Ecommerce Bookkeeping: Everything You Need to Know
For any entrepreneur, starting an online store is a thrilling endeavor. With an online store, a wide range of clients from around the world can access your products day and night, all year round. As the owner of an eCommerce business, you have to wear several hats, and (for better or worse) bookkeeping is one of them. Getting the books in order is your non-negotiable duty because cash flow is one of the main factors that kill startups. You may confidently manage the financial aspects of your eCommerce firm if you have a basic understanding of bookkeeping and a little experience. You just need to continue reading; about how eCommerce bookkeeping works and how it will help you in your eCommerce business.
What is Bookkeeping?
Bookkeeping is the process of keeping track of the money that comes into and goes out of your business by physically keeping a ledger or documenting it digitally in accounting software. This financial data gives you insights into your spending habits and the revenue sources for your company. Additionally, keeping thorough financial records makes tax season less difficult.
The most essential aspect of bookkeeping is recording your financial data, but this won’t help you much if you can’t access and comprehend your records. For the purpose of tax preparation, financial audits, and business intelligence, bookkeeping requires accurately classifying, organizing, and archiving your financial transactions.
What Makes Accounting & Bookkeeping Distinct From One Another?
The simplest way to conceptualize this is that the bookkeeper is the prep chef, and the accountant is like the chef. The accountant uses the bookkeeper’s findings to provide a financial summary, analysis, and report for the business.
Operating an e-commerce company is similar to operating a traditional retail store in terms of bookkeeping and accounting. Focusing on your inventory and cash flow while using retail accounting software to help you make up the difference is how to handle accounting for an online retail business.
Your inventory is the foundation of your business as a merchant, and practically everything you do is reliant on it. Because of this, your inventory is the sole subject of many of your financial paperwork and reports.
Four factors Make Bookkeeping Crucial
You’re basically guiding your e-commerce firm blindly without adequate bookkeeping. To identify (and confirm) your strengths, weaknesses, risks, and opportunities, you need financial analytics. Without data, business decisions are purely speculative.
Finding Tax Deductions
An anxiety-free tax season is mostly dependent on accurate, current bookkeeping. You can save more money by finding and claiming all the small business tax deductions with the help of thorough financial record-keeping. In order to avoid unpleasant surprises in April, bookkeeping will also help you estimate your taxes throughout the year.
Getting a Loan For a Business
You may easily produce pertinent financial statements, such as your profit and loss statement, balance sheet, and cash flow statement, by digitally tracking your transactions. These reports give you rapid insights into the financial condition of your company, but you’ll also need them to attract e-commerce venture capitalists or secure affordable funding like SBA loans.
Recognize Fraud & Banking Mistakes
Fraud cannot be stopped, but it can be detected thanks to bookkeeping. Without adequate records, suppliers might tamper with them or workers might abuse company credit cards without your knowledge. Additionally, banks are human and occasionally make mistakes as well. You can fix any inaccuracies that might occur with the aid of current books.
Clearly Depict Your Financial Situation
With bookkeeping, you can quickly assess the financial health of your business. You’ll be able to see your financial situation, including how much you own, how much you owe, and potential future trends. Well-documented books do more to support the success of your firm.
What Advantages Does Bookkeeping Offer?
Here are some of the main advantages of setting up reliable accounting and bookkeeping systems and procedures, regardless of whether you sell goods through Shopify, BigCommerce, Magento, Amazon, Etsy, or eBay.
- Gain an understanding of your company’s finances.
- Create a business that is more successful, sustainable, and financially sound.
- Set up definite growth benchmarks
- In tight or unpredictable situations, better control financial flow
- Create projections for cash flow and inventory.
- dodge frightful tax notices, fines, and penalties
- Make decisions for your business based on factual data, not on gut feeling.
- Recognize trends and early warning signs of impending issues
- Increase client lifetime value by utilizing data
The main advantage, though, is that it keeps your company afloat.
There will be issues if a company doesn’t have enough money in its bank account, so cash flow is the most important aspect of eCommerce bookkeeping services.
How to Handle Accounting The Right Way
Make sure you perform a good job of bookkeeping if you’re going to devote time to it. Making simple adjustments early on will save your books from becoming a useless muddle.
Keep Your Personal & Professional Finances Separate
Open a business account as soon as you can and separate your personal and professional finances. It’s challenging to keep track of your income and expenses when your finances are mixed up. Monitoring your transactions, producing financial reports, and determining your tax deductions are all made simple with a separate account. You won’t have to question whether the IKEA purchase was for your living room furnishings or your business chair come tax time.
Select a Bookkeeping Method
With single-entry accounting, you can easily record your inflows and outflows by simply categorizing each transaction as either an expense or an outflow of funds and adding it to or subtracting it from your cash balance. To ensure that your income, expenses, assets, and liabilities are in balance, double-entry bookkeeping records each transaction in two accounts credit and debit.
The consistency of your bookkeeping is more crucial than the approach you choose. Pick a method and stick with it.
Establish a General Ledger (chart of accounts)
Your whole financial activity is tracked in a general ledger. Without having to sift through your bank and credit card statements, it makes finding transactions simple. You can further break it down into sub-ledgers for assets, liabilities, equity, revenue, and expense transactions. To ensure that you and your accountant don’t get lost in the future, identify all of your sub-ledgers names and purposes in a chart of accounts.
Keep a Record of Everything
Record every transaction, regardless of how big or small, frequent or irregular. Yes, that includes the coffee you purchased while on a work trip using corporate funds. Organize your expenses into categories with distinct, clear tags to see trends in your cash inflow and outflow.
Additionally, you should gather all of your receipts, keep them safe, and keep them for at least three years (the IRS’s standard audit period). Documentation such as bills, statements, orders, tax returns, forms, and applications should all be saved. You never know when an IRS audit might require you to use them.
When you maintain regular and constant attention to it, bookkeeping becomes simpler. When you’ve allowed stuff to accumulate for weeks or months without being attended to, cleaning up can be difficult, much like keeping your home tidy. Close your books at the end of each work day, week, month, quarter, and year is a good practice to get into. This habit keeps your funds organized and enables you to identify mistakes early on.
Create financial reports (income statement, balance sheet, and cash flow statement) every month and every three months to track the development and trends of your company.
Tools & Techniques For Bookkeeping
It’s a necessary evil to keep books. It is ranked as their least preferred task by over half of small business owners. You probably didn’t think about tracking your earnings and costs while you were daydreaming about creating your e-commerce company. In that case, there are several bookkeeping options available to suit your needs, so don’t worry.
In House Solutions
Spreadsheets make keeping track of your transactions quite easy. To carry out the required tasks, only a basic understanding of computers is required. When your firm is small, manually tracking using spreadsheets is manageable, but it’s a challenging bookkeeping strategy to retain as your company grows.
Accounting software that is hosted in the cloud has more features and automates many bookkeeping details. Additionally, many software programs provide free price tiers. By doing so, you can experiment with the fundamentals and acquire a feel for the programs, and the free service might be all that your company will ever require.
Hire a bookkeeper if you’re not good at it. Software applications like MyCountSolutions and Bench offer e-commerce bookkeepers a subscription-based service that bundles their systems and the services of their specialists. E-commerce bookkeepers will categorize your transactions, reconcile all of your records for you, and provide real-time financial information.
Six Best Practices For Ecommerce Bookkeeping
Although some aspects of bookkeeping can be difficult, much of it is rather simple. An excellent place to start is by simply tracking your cash flow. However, a few best practices will assist you in gaining even more insight into the financial health of your company.
Even though you don’t need to pay for utilities or a storefront for your eCommerce business, there are still a number of costs that might add to your overhead. Make sure to account for all associated costs when calculating your ROI, like:
- Merchant fees: To handle payments, e-commerce sites like Shopify and BigCommerce charge a fee.
- Fees for shipment: Offering same-day, two-day, or even free shipping gives you a competitive advantage, but it has a price.
- Tools from a third party: The majority of practical software programs demand a monthly membership.
- Chargeback fees: If a consumer disputes a charge with their credit card provider (and the claim is upheld), you may be responsible for the full amount of the transaction plus a chargeback cost of $15 to $100.
- Return fees: If your company offers free returns, you will be responsible for paying the costs of packaging, shipping, and processing returns.
Keeping track of your inventory and keeping your books up to date go hand in hand. Since stock is essentially money, you must keep an eye on how it enters and exits your company. To maintain your inventory levels if you sell on several e-commerce sites, you’ll need a single source of truth. This is essential to keep your assets, sales, returns, and restocks current in your financials. You can improve your inventory forecasting by keeping track of your stock. You may produce precise, trustworthy forecasts using the historical information in your books.
Consider Several Payment Options
Most of your clients will probably use credit cards to pay. However, if you conduct any business offline, you should think about allowing alternate payment methods including cash, cheques, PayPal, and gift cards. Although adding extra payment options may complicate your bookkeeping, they enhance the overall consumer experience. Keep in mind that your records won’t record any income from accepting cash or cheques until the deposit has been cashed. The transaction will then need to be manually updated with the required information and category. If you sell gift cards, the transaction is only recorded as unearned revenue when the card is redeemed because no items have yet been traded.
Pay & Collect Sales Tax
The relevant sales tax will be computed and collected from your clients via a number of e-commerce platforms. The collection is merely the first stage, though. Make sure the appropriate tax authority receives that payment. Tax money is a liability that you owe the government; it is not the same as revenue. The difference between revenue, sales tax, fees, and the last cash deposit into your bank account must be documented in your books.
Determine The Point at Which You Break Even
The quantity of sales you must produce to break even and begin making a profit is your break-even point. You can find that number using your books. With that figure in mind, you’ll be able to decide whether you need to cut costs or raise prices. This is a good illustration of how to make the most of and inform your cash flow estimates by using your daily bookkeeping routine.
Get Your Loan Information Correct
It might be difficult to record and keep track of small business loans and payments in your books. You must record the cash as a debit (asset) and the obligation as a liability when you receive the loan disbursement (credit). You must debit the loan debt and credit the cash account when making a loan payment.
To operate a profitable online store, you don’t need to be an accounting whiz. Thankfully, you have access to a variety of tools to stay on top of your bookkeeping for eCommerce requirements, like working with an accountant and/or collaborating with a fulfillment firm that assists with inventory tracking and administration.
Avoid letting subpar eCommerce bookkeeping services impede the expansion of your organization. In light of this, it’s a good idea to familiarize yourself with the fundamentals of eCommerce bookkeeping for online retail enterprises so that you will know what to anticipate and what to pay attention to while you’re busy starting your firm. We provide quick tutorials and detailed instructions to guide you through using MyCountSolutions if you need them.
MyCountSolutions can also assist you in finding a ProAdvisor with experience in retail accounting if you want to take a bookkeeping course or learn from the experts directly. Getting assistance from experts in bookkeeping basics and managing eCommerce bookkeeping can be a smart move if you’re just starting out in business.