Inventory is an asset until it sells
The mistake that distorts more ecommerce P&Ls than any other: expensing inventory when you pay for it.
Buying $50,000 of product in March is not a $50,000 March expense. It converts cash into an asset. The expense — cost of goods sold — happens as units sell, which might be spread across four months.
Get this wrong and March looks catastrophic while June looks extraordinary, when in reality both months were fine. Every decision built on those numbers is built on noise.
The tell
If your gross margin swings more than a few points month to month without a pricing or supplier change, you are almost certainly expensing inventory on purchase rather than on sale.
Landed cost is the real unit cost
The invoice price from your supplier is not what a unit costs you. Landed cost captures everything required to get a sellable unit into the warehouse, and brands that skip it systematically overstate margin.
- Supplier unit price
- Inbound freight and shipping
- Customs duties and tariffs
- Import brokerage and handling fees
- Inspection and quality control
- Inbound receiving fees at your 3PL
Channel fees belong in the margin calculation
Each sales channel deducts fees before settling, and each does it differently. If you record the net deposit as revenue, both your revenue and your margin are understated and the fees become invisible.
- Amazon: referral fees, FBA fulfillment, storage, long-term storage surcharges, returns processing
- Shopify: payment processing, app subscriptions, transaction fees on external gateways
- Wholesale: chargebacks, co-op advertising, early payment discounts
- Marketplaces: commission tiers that change with volume
Record gross, then deduct
Book gross revenue and each fee category as a separate line. It is more work at close and it is the only way to see that a channel doing 40% of your volume is doing 12% of your profit.
Choosing a costing method
You need one consistent method for assigning cost to units sold. Consistency matters more than which one you pick.
- FIFO — first in, first out. Matches physical flow for most consumer goods and is the default for a reason.
- Weighted average — blends cost across all units on hand. Simpler when you buy the same SKU repeatedly at varying prices.
- Specific identification — tracks actual cost per unit. Only practical for high-value, low-volume goods.
The cash flow trap
Growing ecommerce brands routinely run out of cash while profitable, because growth consumes working capital faster than it produces profit.
You pay suppliers 60–90 days before those units sell. Doubling revenue means roughly doubling inventory investment, and that cash leaves before the revenue arrives. A brand growing 100% a year on 40% gross margins can be genuinely profitable and genuinely insolvent at the same time.
The metric to watch is the cash conversion cycle: days inventory outstanding, plus days sales outstanding, minus days payable outstanding. If it is lengthening while you grow, you need financing lined up before it becomes urgent rather than after.