost of Goods Sold

These three product costs are referred to as the cost of goods sold (COGS): Direct Material, Direct Labor, and Manufacturing Overhead.

The cost of your products' raw materials is included in direct material. Ceramic and paint are the raw materials used in the production of coffee mugs. In the direct materials cost, include taxes and shipping from the supplier to your factory.

Direct labor refers to the labor costs incurred by workers in the process of converting a raw product into a finished good.

Manufacturing overhead includes factory rent, utilities, and supervisory staff costs. It contains both fixed and variable components.

3. Shipping Cost

One of the first processes you should perfect is e-commerce order fulfilment. When your sales rely on product shipping, you must be quick and efficient.

The cost of shipping to customers is not included in the cost of goods sold because it is separate from the product itself, but it does factor into the total cost of sales. Keeping accurate records of these costs allows you to determine how much to charge for shipping.

4. Sales Discounts, Returns, and Allowances

Accounting for sales discounts, returns, and allowances should be familiar to any retail business.

To record sales adjustments, add two accounts to your accounting software's chart of accounts: "sales discounts" and "sales returns and allowances."

Net sales are calculated by subtracting these two accounts from total sales. Net sales are your total sales revenue less returns, discounts, and allowances, which are discounts given to customers for defective merchandise that they keep.

5. Profitability

E-commerce startup operate in a global marketplace, resulting in fierce competition for customers. Sales and price cuts can give you a competitive advantage in the market, but you must first assess your profitability before offering a deal or price cut on your products.

To determine your company's profitability, use the following metrics:

• The break-even point indicates how many products your company must sell in order to cover its costs.
• The contribution margin calculates your product's profitability after deducting variable costs. Direct materials, direct labor, the variable portion of manufacturing overhead, and shipping to customers are the main variable costs.
• After deducting all product costs, the gross profit margin determines the profitability of your products. For e-commerce businesses, this metric includes the fixed portion of manufacturing overhead, which is the only difference between contribution margin and gross profit margin.
• The operating margin of your company is the amount of money you make after deducting the costs of your primary business activities.

Net profit margin, also known as net income, is the bottom-line earnings of your company. Net profit margin is calculated by subtracting non-business expenses and income tax from operating margin. The net profit margin is the final determinant of whether your company is profitable or not.

Profitability metrics can help you create a pricing structure that maximizes profits and inform your business budget.

6. Taxes

E-Commerce Founders may be unfamiliar with the business tax deductions available on their tax return. Businesses, unlike individuals, can deduct the majority of ordinary and necessary business expenses.

An e-commerce business can be run from anywhere. The home office deduction is available to those who dedicate a portion of their home to an e-commerce business.

About Jordensky

At Jordensky, we are committed to providing an experience of the highest caliber while specializing in accounting, taxes, MIS, and CFO services for startups and expanding businesses.

When you work with Jordensky, you get a team of finance experts who take the finance work off your plate– ”so you can focus on your business.

Also read,

Basics of Accounting - Terminologies and Concepts for Business Owners

Step by Step Accounting Performance Evaluation Guide