Regardless of where you are in your eCommerce business, bookkeeping and accounting are two of the most critical determinants for your long-term success. Without a solid eCommerce bookkeeping and accounting system in place, things can quickly go awry.
Unclear tax laws and exciting growth possibilities afforded by the internet are just a few reasons why bookkeeping and accounting are vital for eCommerce businesses. This blog discusses how to ensure your eCommerce business’s success with effective bookkeeping and accounting procedures. Implementing the systems discussed in this article lets you drastically reduce the stress you experience as a growing business and ensures you stay compliant with all tax laws.
At Fully Accountable, we believe eCommerce businesses should have access to bookkeeping and accounting services. Having real-time reports, thorough data analysis, and comprehensive financial forecasting is an essential component of your overall success. Our team of financial experts can help you reach your maximum potential.
Difference Between eCommerce Bookkeeping and Accounting
Ask any eCommerce business owner their least favorite part about running their business. Most will reply with one word: accounting. However, most small business owners try to take on accounting responsibilities by themselves. But what exactly are the differences between bookkeeping vs. accounting?
As your eCommerce business grows, so too do your financial responsibilities. That means, as a business owner, you have an awful lot on your plate. Sales, returns, supplier payments, banking fees, every financial area you can think of, gets more complicated the larger your business grows.
At this stage, bookkeeping is no longer the performance of mundane tasks. It’s much more complicated than that. It includes the following:
- Transaction categorization
- Invoicing
- Account reconciliation
- Balance sheets
- Payroll management
- Account payables and receivables management
Accounting also becomes more difficult as an eCommerce business. Since the internet’s business environment is relatively new and rapidly changing, analyzing financial records and forecasting for the future is more difficult.
Accounting tasks include the following:
- Preparing and adjusting entries
- Financial information audits
- Tax planning and reporting
- Financial reporting and reporting
- Financial forecasting and risk analysis
- Financial statement preparation
As you can see, growing as an eCommerce business is exciting, but it comes with extensive responsibilities. If you don’t have the correct accounting systems in place, growth can quickly turn into a nightmare.
What Are the Two Types of Accounting for eCommerce Businesses?
There are two primary types of accounting for eCommerce businesses: cash basis accounting and accrual.
Cash Basis Accounting
Businesses do well with cash basis accounting when they start because of its simplicity. Cash basis accounting records transactions whenever they land in your account or leave it as an expense. Then, based on the transactions, an accountant can see how much cash you have at your disposal at any given time.
With cash basis accounting, you also don’t have to pay income taxes on the payments you haven’t received. This bookkeeping method primarily works for the following businesses:
- Smaller eCommerce sellers
- Maker businesses
- Products on-demand businesses
- Dropshipping operations
Cash basis accounting, while easy and convenient, may be too simple for larger corporations. The method of cash basis accounting doesn’t account for future account receivables or accounts payables.
Accrual Method
Accrual accounting records transactions as they occur, not when the money reaches or leaves the account. Most financial institutions use this method.
Accrual accounting can seem confusing at first glance. However, accrual accounting provides a more realistic representation of your monthly business income and allows more accurate financial projections when you account for present and future obligations.
The downside to this method is that it shifts the focus from how much money you have to how much money you move. Including future payments and expenses using accrual accounting carries the danger of making your finances look more encouraging than they are, which means you must monitor them more closely.
Despite the pitfalls of accrual accounting, it makes sense to use this method as an eCommerce entrepreneur. The reason is that cash basis accounting is only permitted for companies with an average annual growth receipt of $5 million or less. So, if you plan on expanding your business, the accrual method lies in your future.
Why Are Bookkeeping and Accounting Important for eCommerce?
Whether you sell via Etsy, Amazon, or Shopify, you need a stable system for your finances. The following represents a few of the main benefits of having a reliable eCommerce accounting system in place from the start.
eCommerce Accounting Helps You Build a Stable Business Model
Bookkeeping and accounting maintain your business’s financial integrity. They provide a reliable system for all records and can help you glean insight without disrupting processes such as payroll and tax audits. eCommerce accounting ensures you stay up-to-date and prepared for the logistical aspects of your business.
eCommerce Accounting Helps You Financially Forecast
Without thoroughly understanding your numbers, you can’t project your business’s future success. Having an eCommerce accounting system in place enables you to plan for the future confidently.
eCommerce Accounting Ensures Proper Tax Compliance
It takes a lot of time and focus away from your business’s core principles when you handle all of your bookkeeping tasks, including tax compliance. As an eCommerce business owner, you can’t afford that distraction. eCommerce bookkeeping procedures ensure you stay tax compliant so you don’t have to divert any attention away from what’s most important: sustainable business growth.
What Does Effective eCommerce Accounting Look Like?
Successful eCommerce businesses have a few bookkeeping and accounting principles in common:
Organization
When your eCommerce bookkeeping and accounting are disorganized, you won’t know how to locate financial records and financial reports. You will also inconsistently generate KPIs and benchmarks because you don’t understand how to accurately measure your financial success.
An organized accounting system keeps track of everything, so all of your financial records are easily accessible. Having an organized system in place eliminates the stress of pesky detractors such as tax audits and payroll. Everything is where it needs to be whenever you need it.
Well-Defined Roles
Effective eCommerce accounting systems have well-defined roles. If your in-house bookkeeper tries to perform accounting responsibilities while you’re in growth mode, details that grow into larger issues quickly get lost in the shuffle.
An easy way around this common issue is by outsourcing your eCommerce accounting responsibilities. As shown, bookkeeping and accounting are different positions. When expanding rapidly, a bookkeeper should focus on keeping tightly organized records. At the same time, accounting should fall to someone who can focus solely on financial forecasting and data analysis.
Strategic Resource Allocation
Well-researched resource allocation is another clear marker for effective eCommerce accounting procedures. For example, using a scalable outsourced accounting firm ensures that you don’t overpay for services you don’t need.
Most bookkeeping and accounting procedures don’t require yearly salaries. Scalable outsourced accounting firms let you take advantage of bookkeeping and accounting services when you need them.
Accounting Reports Are the Root of Great Decision-Making
Businesses, irrespective of their operation domain, must maintain various accounting reports to track financial health, make informed decisions, and comply with regulatory requirements. Principal among these reports is the Profit and Loss (P&L) statement, which provides a summary of the revenue, costs, and expenses over a period, highlighting the net profit or loss. This is crucial for eCommerce businesses, which often have fluctuating revenue streams and need to monitor margins closely.
Another essential report is the Balance Sheet, which presents a snapshot of a company’s assets, liabilities, and equity at a specific point in time, offering insights into its overall financial position. For eCommerce enterprises, understanding liabilities such as refunds or chargebacks, and assets such as inventory, can be particularly significant. Other reports, like cash flow statements, can also be vital, especially for eCommerce businesses to manage their liquidity and ensure they have sufficient funds to cover operational expenses.
What Is eCommerce Accounting and Why Is It Important?
As an eCommerce business owner, you’re venturing into somewhat uncharted territory. With rapidly changing tax laws, ample growth opportunities, and unique business models and structures, you need an equally adaptable eCommerce accounting firm that’s familiar with the latest regulations, practices, and cutting-edge eCommerce accounting software.
Fully Accountable is a team of accounting professionals who understand the rapidly changing atmosphere eCommerce businesses face. Whether you need a controller to monitor your finances and ensure tax compliance or a fractional CFO to offer consulting services as your business grows, our team is here to help.
Contact us today to take advantage of comprehensive eCommerce accounting services.
Rachel Scava is the COO of Fully Accountable - a back office solution for outsourced accounting and finance services. Fully Accountable provides full back office services for eCommerce and digital based companies that are looking to grow and scale. Rachel has dedicated her career to helping entrepreneurs and owners reach their highest potential through human ROI. Having discovered that one of the most challenging things for any business is building a high performing team, Rachel has developed processes and procedures to help companies build, train and measure team members that become major assets to the organization. Rachel believes in the theory of Super Employee’s where you can turn any ordinary team member into an extraordinary one. Her passion is people and yours can be too!
