Running an e-commerce business can give a false impression that growing revenue is an easy task. The e-commerce store could receive thousands of orders but have difficulty ensuring that they have sufficient cash for their inventory, marketing efforts, payroll, delivery costs, taxes, and various other expenses.
In this case, the challenge is likely to have more to do with cash flow rather than sales. Payments are coming from several marketplaces and payment gateways, while payments for inventory and expenses are required much sooner. If one doesn’t keep track of their money properly, a seemingly profitable business will still face cash shortage problems.
Outsourced accounting services for ecommerce businesses can assist ecommerce stores to keep their accounts accurate and track payments and expenses.
Why Cash Flow Management Matters for E-Commerce Businesses
Cash flows for e-commerce companies differ from that of many traditional businesses.
Revenue Does Not Equal Cash
For an e-commerce company, recording a sale does not necessarily mean the same amount of cash is received into the business bank account. There could be delays caused by payment processors, marketplaces, and other factors.
The result is a gap between the recorded revenue and the cash actually at hand.
Inventory Costs Money Before Sales
In order to create sales, an online seller needs to buy inventory first.
If there is too much money invested into inventory, then the company will be unable to pay for marketing, salaries, taxes, and other costs despite increasing sales.
Common Cash Flow Mistakes Online Sellers Should Avoid
Being aware of typical mistakes will enable e-commerce entrepreneurs to develop better finance management practices.
Mistake: Relying Solely on Sales Figures
The number of sales can make one feel secure financially.
However, an online store has to track gross margin percentage, operating expenses, inventory investment, payment gateway charges, refunds, and cash balance.
Mistake: Neglecting Payment Processor Account Reconciliation
Money received from customers is transferred through different methods, like a marketplace, payment gateway, and merchant account.
If these accounts are not reconciled, it is easy to overlook differences between the amounts of sales, fees, refunds, and deposits.
Mistake: Buying Too Much Inventory
Large purchases of goods might seem to be reducing per-item prices; however, extra stock requires considerable working capital.
Considerations for inventory purchases include sales velocity, forecasts of demand, cost of storage, product margin, and money availability.
How Accurate Accounting Improves E-Commerce Cash Flow
Consistent accounting provides online retailers with more accurate information for managing their finances.
Reconcile Sales Through Each Channel
A company needs to reconcile the sales made through each sales channel with the account and bank deposits.
This process will help track all the deposits that are missing, processing fees, refund payments, chargebacks, and any other adjustments.
Expenses According to Categories
There are many expense categories for e-commerce companies. The categories include advertising, shipment costs, packaging, inventory management, software costs, fees charged by the marketplace and payments processor, and others.
Managing Inventory Without Creating Cash Problems
The management of the inventory represents one of the key factors affecting cash flow among online sellers.
Track Inventory Turnover
This metric will allow the company to determine how fast its products move and turn over.
Slow inventory turnover suggests that cash is locked up in inventory which does not generate enough returns.
Link Purchasing Decisions With Cash Flow
Owners need to evaluate all their expenses and inflow of money before making the inventory purchase.
The well-organized accounting system can assist in collecting necessary data.
How Outsourced Accounting Services Support E-Commerce Businesses
Many online sellers do not have the resources to build a large internal finance department. Finance and accounting outsourcing services can provide access to accounting professionals without requiring a large permanent team.
Maintain Accurate Books
The outsourcing professional can record transactions, reconciling accounts, accounts payable, accounts receivable, and month-end financial reporting.
Updating the bookkeeping process helps provide the business owner with a better picture of their financial status.
Reconcile Various Payment Systems
The accounting staff for an online store will be able to reconcile various transactions across marketplaces, payment gateways, merchant accounts, and bank accounts.
Benefits of Outsourcing Accounting for E-Commerce Businesses
There are several benefits of outsourcing accounting services for online sellers.
Better Financial Visibility
Regular financial reporting will enable the owner to determine the income, expenses, margins, inventory costs, and cash flow.
In addition to just sales reports, owners have full access to financial data to measure the performance of their business.
Flexible Accounting Assistance
Order volumes and finance operations of an e-commerce company may change rapidly.
With outsourcing, assistance in accounting may grow according to the transaction volume without the need to immediately hire more employees within the company.
Extra Time to Grow the Business
Accounting management can take some time off from sourcing products, marketing, customer relations, and other business development work.
With outsourcing, the owner has more time to concentrate on growth-related activities.
How the Best Outsourced Accounting Services Can Help
Choosing the best outsourced accounting services means looking for more than basic bookkeeping.
E-Commerce Experience Matters
An accounting service provider must be aware of the financial complications related to e-commerce business including marketplace settlements, processing fees, refunds, inventory, shipping expenses, and marketing costs.
Industry experience could make it easier for the company to set up proper accounting procedures.
Financial reporting needs to facilitate decision-making.
Questions that can be answered using financial data:
- What product lines provide high margins?
- How much liquidity is tied in the inventory?
- Are marketing expenses rising at a greater rate compared to sales?
- What is the real cash position?
- What are the expenses that affect profitability?
Proper accounting assistance will make it easier to get the above answers.
Cash Flow Forecasting for Online Businesses
Cash flow forecast is an important tool for e-commerce businesses that can help them plan their financial needs in advance.
Forecast Future Inflows of Cash
Predicted inflows may include marketplace settlements, customer payments, revenue from the subscription, and any other future cash inflows that can give an idea about the future availability of cash.
Forecast Future Outflows of Cash
Other cash flows that need to be considered by the company could include inventory purchase, payment of salaries, marketing, payments to suppliers, taxes, shipping charges, software subscriptions, and debt obligations.
Avoid Mixing Business and Personal Finances
This will complicate things further in terms of financial accounting for owners of e-commerce businesses.
Use Business Accounts for Business Only
Money earned and spent by the business needs to come through its own account.
It becomes easier to reconcile the business's finances in such a case.
Maintain Personal and Business Finances Separately
Personal transactions should not become entangled with business expenses.
Classifying them properly will help ensure that the financial records are accurate.
Be Careful With Your Online Advertising
Online advertising can eat up your cash fast in the world of online selling.
Track Advertising Spend Against Revenue Earned
Businesses need to keep track of advertising spending along with sales.
High sales figures do not automatically make an advertisement campaign profitable when costs of acquiring customers eat away at those sales.
Cash Flow Matters
It is possible that advertising spending will be upfront while marketplaces will deposit revenue later.
Prepare for Refunds, Returns, and Chargebacks
Refunds and returns can have a substantial impact on e-commerce cash flows.
Proper Recording of Refunds
It is important to record refunds properly in order not to report revenue that does not represent reality.
Be Aware of Chargebacks
Chargebacks may bring additional expenses and losses to the cash balance.
Reconciliation will help owners spot such transactions and see how they influence financial performance.
Using outsourced accounting services from The Fino Partners, companies in the field of e-commerce will manage to enhance bookkeeping, reconcile different sales channels, and monitor their cash position. Additionally, finance and accounting outsourcing services will bring you flexible accounting skills in case of growing transaction volume.
However, there is more to the advantages of accounting service outsourcing than just saving time. Accurate accounting enables an entrepreneur to make informed decisions about their inventory, check for profit and losses, predict their cash flow and detect any financial problems early. The right choice of outsourced accounting services for developing e-commerce businesses can ensure that accounting does not become a hurdle to their development.
