Variable Expenses in Ecommerce: How to Manage Inventory Costs

Picture this: you’ve just launched your latest product online, and while sales start pouring in, so do unexpected inventory costs that threaten to derail your profitability. 

Luckily, doola Bookkeeping services can help you keep those unpredictable costs in check that come with stocking up on products.

From tracking and categorizing every expense in an accurate and timely manner, our automated bookkeeping solution streamlines budgeting, financial reporting, and even tax filing.

Let’s turn fluctuating variable expenses in ecommerce into opportunities for growth with effective inventory management!

Understanding Variable Expenses in Ecommerce

Unlike fixed expenses, which remain constant regardless of business activity, variable expenses can increase or decrease depending on certain factors.

These costs are directly linked to sales volume; as sales increase, so do inventory costs. But if your sales drop or slow down suddenly, inventory costs would also decrease.

For example, let’s say you run an online clothing store and decide to launch a new line of winter jackets before the start of the holiday season. During peak periods, you purchase a large quantity of jackets at a discounted price since you are expecting a big demand.

However, if consumer interest suddenly declines, you end up with excess inventory that’s not easy to sell at full price once the winter is gone. This could have been easily avoided by tracking your expenses, which would have alerted you about the sudden uptick in inventory costs.

With this information, you wouldn’t have made an unnecessary inventory purchase or sold all the items at a discount to recoup your investment.

So, to prevent excessive inventory spending and minimize losses, you need to know where you could have spent more and where you must cut down.

The Impact of Inventory Costs on Ecommerce Profitability

What you sell is what you get! This quote emphasizes the quality and value of what you offer in a transaction directly impact the outcome and the value you receive in return, even in ecommerce.

Therefore, every online business must understand the role of inventory costs in their profitability and take measures to manage them effectively.

Cash Flow Is Disturbed

Excess inventory means tying up valuable capital that could have been used for other crucial business operations. 

Also, insufficient inventory can result in lost sales opportunities and dissatisfied customers. Both these scenarios have a negative impact on cash flow. 

By implementing Just-in-Time (JIT) inventory management and accounting tools for real-time expense tracking, you can strike a balance between supply and demand to optimize cash flow.

Profit Margins become Lesser and Lesser 

Ecommerce businesses have higher inventory carrying costs, such as storage fees, insurance charges, and transportation expenses, which lower profit margins. 

Also, markups on products may not always compensate for higher purchase prices from suppliers due to market fluctuations or disruptions.

However, knowing where you are spending more than required with accurate expense reporting can help you optimize your stock levels and minimize holding costs.

Sustainable Growth Gets Out of Reach

Poorly managed inventories lead to wastage through spoilage or obsolescence, which adds an unnecessary burden on carrying costs.

Moreover, uncontrolled growth fueled by poor strategies, especially during peak periods, results in mounting overheads, leaving warehouses full as sales start dropping off afterward. 

doola’s expense tracking with financial reporting can help you analyze buying and selling patterns from the past to optimize inventory levels for sustained growth.

Common Challenges in Managing Inventory Costs

It can be challenging to manage inventory costs, which involves the expenses associated with purchasing, storing, and managing inventory to meet customer demand. 

That’s why we have identified some common challenges that can prevent optimal utilization of resources and maintain a healthy balance between variable expenses and profits.

• Overstocking: Holding excess stock results in tying up capital in unnecessary inventory and increases storage costs. 

• Stockouts: Not having enough inventory is equally bad since it leads to lost sales and damages customer trust and brand reputation.

• Fluctuating Supplier Costs:  If suppliers increase their prices unexpectedly, it can significantly impact profit margins for businesses. 

• Seasonal Demand Shifts: Seasonal spikes or dips in demand for certain products require careful planning of inventory levels and timely restocking during high-demand periods.

• Slow Movement of Dead/Inactive Stocks: This can lead to excess holding costs for these items and can tie up valuable warehouse space.

• Inefficient Order Fulfillment Processes: An increased time taken to get products out of the warehouse for shipping results in higher logistics costs for ecommerce businesses. 

How to Manage Inventory Costs: Effective Strategies

Managing variable expenses associated with inventory is essential for the success of any ecommerce business. 

But first, you must know where to put your efforts and identify effective strategies to optimize your inventory expenses while maintaining a high level of customer satisfaction. 

Here are our actionable tips that can help you minimize your variable expenses and ultimately increase profits.

• Invest in an accurate expense tracking system that gives insights into future demand trends based on historical data and current market conditions.

• Regularly review your inventory expenses and adjust your inventory levels to avoid overstocking or stockouts.

• Develop strong relationships with reliable suppliers and negotiate favorable terms to minimize the impact of fluctuating costs.

• Keep a close eye on market trends and customer buying patterns to anticipate and prepare for seasonal demand shifts.

• Implement an efficient inventory management system that provides real-time visibility into your inventory levels, sales, and purchasing data.

• Adopt a JIT inventory strategy to have minimal stock levels so you can avoid excess stock sitting in warehouses and minimize warehousing costs.

• Automate mundane processes, such as order management, purchase orders, and expense tracking, providing real-time visibility into inventory levels.

• Optimize packaging and shipping to reduce shipping costs and negotiate with delivery service providers to get the best deals on shipping rates.

Manage Variable Expenses With doola Bookkeeping

Every ecommerce business has its unique set of variable expenses associated with inventory management. 

With doola Bookkeeping software, you can easily manage your variable expenses by automatically tracking and categorizing every expense related to your inventory. 

This also allows you to view actionable reports on your variable expenses in real-time, allowing you to see exactly where your money is going and how it affects your bottom line.

Also, you don’t need to be a financial expert to navigate through the software; everything is designed in a way that even beginners can use without any difficulty. 

Book a demo today and see the positive impact it has on your ecommerce business’s finances.