Accounting is a less exciting part of running an ecommerce business, but it is a necessary component in determining the company’s success. Many sellers undertake these tasks when the business first launches, but they often turn to accountants for help later on.
No matter who is handling the bookkeeping, it is crucial to know some of the basics of accounting for ecommerce companies so sellers understand they are not handing financial control of their business to another individual. Knowing the basics of accounting also helps to make sense of all the jargon.
“Accounting is the language of business,” according to Warren Buffet. Understanding this language, therefore, can be the difference between an ecommerce hub’s success or its failure.
Accounting essentially helps to…
- Use a company’s financial data to boost efficiency and profitability
- Plan the long-term goals of the business
- Maximize business tax savings.
These are six steps you can take to improve your ecommerce accounting practices to ensure your client’s business is profitable.
1. Record All Transactions
Any time money leaves or enters the company, it counts as a transaction. It is generally best practice to record all the sales, fees, expenses, and refunds to get a clear picture of true cash flow.
There are six types of transactions that sellers will need to keep track of to ensure their company remains profitable. They are:
- Liabilities: Any outstanding balance of financial loans
- Equity: Investment by the owner of the ecommerce site into the company’s coffers.
- Revenue: Money collected by the company from sales.
- Expenses: Money paid by the company to make purchases that will keep the business running.
- Assets: The company’s owned cash, equipment, properties, vehicles, and so on.
- Returns and Charge-backs: Money that a customer or credit card company gets from the company due to a product return or credit card behavior that looks fraudulent.
These transactions must be recorded for tax filing purposes and to determine the company’s gross profit. This is key to seeing a business’s real financial health.
2. Invest in a High-Quality Accounting Software
Accounting software will help to quickly monitor accounts, generate detailed financial reports, and make business decisions backed by data. Microsoft Excel is the baseline for software that keeps track of a company’s cash flow.
However, there are other software brands like QuickBooks that are dedicated to ecommerce accounting. These applications offer free trials that allow prospective users to experiment and determine which software will work best for their business.
Software that makes it easy for you to transfer data into your books is vital for ecommerce businesses that use ecommerce platforms like Amazon, Shopify, and others. These types of software will help you save time and money.
Sellers and accountants can then take their software to the next level by adding automation. Accounting automation software records all ecommerce transactions and posts them to QuickBooks, saving everyone the time and headache of manual data entry.
3. Track All Inventory
Tracking inventory involves monitoring every item that’s in stock and is available for customers to purchase. Accounting for ecommerce companies requires that sellers know their company’s inventory at any given time. Keeping track of inventory will also help you write a proper budget plan for your client’s business’ to maintain its smooth operation.
It is essential to determine the least amount of inventory the seller wants to have on hand and then keep track of it so they can make supplier orders before it’s too late. The business will suffer if it runs out of inventory, leading to diminishing sales.
Phenomena like ‘shrinkage’ occurs when part of a store’s inventory gets lost, stolen, or damaged, and it can affect the business’s success. However, ecommerce businesses without a physical store have a lower rate of shrinkage.
4. Prepare Financial Statements
Businesses of all sizes employ accountants or bookkeepers to prepare financial statements, though some small business choose to develop these statements by themselves. Regardless of who prepares them, these statements summarize the financial goings-on at the company and, in turn, guide accountants toward making sound decisions for the business.
An income statement, balance sheet, cash flow statement, and shareholder equity statement are the four kinds of financial statements you will have to prepare for the business. The income statement will help you determine how well the business fared over a period of time (a month, a quarter, a year).
An income statement provides a short-term picture of a company’s financial health, but preparing a balance sheet will reveal more in-depth information. This will help you view the company’s long-term map and the overall equity to guide you in making informed decisions for the business’s long-term health.
By subtracting the liabilities from the assets, you will know the business’s overall equity. You can inform your clients that all shareholders will want a well-written equity statement, which sellers can outsource to writing experts if they feel it is out of their wheelhouse.
5. Determine What It Will Take To Break Even
The first four steps are all vital ecommerce accounting practices sellers need to pay attention to to guarantee profitability. However, it’s also important to determine how much revenue will cover all the costs of operation.
For example, if all fixed costs amount to $3,000 per month, monthly revenue must cover the cost of labor, plus an additional $3,000 to break even. If this requires selling 5,000 units of a product to break even, then selling 7,000 units will generate a profit.
6. Update The Books As Often As Possible
For accounting data to be useful, it must reflect the present state of the business. Waiting until the end of the month to update accounting can be dangerous for the business, as well as tempting to make reckless business decisions before the close of the month.
Ensuring the company’s balance sheet is regularly updated will help you get an accurate view of its assets, liabilities, and equity at any given time. Fortunately, ecommerce accounting software automatically keeps everything up-to-date so sellers and accountants can access this information whenever they need to.
The kind of accounting practices deployed in your business can be the difference between your client’s ecommerce company’s success or its financial failure. Even though the process can be time-consuming, it is worth the effort to guarantee the business’s longevity.
Aaron Swain is a writing specialist who is currently working in the company Best Writers Online service for writers and as an editor at review service Online Writers Rating. He working to make better himself in his blogging career. He is constantly trying to find new ways for personal and professional growth and is convinced that it’s always important to broaden limits. That’s why Aaron expands and improves his skills throughout the writing process to help and inspire people.