ecommerce bookkeeping best practices
When it comes to managing an ecommerce company, it’s not that different from raising children. The bigger your family grows, the more stressful and complicated it can become.
Whether you’re starting from scratch or are already established, minding your Ps and Qs with loved ones is just as essential as crossing your t’s and dotting your i’s in business. Both are sure to save you headaches and hardships in the long run.
Often seen as a necessary evil, learning how to track expenses and income is crucial. This is known as bookkeeping basics.
With ecommerce business ownership, running out of cash was ranked as the No. 2 reason out of 20 that startups fail, according to a November 2019 article published on cbsinsights.com.
Are you ready to commit to bookkeeping for better or worse? This blog will teach you some basic knowledge to manage your finances with more confidence.
WHAT IS BOOKKEEPING?
Bookkeeping is a record that can be used to track your company’s financial transactions. This can be done in a physical ledger or via digital accounting software.
Like balancing a checkbook, bookkeeping needs constant tending to for correct accounting.
WHY IT’S IMPORTANT
Often referred to as a necessary evil, without accurate bookkeeping, you lack valuable insight into company expenditures and profit details such as your strengths, weaknesses, opportunities and threats (SWOT).
Identifying tax deductions
First and foremost, up-to-date bookkeeping will likely result in a stress-free tax season. Self-employed individuals and small businesses are generally required to file an annual return and pay estimated quarterly taxes.
Keeping detailed financial records creates an estimate for taxes throughout the year, so you’re prepared for tax season. It also helps you find and claim all available small business tax deductions. Simply put, having detailed records provides greater financial clarity.
Getting a business loan
Digital bookkeeping provides quicker access to transactions including financial information like balance sheets, or profit and loss/cash flow statements. You’ll also need them to secure an SBA loan or get investor buy-in.
Detect fraud and banking errors
Bookkeeping helps detect when fraud has occurred and therefore protects your business. Record upkeep can help regarding theft from a vendor or employee and can help banks reconcile any discrepancies.
HOW DO I START?
Separate business and personal finances.
Open a business account as soon as possible and separate business finances from personal ones. Mixing these two complicates the ability to track income and expenses as well as monitor transactions.
Choose a bookkeeping system
Single-entry bookkeeping is a straightforward way to record each transaction, doing so either as income or an expense, then add or subtract it from your cash balance. QuickBooks is a popular example. Whatever system you choose, just be consistent.
Create a chart of accounts (general ledger)
A chart of accounts summarizes all financial activities in one place, making it easy to find transactions without digging through bank and credit card statements. There are even sub-categories such as assets, liabilities, equity, revenue and expenses.
Record (and store) everything
Record every transaction, even if it’s seemingly insignificant. Also be sure to categorize expenses so you can see cash flow trends.
In addition, keep all related paperwork in a safe place and hold onto it for at least three years (the IRS’s typical audit duration). These items include receipts, invoices, statements, orders, tax returns, forms, and applications.
Reconcile on the regular
Like cleaning, make bookkeeping a habit at the end of each business day, week, month, quarter, and year. This routine helps you catch any errors ahead of time.
Produce financial reports (income statement, balance sheet, cash flow statement) each month and quarter to monitor business progress and trends.
TOOLS & METHODS FOR BOOKKEEPING
If your business is still considered small and manageable, opt for recording transactions with good ol’ fashioned spreadsheets. Cloud-based accounting software automates many bookkeeping aspects and some offer free pricing tiers.
If you’d rather focus your efforts elsewhere, hire a bookkeeper. Yet another alternative to a traditional accountant could be to partner with a fulfillment company, which helps with management and tracking inventory.
ecommerce BOOKKEEPING BEST PRACTICES
When calculating your ROI, make sure to factor in all related costs; merchant and shipping fees, third-party tools, chargeback and return fees—that way they don’t eat into your overhead.
This goes hand-in-hand with maintaining your books. Stock equates to money, so you should monitor how it moves in and out of your business.
Especially if you’re selling on multiple ecommerce platforms, make sure you’ve got a central place to maintain inventory levels. Doing this creates historical data that helps create accurate, reliable forecasts.
Alternative payment methods
While the majority of consumers pay with credit cards, it’s good to consider alternative payment methods such as PayPal, Venmo and gift cards. While doing this leads to more in depth bookkeeping, it improves overall customer experience.
Collect and pay sales tax
The sales tax collected from customers via ecommerce platforms must be paid to the proper tax authority. Tax money is not revenue rather, it’s a liability owed to the government. Your books should reflect the difference between revenue, sales tax, fees, and the final cash deposit in the bank.
Accurate bookkeeping is essential in growing your ecommerce business. So put in the work up front to avoid significant financial setbacks. For more information on working with an e-fulfillment company visit: www.fulex.com.