Basic Accounting Terminology Every Small Business Owner Should Know

Order fulfillment is part of the business that founders often take for granted, in part because it seems easy. An order comes in, a box goes out. But if the process is messy, it’s already broken. Every missed shipment, wrong SKU, or late delivery chips away at growth and eats into margins.

Fulfillment is the last interaction your customer has with your brand, and it’s often the most expensive one to get wrong. Costs pile up faster than founders expect, and small mistakes turn into real money. This guide breaks down the questions we hear most often about fulfillment and the straight answers on where it goes wrong and what it really costs.

‍

1. How should e-commerce businesses track and account for fulfillment costs?

Good accounting follows the operation. It’s almost impossible to do good accounting unless you understand the operations of the company.

To start, you need to look at the labor attributed to whoever is picking and packing and shipping. That could be one person half the time, or it could be multiple people doing multiple things, so you need to split up and allocate their salary.

Packing supplies matter too. Boxes, tape, labels. Early on it might seem insignificant. At $1 million in revenue you might spend $20,000 a year. But at $10 million, supplies might be at $200,000. Now it’s not insignificant.

It’s tedious to count boxes and rolls of paper and put a value on it, which is why a lot of times it just gets expensed when you buy it. That can be fine until it’s not. If you buy $40,000 of packing supplies all at once, you probably shouldn’t skew one month’s numbers with all of it. You should spread that cost over the period you’ll use it. To do that, you need some sort of inventory system.

‍

2. Why do fulfillment costs increase as an e-commerce business grows?

Fulfillment costs grow with the business. Take labor, for example. You start small and probably pick, pack, and ship yourself. Then you hire someone part-time. As the company grows, you add more SKUs and more orders. Now you might have to hire two or three people.

Shipping rates are another example. When you’re just starting out there’s not much negotiation with UPS or FedEx. But, if you double or triple in size and you’re still paying the same rates as when you first started, that adds up. You need someone raising a hand and calling the rep.

As you get further removed, complexity grows and there’s more room for error. Someone grabs the wrong SKU and ships the wrong thing. You pay for the return, you ship a replacement you can’t charge for, and you eat the labor and materials.

To keep costs from getting out of hand, pay attention to your fulfillment cost as a percentage of sales and in total dollars. That percentage should move in plateaus as you grow. You hit inflection points. Maybe you outsource to a third party. Later you might bring it back in-house if volume supports a team. If those plateaus are not showing up, you could be leaving profit on the table.

‍

3. How does free shipping affect e-commerce profit margins?

Put simply, you’re going to eat the shipping cost.

Shipping is one piece of fulfillment. There is also packaging and labor. If your margins can absorb it, you can always offer free shipping, but you had better keep close tabs on your fulfillment cost, both as a percentage and as a dollar amount.

Even if margins do not support free shipping, you might still use it strategically. Maybe offer it on inventory that’s a little stale. But you should model the impact. The dollars per order will be lower, so before you offer free shipping, you need to be confident that you will bring in more dollars in total. If you can reach the volume that makes financial sense, do it. If not, you’re likely going to lose your profit.

‍

4. What is the biggest mistake e-commerce founders make with fulfillment?

The biggest mistake is trying to manage fulfillment yourself without the right level of detail. Until you can buy a robot, fulfillment is managing people. And fulfillment done right is process and procedure, down to warehouse design for the fewest steps from shelf to truck.

There are some terrible third parties out there, but there are good ones too, optimized to be efficient so they can make margin on a low-margin business. If you are not a detailed person, which a lot of brand owners aren’t because they’re creative, you should not be managing fulfillment once it takes more than one person.

‍

5. What fulfillment metrics should e-commerce businesses track?

The most important metrics are error rate, return rate, and inventory adjustments.

Error rate and return rate will tell you if you’re shipping the wrong product to the right person, or the right product to the wrong person, or damaging shipments.

At Eucalyptus, we order from brands before we work with them because we want to see what we get. For example, we have ordered two units and gotten two case packs. That’s the worst for the business because most people won’t tell you; they just got free product.

Inventory adjustments are the other big metric. Do physical counts at least quarterly; monthly is even better. If the adjustments from physical to book are growing, you’ve got a problem. People might be shipping too much product because they’re overworked or careless, or someone might be putting a case pack in the trunk on their way out the door.

‍

6. How can e-commerce founders improve fulfillment quickly?

Walk back to wherever your fulfillment is happening and watch it happen. People will be on their best behavior when the owner is standing there, but you’ll still get a rough idea. Do people walk with purpose? Do they know where to go? Is there a consistent way things are done?

If your fulfillment center is off-site, go visit. It’s worth it for peace of mind and understanding. Customers getting the product is the last impression they have of your brand, and it’s the most impactful.

Look for controls to minimize errors. If controls exist and problems continue, you’ve got bad people. If controls do not exist, you might have good people working with terrible processes.

‍

7. What are the pros and cons of using Fulfillment by Amazon (FBA)?

The main pro is access to Amazon’s reach and logistics. You get fast shipping and access to a massive customer base without having to build the infrastructure yourself. For some products, that can drive huge volume.

The cons are cost and risk. You need to have either huge volume or extremely strong margins to use FBA, because Amazon takes an enormous chunk. With promoted ads it gets even worse. For some clients, margins on Amazon are half what they are in other channels.

There’s also the knockoff risk. A product goes up and someone copies it. We had a client in Wired because of knockoffs. Customers thought they were buying from her and then complained about quality.

If your brand is about quality and you don’t have a lot of margin to spare, Amazon may not be the channel for you.

‍

8. Is it normal for wholesale and direct-to-consumer orders to use different fulfillment systems?

It’s not uncommon. Retail orders might come through Shopify or BigCommerce. Wholesale might be phone, email, text, or marketplaces like Faire. Some people used to write orders at trade shows or use sales reps.

It’s also not uncommon to fulfill differently. Some outsource only wholesale and keep direct-to-consumer in-house to control of the customer experience. That can be right if it fits your brand and margin.

There’s no single right answer. The question is whether you are doing it effectively, efficiently, and profitably.

‍

9. What signals show that fulfillment is causing problems, even if it looks like it’s mostly “working”?

The number one signal is customer complaints. Either shipments aren’t arriving on time, the wrong product shows up, or the wrong quantities are sent. Most fulfillment companies won’t raise their hand and admit they’re doing a bad job, it’s going to be your customers telling you they didn’t get what they were supposed to get, or they didn’t get it at all.

When companies scale, they sometimes take fulfillment for granted. But if your brand is built around customer experience, messy fulfillment is already broken. Was the order correct? Was it packed properly? Was it damaged in transit?

Some clients even add handwritten notes for first-time or repeat orders. That extra effort can matter. But there’s a mistake, you’re tanking the goodwill you built through sales and marketing.

‍

10. When does it make sense to outsource fulfillment or switch providers?

All the signs are the same: rising customer complaints, wrong products, wrong quantities, or missed shipments. If you’re doing fulfillment in-house and those issues are growing, the problem is usually weak management of the team. At that point you either need to hire someone specifically to oversee fulfillment, which most smaller companies can’t afford, or you need to move to a fulfillment center that specializes in it.

Switching is scary. It can shut down your operation for a while, and in the worst case you can lose customers. But if complaints are going up, refunds are eating into margins, and revenue is slipping because customers no longer trust they’ll get what they ordered, you don’t really have a choice.

At best, switching means losing a week of shipping. At worst, it could take a month or longer to get products moved, unpacked, and systems aligned. A good fulfillment center should be able to explain exactly how they’ll get you running quickly. If they can’t give you clear answers and timelines, don’t switch to them. Once your product is in transit between centers, you lose control. That’s why it’s critical to spend the time up front with the new provider before making the move.

‍

11. How do you compare in-house fulfillment costs vs. using a third party logistics (3PL) company?

It is impossible to compare if your books are bad. If your books are done properly and costs are in the right buckets, then you can compare. That means separating fulfillment labor from other roles like design or sales, accounting for warehouse space, supplies, and postage.

Once the numbers are clean, the harder question is about your brand. If you sell a high-end product with lots of customization, outsourcing is tough because most 3PLs won’t take the time for special touches unless you pay a premium. If you have good books, the financial comparison is straightforward. But whether outsourcing makes sense comes down to your brand promise and what your customers expect.

‍

12. How do customer expectations shape fulfillment decisions like shipping speed and customer experience?

It depends on what you’re selling. If your product is inexpensive and in a crowded market, customers aren’t expecting much beyond a smooth delivery. Maybe you add a small gift for someone who has ordered multiple times, but you don’t have a lot of room for extras.

If you sell expensive, highly customized items, customers expect a boutique experience with premium packaging or handwritten notes. The real question is whether your margins support it. If you know your numbers, you can make informed decisions about whether you can afford to add extra touches.

Small changes like adding two minutes per order for nicer packaging may sound harmless, but that can mean five to ten fewer orders shipped each day. That tradeoff might be worth it, or it might not. Start with the numbers. And remember that boutique experiences are hard to scale, especially with a 3PL.

Shipping speed works the same way. If your shipping has always been slow and customers never complain, you may not have a problem. But if you used to ship same-day and now it takes a week, your loyal customers will notice and they will care.

Amazon has raised the bar. People expect fast shipping, sometimes next day. If your product is highly customized or expensive, customers might accept a longer wait. If it’s a commodity with lots of competition, you need to get it out quickly or your competitors will.

The answer depends on what your brand is built on. If it’s speed and low price, you have to deliver speed. If it’s quality and a boutique experience, you probably have more leeway.

‍

13. How do you raise prices or charge for shipping without losing e-commerce customers?

You don’t. Customers will be upset. But if you’re transparent and not overly aggressive with price increases, it’s manageable. In wholesale, most businesses understand occasional changes. Once a year is usually fine. Every month or two is probably a different story.

Right now tariffs and supply costs change constantly. Everyone is raising prices. If you explain why (e.g., labor costs, tariffs, shipping), customers may not like it, but they’ll understand.

It comes back to your brand. If you’re the cheapest option, raising prices is dangerous. If you’re the premium option with loyal customers, you can probably increase prices more often. Your brand values should guide the decision.

‍

14. How do product returns affect e-commerce fulfillment costs and margins?

The impact of returns varies by business. For cheap, commoditized products, it often costs more to restock than to refund, so many companies just let customers keep the item. For customized products like engraved goods, returns usually aren’t possible.

On the wholesale side, most companies refuse returns because retailers would otherwise send back unsold seasonal products. The common exception is defective items.

‍

15. Can improving fulfillment processes boost e-commerce growth and margins?

Most founders who move to a fulfillment center do it as part of a growth plan. The goal isn’t to cut costs, but to free up the owner’s time. When fulfillment is off their plate, they can focus on product development, marketing, or sales strategy, which drive top-line growth.

Using a 3PL rarely saves money. It’s usually more expensive. But it’s often cheaper than hiring a full-time fulfillment manager, and it allows founders to focus on higher-value parts of the business.

‍

16. Why is process so important in e-commerce fulfillment?

Until robots take over, most fulfillment workers are temps, day laborers, or people not planning a career in the field. That means process is everything. You need clear expectations, good warehouse layout with the right equipment in the right place, and documented procedures for picking, packing, and shipping.

If you don’t have the time to create those processes, that’s another sign you need a fulfillment partner.

‍

Final Thoughts: Making E-Commerce Fulfillment Work for You

Fulfillment problems don’t stay small. They drain cash, create unhappy customers, and stall growth.

The good news is that fulfillment issues are solvable. With the clean books and the right systems, you can see the real costs, decide if outsourcing makes sense, and build a process that supports both margins and customer experience.

At Eucalyptus, we help founders get the financial clarity and operational support they need to turn fulfillment from an afterthought into a strategic lever for growth. If you’d like a partner to help you think through your fulfillment strategy, book a free 15-minute call to see how we can help with your specific needs.

Inventory management is one of the most common sources of stress for product-based businesses. It ties up cash and weighs down every part of the operation. By the time you notice the impact, it’s already affecting your margins and cash flow.

This blog breaks down common inventory challenges faced by e-commerce businesses. It offers straightforward answers to the questions we hear most often: from managing cash tied up in stock to deciding when to reorder or clear out slow movers. If you want to take control of your inventory, this post is for you.

Why is inventory management so difficult in e-commerce?

Running out of stock hurts sales, while holding too much inventory ties up your cash. Many e-commerce founders feel like they’re constantly trying to balance these two problems.

What makes it harder is that inventory planning often doesn’t show up clearly on your P&L. You can be profitable on paper and still have no money in the bank because your cash is sitting on a shelf. If you’ve ever looked around your warehouse and wondered why you still feel broke, this might be the reason.

Most founders didn’t start their business because they love inventory management. They’re product people, creatives, marketers, builders. So when decisions have to be made about how much to order, when to restock, or what to phase out, they often go with instinct. That can work for a while, especially in a fast-growing business, but over time the guesswork starts to fail.

Inventory is tricky because it’s both a cost and an asset. You can’t grow without it, but too much of it will slow you down. The goal is to find a middle ground where your money is moving, not sitting.

That starts with asking better questions. The rest of this guide is built around the ones we hear most often and the ones we wish more founders would ask sooner.

Struggling with inventory chaos? Schedule a free 15-minute intro call to get started with a personalized financial health check.

What is the true cost of carrying inventory?

When founders think about inventory cost, they usually focus on what they paid for it, but that is only part of the story. Inventory carries hidden costs that don’t show up immediately on your P&L, and those costs eat into your cash.

Every unsold item on your shelf is money you cannot use elsewhere. It is not just the purchase price, it includes storage fees, labor to move and count the stock, time spent managing it, and the opportunity cost of not being able to invest that cash elsewhere.

Inventory also makes forecasting more difficult. If not managed properly, you might show profit on paper that you did not actually make. In some cases, you might be paying taxes on sales that have not yet cleared your books.

This is why it is important to look beyond the inventory line on your financial statements. It is not just what you paid for it, it is everything it costs to hold it.

When you begin to think of inventory as a cash investment, your decision-making changes. You stop asking, “How much does this cost per unit?” and start asking, “How long will this tie up my cash?” That is a better question for a growing business.

Want to dive deeper into cash flow management? Check out our other resources on financial planning for e-commerce businesses.

How much inventory is too much?

There is no universal rule for the right amount of inventory. What matters most is whether your stock matches your sales volume and business model. Too little means missed sales. Too much means you’ve tied up cash that could be used elsewhere.

A good place to start is by calculating how many days of inventory you usually carry. For example, if you typically turn your stock every 60 days but now have enough to last 180 days, that’s a sign you might be holding too much. You can find a rough number by dividing your current inventory by your average daily sales.

Watch the trend over time. Inventory should rise when shipments arrive and fall as you sell through it. If your inventory keeps increasing but sales stay flat, that’s a warning sign. You could be buying too much or not selling enough.

Sometimes the problem is not the total amount but what inventory you have. Slow-moving products can take up space and cash even if your overall stock level looks okay. You don’t need a perfect ratio but you do need visibility. Being honest about what’s sitting too long is a good first step toward fixing it.

Not sure if your inventory levels are healthy? Get a personalized diagnostic with a free 15-minute intro call to assess your situation.

How can I tell which SKUs are actually profitable?

Start by cleaning up your books. Without good bookkeeping, you won’t be able to answer this question at all. The key is to set up your accounting so you can run a profit and loss report by item. Most accounting systems can do this, but the setup and maintenance have to be correct for the data to mean anything.

When evaluating SKUs, ignore overhead like rent, software, and marketing. You’re looking at what you sold the item for and what it cost you to produce or purchase. That’s your margin.

There are two ways to look at margin: by percentage and by total dollars. Both matter. One product might have a 90% margin but barely sell. Another might have a 40% margin but generate thousands in sales. Looking at both metrics will help you see which SKUs are most profitable and which ones are actually moving volume.

You don’t need to allocate every expense to every SKU. Just track what it cost to sell the product and how much you brought in from selling it. That’s enough to spot your winners and your laggards.

Need help setting up proper bookkeeping to track SKU profitability? Explore our business accounting insights for more guidance.

How do I calculate inventory turnover?

Inventory turnover tells you how many times you sell through your stock in a given period. To calculate it, divide your cost of goods sold by your average inventory during that period.

Inventory Turnover = Cost of Goods Sold ÷ Average Inventory

For example, if you sold $400,000 worth of product in a year and your average inventory was $100,000, your inventory turnover is four times.

Is that good? It depends on your business. If your margins are high, you don’t need to turn inventory as often. If they are lower, you’ll want to move product faster to stay healthy.

You don’t have to calculate turnover for every product unless costs or sales vary widely. Looking at total inventory turnover is usually enough.

You want to see a pattern where inventory rises when shipments come in and falls as you sell. If that cycle disappears, something is off. You may be buying too much, selling too little, or your books may not be correctly adjusting inventory. Inventory turnover helps you spot these problems early.

What are common inventory mistakes to avoid?

One of the biggest mistakes is buying too much too soon. Founders fall in love with a product and get excited about a potential hit. A supplier offers a discount for volume, so they stock up, thinking they’ll get a better margin. But if that product doesn’t sell, all you’ve done is tie up cash.

The smarter move is to take the lower margin on smaller orders while you validate demand. Once you know it’s working, then scale up. Otherwise, you risk being stuck with thousands of dollars worth of inventory that’s not moving.

When inventory isn’t selling, you need to do something with it. Don’t let it sit in a warehouse hoping someone might want it later. If a product hasn’t moved in six months, that’s usually too long. Sometimes founders hang on because they hope a past customer will reorder. If that ever happens, you can always reorder or have a conversation about their volume expectations.

At a certain point, you have to stop thinking about what you paid and focus on what you can get. Selling at cost is great. Selling below cost might be better than doing nothing, especially if it clears shelf space and lowers carrying costs. If nothing else works, donate it or write it off. Holding onto inventory “just in case” costs more than most people realize.

Ready to stop making costly inventory mistakes? Schedule a free intro call and we'll start with a personalized financial health check to identify your biggest opportunities.

When should I outsource fulfillment or inventory management?

The tipping point usually comes when doing it yourself starts pulling you away from growing the business. If you’re spending your days chasing boxes and managing warehouse chaos instead of focusing on strategy, product, or customers, that’s a problem.

It’s not always about scale. We’ve seen businesses making $1 million a year where outsourcing made sense, and we’ve seen $5 million businesses where it didn’t. What matters more is how much time and mental energy fulfillment is taking from you.

Cost is part of it too. When you outsource, you’re paying someone to handle picking, packing, shipping, and customer service. That cost may seem high, but when you factor in what your time is worth and the errors, delays, or missed opportunities that can come from trying to juggle everything yourself, it often makes financial sense.

There’s no one-size-fits-all answer, but if fulfillment feels like the biggest source of stress in your business or if your growth has stalled because you’re spending too much time putting out fires, it’s probably time to look at handing it off.

How does inventory planning affect cash flow?

Inventory is one of the top places your cash goes, especially for product-based businesses. Inventory, sales, and cash flow need to be planned together.

Start by laying out what you expect to sell over the next three, six, or twelve months. That sales plan will tell you what inventory you’ll need to hit those numbers. From there, you can build a cash forecast. You’ll see when you’ll need to spend money on inventory and when you expect it to come back in as revenue.

The order matters. Plan your sales first, then inventory, then cash. Sales is your inflow. Inventory is the cost you pay to generate that inflow. Together, they define how much cash you will or won’t have.

Without this structure, it’s easy to lose track of what’s driving your cash burn. Maybe you missed sales targets because you didn’t have enough stock. Or maybe you spent too much on inventory that’s still sitting unsold. Both hurt cash flow and both are avoidable with better planning.

The more you connect these pieces, the easier it becomes to see where things are breaking down. You can hold yourself and your team accountable, and you can move faster when something needs to change.

Want to master cash flow planning for your business? Read more financial management strategies on our blog.

What’s the easiest way to forecast inventory needs?

Start by putting numbers on paper or into a spreadsheet. Even if you’re guessing, that guess is better than flying blind. Lay out what you think you’ll sell over the next three to six months. This gives you a starting point.

For example, if you believe you’ll sell $1 million in product and your cost of goods is 25 percent, then you’ll need around $250,000 in inventory. Next, look at what you already have. If you’re sitting on $500,000 worth of product, that means you’ve got a $250,000 overstock problem.

Knowing the size of the gap won’t fix it overnight, but it will change how you think about solving it. Many founders get stuck because they haven’t defined the problem. They don’t know if they’re short or over, if they’re paying too much, or if product is arriving too slowly. Without that clarity, it’s hard to take action.

Once you can say, “Here’s what I think I’ll sell, here’s what I’ll need, and here’s what I already have,” you can build a plan around that. Whether you need to cut back on reorders, sell through overstock, or adjust your pricing, you’ll be making decisions with actual numbers.

You’re not aiming for precision here. You’re just trying to put a shape to the problem so it feels smaller and more manageable. From there, the next decisions become easier.

How should I think about tariffs in my inventory strategy?

If you import product, tariffs affect your costs. They might not show up as a separate line in your books, but they belong in your pricing and purchasing decisions.

Tariffs can change quickly and take a bite out of your margins. You don’t want to wait for a surprise increase to start reacting.

Ask yourself: if tariffs rose by 10 percent on a key product, could you raise prices without losing customers? Would you still make money? If not, you need to rethink your pricing or your product mix.

Tariffs are part of your cost. Treat them that way and you’ll be better prepared to respond when changes happen. It’s better to act before problems pile up.

How does inventory impact other parts of my e-commerce business?

One of the hardest parts of inventory is that it touches every part of your business. Sales, cash flow, forecasting, and pricing all connect. You might be making the right call on sales but still run into inventory problems. Or you might be building cash reserves while holding too much stock.

Most founders don’t need a complicated system. They need a way to see the big picture and catch warning signs early. That is where most of the value lies. If inventory still feels overwhelming, you’re not alone. It is one of the most complex parts of running a product business and rarely fixes itself.

You don’t need new tools. You need someone to help you make sense of the numbers you already have.

What blind spots hold founders back in inventory management?

The biggest blind spot is usually emotional. Founders get attached to products and past decisions. They hold onto inventory hoping it will eventually sell.

That emotional weight can cloud judgment and stop you from making necessary changes. Holding on to slow movers costs you time, space, and cash.

Inventory management is more than numbers. It’s about being honest with where your business stands and making decisions based on reality.

Building a product business is hard, and getting stuck is normal. With the right support, you can build momentum and lead with strength.

Conclusion: Inventory Doesn’t Have to Be a Mystery

Inventory management is one of the toughest parts of running a product business. It’s messy and emotional, but you don’t have to guess your way through it or suffer in silence.

Many founders we work with have been exactly where you are: stuck between wanting to be prepared and drowning in stuff that won’t move. The difference comes down to asking the right questions, getting clear on the numbers you already have, and making decisions based on facts instead of feelings.

You don’t need to be perfect, you just need to start. Even simple steps like writing down a rough sales forecast or calculating how much inventory you’re carrying can change the way you see your business. From there, next steps become clearer.

Inventory is money sitting on shelves. It’s cash that can either help your business grow or hold it back. When you get a handle on it, you take back control of your cash flow, your operations, and your future.

Let’s figure this out together

You don’t have to go it alone. If you would like help turning your inventory challenges into opportunities, please reach out. We’re here to help.

Ready to turn your inventory challenges into opportunities? Schedule your free 15-minute intro call today to get started with a personalized diagnostic and financial health check.

You can also email us at info@goeucalyptus.co or call/text 702-213-5701.

‍