As an e-commerce business owner, you have to wear a lot of hats, and bookkeeping is one of them. It is an indisputable responsibility, as cash flow is one of the most prominent startup killers.
If tracking and managing your expenses and income sounds scary, you’re not alone. Almost three-quarters of small business owners are less confident in their bookkeeping and accounting skills, but they don’t have to.
Having some basic accounting knowledge and a little know-how, you can confidently manage the finances of your e-commerce business. No, you don’t have to take a 12-week course. Just keep reading.
Bookkeeping is the tracking of a company’s financial transactions (deposits and withdrawals), either digitally in accounting software or physically recorded in a ledger. This financial data provides insights into what you spend money on and how your business makes money. In addition, detailed financial records reduce headaches during the tax season.
Keeping data of financial records is the most basic part of bookkeeping, but it’s not very useful if you can’t access and understand the records. Accounting involves correctly classifying, organizing, and storing financial transactions to support taxes and audits and provide business insights.
Advantages of Bookkeeping
Without proper bookkeeping, you would unintentionally navigate your e-commerce business. Financial information is needed to identify your business’ strengths and weaknesses, even threats, and opportunities. Business decisions without data are just speculations.
- Helps with Tax Deductions Identification
Precise and up-to-date bookkeeping is the major key to a stress-free tax season. Monitoring and keeping track of the financial records can surely help you in finding and claiming available tax deductions for small businesses. That simply implies that there would be more money for you. This will also prevent any surprises come tax season since you will have estimated taxes for the whole year.
- Helps with Getting a Business Loan
Digitally tracking transactions allows you to quickly create relevant financial statements such as income statements, balance sheets, and cash flow statements. While these reports provide quick insights into the financial position of your business, they are also needed to raise affordable funding such as SBA loans and to attract e-commerce venture capitalists.
- Helps with Fraud and Banking Errors Detection
Bookkeeping cannot prevent fraud, but it will let you know when it happens. Without proper records, sellers can tamper with them and employees can misuse corporate credit cards. Banks aren’t perfect either as sometimes, they also make mistakes. The latest books will help you fix the discrepancy.
- Helps Show a Clear Picture of Your Business’ Financial Status
Accounting allows you to instantly see the financial status of your business. You will see how much money you still have, how much you currently owe, and what trends might be right there. Nothing is more credible to the success of your business than a well-documented book.
How Does Bookkeeping Work?
When you invest your time in bookkeeping, you want to make sure you do it the right way. Doing the little things correctly from the beginning can prevent your book from becoming useless and confusing.
- Detach Your Business from Personal Finances
As quickly as possible, open a business account and separate it from your finances. The combination of both finances makes it tough to monitor your earnings and expenses. A separate account makes it smooth to display your transactions, create monetary reports, and become aware of your tax deductibles.
- Selecting a Good Bookkeeping System
Single-entry bookkeeping is a straightforward way to record your cash-ins and cashouts, wherein you just put each transaction you are making and mark it as income or as an expense, and finally add or deduct from your total cash balance.
On the other hand, double-entry bookkeeping facts every transaction in two separate accounts, one debit, and one credit, to make certain that income, expenses, assets, and liabilities are properly recorded.
Nonetheless, the bookkeeping method is not as relevant as your consistency. Thus, you must select a method that will work for you for a long period.
- Build a General Ledger
The ledger keeps all your financial activities in one place. You can easily find a transaction without sifting your bank or credit card statement. Further subdivided, there is a sub-ledger for recording category-specific transactions (assets, liabilities, capital, income, and expenses). Use the chart of accounts to list all the names and purposes of your sub-ledger so, in the future, you and your accountant won’t get lost and confused.
- Monitor and Record All Information
Be sure to record all large, small, regular, or one-time transactions. Yes, this includes coffee purchased in company dollars while on a business trip. Use clear and clear tags to categorize expenses and show trends in money income and expenses.
You should also collect receipts, store them in a safe place, and store them for at least three years which is the normal IRS audit period. Keep all documents such as invoices, statements, purchase orders, tax returns, forms, and applications. You will never know if you’ll be needing them for IRS audit in the future, so better be sure to have them with you safely.
- Reconciling Daily
Keeping track of things on a regular and consistent basis makes bookkeeping easier. Just like keeping a house clean, leaving everything unattended for weeks or months can be difficult to clean up. Get in the habit of closing books at the end of each business day, week, month, quarter, and year. This routine will help you keep your finances tidy and help you find mistakes initially.
Generate monthly and quarterly financial reports which include income statements, balance sheets, cash flow statements to monitor business progress and trends.
Bookkeeping Instruments and Methods
Bookkeeping is a necessary difficulty. Almost half of the small business owners rank this as their most disliked job. Tracking your income and expenses was probably not part of your fantasy when you dreamed of building an e-commerce empire. Don’t worry as there are many bookkeeping solutions to suit your taste.
- Internal Solutions
Spreadsheets are the easiest way to monitor your financial transactions as it doesn’t need too much tech-savviness to have it worked on. Manual monitoring through spreadsheets applies to small businesses, however, if you are running a big one, this method will be more difficult to apply.
Cloud-based bookkeeping software is more feature-rich and automates many of the accounting details. Also, many software solutions have a free price range. This allows you to do basic work and get a feel for the program. The free service may include everything you need for your business.
- Outsourcing Solutions
If the bookkeeping isn’t your forte, hire an accountant. Software solutions provide accountants with a subscription model that consists of bundling programs and professionals into one bundle. The accountant will coordinate all the books for you, categorize your transactions and provide real-time financial reporting.
One more option under this one is hiring a virtual accounting firm that will probably need payment of a higher fee. But ensured that you will have the benefit from working with a team of professionals rather than alone.
Best Course of Action When It Comes to E-commerce Bookkeeping
Bookkeeping may be difficult to deal with however, maximum of it’s quite intuitive. Just monitoring the fine details of your cash flow is a great start. However, some satisfactory practices will let you advantage even extra clarity into your business’s finances.
- Think of the Fees
Your e-commerce business doesn’t have to pay for stores or utilities, but there are still some charges that can put pressure on your overheads. Remember to consider all relevant costs when calculating the ROI. This includes merchant fees, shipping costs, third-party tools, return fees, and chargeback fees.
- Monitor Inventory
Tracking your inventory and taking care of your books are inextricably linked. Stocks are money, so you need to monitor the comings and goings of your business.
When selling on multiple e-commerce platforms, you need a single source of truth to manage your inventory. This is important for keeping your sales, revenue, and financial assets up to date.
Tracking inventory is also useful for inventory forecasting. Your book can provide the detailed historical data you need to make accurate and reliable predictions.
- Expand Your Choices Through Alternative Payment Methods
Most, if not all, of your customers, will probably pay by credit card. However, especially if you are doing business offline, you should consider allowing alternative payment methods such as cash, checks, PayPal, and gift cards. Additional payment methods can complicate accounting but they will positively affect the experience your customers will have.
Remember that upon accepting cash or checks, books won’t recognize it as income until it is cashed. Moreover, you will be needing to manually update it with needed information and categorization.
Offering a gift card, your sales will not be recognized as unearned revenue until the card is used because you have not exchanged the item yet.
- Gather and Pay Sales Taxes
Some e-commerce platforms calculate and collect the required sales tax from the customer. However, collecting is only the first step. You need to make sure to pay this money to the relevant tax authorities.
Tax cash isn’t always similar to revenue. It’s s a legal responsibility which you owe the government. Your books want to reveal the distinction among revenue, income tax, fees, and the very last coins deposit on your financial institution account.
- Find Out Your Break-even Point
The break-even point is the number of sales required to cover all costs and make a profit. Use your book to find this number. With that number determined, you will know whether to reduce spending or raise your price.
This is a very good example on how important it is to have a daily bookkeeping that will support and notify you of cash flow forecasts.
- Get Loan Details Correctly
Capturing and tracking small business loans and payments in your book is not easy. When you receive a loan payment, you must enter cash as a debit (asset) and liability as a liability (credit). When paying a loan, you must debit the loan’s debt and credit it to your cash account.
Proper bookkeeping is essential if you want to grow your e-commerce business and stay financially sound. Without them, major financial setbacks such as tax audits and loss of profits can occur.
Fortunately, there are many resources to help you understand your accounting needs, such as working with an accountant or partnering up with a shipping company that helps with inventory tracking and management. Make sure poor e-commerce accounting doesn’t hinder your business’s growth.