Every successful eCommerce owner understands the eCommerce accounting basics. Are you doing all the basics?
Why do you need to understand the fundamentals of eCommerce accounting? Let’s face it, accounting is neither simple nor fascinating when it comes to running a firm. However, it has a vital role to play in its performance. As such, you need to pick between doing it yourself or finding a professional to do it for you. If you want to partner with a professional, bear in mind that you will always have the practical knowledge to make informed market and financial choices.
In this post, we discuss the fundamentals of eCommerce accounting that you need to run your company successfully. And if you want to employ an accountant, you need the basics at your hands, so you can see what’s going on and ask important questions. It’s all your company at the end of the day, and you want it to succeed.
1. Implement accounting software
If you don’t want to deal with an accounting-induced nightmare, you need to find the accounting program right for your operation’s size. Using Google Sheets or Excel, though inexpensive, is unlikely to provide you with the details needed to file tax returns or handle the cash flow.
So, choose a smarter move and get some decent accounting tools. There are a lot of cool choices, like Xero or Quickbooks. They work well with Shopify, which also has a range of accounting applications in their app market.
These platforms also come with a free trial period so that you can test each of your options and choose the one that suits your company and skills. Ensure that the programme can monitor prices, inventory, and revenue.
A lot of online software focuses on a specific accounting function, such as delivering reporting or producing invoices. Instead, you need an all-in-one kit to prevent difficulties during accounting and ensuring that it can be synchronized directly with any e-commerce store or store.
2. Keep track of cash flow
It’s really critical to be aware of cash flow and to make it easily available in your accounts. If you happen to be using a personal account as a company account, please note that you are potentially creating twice the accounting work. You need a separate bank account for your company. This way, you can keep watch on how much money is being made, and this is where the cash flow of the company comes in handy.
With your cash balance, you will equate sums coming into amounts deducted from your business account. And as long as your account gets more than what’s going on, your company is expected to do well (noting that there are other things like GST and income tax to hold on top of that as well!).
Time is another important aspect to remember in cash flow. Ensure that the cash balance matches the time you use to pay your bills. This way, you can afford to settle the accounts, whether it be an employee’s wage or payment for another bulk shipment of merchandise.
In the meantime, take care of any delayed action, particularly in payments. Do you have customers who always delay paying invoices until they collect their goods or services? This is particularly relevant if you are aiming for payment in order to repay those debts or to invest them.
To make the cash flow experience less bumpy, we propose setting up a cash flow outlook on a monthly or weekly basis to foresee any cash gaps in advance. Be careful that the sum you plan to pay for spending should not exceed what you have in your account. How much of the expenditure is necessary or discretionary?
- Cashflow is important to a stable enterprise, so consider the following: Do not settle bills until the due date.
- Incorporate payment arrangements, such as subscription or monthly fees, to ensure cash inflows.
- Maintain an emergency company contingency account (this can fund at least a month’s worth of expenses).
3. Inventory Count
Also known as inventory, daily inventory counts are critical when operating an eCommerce store. You will decide how many what need in stock and when to stop ordering more than you need. You can prevent damage by finding the stock that isn’t turning over as well.
In addition, inventory may be considered locked up capital. The only way to release this capital is by the sale of the commodity. Capital in the form of inventory is also very unpredictable, as you may end up earning more revenue if there is a price gain in the commodity or a loss as it declines.
Finally, watch out for the shrinkage. Shrinkage is a lack of inventory related to factors such as employee stealing, damage, the error of administration, fraud of the vendor, etc. It’s more common if you’ve got a physical shop. However, whether you run your company from a factory or drop distribution, eCommerce losses are smaller if you store your goods at home.
Note that the inventory count only matters if you’re supplying products.
4. Master the COGS (Cost of Goods Sold)
This applies to the cost of merchandise delivered. In simpler words, it is the cost of goods that are being exchanged. This covers the cost of materials, shipping, freight and labour used and excluding secondary costs such as marketing.
Calculating this is pretty straightforward if you’re working with goods with the same cost. However, it becomes difficult if the same commodity has varying manufacturing, labour and packaging costs, among other direct costs. However, you can quickly get around this by using a weighted average during your calculations.
As you expect the labour of workers to be part of the COGS, remember that this will only be the case if you pay them for the commodity they assemble. This means that if you pay them regularly at a flat rate, even if they don’t assemble anything, you do not have labour costs in the COGS. Payment transaction costs on transactions such as Stripe or Paypal fees can also be used as part of the COGS.
So why do you need to understand COGS as part of the fundamentals of eCommerce accounting? COGS is crucial when calculating the gross profit – maybe even more important than the turnover. But bear in mind; this is not your real benefit. It’s all money from each commodity, minus indirect costs (like admin or sales). You may use accounting tools such as Xero or Unleashed to manage COGS and stop a difficult manual process.
5. Define fixed vs variable costs
The next step in your eCommerce accounting fundamentals course is to realize the distinction between fixed and variable costs.
Fixed Costs: These are expenditures that do not adjust on the basis of the level of demand or output. That includes running expenditures such as rent, income taxes, depreciation, research and development, revenue-free promotion, staff costs, hardware and applications.
Variable Costs: These are costs that vary based on the amount of output or demand of your company. This includes contingent costs such as raw materials, labour, payment transaction fees, utility charges and sales commissions.
6. Calculate the break-even sales you need
When it comes to running a profitable company, logistical activities such as planning and budgeting are crucial to keeping the business afloat. The main figure here is to consider the point of your break-even. This applies to the number of transactions you need to make in order to take care of the expenses.
This ensures that the profits can raise enough to fund COGS and running costs to compensate. There are no gains or losses at this stage.
Break-Even Volume (BEV)
fixed cost/(revenue per unit – variable cost per unit)
operating costs/unit margin
At the end of the day, you need to produce more from revenue to exceed the BEV. However, if your company is doing less than break-even, your business is in trouble. At this stage, you need tactics to do better by raising costs for your goods or services or even lowering COGS.
7. Track your sales & profits before tax
Once you are in the process of calculating the break-even and the minimum amount you have to produce from purchases, the next step is to monitor your sales. By doing so, you will predict when you would be able to hit the minimum break-even with your sales. One of the easiest ways to track your sales is by using Google Analytics, which will connect to your eCommerce website.
Once you have compiled COGS, revenue, and fixed costs, you will decide what you did before income tax. However, from this point on, things get a little messy and it’s best to pursue the services of an eCommerce accounting company like run[Accounting]. Outsourcing tax experience is not just deductible, it is standard practice for simple business management.
8. Understand where tax fits in the picture or where to find help
Taxation is a little difficult and, in most situations, you are encouraged to obtain professional help, particularly if you are exporting your goods or services around the world. In Canada, eCommerce companies are subject to a range of various taxes, including
Income Tax – Remunerated on the basis of net revenue reported on the annual income tax report and income tax declaration.
Harmonized Sales Tax – Tax charged on most goods and services imported or purchased with significant exclusions, such as export sales or government services.
Withholding Tax – Tax-deferred on behalf of the employers in respect of taxes on their salaries and earnings.
The most popular tax you can face is GST on purchases, where your eCommerce platform will benefit you in a major way. Ensure that the programme you are using is able to measure the tax payable on goods sold. If you are concerned with tax-exempt goods (such as fresh food) so make sure that your customers are not charged when purchasing your items.
9. Have in place a plan to cover your taxes
Note that the tax has a position to understand the fundamentals of eCommerce accounting. It is important that you include HST in the selling price of your goods. To be on the safe side, ensure that you put aside the HST credits earned on a daily basis in a special savings account when received from your clients. By doing so, you can conveniently lodge and pay for your Business Activity Statements (with HST payable) without harming your company.
10. Utilize the balance sheet
The next move in eCommerce accounting fundamentals is to manage the balance sheet so that you’ve covered cash flow and benefit and loss. You will keep track of your financial status and general wellbeing across the balance sheet. That said, profit and loss are a sneak preview, while the balance sheet is a full sight.
The balance sheet consists of equity, liabilities and cash. Resources are objects or products of worth. It may be currency, inventory or accounts receivable; (revenue payable by customers). Liabilities, on the other hand, are what you owe in debt or some other kind, such as credit card balances or unpaid bills. Equity, on the other hand, is the money for which you stay until you settle the obligations. You will see if the company is in a stable or cash-poor condition across the balance sheet.
With these 10 eCommerce accounting principles in place, you can run your company easily. At the outset, the key is to have the accounting program applied properly, which eliminates various processes that are otherwise very difficult to run manually.
After that, you can control your success and track the growth of your market. In areas like taxes, where things might seem more complicated, you should recommend getting technical assistance from eCommerce accountants on the run[Accounting].