Whether you’re starting out in eCommerce or you’re already rising up the ranks, you’ll know that accounting is pretty much the most boring part.
But, unfortunately, it’s super important.
While we’d rather work with influencers or find more products to sell, at some point of the journey we have to sit down, roll our sleeves up, and take a look at our finances.
Accounting for eCommerce is very different from other businesses and even physical brick-and-mortar accounting. So, what are some best eCommerce accounting practices? How does accounting for eCommerce differ from accounting for brick-and-mortar locations? What are some ramifications of ignoring the accounting side of things? In this article, we’ll be answering all of those questions, as well as a few others.
What unique challenges do eCommerce stores face in accounting?
On the surface, running an eCommerce store might seem easier than a physical location. In some ways it is, but in other ways, it’s more difficult. Operating in the digital space means that some things get fuzzy, which results in unique challenges for eCommerce accounting.
Complicated tax laws
One of the biggest advantages of running an eCommerce store is the ability to reach a wider audience. You’re no longer limited to selling within the state or even international, borders. This wider audience naturally leads to an increase in sales, but it also complicates the financial side of things. More specifically, the tax side of things.
When you run a business in the U.S. you pay sales tax depending on your location. These rules are clear when you’re selling within state borders, but things change when you sell interstate or internationally.
If you’re not up-to-date on how international sales affect your sales taxes, you might get caught up in trouble somewhere down the line. If you fail to comply with legislation, there’s a bevy of ramifications. Late fees, chargebacks, accrued interest… the list goes on.
Lots of transactions
Sales mean transactions, and transactions mean data. Important data.
But all that data must be recorded somewhere, and it must be processed by something as well. For brick-and-mortar stores, that generally means on-premise systems that handle transactions and records data. But these systems are expensive, and their size and cost make it impractical for eCommerce stores.
As a result, many eCommerce stores gravitate towards cloud services for their eCommerce accounting needs. They’re relatively inexpensive and allow you to access data from anywhere. On the other hand, because they’re cloud-based, they’re susceptible to slowing down when handling lots of transactions at once.
Difficult to Manage Inventory
Brick-and-mortar stores keep their inventory close by, meaning that it’s easier to keep track of. For eCommerce stores, on the other hand, it’s not uncommon for them to sell through multiple channels at the same time. This makes it much more difficult to keep accurate records of inventory. This is part of why dropshipping has seen an increase in popularity.
How is eCommerce bookkeeping different than accounting?
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Before we start diving into things, though, there’s an important distinction to make. Many people use the terms “bookkeeping” and “accounting” interchangeably. While bookkeeping and accounting are similar in nature, they are not the same thing. A bookkeeper and an accountant will often play similar roles in a business, but the scope of their work differs.
A bookkeeper generally keeps track of a business’s day-to-day transactions. This will generally include things like payroll, receipts and bills, invoices, and other business-related transactions.
An accountant may do all of the above, but they’re also in charge of other finance-related tasks. For example, an accountant is often in charge of analyzing performance, writing financial reports, preparing tax documents, and setting budgets.
8 Key eCommerce Accounting and Finance Best Practices
Regardless of business size, keeping track of your finances is important.
Accurate information can help you plan ahead, increase your profits, and help decrease your operating costs.
Perhaps most importantly, filling out tax documents requires businesses to have accurate financial records. If something doesn’t add up here, you could find yourself in a world of legal (and potentially financial) problems.
With that out of the way, here are 8 best practices regarding eCommerce accounting.
1. Keep track of cash flow and use accrual accounting
Business runs on cash. It’s what keeps inventory on shelves, enables marketing campaigns, and keeps any employees working. It’s also important for filling out legal documents. Because of this, it’s important to keep track of transactions. You need to know what’s going where, and that there’s enough in the bank for expenses.
For eCommerce accounting (and accounting in general), there are two popular systems that businesses use to track cash flow.
Cash Basis Accounting
The first of these two systems is cash basis accounting. A business using this method updates their books when cash enters or leaves the bank account. This is the simpler of the two systems. It’s also relatively easy to track and maintain, making it a common starting point for new eCommerce businesses.
This accounting system is best for small eCommerce businesses that only have one or two suppliers.
As sales increase, though, it becomes more and more difficult to update your systems with all the transactions that happen. This is where the second accounting system comes into play.
Accrual Accounting
Accrual accounting is a bit more complex. Instead of recording transactions when they affect your bank account, accrual accounting records when they take place.
This probably sounds strange, so let’s break it down with an example.
Let’s pretend that your eCommerce business did $10,000 in sales last month. Let’s pretend that out of that ten thousand, $3,000 is from individual sales, and is already in your bank account.
Let’s also pretend that the other $7,000 is from a bulk sale. For whatever reason, this $7,000 payment is delayed. Maybe there’s an agreement not to bill until the product ships, or maybe a check hasn’t passed its clear date.
Using cash basis accounting means that you record $3,000 in income, because only $3,000 has entered the account.
Using the accrual method, you’ll tally $10,000 in income. Because while the remaining $7,000 isn’t in the account yet, it will be.
Because the accrual method takes more factors into account, it offers a more accurate figure for your monthly revenue. At the same time, relying only on this number could lead you to make plans with money that’s not currently available.
Over time, most businesses should transition to this model. While cash basis accounting is easier to maintain initially, there are eventually too many transactions to feasibly record.
Action points:
- Limit the number of bank accounts in use. If money moves between many accounts on a regular basis, the number of transactions increases exponentially. Keeping the number of active accounts low helps minimize the number of transactions, making it easier to keep track of things.
- Automate transaction records. Manually recording and compiling transaction records is tedious, time-consuming, and opens the door to human error. Automating this process saves time and reduces errors.
2. Keep track of operating expenses
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eCommerce accounting might be different from brick-and-mortar accounting, but there are still operating costs. In eCommerce, the biggest overhead cost tends to be warehouse space.
This is especially true because eCommerce platforms like Amazon– which remains one of the most popular eCommerce platforms– charge extra for inventory that remains on the shelves for too long.
There are other operational costs, like handling, shipping, insurance, taxes, and so on. Keeping track of these expenses helps make sure that you won’t be caught without the necessary funds to keep operating.
Action points:
- Categorize expenses. Categorizing expenses is essential to understanding how much money is going where, and can help save money by cutting corners.
- Use accounting software. Popular accounting software like QuickBooks and Xero can track revenue, expenses, and help generate financial reports.
3. Manage your inventory
Considering the digital nature of eCommerce, inventory management might not be the first thing that comes to mind. But eCommerce is a fast-moving market. If you don’t have the product in stock, customers will take their business elsewhere.
If you buy too much at once you risk leaving capital tied up in the warehouse. Not only that, you’re still paying for the warehouse space to store it. If you don’t have a good read on market trends, buying too much inventory can quickly prove to be a money sink.
On the other hand, if you buy too little, you run the risk of losing out on profit. Potentially a lot of it.
Action points:
- Use inventory management software. Robust software can help eCommerce businesses track their inventory levels, set restock levels, and automate stock purchases.
- Forecast demand. While difficult, reading market trends and forecasting demand can help keep margins low and profits high.
4. Figure out cost of goods sold (COGS)
It costs money to make money. Sounds counterintuitive, right? But it’s true! Even if you’re not involved in the manufacturing side of things, there’s a cost to obtaining and selling inventory. This is known as Cost of Goods Sold (COGS), and it’s an important part of eCommerce accounting.
It’s important to know the COGS for each item you carry. It tells you whether or not an item is profitable and is part of figuring out gross margins. In turn, this financial information is an important part of creating accurate financial reports.
COGS includes (but is not limited to) shipping & handling costs, and labor costs.
Action points:
- Determine direct costs. Direct costs includes any cost incurred while obtaining the product in question.
- Determine indirect costs. Indirect costs are not directly tied to obtaining the product, but refer to those necessary to run the business. This includes costs like warehouse costs, marketing, and so on.
5. Familiarize yourself with tax laws
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Most people dislike doing taxes, but they’re an important part of doing business. If you’re not sure what taxes you need to be paying and when, you’ll rack up late fees. On the flip side, there are products that don’t require a sales tax. If you’re not familiar with these laws, you could end up paying more than necessary.
For eCommerce stores especially, it’s important to stay familiar with tax laws. Laws regarding eCommerce are always changing, so what might have been legal last year might not be this year.
Action points:
- Talk to an expert. The law can be complicated. Even if information is available online, it might be inaccurate. Tax experts are readily available online; use them as a resource.
- Keep up with changes. The law is frequently changing. Once you’ve got a good idea of what laws apply to you, stay up-to-date with them.
6. Calculate your break-even point
The break-even point is when the total revenue is equal to the total cost. This means that there’s no net loss or net gain. This is an important calculation for any business because it represents the minimum number of sales to maintain operations. This figure helps business owners plan ahead and make informed decisions and pricing and other business-related factors.
Fixed costs don’t change very quickly, meaning that the break-even point serves as a useful reference point for financial planning.
Action points:
- Determine fixed costs. Fixed costs refers to expenses that do not vary based on the level of sales. This includes things like rent, salaries, and so on.
- Determine variable costs. Variable costs refers to expenses that vary based on the level of sales. This includes expenses like credit card processing fees, shipping costs, and so on.
7. Verify information with experts
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When you’re just starting out, eCommerce accounting can be simple. As time goes on and business grows, though, things get more and more complicated. Tax laws become more complex, financial reports become more detailed, and in general, business operations become more difficult to manage.
It’s feasible to find most– if not all– of the information you need on the internet, but finding and understanding that information takes time. There’s also a lot of misinformation out there, and if you act on incorrect information, you could end up damaging your business.
Experts can help you understand the legal and accounting side of business. Accounting experts can also analyze financial reports and tell you whether your business model is viable. And thanks to the internet, they’re accessible from almost anywhere.
Action points:
- Take advantage of online consultations. With widespread internet access, it’s much easier to get in contact with experts. Use them as a resource to shore up your own knowledge.
- Find different experts for different fields. There’s a lot that goes into running a successful business.
8. Take advantage of software
For a business, time is money. Saving time means saving money– which is why software has become so prevalent in the business world. Automating repetitive tasks or keeping track of inventory in real-time frees up time that can be used elsewhere.
Some software will also bundle different feature sets into one package. Consolidating different features into a single package makes handling multiple tasks easier, and cuts costs by offering a feature-rich platform. For example, on top of perpetual inventory tracking, inventory management software like inFlow offers an invoicing service, allowing customers to pay right from their browsers and recording transactions as they happen.
Having a system that automatically records this sort of data— and integrates with popular accounting platforms like Xero and QBO— gives access to financial data at a glance while eliminating the need for multiple data entries.
Action points:
- Find a software that does it all. With the growth of the software industry, many providers are continuously adding new features to their product in order to stand out from the competition.
- Find software with as many integrations as possible. While software is becoming more and more feature-rich, chances are that you’ll still need different software for different tasks. Finding a core software that integrates with other platforms is key to building a reliable network.
Parting words
Accounting may be tedious, but it’s an important part of any business. It gives them the tools they need to create financial reports, track their inventory, and accurately forecast sales and other market trends. Perhaps more importantly, proper accounting is an essential part of preparing accurate tax documents.
While eCommerce shops lack some of the limitations of brick-and-mortar stores, accounting remains as important as ever.
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