How to spot the biggest company-killer in eCommerce before it’s too late:

Here’s how to spot the biggest company-killer in eCommerce before it’s too late:

I call it the silent killer, and it almost got our business. Don't let it get yours.

In accrual accounting, you first record the expense when a sales/transaction occurs. This means that money is going out of your bank account before it shows up in your P&L. This is perfectly normal, but also something that can give you a world of trouble if you don't understand it.

Why? Because it might make you look profitable, but you're really just stacking inventory until at some point, you run out of cash and die. Here's an example:

Let's say you're buying $100K worth of inventory. This means $100K is going out of your bank account and recorded as inventory (technically an asset on your balance sheet).

During 2025, you sell 60% of it — $60K.

Now, that $60K is recorded on your P&L as the cost of goods sold (COGS) for 2025. That's what you paid for the raw materials/goods that you then resold to your customers.

But what about the last 40% of the inventory? You still paid for it, so the $40K went out of your bank account even though there's only $60K recorded as a cost of goods sold. In other words, you spend $40K that doesn't show up in your P&L.

Again, that's perfectly normal and how it should work. It's designed like this to make accounting and annual reports more representative of the actual operations. If wouldn't be "fair" to the operations to record the full $100K as a cost when you only sold 60% of it. The other 40% will be recorded on the P&L as COGS when it's sold later on, e.g. in 2026.

But what happens if it's never sold? It happens to all of us. That's why we have sales to (try to) get rid of the last inventory.

But imagine that you don't get rid of it all, and it happens year after year. This means that you have small amounts of too-much-inventory that slowly grows to a big pile.

For the sake of the example, let's say you get rid of some of it in a sales, but you're not able to sell 20% of what you bought — $20K.

Also, let's assume that this happens every year. Then, year after year, you're spending $20K on inventory that you never sell. Your P&L looks profitable, because it's only the $80K that's recorded as COGS, so you don't think much about it. Until the day you can't pay a bill. And another bill. And another one. "What the hell?", you think.

And this is when you go out of business. You thought everything was fine, until it's not. Why?

The problem is that all those years of spending $20K on inventory that you didn't sell means that you have a lot of cash tied up in old inventory sitting at the back of your warehouse. Cash you now need to pay your bills. You thought everything was fine looking at your P&L, but at some point, you hit a tipping point where you can't sustain it anymore. You need the cash. I've seen it over and over again — especially in small, local clothing stores. They understand clothes, but they don't understand accounting. So they end up in trouble.

So, how do you prevent getting in that situation? It's simple, really. You write off inventory. You can see writing inventory off as recording your unsold inventory as a cost on the P&L even though it's not sold. That way, your P&L is a better representation of what happened in your business. Because the cost has taken place - you paid for the inventory - you're just not able to sell it.

How do you know if this is happening to you? Check whether your inventory is slowly climbing over time on your balance sheet. It's normal for inventory levels to increase when you grow. But if it grows faster than your revenue, something is probably up.

I hope this prevents you from making the same mistake! Please let me know if something is unclear or just plain gibberish.

Godspeed,
Mathias