Want to better manage your cash flow? This eCommerce accounting guide is for you.
Your eCommerce business will live or die based on how you manage your cash flow.
If you have record sales, but your customer acquisition costs and operating expenses are more than total sales volume, you are still on a fast track to business failure.
This doesn’t have to be the case. Understanding the accounting basics for an eCommerce business, along with setting up simple systems and processes, can help you stay compliant and out of the red.
In this post, we’re sharing a detailed guide to eCommerce accounting, including:
- Why bookkeeping & accounting are important for eCommerce
- When it goes right: What a financially savvy eCommerce business looks like
- When it all goes wrong
- Getting paid: Top 10 eCommerce Payment Gateways
- Choosing an eCommerce cloud accounting solution
- Cash flow forecasting tips for eCommerce
- How to finance inventory purchases
- Chart of accounts – Categorizing eCommerce transactions
- When to DIY and when to hire bookkeepers and accountants
- How to vet bookkeepers and accountants
- Accounting concepts eCommerce business owners need to know about
- eCommerce Accounting Key Takeaways
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 step-by-step guide to getting your Xero file in order, a Cashflow Forecast Template, and a Bookkeeping timetable template to help you stay on top of your finances & get current reporting. Download now.Want to better manage your cash flow? Read this eCommerce accounting guide. Click To Tweet
Why bookkeeping & accounting are important for eCommerce
A good bookkeeping system is the foundation for a financially stable and viable business.
Whether you’re selling products through Shopify, BigCommerce, Etsy, or Amazon, you are going to need a good system in place to manage your finances. Here are some of the main benefits of building out solid bookkeeping processes from the get-go.
Bookkeeping will help you build a financially stable and reliable business model.
Bookkeeping is the foundation of a strong, viable business. If you have a system for recording all transactions and expenses, you can get clear insights into how your business is operating at any time. You can get in front of any unpleasant surprises at the end of the month when it is time to pay your employees and contractors or the tax bill.
Bookkeeping will help you forecast your business.
Once you know your numbers, you can then create projections that predict your business’s future activity. This will enable you to plan better and work smarter.
A good bookkeeping system will ensure the preparation of your tax returns.
Solid bookkeeping processes will save you a lot of time and headaches when it comes to filing your taxes each year. By maintaining your financial records, you will be able to act in accordance with federal and state tax laws and comply with all relevant sales tax regulations.
In addition, planning ahead also allows you to work with your accountant to help you save money on your taxes.If you wait until the last minute, you might not have time to do all of the tax planning to ensure you maximize your deductions.
Solid bookkeeping will help you sell the business
As Vincent Wong of Empire Flippers points out in How to Sell Your Shopify Store for Multiple Six-Figures, having a clean Profit & Loss Statement is critical if your goal is to eventually sell your eCommerce business:
“As far as selling your business goes, this will be the most important document you can bring to the table. It’s also the one Shopify store owners usually get wrong because bookkeeping isn’t their forte.
While it might not seem high in your list of priorities to prepare, getting this wrong could put a deal in jeopardy. If a buyer sees that the P&L statement is riddled with inaccuracies, they’ll probably start to question what else is wrong with your store, and this is before any negotiations have even started!
In short, you definitely need a solid and well-organized P&L statement.”
When it goes right: What a financially savvy eCommerce business looks like
A financially savvy business has a well-defined system and set of processes. Here at Bean Ninjas, we are big fans of the Profit First system.
Pro Tip: If you need help setting up Profit First for your eCommerce store, we can help. Get in touch here.
It doesn’t matter what system you choose, as long as you have one. It can be as simple as a calendar of times that are set aside within the month to categorize transactions and expenses, whether it be in a Google Sheet or in a more robust cloud accounting system like Xero.
Setting up streamlined bookkeeping processes will help you improve the efficiency of your business. Once you take something complicated such as bookkeeping and turn it into a simpler thing, it will save your business valuable time and money. In addition, it will result in less stress and more productivity.
As part of this process, you’ll also have dedicated resources that are helping provide a clear understanding of profitability – be it an accountant, bookkeeper, and/or VAs.
This will allow you to plan for the future, work within a budget, and manage your cash flow. Additionally, it won’t be a challenge to hit payroll each month or save money for taxes since you’ll have a much clearer understanding of your duties in that regard.
Finally, you are looking at financial reports – such as your P&L, balance sheet, and cash flow statements (more on that later in this post) at least once a month.
For example, you can see just how successful each sales channel is, their profit margins on individual products, and their top sellers. Beyond that, they’re also understanding the return on investment that they’re getting from their marketing and advertising efforts.
When it all goes wrong (because you’ve neglected your eCommerce accounting)
When you neglect your accounting, eCommerce businesses can run into a host of short-term and long-term problems.
The biggest short-term problem is tax ramifications. We always tell our customers. Just like Christmas, taxes will come about every year. The earlier you plan, the less stressful the process will be.
When you wait till the last minute, it is a scramble to produce the supporting documents that your accountant needs to do their job in generating a tax return and ensuring you stay compliant with all federal and state regulations. Plus, your tax return can only be as accurate as of the inputs that have been provided. Typically in this scramble and rush to deliver this type of detail 12 months after the decisions have been made and the money has been spent, it’s hard to recall what exactly was spent and when.
Not to mention, you won’t be able to maximize your tax savings since you won’t have time to have proper tax planning conversations with your accountant.
You may even have to pay rush fees in order to meet your tax deadlines.
Troubles with getting finance
Another problem that we see all the time is around inventory planning. Let’s say you need help financing a large purchase order or inventory shipment.
Finance companies are going to want to look into your records prior to approving the loan. If you don’t have everything documented properly, it looks like your business isn’t running smoothly. They’ll be more likely to deny your loan request.
Pro Tip: In addition, if you intend to sell your business down the road and you don’t have proper records in place, this will be a huge red flag for any potential buyers. This could prevent a sale from occurring altogether or cause you to sell at a lower multiple.
Cash flow shortages
In addition, without documenting how your business actually works in terms of money going in and out, you won’t be able to determine your income. This can lead to cash flow shortages and payroll problems.
Competing on price
Another problem is many eCommerce entrepreneurs – especially newer ones- try to compete on price alone. This can be dangerous.
Megan Winter, of Unstoppable eCommerce, says, “When you compete on price, it’s a very fast race to the bottom. Bargain Hunters are Only Loyal to Price. If someone bought from you due to your low prices, they’re likely to buy from someone else, the minute they find a cheaper alternative. As soon as there is a cheaper option, you lose that customer. And, in the world of eCommerce, there will always be a cheaper option. Another fundamental reason we don’t compete on price is human psychology. “You get what you pay for” has been so deeply ingrained in our psyche that if it’s cheap we expect it to be nasty.”
In addition, Winter recommends, “increasing your average order value. There are really only 3 ways to sell more on your online store:
- Increase your sales conversion rate (how many people buy from you)
- Increase the traffic to your site (how many people come to your site)
- Increase your average order value (how much they spend)
If you did nothing else but increase your average order value, you’d be making more money from the sales you’re already making. We do this by offering bundles, having a free-shipping-threshold and offering order bumps, upsells and cross-sells.”When you compete on price, it’s a very fast race to the bottom. Click To Tweet
Getting paid: Top eCommerce Payment Gateways
In order to get paid, you need a payment gateway.
At its most basic, a payment gateway is a way for your eCommerce store to process credit card payments.
The most popular payment gateways are Stripe, Paypal, Authorize.net, and Braintree (acquired by Paypal).
However, these payment gateways won’t work for all eCommerce businesses. Some key things to keep in mind when selecting a payment gateway.
One of the biggest things to take into account is where your business is registered. Most payment gateways – like Stripe- only support some countries. If your business is based in a country like Pakistan, Saudi Arabia, or Nigeria, you may find that you need to use a payment gateway like 2Checkout.
Another thing to keep in mind is the products you are selling. For example, Stripe won’t work with companies that sell high-risk or highly regulated products, including alcohol, marijuana and supplements.
A third thing to consider is how your payment gateway will integrate with your bookkeeping processes. For example, here is a detailed guide for how to sync Stripe with Xero.
Choosing an eCommerce cloud accounting solution
A key component in your accounting system is using cloud accounting software, such as Quickbooks Online or Xero.
Cloud accounting software enables you to have your data and software accessible online at all times and from any device.
In addition, unlike spreadsheets, they provide added reliability and accountability.
They also allow you to connect to other best-in-class third-party apps. For example, if you use Xero, you can sync it with inventory apps to measure your goods, quantity of goods, or cost of goods.
Another use case is around sales tax calculations. You can hook up Xero to Avalara or TaxJar to understand your tax liabilities in each state.
Here’s a short checklist of things to consider when getting started with cloud accounting software.
- Is the software easy to use?
- Can it sync with your business bank account, credit cards, etc?
- Does it integrate with the key business software you already use?
- Is it fully secure and encrypted?
- Is it within your budget?
- Do they offer fast and friendly customer support if need help or run into any issues?
Cash flow forecasting tips for eCommerce
Cash flow forecasting is like your crystal ball. It gives you the opportunity to take a stab at predicting your business’s future.
Derric Haynie of eCommerceTech.io says, “Two key metrics that become very important very quickly are net margin and lifetime value, and there is an important relationship between them. If you can really know your net margin per order, after advertising, shipping/logistics, customer service, and even deducting your aggregate technology costs, then you will be able to understand your cash flow and begin to think about where to best invest the money coming in. That leaves us with lifetime value, because if you only consider a customer for that initial purchase, then you are thinking your overall margin is quite low, but if you know that 20% of customers come back for a second time, and that requires no or minimal repeat acquisition cost (like maybe a small amount in ad spend or using an email provider, SMS provider, or loyalty tool), then you can beef up your investments and increase your target acquisition cost, and therefore grow faster. So when you know these numbers really well, you can take bigger risks/investments into growing the business.”
Here are some forecasting tips.
- Collect and use historical data from your P&Ls to understand sales trends and project out fixed costs.
- Identify all sales channels, including any investments from joint ventures, and any loans or lines of credit that you might have available to you.
- Plan three different forecasts: the best case, moderate and worst-case scenarios
- Revisit your forecasts on a regular basis. Weekly or monthly works great. This allows you to create comparative reports, so you can see if you are on track.
- Automate your cash flow forecasts with the use of third-party apps. This allows you to eliminate manual work and run more detailed calculations and forecasts. Some great apps that work with Xero are Float, Fathom, Jirav, and Spotlight Reporting.
How to finance inventory purchases
To grow, you need to appropriately plan for and sell more inventory. But to sell more inventory, you need to pay for it first (unless Dropshipping).
Managing inventory is one of the biggest challenges for new eCommerce store owners. You want to make sure you have enough inventory that you aren’t running out of stock every other day, but you don’t want to have too much excess inventory sitting in a warehouse. This doesn’t even factor in shrinkage – i.e inventory that is lost, stolen, damaged, or otherwise can’t be sold.
Having a firm understanding of your numbers can help you figure out how much inventory to buy and when to buy it.
Due to sales and payout cycles – especially if you sell into retail, you may need some short-term help – in the form of a small business loan – to finance inventory and purchase orders.
Pro Tip: Check out our guide with six types of financing available for small businesses, along with the pros and cons of each approach.
Chart of accounts – Categorizing eCommerce transactions
If you just signed up for Xero or have been using it for a while, you’ll likely have a backlog of transactions to categorize.
It is easy to overcomplicate the process. Once you have talked with your accountant, it just becomes a game of categorizing transactions into the best fit category or opening up new ones if you’re not sure where a particular item or spend should go.
When you maintain your chart of accounts on a consistent basis, the effort is pretty simple. The volume is not overburdening within your time.
With platforms like Xero, you have the ability to establish automated bank rules that add efficiency to the process. For example, every time it sees a Starbucks transaction, it can classify it as “meals.”
Want to look at an example chart of accounts for eCommerce businesses? Click here to download a sample eCommerce chart of accounts now.
When to DIY and when to hire bookkeepers and accountants
One of the most common mistakes that we see eCommerce companies make is hiring accountants and bookkeepers too late. Bring on an experienced bookkeeper early to avoid tax and payroll complications.
If you are just starting, you may be considering doing it all by yourself. You’ll need to determine if this is the best approach and take into account a couple of considerations:
- Your accounting experience – and your willingness to learn the financial skills required to set up your accounting system, review and understand your books regularly,
- Your budget for hiring somebody else to take care of it for you, and
- Your time and how much of it you’re willing to commit to working on your numbers on a weekly basis.
As a founder, you need to think about what’s the best use case of your time. Is it bookkeeping, or should you be spending time on marketing, sales, sourcing new products, delivering a great product/service or supply-chain management?
Here are a few of the benefits of outsourcing your accounting:
- Free up your time to focus on sales, marketing, and other important business tasks
- Stay compliant of all sales tax regulations
- Get detailed P&L statements, balance sheets, and cash flow forecasts on a regular basis
- Tax planning and tax return preparation
- Stay compliant with all payroll taxes if you have any employees
In fact, one of the most common areas where new eCommerce founders get into trouble is once they start hiring and paying employees. An experienced accountant can help you avoid these issues.
Pro Tip – Screwing up payroll taxes is a serious offense. In the U.S., the government can shut down your business, seize your home and all personal assets, and even throw you in jail if you don’t pay. In addition, payroll taxes – along with student loans – are one of the few things that can’t be discharged if you file for bankruptcy.
Hire bookkeepers and accountants
As you can see, it is a good idea to outsource these options as soon as you are able to.
Most eCommerce companies start out with hiring an accountant. This is a great first step and can help you with tax planning and filing your taxes.
“It’s never too early to hire an accountant or bookkeeper,” says Jonathan Kennedy of HeyCarson. “In fact, if it’s not one of your core skills as an entrepreneur, it’s probably the first thing you should hire for or outsource. It’s easier and more cost efficient to start with a good accountant than it is to backtrack and clean up financials 1-2 years into your business. Get your accountant aligned with your business objectives from day one. If your end goal is to exit your business in 3-5+ years, share this with your accountant so they can help you optimize your earnings as you’re running the business and your exit.”It’s easier and more cost efficient to start with a good accountant than it is to backtrack and clean up financials 1-2 years into your business. ~ @johnnyk3842 Click To Tweet
Alex Brown of eCommerce Rockstars adds, “Since most ecommerce companies grow and bootstrap without raising significant capital they REALLY need understand their cash flow cycle to turn cash over quickly for growth. Having a CFO-caliber team member (or typically a fractional team member) will pay for themselves 10x over in the long run in helping manage cash flow properly. The more your business grows, the more cash you typically tie up in inventory. When I was newer and less experienced, I envisioned that the bigger my company got the easier it was on cash flow. This is partly true, but the risks and investments also get far bigger to match the growth. Unless you are a CFO yourself, you need one in your corner to scale your company.”The more your business grows, the more cash you typically tie up in inventory. ~ @ecomrockstars Click To Tweet
When you notice that you are spending a ton of time on bookkeeping and other financial tasks, this is when it can be helpful to hire a bookkeeper or a productized bookkeeping service, such as Bean Ninjas.
Hire an in-house bookkeeper
The main advantage of hiring a bookkeeper is that they can get to know your business inside and out as well as handling all of the day-to-day invoicing and bookkeeping tasks within your cloud accounting software.
You can expect to pay anywhere from $10 to $150 per hour for a bookkeeper depending on the scope of the work and how much experience they need to have.
The disadvantages are increased onboarding and management time.
Pro tip: If you’re going to bring your bookkeeping in-house, we highly recommend that you (the business owner) are well versed with knowing your numbers and financial reporting. That way, you can protect yourself from fraud and also ensure that you know what to look for when you’re working with your internal finance manager.
Hire a third-party accounting service
If you want a more turn-key solution, companies such as Bean Ninjas specialise in this component and charge on a monthly subscription basis. We are highly skilled in setting up accounting software and processing transactions accurately and consistently. We pride ourselves on delivering customer excellence and being recognized as leaders in the accounting space.
Even more important to us than industry awards is the feedback that we receive from our clients. So when we receive reviews like this we know that we’re on the right track…
How to vet bookkeepers and accountants
You might feel a bit insecure regarding the hiring process.
This makes sense.
There is a big variation between the services that accountants and bookkeepers offer. Your requirements will also vary depending on your own skills and the scope of the work your accountant completes.
In addition, the outputs are only as good as the inputs. So, for example, the conversation with a tax advisor or accountant can be more robust and specifically tailored to your individual business by your unique ability to provide them the best data and resources from your business. You can move from getting advice based on generalities to getting advice based on your particular position within your business and your particular growth strategies.
Whether you are hiring a freelance bookkeeper, bookkeeping productized service, such as Bean Ninjas, or bringing someone in-house, here are some questions to ask to vet them properly.
- Are they registered and qualified?
- How much expertise do they need to do the tasks?
- Do they need to have prior experience in your niche or industry?
- What’s their communication style? Does it fit with how you like to communicate?
- What’s their average delivery and response times?
- How do they protect their clients?
Accounting questions and key concepts eCommerce business owners need to know about
Before we dive into the weeds, there are some key accounting concepts and terms that all eCommerce business owners should know.
What is a Chart of Accounts?
The chart of accounts is basically a list of the individual accounts that make up a company’s summary of transactions. It covers everything from assets and liabilities to your equity, revenue, and expenses.
With a chart of accounts, you will be able to see all the money coming in and out of business, effectively manage your inventory and maximize the selling potential of your business.
Want to look at an example chart of accounts for eCommerce businesses? Click here to download a sample eCommerce chart of accounts now.
What’s the difference between cash vs accrual accounting?
There are two ways to keep a record of your business: cash-based or an accrual-based accounting system.
A cash-based accounting system allows you to record sales and expenses when the money lands or leaves your business bank account. For example, someone ordered a product but hasn’t paid their invoice. You hold off on recording the transaction until you get the money. Only then, you account for it.
In contrast, an accrual-based accounting system is based on when the transaction occurred, instead of when you received or paid cash.
There are pros and cons to consider based on the specific nuances of your business. We recommend chatting with your eCommerce accountant to decide on which system to use.
What’s bank reconciliation?
It can be helpful to think of bank reconciliation, like going to the doctor every year for a check-up. This is a process to evaluate what’s coming in and out of your business bank account and preventing any discrepancies between your bank reports and your accounting software records.
If you notice any inconsistencies, you should then proceed to make an adjustment to your software records. This will help you when it comes to tax time.
Pro Tip: We recommend reconciling your bank account once a month. This will keep you from having to look through 12 months worth of transactions.
What are the key financial reports that eCommerce businesses should be looking at each month?
There are three reports that all founders should look at on a regular basis to help them understand their numbers and make data-driven business decisions.
Profit and Loss (P&L) / Income Statement
A profit and loss statement (i.e. P&L) is your income statement. It refers to your business’s revenue, costs, and expenses at any given time.
Here are some things to monitor:
The success rate on various sales channels
If you are extremely dependent on one sales channel, such as Amazon FBA, you want to think about how you can diversify your sales and associated risks. If something changes within one platform, then your business doesn’t suffer.
Look for trends
You’ll want to monitor any sales spikes or droughts. This can include seasonality, big marketing campaigns, inventory shortages, underperforming products, etc. Your P&L gives you the unique ability to review the financial outcome of those decisions you’ve made in the past. So, you can really start to understand what you’ve prioritized within your business based on how much you’ve spent across those areas.
Keep tabs on expenses
If you notice that you spent a ton of money on SaaS software or office supplies one quarter, you want to make sure that you are actually using it. This allows you to be more intentional about your spending.
A balance sheet is simply what you own (i.e. assets) v. what you owe (i.e liabilities). This allows you to see a 50-foot view of your business.
Cash Flow Forecast
A cash flow forecast allows you to think like an investor. This report is similar to GPS tracking, allowing you to see if your business is on the right track.
For example, are you providing an opportunity as the owner to receive rewards from the effort and sacrifices that you’re making to create and scale this business venture? Will you have enough money coming in to be able to invest in R&D or to launch a new product?
Want to save some time by using our free cash flow forecasting spreadsheet template? Click here to grab it now.
eCommerce Accounting Key Takeaways
In sum, setting up a proper accounting system from the get-go can help grow and scale your business. Some key things to do are:
- Use cloud accounting software such as Xero.
- Get your financial reporting in order.
- Hire accounting and bookkeeping experts as soon as you can afford to.
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 step-by-step guide to getting your Xero file in order, a Cashflow Forecast Template, and a Bookkeeping timetable template to help you stay on top of your finances & get current reporting. Download now.
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