The Ultimate Guide to Bookkeeping for e-Commerce

e-Commerce Bookkeeping Image

Your books are the cornerstone of your business. If you find yourself in the red, or you don’t know how many outstanding invoices you have — you could end up in trouble. 

Bookkeeping for e-commerce businesses is its own beast. When you’re running an online store, you have to deal with product storage costs, shipping, online customer service, and other fees that brick and mortar shops may be able to dodge. 

This comprehensive guide is a great place to start if you’re looking to initiate a new bookkeeping strategy. Read on to learn more about how bookkeeping for e-commerce the right way can save you money and help your organisation thrive.

How bookkeeping may help you get a better tax return

Businesses have their own unique requirements for lodging tax returns in Australia and New Zealand. Not only does accurate e-commerce accounting allow you to lodge your tax returns on time (and avoid hefty late fees), but you’ll have everything you need to sidestep common mistakes (like omitting critical payroll details). Plus, you may get a better tax return, because you’ll have information on hand to apply for helpful credits and deductions. 

Up-to-date online bookkeeping should include the following financial information, which is required by the government at tax time:

  • Taxable income of the organisation
  • Tax offsets and credits
  • PAYG instalments 
  • Amount of Goods and Services Tax  (GST) collected
  • Repayments of loans to the company
  • Fringe Benefits Tax (FBT)
  • Taxable Payments Annual Report (TPAR)
  • Superannuation/KiwiSaver deductions

There are a lot of reports to lodge as a part of your business tax return. This is true regardless of your business structure: sole trader, partnership, company, etc. Having accurate books is essential to lodging accurate taxes. If you don’t have what you need, you may be dinged with unexpected penalties or fines. 

For more information about what to track throughout the year, check out this helpful government guide to lodging a tax return in Australia. 

How to choose a bookkeeping system

Not every e-commerce bookkeeping system is created equally. And they’re not all right for your business. Before you land on the right system of virtual bookkeeping for e-commerce, ask yourself these questions. 

Can this bookkeeping system scale with my organisation?

Bookkeeping for e-commerce requires the ability to grow. Your online sales could double within a few months if the right influencer mentions your brand. As you scout online bookkeeping systems, ask yourself if the software in question will grow with you.

Some bookkeeping systems are designed for small businesses only. This means they will limit how many accounts, customers, and transactions you can store in your software. Once you pass a certain threshold, you will have to delete data to add more data. In other words, as a growing business, software with these types of limitations may not work for you anymore. Can you upgrade your account when the time comes to add more storage, or will you be up a creek?

Does this system track each transaction more than once?

You should also compare single-entry bookkeeping with double-entry bookkeeping. The single-entry method can work for cash-only small organisations; you’ll just enter debts or credits once. 

Double-entry bookkeeping is more appropriate for larger businesses. This method involves recording each transaction twice: once as a debit, and once as a credit. For instance, if you make a $100 payment on a business loan, you lose $100 in cash but gain $100 in business equity. The two transactions should always cancel each other out. 

If you are operating anything larger than a cash small business, you should stick with double-entry methods. 

Is my financial data available when I need it with this bookkeeping method?

You should also think about accessibility. Is the bookkeeping method you’re choosing transparent? Online bookkeeping for e-commerce shouldn’t be full of gatekept information. You want a bookkeeping method that generates automated reports and is available 24/7. Paper methods of bookkeeping make it too easy for things to get lost and be unavailable after hours. 

The difference between cash and accrual accounting

Deciding between cash and accrual accounting is another major decision to make. The method you use will inform the way you lodge your taxes, and the way you calculate your monthly sales. Bookkeeping for e-commerce organisations require an accurate monthly intake of their cash flow — so choose carefully. 

Cash basis accounting for small businesses 

Cash basis accounting tracks funds only when cash exchanges hands. If a customer places an order now but pays later, you only document it once you receive the funds. With cash basis accounting:

  • You have an accurate picture of cash flow. This is the primary benefit of cash basis accounting. Your books will remain aligned with cash flow reports. 
  • You may not have a good, comprehensive notion of your businesses’ financial health. Your cash flow might look stable while you’re ignoring a tonne of unpaid invoices. 
  • Cash basis accounting is generally recommended only for small operations. You will outgrow it once you have multiple vendors and customers who don’t all pay on the same schedule. 

Accrual basis accounting for all businesses

Accrual basis bookkeeping is more complicated. You record income when work is complete or a sale is made, even if you haven’t been paid yet. The payoff for added complexity is that you gain a more accurate picture of your total financial picture. You’re not only tracking cash in hand, but also expected income and costs. With accrual basis accounting:

  • You can see which customers have paid and which customers have outstanding payments. If your online store offers payment instalments, accrual basis accounting is a better tracking method. 
  • You can predict future cash flow. Because you’re recording sales once the agreement is signed — even if the payment is incomplete — you can look forward and see what future income looks like. 
  • Tracking debts is easier. With accrual basis bookkeeping, you’ll also have a better picture of who you owe money to. You’ll track a refund once it’s requested, not just when it clears at the bank. 

How to categorise transactions

Your books can never be too organised. Well, if you start separating paper purchase by colour… it may be time to take a breath. But categorising expenses in a detailed manner is usually wise. When you develop your bookkeeping for e-commerce strategies, deciding how to itemise is key. 

Each business will need different expense categories based on the type of business they conduct. In e-commerce, for instance, you may not have as many merchandising expenses as an in-person retailer. You will have a more complicated shipping system instead. Categorising expenses helps you identify where you spend the most money, where you can cut back on costs, and which budgets have wiggle room for growth. 

Some common expense categories for all e-commerce businesses include:

  • Payroll costs: Hourly staff payments, salaries, and mandatory payroll taxes would all fall under this category. 
  • Superannuation contributions: Businesses are required to contribute to their staff’s superannuation funds, and you will want a category that tracks these expenses. Your annual costs must be reported come tax time. 
  • Lease and mortgage payments: Track any rental costs or mortgage expenses. Some of these can be deducted on your business taxes. Plus, you want to know your total overhead on property so you know if you need to find a more affordable option. 
  • Communications bills: Internet, video conferencing, and other communications costs can really add up. You’ll also want to put mobile phone bills in this category. 
  • Website maintenance: As an e-commerce business, tracking the costs of your website is a no-brainer. This might include domain purchases, website copy, search engine optimization (SEO), and graphics.
  • Marketing costs: Organic traffic is great, but even major businesses pay for Google Ads, targeted social media ads, and emails. Categorising these costs into marketing helps you calculate how much you’re spending per converted customer. 
  • Shipping expenses: As an e-commerce business, you will likely have to ship some of your items to customers. This category can include everything from postage to packing peanuts. 
  • Payment processing: Whether you use eWay, SecurePay, or another third-party payment processor, you can expect to pay fees. You may also have to pay chargeback fees for failed payments. Tracking these fees helps you figure out when it’s time to shop for a more affordable option. 
  • Software and subscription costs: Software subscriptions and other monthly subscription fees should usually be categorised on their own. 
  • Insurance: Businesses typically have to carry multiple types of insurance. Tracking your premiums helps you identify sudden increases. 

Many bookkeeping software programs make it easy to categorise expenses into categories. You may even be able to automatically sort costs into categories when they’re input. 

The most important ecommerce KPIs to track 

Key performance indicators (KPIs) are a way to measure your business’ successes in more tangible ways than “It seems like things are going well.” Some measurements are qualitative and others are quantitative. For instance, customer satisfaction is more difficult to put an exact figure to than the number of monthly sales. Both types of data are important.

Tracking KPIs is an important part of the financial analysis for e-commerce businesses. A bookkeeper who keeps solid records can calculate the following KPIs without a problem. 

Conversion rate: This refers to how many people who visit your website make a purchase. Obviously, the higher the number, the better. Average conversion rates vary by industry. For clothing and fashion, you can expect a rate of about 1.8%

Average order size: How much do people buy when they do decide to check out? Calculating how much people currently spend on a single order gives you a baseline from which to grow. 

Customer loyalty: This measures whether most sales are from returning customers or new customers. You can measure this by requiring a log in to check out. The more returning customers you have, the better — loyalty can cut down on your need for advertising costs. 

Number of transactions: As an e-commerce business, you’ll also want to track the total transactions for the month to make sure they are scaling in the right direction. 

Cart abandonment: A customer who abandons the items in their virtual shopping cart represents an almost-sale. These are customers who nearly spent money but something changed their minds. If your rate goes up, you may want to consider targeted reminder emails.

Cost of goods sold (COGS): The total cost of goods sold include the material and labour it costs to create your goods. But it also includes marketing expenses, staff salaries, and other overheads. Keeping COGS low increases your profit margin. 

Churn rate: When a customer stops subscribing to your services, opts out of brand emails, or otherwise abandons your brand — they are contributing to your churn rate. Aim for a churn rate of no higher than 5%

Inventory level: Over time, you will figure out how much inventory is too much inventory to move in a short period of time. Find your range and create a KPI so you can flag items that aren’t moving.

Other things to consider for e-commerce bookkeeping

We can’t complete our guide without pointing out some must-know details about e-commerce bookkeeping. These three best practices can save you money, time, and strife. 

  1. You may not be the best bookkeeper for your e-commerce business.

As a small business owner, you may handle all of your own bookkeeping with at-home software. As you scale, that won’t cut it. And when an owner is spending their time reconciling bank accounts — they aren’t brainstorming new products or luring investors. When you call in reinforcements, you’re able to spend more time on high-level strategy and other tasks. 

  1. The best bookkeeping candidate may not be an in-house candidate.

Don’t rule out off-site bookkeepers. A virtual bookkeeping team can become an invaluable partner. When you hire a virtual team, you have access to experts from near and far. That increases your chances of finding an expert in your industry. Plus, virtual teams lower your overhead costs. You’ll never have to clear out an office for a virtual bookkeeper or buy them a computer. 

  1. Cloud-based services are essential.

In modern bookkeeping, you should have access to your reports around the clock. Locally stored documents may only be accessible from certain servers, and paper documents are too easy to lose. When you’re shopping for a bookkeeping service, make sure you’ll be offered unfettered access to your books. 

When to hire a bookkeeper for your business

Once you’re no longer a small business, it’s time to have a dedicated bookkeeper. Many e-commerce businesses find a bookkeeper helpful when they start to add employees, even if they still qualify as a small operation. Hiring a bookkeeper can be worth it for tax season alone. 

You may also want to hire a bookkeeper when you are in a specialised industry with a lot of complicated tax rules and licenses. It can be difficult to find a bookkeeper with the expertise you need when you’re pulling from a local pool of candidates. 

Hiring a bookkeeper is a savvy move when you have a fully remote team, too. Your bookkeeper serves as a uniting force who tracks all the moving pieces and expenses, no matter where your staff are located. 

The final word on bookkeeping for e-commerce

An e-commerce bookkeeper can aid in keeping your bank statement, monthly reports, and tax returns in order. As you grow, trying to manage your general ledger and payroll will simply become a burden. Let the team at Visory step in and save the day. Our virtual team can help your team in Australia or New Zealand. We have experts across all industries, and you can add more team members to your bookkeeping squad as needed. You can also add new bookkeeping services as your e-commerce business grows.

How well does your bank really know you?

Whilst some Government initiatives such as JobKeeper have been extended, other programs including private sector initiatives have not. This will inevitably place additional pressure on the cashflow of businesses in the coming months. The result is a financial environment where requests for new credit, and reviews or modifications to current facilities could become very crowded as we approach the end of 2020 and head into early 2021.

This environment has pushed banks and lenders to refocus on reviewing the portfolio of their business customers on a more regular basis. So, not only can you expect your bank to ask for updated financials and scenario stress testing when reviewing your current facilities or assessing new credit requests, you can also expect them to be reviewing your portfolio and evaluating your viability even if you have not approached them for additional credit, or have time left on your facility.

The importance of communicating your business strategy right now cannot be understated.

Communicating your business narrative

Banks remain interested in providing assistance but in this environment, they need to have confidence in the management team’s ability to execute the business’ strategy during Covid-19 and post pandemic. This requires you to focus not only on the “what”, “why” and “how” but importantly the “who”.

It is up to you to ensure your business narrative is communicated correctly and effectively to the decision makers. Don’t rely solely on your Relationship Manager, he/she has enough to do in the current environment. Your Relationship Manager may be well versed on the details of your business operations, owners and management team, but it is the credit group of your lender that will determine the success or otherwise of your credit submission. Additionally, you are the person best positioned to explain the quality, resilience and nuances of your business.

To give the credit group confidence, your business needs a strong narrative. When done well, it’s a tool you can use to help move you higher on their list for attention.

A strong narrative explains:

  • Your business
  • Past, current and projected activity, including:
    • Effect of COVID-19 regardless of whether it’s positive or negative.
    • Level of material impact – is all the business impacted or only partly?
  • Clearly outlined strategy for dealing with the challenge.
  • Background and experience of your business’ management team, especially in dealing with challenging situations and implementing change.
  • Storyline supported by three-way cashflow analysis and scenario testing.

Approaching your bank or lender with a strong qualitative narrative combined with a complete quantitative three-way cashflow assessment is extremely powerful. It provides a complete picture for the bank’s credit process, but more importantly, it allows your business’ story to be told in the way you want it to be told.

Presenting the information to the bank in a formal document helps ensure the information gets to the decision makers intact rather than having to be created by the Relationship Manager based on their understanding of your business. Above all, it helps show the bank that you, the business owner or management team of the business, are proactive and on top of the situation both operationally and financially, providing the bank with a higher degree of confidence to support your business going forward.

For more information on how to prepare your business financially with funding assistance from the banks, watch COVID-19 webinar | Is your business financially equipped post COVID-19?

To help you understand your cash flow position and possible funding needs, take our 10-question Financial Health Self-Assessment to assess your business’ financial health both now and into the future.