You must keep track of what you have in inventory. That’s the only way you know what to order and when, and it’s also necessary when doing your taxes.
If you use a fulfillment service, most likely they keep track of what you have in inventory and you just need to download the report, though you may still want to keep track of it yourself independently to make sure your inventory isn’t simply ‘disappearing’ in the fulfillment center without actually being sold. If you don’t use a fulfillment service, you need to keep a spreadsheet with how much you have of each item. This includes decrementing each item count when you ship orders out, and incrementing each item count when you receive a shipment from the manufacturer.
As you can imagine, if you stock several thousand items and you’re shipping hundreds of items every day, this will consume a great deal of your time. I’ll mention again that, as with any mechanical step in running your business, there are service providers that can help you automate the process and save you a lot of time, but they all cost money.
You must keep an itemized list of all expenses so you can accurately do your taxes. Many people use QuickBooks to keep this information.
I’ve never used QuickBooks, I started by keeping the information in another Excel spreadsheet and I still do it that way. I also wrote a small program to go through the spreadsheet and extract everything I need to do my taxes, and generate three useful reports:
- Profit and Loss
- Sources and Uses of Capital
- Balance Sheet
My accountant tells me my program essentially does a very small subset of what QuickBooks does, just the parts I need, but without the nice graphical user interface.
Again, you don’t have to be able to write a program to do these things. Initially you can do it by hand, and when it becomes burdensome you can buy and learn how to use QuickBooks or some other accounting program.
The information I keep for each expense includes:
- Amount of the expense
- Type of expense (eg, inventory, tax, office supplies, etc.)
- To whom it was paid
If you don’t have an accounting background (I don’t), I recommend reading an introductory accounting book, something like ‘Accounting for Dummies’ is fine.
Separating Business and Personal Expenses
This is another thing that you absolutely must do from the beginning, because if you don’t there’s no way to accurately get the data you need for taxes later on.
Be certain that you can determine what expenses were for your business. For example, I have credit cards that I use only for my business expenses, and other credit cards that I use only for personal purchases. I’ve never mixed the two. That doesn’t necessarily mean you have to have cards issued under your business name, though you can. But you can also simply choose which existing credit cards are going to be used for business expenses and start using them for that exclusive purchase. Just make sure you stop using them for personal use and pay off all charges before you start using them for business expenses.
You should also have a separate bank account for your business. Pay all of your business-use credit cards and other expenses out of the business bank account. Have your deposits from online sales go to your business bank account. If you decide to lend money to your business, for example to buy more inventory and ramp up faster, write a check from your personal account and deposit it into your business account. That way there will be a clear delineation of what money belongs to you and what money belongs to your company, and where the money in your business account came from.