More business owners are selling their goods and services online as e-commerce sweeps the globe. The capacity to sell goods around-the-clock to a larger, global audience is one of the main benefits of e-commerce.
However, managing an e-commerce company has its difficulties, particularly regarding accounting. We will examine the basics of do-it-yourself e-commerce accounting in this article.
What is Do-it-yourself eCommerce Accounting?
This describes the process of documenting, maintaining, and keeping track of all financial information and transactions important to an e-commerce business by yourself.
It is a hands-on approach to handling the financial and accounting aspect of your eCommerce business instead of outrightly hiring an accountant.
Six Do-it-yourself Accounting Strategies For E-Commerce businesses.
Do-it-yourself accounting can be quite the challenge if you have no previous experience. However, there are several strategies you can use to make it more doable.
Keep precise records
Keeping correct records is fundamental to e-commerce accounting. This involves keeping track of every dollar that comes in and goes out of your company. You can use simple spreadsheets or accounting programs like Xero or QuickBooks for this.
It’s critical to keep track of all sales and revenue your e-commerce business generates. This covers any sales from your website and any third-party online stores like Amazon or eBay. Refunds and returns should also be tracked because they affect your revenue.
You should also maintain a record of all expenses related to daily business operations. This includes;
- cost of goods sold (COGS)
- shipping and handling charges
- website hosting and maintenance fees
- marketing and advertising costs, and any other business-related costs.
With clear and updated records, you can monitor the financial progress of your company over time. You can find out where you may be spending too much money or where you could be making more.
It is also simpler to file your taxes at the end of the year when you keep accurate records. This includes easily claiming all the deductions and credits you’re entitled to on time.
Keep personal and business finances separate
This involves opening a separate checking/savings account and a credit card for your online store and using these accounts solely for business-related transactions.
Your business’s financial performance will be clearer, and you can manage your income and expenses more precisely if you keep personal and business funds separate. You may also avoid future legal or tax problems by doing this.
For instance, having separate bank accounts and credit cards for your personal and business finances can help prove that you’re operating a real business and aren’t just utilizing your e-commerce platform as a hobby or side gig if you’re under IRS or CRA audit.
It also makes controlling your financial flow simpler. You’ll be able to see exactly how much money is coming in and leaving your company, which guides your decision-making process on when you can spend money on new inventory or marketing campaigns.
Watch key metrics
Monitoring important metrics is vital for e-commerce accounting. Here are some KPIs you should be monitoring:
- Gross revenue is the money your e-commerce company makes during a specific period.
- Refunds and returns are subtracted from the total sales to determine the net revenue.
- The gross margin is the difference between the cost of goods sold (COGS) and the gross revenue. It’s a crucial metric for determining how much money you make on each sale.
- Average order value (AOV) measures the typical sum that customers spend on each order.
Examining these crucial metrics allows you to see patterns and decide how to expand your e-commerce business.
Establish a system for managing your inventory.
Knowing the inventory you have on hand, when to reorder, and how much of each item you need to order is essential. This can be difficult, especially if you sell a lot of different products.
Setting up a system for tracking your inventory will help streamline your inventory management procedure. You can use a straightforward spreadsheet or an inventory management software like TradeGecko or Stitch Labs to do this.
The following data should be trackable through your inventory management system:
- The number of each item you have in stock
- date of the most recent order
- The price of every item
- The expected lead time for reorders
- The merchandise’s maker or distributor
Establishing a good system to manage your inventory will prevent stockouts, and ensure you always have enough products on hand to satisfy client demand. Over time, this will help you boost sales and provide better customer service.
Manage Your Taxes
Setting aside money for taxes is one of the most fundamental principles of ‘do-it-yourself’ e-commerce accounting. You must pay federal and state taxes while operating an online business, and the cost could build up rapidly if you are unprepared.
E-commerce companies, as opposed to conventional brick-and-mortar ones, must understand complex tax requirements, such as sales tax, which might differ from state to state or province to province
You should set aside money from your income to cover your tax bills so there are no unpleasant surprises when it’s time to file your taxes.
As a general rule of thumb, you should strive to set aside 20–30% of your revenue for taxes. However, this can change based on the revenues and expenses of your business.
Working with an accountant or tax expert is one way to ensure you have enough money for taxes. These professionals will advise on how much you have to save each month and assist in estimating your tax liabilities.
As an e-commerce business owner, you must understand the various tax obligations you may have to fulfill. Some typical tax types include:
- Sales tax is levied on the purchase of products and services. Normally, the seller collects this tax and sends it to the appropriate state or province.
- Income tax is the fee you must pay to the federal government and occasionally the state or province, depending on your company’s earnings.
- Self-employment tax is a levy on people who work for themselves based on their net income. You must pay self-employment tax since you are a self-employed proprietor of an online store.
Maintaining accurate records of your company’s income and expenses will help you set aside the appropriate sum for taxes. To avoid fines and interest, you should also make sure to file taxes promptly and pay any unpaid levies.
As an e-commerce business owner, you must understand your potential tax deductions. Some typical deductions include:
- Expenses associated with your home office: If you work from home, you might be eligible to write off a percentage of your rent or mortgage, utilities, and other home-related costs.
- Business expenses: Expenses like cost of goods sold, shipping and handling fees, and advertising can be written off if they are regular and required for your company.
Saving money for taxes is essential to do-it-yourself e-commerce accounting. You need to make sure you are setting aside enough money to cover your tax obligations and prevent any surprises by knowing the various taxes you might be liable for.
You can also work with a tax professional to estimate your tax liabilities, and maintain accurate records of your business’s income and expenses.
Keep Your Books Current
Documenting each transaction as it occurs and ensuring that your financial records are accurate and comprehensive is vital
Setting aside time each week or month to update your records is one way to keep up with your bookkeeping. This process usually involves generating financial reports, classifying transactions, and balancing bank accounts.
When bookkeeping is done right, you’ll be able to see your company’s financial health clearly and make wise judgments about how to grow your business over time.
DIY e-commerce accounting is a crucial skill for any owner of an online business.
You’ll be well on your way to running a successful e-commerce firm by;
- maintaining correct records
- segregating personal and business finances
- monitoring key KPIs
- establishing a system for inventory management
- setting aside money for taxes
- and keeping your books up-to-date.
E-commerce accounting can be complicated, so consulting with a professional bookkeeper or accountant to ensure your financial records are correct and current is always a smart move.