As an eCommerce business owner pitted against thousands of others online, mulling over your ledgers is probably the last thing you feel like doing. “Let me think about my product and my marketing strategy, and the rest will take care of itself,” you may say to yourself. Fair enough?
Not fair enough! While it may not be fun, sound bookkeeping and accounting are critical to maintaining the health and viability of your business, which means investing in it is non-negotiable.
The best part is that good bookkeeping does not have to be hard if you have an ironclad system and reliable software running your back end. In this quick guide, we cover the basics of bookkeeping for eCommerce and why it matters for your online business:
Why bookkeeping is so important for eCommerce
Having solid bookkeeping practices in place from the start will save you considerable amounts of time and money. Let us take a closer look at the benefits:
1. Insights into daily activities
With regular bookkeeping, you always have eyes on where your money is coming from or going, which means no unwanted surprises when it is time to run payroll or send out invoices.
2. Better business forecasts
When you have accurate insights into how your business has done in the past and is currently doing, you can make better projections about what it can do in the future.
3. Better tax preparation
Having all transactions neatly and accurately recorded will simplify filing your taxes. You will have enough time to prepare your returns according to the legal requirements and also be able to see what claims or relief schemes you are eligible for. Not having complete records will lead to unnecessary last-minute stress for you and your eCommerce accountant and even attract hefty penalties if you submit the returns late or make mistakes.
4. Ease in selling
If you plan to sell your eCommerce business someday, know that the first thing any buyer will want to do is see your financial statements. And you do not want to show them incomplete or inaccurate records!
What an eCommerce business with sound bookkeeping practices looks like
Bookkeeping does not have to be hard. Clarity and defined processes are half the battle. Here are some signs your bookkeeping practices are in good shape:
A clear system
This could be a top-range bookkeeping software with automated processes or a defined time every week and month when you examine and update your spreadsheets with your business transactions. Depending on your budget and the size of your eCommerce business, either might work for you.
Updated financial statements
Your profit and loss statement, balance sheet and cash flow statement should always be updated with the latest numbers. This gives you vital insights into profitability and helps you make smarter decisions on what to invest in.
Dedicated bookkeeping resources
A savvy eCommerce business owner knows they cannot always do their bookkeeping. That is why they hire someone to do it for them, be it an in-house Amazon accountant, an eBay accountant or an outsourced agency.
How eCommerce has impacted the accounting industry
You do not need us to tell you how much eCommerce has evolved over the last twenty years or so. This means accounting practices have had to evolve too! Here are some of the big trends we see in eCommerce for the next few years and what that means for accounting for eCommerce businesses:
1. Greater emphasis on stellar customer experience
Ecommerce sellers are starting to differentiate by offering customers chatbots and AI-powered buying journeys. While these are not directly in the accounting domain, you must speak with your eCommerce accountant about whether the returns will outweigh the costs.
2. The move towards multichannel
Ecommerce marketplaces are saturated, so standing out on any platform is much harder. Thus, online retail businesses opt to go broad-spectrum and build presences across channels. This requires understanding about how to account for multiple sales channels and inventories, including different tax requirements in different geographies.
3. Customer-oriented fulfilment
Customer expectations do not just stop at the product these days. They expect free shipping and returns/exchanges, free cancellations, branded packaging and environmentally friendly shipping practices. Accountants can help you navigate the costs involved with your fulfilment strategy, such as by suggesting affordable shipping partners.
4. Retention strategies
Special event or day-of-the-week loyalty points and referral programmes to periodic gifts and perks, eCommerce businesses are keener than ever to keep their buyers coming back. Here again, accountants can help you to identify the most profitable options.
5. Personalisation
There are hundreds of ways to personalise the customer journey using the data collected as they browse your eCommerce storefront. Accountants can help you choose your business’ most profitable personalisation ventures.
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Key accounting concepts for every eCommerce business owner
Even if you hire an eCommerce accountant (and we certainly think you should), you need to know how your books operate. Let us break down some of those key concepts for you key in accounting for eCommerce businesses:
Chart of accounts
This is the list of all the individual accounts that sum up your company’s transactions. It contains complete details of all your assets, liabilities, expenses and revenues.
Cash vs accrual accounting
These are the two standard accounting systems followed by businesses worldwide and across industries. You could choose one or the other depending on what your ecommerce accountant advises. But essentially:
- In cash accounting, you record transactions as and when the money reaches or leaves your bank account. So if you make a sale, you will not record it unless the buyer pays.
- In accrual accounting, you record transactions as and when they occur. So if you make a sale, you record it even if the money has not reached you yet.
Bank reconciliation
This essentially involves matching all your transactions with the corresponding amounts going out of or coming into your bank account. We recommend doing this at least once a month so that you can spot and rectify mistakes early.
Profit and loss statement
Also known as an income statement, this records your revenues, expenses and profit or loss at any given time.
Balance sheet
This gives you an overview of all your assets and liabilities at any point in time.
Cash flow forecast
As a business owner, this allows you to see whether you are investing in the right area and whether your money would be better served to go elsewhere. It lets you build a more robust and profitable business through sound financial planning.
Over to you
In conclusion, accounting for eCommerce businesses might seem like a lot of work, but at its core, it involves always knowing where your money is, where it has been and where it is about to go. Your eCommerce accountant will help you all the way, so there is no need to be nervous.
Invest time upfront to understand the basics, keep updating your books as you go, and you will be well on your way to building a financially sound business!
And if you are looking to hire accounting help, we are happy to tell you that Bradleys Accountants works with varied online retail businesses, helping them with their bookkeeping, payroll, and taxation. Simply fill out the contact form to get in touch with us.
