Operating an online store entails much more than luring the clients and fulfilling their orders. Each transaction generates financial data that includes revenues, payment processing expenses, inventory, shipping, refunding, advertising costs, and possibly sales taxes. As an e-commerce business develops through various marketplaces, payment processors, and states, organizing these financial activities becomes even more critical. Otherwise, an entrepreneur may not be able to determine whether his enterprise is truly profitable, how much cash it possesses, and what are the real costs of its inventory.
In this blog, we will focus on what e-commerce accounting is and discuss the basics that beginners should know when running an online business. From distinguishing personal and business finances to managing inventory, accounts payable, sales taxes, utilizing accounting software and financial statements, all these techniques could help an online store establish a better financial base. In addition, we will talk about how professional outsourced accounting services could facilitate the growth of e-commerce businesses.
What Is E-commerce Accounting and Why Does It Matter?
E-commerce accounting is the practice of accounting for the transactions that are created from doing business online. It is different from cash register accounting in that there are multiple payment methods being used at once while also managing inventory and other costs at the same time.
Track Sales and E-commerce Revenue Accurately
In this regard, an online business may operate via its website and other marketplaces. There may be varying transaction costs, payment structures, refund methods, and reporting methods for both. Keeping track of the total sales without considering this may prove problematic in determining the real revenue and profitability of each sales channel.
It is important to reconcile the sales and payments with the accounting records on a regular basis. The payment processing costs, commission from the marketplace, refunds, discounts, and chargebacks should all be appropriately reflected in the records for the business to be able to report relevant revenue and expenses.
Keep Business and Personal Finances Separate
It is among the easiest accounting principles that the e-commerce proprietor can employ when he creates a separate business account and utilizes proper business methods of payment for making it easy to recognize business transactions.
Moreover, the keeping of separate accounts makes accounting easier. When there is the mixing of personal expenditures and business expenditures, then it would be difficult to recognize business transactions.
Monitor the Costs Behind Every Sale
Revenue does not necessarily mean profit. Apart from that, it is important for businesses to measure the cost of the product sold, the cost of shipping and packaging, payment processing cost, marketing cost, software subscriptions, returns, and many other costs.
By organizing all the costs, it becomes easy for business owners to measure their gross profit and profitability. It may also assist them in measuring which product generates profit from sales but not revenue.
How Inventory, Bookkeeping, and Accounts Payable Affect E-commerce Finances
Inventory and supplier payments may get complicated as an online business expands. Bookkeeping and inventory management practices will help organizations keep better financial records and cut down unnecessary paperwork.
Use Inventory Accounting to Track Stock and COGS
Inventory accounting allows organizations to see the extent of their purchases of goods, how much stock is available, and the amount of cost of inventory that is related to their sales. It plays a critical role in computing the cost of goods sold and gross profit.
Inaccurate inventory records lead to numerous issues. There may be an assumption of having adequate stock in terms of the quantity and making unnecessary purchases. Moreover, an organization will be unable to compute COGS correctly. The use of inventory management and accounting systems in one system may solve these issues.
Virtual Bookkeeping Provides Ongoing Financial Organization
Virtual bookkeeping ensures that the various bookkeeping functions can be done from a remote location by the use of cloud computing and digital financial statements. It is also quite advantageous for e-commerce since transactions might take place at all times without following normal business hours.
Depending on the engagement, the virtual bookkeeping team can provide help with transactions processing, banking, and credit card reconciliation, financial reports, accounts payable, among other repetitive activities. Business owners get more time to take care of merchandising, marketing, order fulfillment, and customer relations.
Manage Accounts Payable and Supplier Obligations
E-commerce companies usually deal with manufacturers, wholesalers, packing agents, logistics agents, marketing firms, and software providers. Each supplier can have unique invoices, payment schedules, and deadlines.
An organized accounts payable process allows organizations to keep track of invoices, monitor pending transactions, and manage payments based on their predetermined payment schedule. Accounts payable outsourcing can also help with handling increased transaction volumes, provided that the organization has effective authorization and payment processes in place.
How E-commerce Businesses Can Use Accounting Systems for Better Financial Management
An effective accounting system goes beyond mere storage of data to enable linkages between sales, expenses, inventory, payments, and financial reporting to ensure that the business owner knows exactly what is going on.
Choose Accounting Software That Integrates With Your Sales Channels
It is important to think about whether the e-commerce business has accounting software that can integrate with the company's website, marketplaces, payment gateways, inventory, payroll software, and all other programs that the company uses.
Some popular examples of accounting software are QuickBooks and Xero. However, the type of accounting software that suits an e-commerce business is contingent on its size, the sales channels used, transaction volumes, inventory management needs, and reports needed by the business.
Understand the Basics of E-commerce Sales Tax
The obligation to pay sales taxes may become more complex if the online business operates across several states. The obligations may depend on various aspects including location of the customer, type of sale, involvement of the marketplace, and if the seller has taken care of its obligation.
It is not advisable for the online business owner to think that all their obligations of sales tax will be taken care of by the ecommerce platform itself. It is necessary to keep accurate records of the location of the transactions and consult tax specialists about state obligations.
Review Financial Statements and Cash Flow Regularly
Financial statements convert the transactions into information that will help the business people make decisions. There are three financial statements that stand out to help understand e-commerce business.
|
Financial Statement |
What It Shows |
|
Income Statement |
Revenue, expenses, and profit or loss over a period |
|
Balance Sheet |
Assets, liabilities, and equity at a specific point in time |
|
Cash Flow Statement |
Cash inflows and outflows during a period |
The income statement may be useful for determining profitability whereas the balance sheet is used to determine the position of inventory, cash, debts, and other finances. It is also important to have the cash flow statement for e-commerce companies because money is stuck in the inventory until sales are made.
Monitor Cash Flow Alongside Profit
Even a successful e-commerce business can face challenges related to cash flow. For instance, the business owner may need to pay off their suppliers and marketing costs before receiving payment from the marketplace or payment processor. Excessive inventory can be another reason why cash becomes locked.
Cash flow analysis helps a company predict their financial needs and know how much money they have at hand to continue running the operations. The data about cash flow enables owners to plan for purchases and other large expenses.
E-commerce accounting is the financial framework that an online company requires in order to know its sales, expenses, inventories, cash flow, and profits. Bookkeeping, inventory management, accounts payable management, sales tax information, and financial statements can assist in enabling the owners to go beyond just monitoring their sales, and actually learn about their performance.
The process of manual transaction management in a growing e-commerce business can become increasingly challenging. E-commerce accounting services will give you the process structure, reconciliation, reporting, and financial organization, thus leaving more room for product development, customer development, and sales.
The Fino Partners provides accounting and bookkeeping support for e-commerce businesses, including virtual bookkeeping, financial reporting, inventory-related accounting, and accounts payable support. Contact our team to discuss a financial workflow suited to your online business.
