Starting an e-commerce business can be lucrative but comes along with some challenges. For instance, e-commerce accounting and bookkeeping can be complex and tedious. But keep in mind that these activities are among the dominant pillars in the success of your e-commerce business. Managing your finances correctly will help dictate the future of your business.
E-commerce accounting and bookkeeping also help you keep track of your income and expenses. When you keep your financial house in order, you can explore and expand other business areas.
What Is E-Commerce Accounting?
E-Commerce accounting is the process of collecting, analysing, managing, and reporting financial data regarding business transactions and assets in an e-commerce business. E-commerce is like any other industry, and managing financial data is important in making financial decisions in your business.
Evaluating financial data helps determine whether the business is on track for success or headed for financial difficulty In addition, you will categorise your financial transactions to help determine income and expenses. Below are key terms used in e-commerce accounting:
This is a legally binding document that states the quantity and type of items a client intends to purchase. It also indicates the prices for the items to be purchased. Remember that this is not a payment, but the payment details must be incorporated.
This document is a response to the purchase order prepared by the seller. It showcases all the details of a sale and should incorporate client information, type and quantity of goods, payment information, date, and delivery address.
Cost of Goods Sold (COGS)
COGS refers to the collective cost of production and distribution of the products. The cost of goods sold entails costs such as shipping, storage, and credit card fees, to name a few. It does not include payroll, office space, software licenses, or marketing costs.
Categories of E-Commerce Accounting
E-commerce accounting is like any other business accounting, which requires preparing and managing financial information and tax management. There are three main e-commerce accounting categories: bookkeeping, reporting, and submitting tax returns.
Bookkeeping is imperative in business planning and operations. It helps assess balance sheets, inventory management, income, and expenditure. When you do not track your bookkeeping properly, you can experience difficulties analysing sales, inventories, tax records, and expenses.
Submitting Tax Returns
Numerous mistakes can arise when lodging and interpreting tax requirements. This may seriously impact your business, but e-commerce accounting helps you plan and prepare for these taxes. You will be able to track and lodge all applicable federal and state taxes with ease.
After analysing your books and lodging required tax returns, reporting is essential in helping plan for growth. It is also the perfect instance for gathering all the necessary information required to scale your e-commerce business. This is important in defining your business goals as you have answers to questions such as:
- The most profitable products and services for your business
- Expenses that consume most of the expenditure
- How to increase your profit over time
- Other ideas that can be incorporated into your business to boost profit margins
When you have adequate data for your business progress, you will also decide whether to venture into new opportunities or rather improve current undertakings.
Basics of Accounting in E-Commerce
1. Track Your Cash Flows
Watching your cash flow helps determine the direction that your e-commerce business is heading. It will help you determine whether your business is making a profit or loss. You should ensure that more money is coming in than going out. Additionally, have targets in the amount you intend to spend within a certain timeframe. A separate business bank account is critical to tracking your cash flow.
2. Purchase an Accounting Software
Most people will use tools such as a calculator and excel to execute e-commerce accounting. Accounting software is more reliable as it will help you track costs, sales, and inventories, with many now integrating with ecommerce platforms directly. There are many available accounting software tools in the market. Choose the one that aligns with your business needs and preferences to get the best results.
3. Compute All the Expenses
There are different expenses in an e-commerce business, such as the cost of goods sold, among other related costs. There are also others referred to as fixed expenses that do not go up when you make sales or decrease when the sales are low. These may be factors such as rent, utilities, insurance, property tax, and salaries. However, they must be factored in when calculating all the expenses. Understanding the costs incurred when running your business is important.
4. Monitor Your Sales and Profit Before Tax
Monitoring your sales before paying taxes will provide early indicators of any issue. It is also important in managing your money. In case there are any issues, you will have time to engage different strategies to ensure you steer towards your long term goals.
5. Plan for Your Tax Payments
Tax payments are determined by a number of different factors. Similarly, tax deductions can vary depending on your size, industry, location, and the type of work you complete. It’s always best to plan and prepare your taxes within the acceptable time frames to avoid hurting your business in the future due to fines or underestimated tax payments. Running a tax report will help you incorporate your taxes into your prices, should they be needed.
E-Commerce accounting is an important element of your business model. This is because it helps you keep track of your business goals, fix any trouble areas and decide on further business expansion. You will also be able to manage your cash flow, expenses, and income seamlessly.
Visory helps your E-commerce business supercharge your business. They help you eradicate the daily spreadsheets and streamline your bookkeeping, accounts, and payroll services. This is vital in having a bigger picture of your business growth.
Get started with Visory today to reap the rewards of convenient e-commerce bookkeeping and accounting.