Accounting and bookkeeping are practices designed to organize and accurately record a business’s records in order to generate financial statements such as balance sheets and income statements.
Income statements provide a snapshot of a company’s profits and losses, calculated by subtracting revenue from expenses like cost of goods sold and general and administrative costs.
1. Keep track of your sales and expenses
First step to ensuring a successful eCommerce business is keeping a detailed accounting of sales and expenses, such as recording all cash incoming and outgoing, inventory levels and any related transactions.
expenses can range from quality advertising and shipping costs, software licenses, tools and equipment purchases and platform fees from shopping carts and payment processors as deductible expenses.
One of the most costly mistakes online retailers make is mishandling sales tax, leading to lost revenue, costly fines, and other hidden costs. To prevent these errors from reoccurring, good bookkeeping practices and accounting software should be employed – this will enable you to keep a better eye on sales, inventory, expenses while meeting all sales tax laws.
2. Set up a business bank account
An important component of any small eCommerce business, a bank account for your eCommerce venture provides you with the ability to keep personal finances separate and accept credit card payments from customers.
An ideal digital business bank offers various services for their customers, such as money transfer options, cards and reports. Furthermore, most are compatible with popular bookkeeping software to make keeping track of sales and expenses easier for e-commerce businesses.
Most online business banks require you to have both an Employer Identification Number (EIN) and two forms of identification in order to open an account, though some have simplified application processes and no monthly fees – such as Novo and Bluevine which both have FDIC insurance coverage as well as offering various banking services.
3. Use accounting software
No matter which business recordkeeping software or spreadsheets you employ, keeping them consolidated and organized is key to reducing errors and providing real-time access to data. Doing this also allows for quick analysis of sales figures and trends to quickly spot areas for improvement and plan your strategy.
Ecommerce retailers should choose accounting software that integrates seamlessly with their ecommerce platform and payment processors, to minimize manual work. Popular options include Wave, with its free offering that provides standard financial reports via mobile app; more advanced ones include Bench which has features that help increase profitability and cash flow management.
4. Keep track of your inventory
Inventory management is essential to running a profitable online business. Being aware of inventory levels and movement enables you to save money on storage fees, transfer charges, employee salaries and employee benefits; while also helping maximize sales by keeping popular products in stock.
For easier inventory tracking, create individual records for each product. Next, apply methods like FIFO (first in, first out) or LIFO to value each stock item – this will reduce inventory waste by selling older items first.
Maintaining your inventory is paramount, as out-of-stock products can lead to lost customers. Make updates as soon as a product sells out on your website and consider adding safeguards such as shipping notices that inform customers when their product will return in stock.
5. Pay your taxes
As an online seller, it’s crucial that you pay your taxes. Your tax obligation may depend on your sales and expenses; keeping good records and paying on time can help avoid surprises while staying compliant with regulations.
Sales tax can be an ongoing struggle for ecommerce entrepreneurs, since different states have different sales tax rates and laws. Before the 2018 Supreme Court ruling, only physical presence states were subject to sales taxes; now however, all 50 states may need to be assessed depending on your “economic nexus,” including factors like customer count and delivery methods.
Cash basis accounting makes reporting your income simpler by recording any time money enters your business, such as bank deposits arriving.
