Being a part of an online business can be equally thrilling and stressful. Like everything else there are elements that we enjoy and others that we don’t like. There is one thing that is disliked by most business owners, whether it’s e-commerce or not, which is bookskeeping as well as accounting. Accounting and bookkeeping are essential, no matter how difficult.
It is true that bookkeeping could be classified under one of the “dull side” of business. Unfortunately, it is a necessity and is especially important if you want to continue seeing growth and success. However the majority of entrepreneurs in the e-commerce industry are afraid of bookkeeping because they aren’t aware of where to start. We decided that we should write a brief blog about bookkeeping for e-commerce to aid you in staying focused and organized. Perhaps you be able to begin to appreciate numbers.
A lot of business owners prefer to put their invoices and receipts in an envelope, then give take them to their accountants right prior to the deadline for tax filing. This is an alternative. However, it’s not recommended it, and that’s from an accountant. Even if you’ve built good relations to your accounting professional, you must remain aware of the basics of bookkeeping. What are the reasons:
- The success of your business could be at risk.
- How can you approach investors (when/if it is time) in the event that you aren’t sure what to present your idea?
- Incorrect books or mistakes could cause harm
Apart from the obvious benefits, understanding basic bookkeeping principles is important. We’ll talk more about this later. Bookkeeping is not easy, but it isn’t as difficult as you might think. You’ll hopefully be able organize, focus and manage your books by the end of this article. This will allow you to avoid costly mistakes.
Incorrect bookkeeping can lead to costly consequences. Incorrect tax reports can be issued if your books are not up-to-date or properly organised. HMRC won’t accept inaccurate tax filings even if they are genuine mistakes. A genuine error could result in you being eligible for a tax rebate or an additional tax payment.
We’ve already said that even if you hire an accountant to handle your books, knowing the basics will help your ecommerce business grow. Yes, it can be tedious but necessary. You’ve done the hard work of opening an e-commerce store. It doesn’t matter if your business is a Shopify store or an eBay trader/dropshipper or Amazon seller. Take control (or at least a portion) of your finances.
In this article we will be discussing the most commonly misunderstood terms in bookkeeping and accounting. We’ll also share our top three e-commerce bookkeeping tips.
We as accountants still get why few ecommerce owners love bookkeeping. It can be stressful and, depending on the platform, you will need to pay fees and other costs. However, it is a common misconception that these platforms will handle everything for you. Yes, they will give you the breakdown but you still need track.
Despite this, there are very few business owners who enjoy bookkeeping. It can be stressful at first. It becomes more enjoyable as you learn the terminology and processes involved in e-commerce bookkeeping. You will understand the process, but you will also be able to see the growth of your online business in numbers.
Top Five Commonly Misunderstood Accountancy and Bookkeeping on E-commerce Terms
You may have heard the term “accounts payable” depending on how long your e-commerce company has been in operation. But do you really know what it means? You may think it means “available money” – this is a common misconception that can often confuse e-commerce entrepreneurs.
Account receivable is the money you owe, whether it’s from a service or product you sent. I think of the phrase “Don’t catch your chickens before they hatch”.
This is how to approach accounts receivable. This is the most important aspect for many new ecommerce entrepreneurs. It’s understandable that it’s thrilling to see your sales rise, but what if you get a return request or a refund?
Unfortunately, your expectations for the money and chickens you are waiting to hatch might not come true. Let accounts receivable age is the best way to look at them. This is what accountants call “ageing of accounts.” In essence, it means that you wait for the account’s age or to come into fruition.
This will help you reduce the chances of overspending and underestimating your profit. Another way to view accounts receivable is to try to predict what you will actually get. Start small and pick a realistic amount. Don’t spend more than you can afford until the second or third month.
After six months, you will be able estimate or work an average account receivable. This is where Vancouver Bookkeepers comes in for your ecommerce business. You can track, monitor, and record your outgoing sales, as well as the return ratio. You will be able to see exactly what accounts are receivable.
This term is actually the opposite of accountant receivable. It’s the amount your business has to pay. You might pay for software, manufacturing or suppliers. Bookkeeping is a great tool for your ecommerce business.
This process will be much simpler if you keep track on your assets, outgoing and service costs in your balance sheet (books). Another term for accounts payable is liabilities. It is important to know what payments you are responsible for.
Accounting is all about balance. Without sounding cliché, it is important that every account payable in your accounting system has an account receivable. Every transaction in your ecommerce business should have an opposite.
Laymen’s terms: Should have PS1 accounts payable and PS1 account receivable.
The example shows us that you shouldn’t count your chickens before they hatch. You could lose money if you spend too much, miscalculate or don’t fully understand the transactions.
Cash is the king of all things, but patience is the king when it comes to accounts receivables and payable.
This term assumes that you don’t know anything about bank reconciliation or how it affects your books. If you like this process, you may find an accountant in yourself if your bank reconciliation is implemented into your bookkeeping.
Bank reconciliation is an important part of accurate bookkeeping. But what exactly is bank reconciliation?
Bank reconciliation: This is where you manually cross-reference transactions with bank statements.
You can do this using software such as Quickbooks or Xero. You can also use your trusted highlighter to match each transaction. Bank reconciliation has many benefits. It is great for identifying duplicate payments and issues early.
While the idea of having more paperwork might not be your cup of tea, it will ensure you have accurate books. This is especially important for startups that are just starting out, as it will help you to keep track of your finances, especially if you plan on investing.
How often should I reconcile my bank accounts?
The question is open-ended, so it’s not a closed-ended answer. Your business and you will find the best answer. This is because the amount of your ecommerce store will determine the extent of the process. We’ll give you a rough recommendation for small ecommerce businesses. Every month.
What should I look for?
You should now be able to understand bank reconciliation. Next, you need to determine what you should be checking. It all depends on how big your e-commerce business is and the frequency of transactions. The rule of thumb is:
- Recipients and invoices are subject to payment
- Receipts and invoices are not to be outgoing
- Bank fees – transaction fees, interest rates and monthly payments
- Earned interest
The bottom two factors may vary depending on the bank. Every business account is different. If you are a startup, have your looked at a business account. Here’s a list of articles that can help you select the right business account.
This process will depend on what type of ecommerce business you have. There are many options available, including:
- Only trade on your website
- eBay sellers/drop shippers
- Amazon FBA sellers or Amazon Traders
- Shopify owners
Depending on the platform you choose, you may be charged for each sale. Merchant services is the name for this charge. This is the most complicated factor, since every merchant will have different payment terms.
You’re ready to take control and be able to bookkeeping on ecommerce. We do recommend that you check the links above to confirm your merchant services.
Unfortunately, many platforms hide some of their merchant charges. You need to keep an eye on accounts receivable, payable, and bank reconciliation.
However, it is sometimes best to get advice if you are unsure about merchant payments when e-commerce. There are tons of resources available, such as forums, other sellers and accountants.
It is crucial to have payroll done correctly. It is a common misconception that you don’t have to worry about payroll until your employees are hired. If you are taking a salary, then you will need payroll.
It doesn’t matter if you have employees or not, your responsibility is to accurately record your payroll. You can hire employees depending on how big your e-commerce venture is. Once you have hired employees, it’s important to make sure you pay them on time and accurately.
There are online payroll software options, and some accountants like Pearl who offer real-time payroll options to all types of businesses. Payroll is important because it is regulated and supervised by HMRC.
You need to ensure that your payroll system is HMRC compliant.
- Frequency of payments
- What happens if there is a bank holiday?
- What happens if your weekly/monthly pay falls on a weekend or holiday?
Some of the factors mentioned above may not be applicable until you start hiring employees. Understanding the factors and processes involved will be a benefit in the long-term.
Top Three Bookkeeping on E-commerce Tips
You will feel less stressed by the complicated accounting and bookkeeping terms. In this section, we will share our top three bookkeeping tips to help you run an e-commerce company.
If you are not a maths genius, our first tip is to search for accounting software for your Amazon or eBay service. We’ve compiled a list of the top online accounting software for Shopify owners.
Online accounting software is worth the investment if you want to simplify your bookkeeping and ensure accuracy. Online software is more efficient than manual bookkeeping, although it is a skill that you can learn over time.
There is a tailor-made online accounting software that targets ecommerce owners. This section will focus on the best accounting software for Amazon sellers/FBA traders and eBay sellers/drop shippers.
Amazon Sellers (including Amazon FBA traders
Xero is the best online accounting software if you prefer to handle this task yourself. Even if you don’t need too many bookkeeping tasks, most ecommerce accountants can work with Xero.
The key benefits of Xero are:
- Xero makes it easy to reconcile Amazon transactions
- Integrate your cash flow into the Amazon Seller Centre
- Xero automatically syncs your Amazon inventory
Xero provides many other benefits. It can also help you see a complete picture about your Amazon ecommerce store.
Drop shippers and eBay sellers
QuickBooks is the best online accounting software if your eBay seller or dropshipper is you. Let’s look at the reasons why.
The best thing about QuickBooks?
- It’s simple to use. Once you’ve started, it’s very easy to navigate. If you are unsure, one of Pearl’s e-commerce accountants can help.
- Great Support: QuickBooks is known for their excellent support and guidance. They make it easy to answer your questions. They will match you with an e-commerce accountant, bookkeeper, and share helpful videos.
- Integration: You can link your drop shipper or eBay seller account to the QuickBooks app on your desktop or mobile device. However, it is possible for the QuickBooks Pros to integrate in certain cases.
QuickBooks offers a free trial if you aren’t sure if QuickBooks is right for you or you don’t wish to pay for a plan immediately.
Online accountancy software is a matter of personal preference and business needs. We recommend that you try an online accounting software instead of relying on your spreadsheet and Excel spreadsheet. This is especially true if you are new to e-commerce bookkeeping.
Monitor your cash flow
Money is the king when it comes to any business. It can be a problem if you don’t manage your cash. If you use our first tip, it can be a great way to track your cash flow daily, monthly, and quarterly.
Balanced or healthy cash flow can help you grow your business even in the early days. Negative cash flow is not something you want. You can prevent this from happening by looking after your profit.
These are two easy ways to track your cash flow and maintain it.
- If you don’t have the funds to pay an upcoming payment, you should not make any early payments. It’s a good idea to pay your invoices early. However, this can have a negative impact on your cash flow. Pay on time. However, if an invoice is due within 30 days, make payment according to the agreed amount.
- If you have ever played Monopoly you know how unexpected payments can drain your cash flow. This is also true for your real-life ecommerce business. It is best to be prepared for anything. What if your manufacturer doesn’t ship the product in time? Their refund policy is only valid for 30 days. You have no other options. A reserve will help you avoid a deficit cash flow.
Your cash flow can be viewed as a flower or plant. It can only grow if it is fed and watered. Don’t let it go to wilt by not monitoring its progress.
Identify your breakeven point
As a follow-up to tip number 2, if you want cash flow to be tracked, you must know your breakeven point. You can’t manage your books if you don’t know how much profit your ecommerce store makes.
Your break-even point refers to the difference between the price of the product and the cost of selling it.
*The cost to profit includes all manufacturing costs, employees and packaging. This is basically all the costs involved in making your product/service.
The Bottom Line
This article has covered many topics related to bookkeeping for e-commerce businesses. If you are still unsure about any aspect of the bookkeeping process, it’s normal. Our dedicated ecommerce team at Pearl Accountants is here to help you with any aspect of ecommerce bookkeeping.
We will help you water and nurture your e-commerce business to ensure it continues to grow.