Blog Posts, eCommerce

E-Commerce Accounting: Stay Compliant, Drive Cash Flow

When running an online business, one of the most vital but often ignored areas is e-commerce accounting. 

It may not seem the most exciting compared to crafting marketing campaigns or launching new products and services. Still, it’s critical to two keys of a successful business – staying tax compliant and driving cash flow. 

So what do the owners of new or growing e-commerce companies need to know? Let’s take a closer look.

Staying Tax-Compliant

Taxes can feel confusing, especially when you’re just getting started. But before you get overwhelmed, keep these three key considerations in mind.

Sales Tax

Unlike many taxes, sales tax is a state/province or even local affair. In areas with a sales tax, a certain percentage of the total value of goods sold or services performed is owed to tax officials. 

Businesses are responsible for collecting this at the point of sale and later paying it as required. 

This means every business will need to know about sales tax rules in the jurisdictions it operates within. That can be simple for smaller companies or ones that work in a limited footprint but can get potentially complicated for nationwide or worldwide organizations.

Corporate Income Tax

Much like a person’s personal taxes, Corporate Income Tax is assessed on a business’ income after any deductions or credits. 

Income tax will vary by geographical location, with some states assessing an additional tax on top of any federal taxes due. While filing your income taxes can be complicated, it’s critical to ensure they’re done correctly to avoid audits or penalties down the road.

Payroll Tax

For e-commerce businesses with employees, payroll tax is also an accounting concern. Split between the employee and employer, the payroll tax is used by the government to fund public programs like unemployment insurance, healthcare, and more. 

How much a company owes in payroll tax will vary widely depending on the number of employees and where those employees and the company are based. This area of your taxes is especially important to get right because mistakes may not only lead to problems for you but for your employees as well!

Driving Cash Flow

Making sure the taxman gets what he’s owed may help keep your business open. But driving cash flow is what can really make your business grow, and e-commerce accounting can do precisely that.

Understand the Difference Between Cash Flow and Profit

First, it’s crucial to know the difference between cash flow and profit. Cash flow is generally thought of as the way money comes into and out of your business, or in some contexts, the general financial intake of a company. This would include all sales and any other earnings. 

Profit, on the other hand, is what’s left over once the cash flow is used to pay all of the business expenses, from cost of goods sold to salaries to marketing. This is the money left over to be paid out to owners or reinvested in growing the business.

It should be apparent why it’s essential to know both your cash flow and profit numbers. A company may take in millions of dollars in sales, but if its expenses are greater than its sales, it’s not a sustainable business. 

Conversely, a company with a relatively modest cash flow but a high-profit percentage should focus on expansion.

Use Your Accounting to Drive Cash Flow

So how can you use e-commerce accounting to help you maximize your business cash flow? Here are a few of the most important ways.

  1. Keep Your Books Organized and Reconcile Often

It can be easy to let your books slip, but staying up-to-date and organized is vital to ensuring strong and steady cash flow. Reconciling is also a critical step, as it ensures you’ve actually received everything you’ve earned – and on a timely basis.

  1. Manage Your Inventory Closely

Proper accounting will let business owners perfect inventory management, avoiding both lost sales from unavailable products and too much money locked up in excess stock. For many e-commerce companies, this simple tool can unlock a dramatic increase in profit.

  1. Revenue and Expense Timing

It can spell big trouble for a business if all of your expenses come due one week while you don’t get paid by your clients until the next. E-commerce accounting can help you manage and anticipate your costs and ensure there’s always cash to pay the bills when they come due.

  1. Cater to Your Customers

At the end of the day, proper e-commerce accounting helps you focus on the most important parts of your business – creating a great customer experience. A positive buying experience goes a long way toward the long-term health of an e-commerce company, ensuring repeat customers and multiple sales.

Master Your E-Commerce Accounting

E-commerce accounting is critical to a successful business in so many ways, from ensuring you meet all your appropriate tax obligations to helping you better understand and grow your business. That’s why it’s so crucial

But if you’d prefer to focus on your business and leave the accounting to the pros, Vertical CPA can help. Contact us today to get started with our experienced accounting professionals!

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