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9 Best Practices to Make Shopify Accounting Easier

Small businesses look at Shopify accounting as unwanted homework. Here’s the thing: Accounting for Shopify doesn’t have to be scary. Here are nine best practices that can help you simplify Shopify accounting.

Accounting is the foundation of a successful business, yet most small businesses struggle to get their books in order. This is especially true for ecommerce businesses. 

The reason? Ecommerce accounting can feel daunting. From inventory management and different selling channels to diverse payment methods and fulfillment challenges, running an ecommerce business can be an uphill battle. 

The good news is that ecommerce accounting can help you stay on top of your assets, liabilities, expenses, revenue, equity, and other growth metrics crucial for your business bottom line. 

According to The Association of International Certified Professional Accountants (CPA),  the three biggest accounting challenges for businesses are planning for growth and expansion (19%), getting expert financial insights (18.6%), and cash flow/minimizing overhead costs (18.2%). Staying in compliance with laws and regulations and lacking time to focus on accounting/financial matters are among the top five challenges.

Image source: CPA

Now the million-dollar question is: how to simplify ecommerce accounting? 

The short answer is accounting automation. 

The long answer is more nuanced than that.

To help you simplify your Shopify accounting, we go through the key elements, metrics you should track, challenges, best practices, and examples from successful small businesses that managed to streamline their accounting and back-office operations so they can focus on growing their business. Let’s dive in.

What is ecommerce accounting?

Ecommerce accounting is the process of collecting, organizing, managing, and analyzing financial data and transactions of an ecommerce business.

And while many business owners use accounting and bookkeeping interchangeably—they are different.  

What is the difference between bookkeeping and accounting?

Bookkeeping is the process of recording financial transactions. Accounting involves recording, classifying, interpreting, analyzing, reporting, and summarizing financial data. In other words, bookkeeping is only a part of accounting that sets the foundation for future analysis. 

Accounting has been evolving over the years and is still in the midst of a digital transformation. As a result, we witnessed the rise of cloud accounting. 

What is the difference between cloud accounting and traditional accounting?

With traditional accounting, you can access your financials only from the computer on which your software is installed. With cloud accounting software, on the other hand, you can access your financials through a web-based interface. 

Cloud accounting has gained popularity for its flexibility, cost-effectiveness, accessibility, scalability, and data security. However, advanced accounting software packages for Shopify, such as QuickBooks, have both desktop and cloud applications.

Key elements of ecommerce accounting

The core accounting task is tracking, recording, and categorizing transactions as income or expense. To be able to do so, you have to understand the key elements of ecommerce accounting. 

  • Purchase order—a commercial document indicating the type and quantity of products, price information, and payment details.
  • Sales order—a commercial document prepared by the seller to confirm the sale of goods or services. 
  • Cost of goods sold (COGS)—the total amount of direct costs related to the sale of products. COGS include direct labor, materials, and overhead. 
  • Accounts payable—the sum of all outstanding amounts a business owes to vendors or suppliers for goods. 
  • Accounts receivable—the sum of money your customers owe you for goods and services that are not yet paid. 
  • Ecommerce sales tax—the percentage of money added to the price of an online purchase that is passed on to the government.

What metrics should Shopify business owners track?

Shopify businesses should keep a pulse on several important metrics, including: 

  • Cash flow—a net balance of cash moving into and out of a business at a specific point in time. Cash flow is the lifeblood of a company, so knowing how much cash a business brought in or spent in total over a period of time is a prerequisite for success. 
  • Gross profit—the profit a company makes after subtracting the costs related to manufacturing and selling its products or services.
  • Gross margin—the difference between revenue and cost of goods sold, divided by revenue. Also known as the growth margin ratio, this metric is expressed as a percentage.
  • Balance sheet—a financial statement that includes the company’s assets, liabilities, and shareholder equity at a specific point in time.
  • Profit and loss (P&L) statement—a financial statement that summarizes the revenues, costs, and expenses during a specified period. Also known as an income statement or statement of operations, this financial report shows a company’s ability to generate sales, manage expenses, and create profits. 

What makes Shopify accounting challenging?

The unique nature of ecommerce makes accounting a real challenge for Shopify businesses. Here’s why: 

Your business is always open

Unlike traditional brick-and-mortar stores, you can’t put a “closed” sign on your Shopify store. With ecommerce, your business is no longer a 9 to 5 job — it’s 24/7. As a result, small business owners face inventory and fulfillment challenges, and staying on top of your operations requires accurate ecommerce accounting.   

Staying on top of your inventory can become a challenge

Shopify merchants know the ecommerce inventory management hurdle all too well. Tracking the amount, location, and pricing of available inventory, combined with the complexity of multiple online sales channels can be a real headache. Ecommerce businesses selling through different stores, marketplaces, and big box trading partners must instantly track and sync orders, to have the confidence that their inventory is always up-to-date and to avoid overselling.

There’s an added complexity because of different payment options and processors

Not having enough payment methods is one of the top ten reasons for ecommerce cart abandonment, according to Baymard. Online merchants are forced to offer multiple payment options to cater to customers’ needs. That, on the other side, makes accounting for Shopify hard to track. 

Another challenge is using Shopify Payments—the built-in payment provider for accepting online payments. While it helps simplify payments, merchants using this provider must pay fees. Shopify payouts are net of any fees businesses owe Shopify, which means that the revenue is higher than what they will receive as a payment in their bank account. This makes keeping accounting records difficult, and it requires separating your sales, refunds, and fees.

Human error from manual data entry can harm your business

Despite the advancement in automation technology, small businesses still rely heavily on manual data entry. 

According to a survey conducted by IMA® (Institute of Management Accountants) and Deloitte in 2020, 75.7% of respondents said their company’s accounting processes are either largely manual or still a considerable manual effort. 

Image source: IMA® and Deloitte

Manual accounting data entry is very time-consuming and can lead to human mistakes with severe business consequences.

How to simplify your Shopify accounting: 9 best practices

Small businesses look at Shopify accounting as unwanted homework. The truth is that ecommerce accounting is the best way to understand your business performance and set the foundation to scale your business further. 

Here’s the thing: Accounting for Shopify doesn’t have to be scary. Here are nine best practices that can help you simplify Shopify accounting. 

#1: Make sure your books are up-to-date 

Precise accounting requires correct data. This is why keeping a close eye on your books is vital. The quality of the input determines the quality of the output. The only way to plan ahead, create forecasts, reduce the risk of cash flow issues, and prepare for filing tax returns is to ensure your books are up-to-date. Using accounting software is the most efficient way to stay on top of your bookkeeping and organize invoices, cash accounts, and receipts.

#2: Keep track of your inventory 

Inventory management is one of the most critical aspects of ecommerce businesses. Without having a clear picture of the goods you have in stock, you won’t be able to order, restock, store, and forecast your inventory levels in time. To avoid the risk of failing to meet customer demand, you need an ecommerce inventory management software to keep you updated and in sync across channels and stock locations. 

Besides allowing you to track your stocks, an ecommerce inventory management system will enable you to generate reports and see which items sell well and which are rarely added to the cart. 

#3: Use the accrual accounting method 

There are two accounting methods—cash accounting and accrual accounting. The main difference is that cash basis accounting recognizes revenues and expenses at the time cash is received or paid out. In contrast, accrual accounting recognizes a transaction when funds are earned or when expenses are incurred, regardless of when cash is received or paid. Complicated enough? Yes, it can be. To put it simply: an example of an accrued expense is when you order inventory items from your supplier but you haven’t yet been invoiced by the supplier or charged the expense to your customer.

Accrual-basis accounting gives more accurate insight into the health of a business and makes forecasting easier. Moreover, using the accrual accounting methods helps ecommerce merchants understand whether they need funding to grow their business.  

#4: Monitor your costs and expenses

Maintaining accurate records of costs and expenses is one of the essential aspects of accounting. The reason is simple: expenses affect your business’s bottom line. Not recording expenses accurately can lead to wrong decisions around resource allocation. 

And not just that—inaccurate expense records will affect your tax filings and even give creditors and investors a distorted picture of your business. To avoid this, create a standard monitoring procedure and track your expenses meticulously.

#5: Reconcile your account regularly

Reconciliation ensures that the money leaving an account matches the actual money spent at the end of a fiscal period. Running a small business can feel overwhelming at times. The reconciliation process allows you to check for errors or fraudulent activity in a timely manner, ensuring that nothing slips through the cracks.

The frequency of reconciliations depends on the nature of the business and the volume of transactions. A best practice is to reconcile your account at least once per month, so you can spot any differences and act timely. 

#6: Implement fraud prevention measures 

Reconciliation is just one way to prevent fraud. However, the complexity of ecommerce businesses requires additional steps to protect yourself from fraud. Establish strong controls and consider segregating duties, dual authorization for transactions, and proper documentation requirements. 

Besides this, you should regularly review financial statements, run regular financial audits, and digitize your accounting processes to reduce the risk of fraud. 

#7: Automate your Shopify accounting 

Automation has significantly impacted how companies perform their ecommerce accounting,  removing the least efficient aspects of an accountant’s work. The result is more time for analysis, strategy, and informed decision-making.

Accounting automation allows you to sync order info between your sales channels and QuickBooks and even record sales tax, customer and item details, shipping and payment expenses, and marketplace fees and expenses. Some of the biggest benefits of accounting automation include saving time, increasing productivity, and getting accurate data, which are crucial for business growth.

#8: Plan your taxes

Taxes are a stumbling block for many ecommerce businesses. And in most cases, it’s because they don’t plan upfront. This, in turn, leads to inaccurate financial statements. Failing to account for taxes is a common ecommerce accounting mistake, which can have severe consequences for your business. 

According to Statista, taxes are the third-most important problem for small businesses in the United States. To avoid this issue, make sure to plan your taxes on time but also put aside the money for taxes. Finally, you can automate sales tax management and record sales tax collected from all your sales channels into QuickBooks for easier tax filing. 

#9: Get better insights into your Shopify store performance

If you’re looking at accounting for Shopify as something you must tick off from your to-do list, you’re wasting a huge opportunity to gather insights and get a regular health check for your business. With commerce analytics, you can find the insights you need to make data-driven decisions, from high-level gross profit trends to detailed metrics by channel and expense type.

The bottom line is that profitability isn’t just a KPI—it’s something that drives every decision you make for your business. 

How companies use accounting automation to grow their business

There’s no doubt that automation has revolutionized accounting for Shopify. Here are examples of successful Shopify merchants who managed to grow their businesses by taking advantage of the benefits of accounting automation.

Benefit #1: Overcome operational headaches from manual bookkeeping 

Skinny Mixes is the leading manufacturer of low-calorie cocktail mixes, sugar-free coffee syrups, and many other specialty beverage items and gifts. The instant success of the products led to fast-paced growth (so the brand couldn’t keep up with manual order entries). 

Syncing their Shopify and QuickBooks platforms let Skinny Mixes consolidate its data and refocus on product innovation. With greater accuracy in accounting and inventory, the brand has been doubling its online business year over year. Automating bookkeeping and cutting errors allowed the Skinny Mixes team to refocus on their customers and operations, boosting order volume 75% year over year.

Benefit #2: Save time and increase work efficiency by overcoming operational roadblocks

Rareform creates one-of-a-kind, well-made, repurposed bags and accessories from billboards in 350 retail stores and online. The team struggled to map sales data into Excel and QuickBooks, and they were looking for a system that could compile one-time journal entries on a daily and monthly basis.

With ecommerce automation software, Rareform reduced the number of hours spent on busywork. Using multichannel order management allowed them to access orders in stock and get timely information on inventory that needed to be reordered.

Benefit #3: Unify online storefronts and back-end operations

Epic Mens is an online menswear retailer that sells a variety of brands hand-selected for superior design and quality. The brand wanted to scale its ecommerce business, but the team was aware that they needed to unify their online storefronts and back-end operations—namely accounting and inventory. Their biggest challenge was manual data entry. 

Automating their bookkeeping allowed the Epic Mens team to easily scale and accommodate larger order volumes, growing 42% yearly. Using an ecommerce accounting automation platform enabled the brand to seamlessly sync orders to QuickBooks, saving 80 hours a week.

Ready to grow your ecommerce business?

Technology has greatly influenced the world and how business is conducted, and accounting is no exception. Ecommerce businesses have just started to scratch the surface using the power of accounting automation. 

Competition in the ecommerce world is fierce, and the only way to stand out is to focus on things that move the needle and automate everything else. The future will belong to businesses willing to streamline their accounting and back-office operations to save time and focus on growing their business.

Ready to discover how you can simplify Shopify accounting and scale your business? Start today.

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The Webgility Team

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