Starting an e-commerce business doesn’t require much overhead or startup costs, but that doesn’t mean that it’s easy. It’s still a business, after all — not just a revenue generator that you can set and forget, but a real company that you have to run. One of the most important parts of operating any company, including an e-commerce business, is accounting. Your expenses, profits, inventory, and more all rely on accounting.
- The accounting basics for e-commerce cover some terms and concepts such as cash flow, inventory, cost of goods sold (COGS), operating expenses, balance sheets, and paying taxes.
- Accounting software is marketed specifically for e-commerce businesses and designed to meet the specific needs that these operations require, finding the right tools and software help in keeping track of everything
- Understanding the accounting of your business helps on how you react and respond to the market, optimize your operation, and make sure that you’re running as effectively and efficiently as possible.
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Accounting Basics for E-Commerce
When managing the accounting for your e-commerce business, there are some terms and concepts that you’ll run into regularly and some principles that you’ll need to understand to manage your operations.
Cash Flow Is the Pulse of Your Business
Cash flow is essentially the pulse of your business. The money coming in and going out tells you how much you’re earning from your sales and how much it costs you to operate. It also helps you to understand your business better, from the times of year where you complete more sales to the periods with more expenses. That information can feel ephemeral, but it all becomes clear when you manage your cash flow.
Inventory Keeps Your Business Flowing
Your inventory is a running list of the goods that you have on hand. It’s what you have in stock. Inventory helps you to know what you’re selling, what is running low, and what you need more of. In time, inventory can expand or shrink depending on what you’re selling and how well it’s performing. Tracking inventory helps to make sure you’re never without the items that you need.
Cost of Goods Sold Helps You Understand Your True Costs
Selling goods and services isn’t as simple as saying that your profit is the difference between the cost of procuring the item and the amount paid by the customer. Cost of goods sold (COGS) helps you to identify the true cost of your business. It accounts not only for the cost of the item itself, but also for how much it costs to assemble, pack, and ship it, including the cost of labor. COGS gives you a better idea of how much you’re making from your business.
Operating Expenses Help You Understand Your Business
Operating expenses help you to take account of everything that it takes to run your business. The cost of hosting a website, paying for advertising, storage space, labor, inventory, and more goes into this. Having an understanding of your operating expenses helps you to understand if your business is or will be profitable.
Balance Sheets Help You Understand Your Businesses Value
The balance sheet is the ultimate ledger for your business. It tells your assets, liabilities, and equity. This tells you where the value of your business comes from, how much you currently owe, and the difference between the two.
Paying Taxes Keeps You Responsible
An important part of running your business is understanding and managing your taxes. Typically, taxes for an individual are simple as you need to file your income tax every year. But for a business, taxes can be more complicated. You need to keep track of your business income, expenses, employees, and other tax categories.
Tools or Software Needed?
When managing your e-commerce business accounting, the best thing that you can do is find the tools and software that will help you keep track of everything. The prospect of maintaining a paper trail all on your own, with boxes of old receipts and inventory sheets stacking up that you’ll have to sift through every time you need to find any piece of information, is overwhelming.
Having accounting software not only digitizes many of these documents but also helps automate some of the most monotonous and complicated tasks related with maintaining your bookkeeping.
There are several different tools that you can use to keep track of your accounting. When deciding what you’re looking for, you’ll need to take into account the other software that you use for your business. Shopify, for instance, is a popular tool as an e-commerce site and can be integrated into many accounting programs like QuickBooks and Xero.
Some accounting software is marketed specifically for e-commerce businesses and designed to meet the specific needs that these operations require. FreshBooks, for instance, is an ideal tool for managing the behind-the-scenes tasks for running your business.
Finding the right tools for your business will be in part a process of trial and error and will become easier once you have a better idea of how your business will operate. Luckily, many accounting tools offer free trials, so you can try out your options and see what is best for you.
What Makes E-Commerce Accounting Different From Normal Accounting?
While operating your e-commerce business will have many similarities to other businesses when it comes to accounting, there are some differences. This is important to keep in mind because some accounting software and some bookkeepers aren’t equipped for managing these specifics.
Here are a couple of the quirks of e-commerce accounting that you’ll want to be aware of:
- Transactional data: For most businesses, transactional data is found in your bank accounts. For e-commerce accounting, you’ll find this information through your selling channels, available through the back end of your selling platform.
- Inventory: For e-commerce companies, inventory is more important than usual. That means tracking it’s not optional, it’s essential. You’ll need to keep tabs on this at all times.
- Sales tax: Perhaps the most complicated thing to manage as an e-commerce business is sales tax, as it varies depending on where your business is located and where you’re selling your goods. You may need specific tax software or an expert in this area to help.
Why Proper Accounting Is Important
Accounting is how you keep track of everything related to your business. From understanding where you’re making money to what the cost of your operation is, managing your inventory to handling your taxes, accounting is the key to all of it. Finding the right tools to help you handle this makes it easier, but you’ll want to understand the accounting of your business so that you can react and respond to the market, optimize your operation, and make sure that you’re running as effectively and efficiently as possible.
When To Do It Yourself and When To Hire Professionals?
Thanks to accounting software and tools that are readily available, managing the accounting side of your e-commerce business is easier than ever. Most of the basics, you can handle on your own with the right tools and just a little bit of work to understand the ins and outs of this essential part of your business operations. Managing your inventory, setting up standard tax information including payroll taxes, and other basics should be something that you can do on your own with basic accounting tools.
However, as your business grows, it’ll become more complicated and harder to manage on your own. Accounting can be a full-time job. When that happens, you may want to consider hiring a professional. If you’re unsure of what you’re doing, running into questions about how to handle your books, or help understanding information about your business, you may want to consult with a professional accountant. If needed, you can hire an accountant to help you manage your books. This isn’t bad news: it means that your business is growing and successful.
Accounting is essential to any business and is especially important for e-commerce businesses. With the right tools and a basic understanding of accounting basics, you can manage your business, understand your books, and continue to grow.