If we’re going to guess, you didn’t start your Shopify store because you loved accounting, bookkeeping, and spending all day in spreadsheets.
You probably started your business because you had an idea for a game-changing product(s), or maybe you wanted to create a better life for yourself and your family.
However, accounting and bookkeeping are the foundation of a profitable eCommerce business.
Running an eCommerce business is hard enough as is. You are only making it harder on yourself if your books are a mess.
In this post, we’re sharing everything you need to know for getting your books in order, including:
Why is accounting and bookkeeping important for eCommerce businesses using Shopify?
Your business’s finances are the foundation of a healthy eCommerce business. If you don’t have accurate inventory numbers, don’t know how many sales you made in a given time period, or your books are a mess, you are doing yourself and your business a massive disservice.
Keeping track of your incoming and outgoing cash flow is essential to running a profitable eCommerce business.
The basics that all eCommerce entrepreneurs should have in place is a way to keep track of the following:
- Assets – this is everything that your business owns
- Liabilities – any outstanding debts or loans that your business has
- Revenue – all incoming cash into the business from sales, affiliate deals, etc.
- Expenses – all of your outgoing cash, including inventory, team costs, packaging, etc.
- Equity – what percentage of the business do you own? For example, if you are a solo business owner with no outside investors, then you own 100% of the business.
- Key Growth KPIs – the most important growth metrics that you move the bottom line
What cloud accounting software works best for Shopify businesses?
If you are running a brand new business with less than six figures in total sales, you might be able to get by with the default reports in Shopify as well as a spreadsheet or two.
However, once you are doing six-figures in sales, it is in your best interest to use cloud accounting software. It will save you a ton of time and can ensure that your finances are up-to-date and accurate.
The two most popular options for US and Australian eCommerce businesses are Xero and Quickbooks.
Whether you are evaluating Xero, Quickbooks, or alternatives like Freshbooks and MYOB, here are some key things to consider when choosing your eCommerce cloud accounting software:
- Is there a direct integration with Shopify?
- How easy is it for you to use?
- Does it sync automatically with your business bank account, credit cards, and any other financial software you are using?
- What third-party integrations do they have?
Here at Bean Ninjas, it is no surprise that we’re big fans – and power users – of Xero.
If you are just getting started, here are eight things that many people forget to do when they are setting up their Xero account for the first time.
Pro Tip: Want to dive deeper into the ins and outs of Xero? Here are some lesser-known features.
What are the top benefits of using cloud accounting software?
As we alluded to earlier in this post, the biggest benefit of using Xero is that it is easier to have accurate financials. You can sync Shopify with Xero so that you can make informed business decisions based on the most up-to-date sales, profit, and cash flow numbers.
Here are some additional benefits of using Xero, including but not to limited to:
- Build a more profitable eCommerce business
- Spot potential problems early on before it turns into a full-blown cash crisis
- Know your top and bottom performing products and sales channels
- Understand your revenue and profit numbers for all of your products and SKUs
- Get accurate customer acquisition and lifetime value numbers
- Run detailed cash flow forecasts – along with inventory forecasting.
- Make informed decisions before you apply or take out a loan or seek out investors
- Gain clarity around your inventory numbers, PO terms, and repayment schedules
- Avoid scary tax letters and fines
How to do accounting for Shopify businesses
Just like you have defined systems and processes for working with your factories, uploading products to your website and third-party marketplaces, customer support, and hiring freelancers and employees, accounting and bookkeeping are no different.
Establishing a solid financial foundation with repeatable systems and processes is standard practice. This can be loosely defined as the following:
- Build your Shopify accounting tech stack
- Follow eCommerce accounting best practices
- Create repeatable systems and processes
Build your accounting tech stack
Between the Xero App Marketplace and Shopify App Store, there are thousands of third-party apps you can use. It is growing bigger every day.
These apps range from direct eCommerce platform integrations – like Shopify – to expense management, payment processing, inventory, payroll, sales tax, and reporting.
With our experience working with dozens of eCommerce clients using Shopify, here are the Xero integrations that we most recommend:
- HubDoc – for receipt management on autopilot (Bonus: it is free if you use Xero.)
- Taxjar – filing, collecting, and maintaining sales tax compliance for US eCommerce businesses
- A2X – automating and posting your Amazon and Shopify (if you sell through multiple channels) directly into Xero
- Gusto – for handling payroll and compliance
Pro Tip: Looking for a detailed guide of more Xero third-party integrations? Check out this post with the top 19 Xero integrations.
For example, our current process with our clients is to use A2X to automate transactions from Shopify to Xero. I would only recommend the direct Xero integration to sellers with a low order volume. At scale, the direct integration presents more admin effort than direct value.
Follow eCommerce accounting best practices
Regardless of what your mom and best friend might tell you, your business isn’t a special snowflake. Whether you are using Shopify, WooCommerce, Magento, BigCommerce, or something else, here are some best practices that all eCommerce businesses should follow.
1. Keep your books up-to-date
In Xero, your chart of accounts is how you can organize and keep track of all of your transactions. Whether you DIY it or have a bookkeeper maintain your chart of accounts, this is something that you should do monthly – if not weekly. This ensures that you are always making decisions based on accurate financial data.
2. Stick with accrual accounting
For eCommerce businesses, accrual accounting tends to work better, especially if you are growing fast, have big sales spikes (for example, around the holidays), or have a lot of complexity.
Pro Tip: What’s the difference between cash and accrual accounting? Check out our guide.
3. Maintain proper inventory reporting
Categorizing and keeping track of your inventory will allow you to make informed decisions about what products are selling through faster when to reorder more inventory, how to account for inventory shrinkage, and more.
4. Set up fraud prevention measures
Whether it is dealing with chargebacks or a rogue employee embezzling from your company – like this wild story from an 8-figure US ecommerce business, there are many things you can do to prevent fraud.
These measures range from simple things like keeping a close eye on who has access to Xero, company bank accounts, payroll, etc., to reconciling your bank statements (We’ll share more on that later in this post!) to completing regular financial audits.
Pro Tip: Looking for additional fraud prevention tips? Check out this post.
Create repeatable financial systems and processes
Many eCommerce entrepreneurs rely on bank balance accounting, where they check their bank balance one, two, or a few times a week. If everything checks out, they go back to business as usual. This works okay when you are small, but as soon as you have a few employees, a few hundred thousand in sales, and more frequent inventory runs, this informal system can quickly cause cash flow problems and stress.
While you don’t need to completely stop your bank balance accounting tendencies, there are three additional processes that we recommend putting in place.
1. Create a weekly or monthly financial reporting cadence
When you are wearing multiple hats in your eCommerce business, it can be too easy to stay in the weeds. Setting a system where you view your financial reports and key metrics on a regular basis- even 10 minutes once a week – can be beneficial.
Here are the key reports that you should look at:
- Profit and Loss Statement (a.k.a. P&L Statement) – this allows you to quickly see all of your revenue and expenses
- Balance Sheet – this is the 10-foot pole view where you can see your business’s total assets and liabilities
- Cash Flow Forecast – this allows you to model out and plan future cash flow in your business
- Inventory Forecast – this allows you to see which products are selling through fastest, when you need to reorder, how to account for shrinkage, etc.
2. Reconcile your bank statements regularly
As we alluded to earlier in this post, fraud prevention isn’t something you should overlook. One simple system you can put into place is to reconcile your bank statements monthly. This not only allows you to get in front of any potential fraud issues before they snowball, but you can also spot any inconsistencies in the data between your bank statements, credit card statements, and your Xero chart of accounts. This allows you to avoid over or underpaying at tax time.
3. Avoid any unpleasant surprises at tax time
There are two certainties in life – taxes and death. At least with taxes, you can plan for it. 😉
Since you know you have to pay each year, setting up systems in advance, so you don’t have to do the mad scramble a week before the tax deadline is a wise move. Not to mention, you’ll be able to take advantage of tax planning to help you save more money.
Shopify accounting key takeaways
Shopify accounting is so much easier when you use cloud accounting software, such as Xero, and take the time to establish a solid financial foundation, systems, and processes, including:
- Setting up Xero correctly
- Building your Shopify accounting tech stack
- Creating your eCommerce financial systems and processes
- Following eCommerce accounting best practices
Want to improve your cash flow and get more confident with your numbers? Learn how to use Xero effectively for your e-commerce business with our free Xero toolkit. This includes our profit margin calculator, eCommerce annual forecast template, salary cap calculator, financial roadmapping template, and more. Download now.