E-commerce is very vast when it comes to establishing, marketing and getting out there and gaining profits. Something that most of us fail to consider is bookkeeping for e-commerce entrepreneurs. While the focus is on getting the e-commerce techniques right, an equal amount of focus should be given to bookkeeping.
So, what exactly does bookkeeping for e-commerce entrepreneurs include and why is this necessary? Bookkeeping involves techniques to systematically maintain an account for e-commerce business done. All legitimate expenses such as
- Loss or profit incurred
- Miscellaneous expenses
- Canceled transaction details
- Relevant Emails
- Discount vouchers
- Earning from other sources
Overall anything that impacts your business revenue should be considered.
Now that we understand what is bookkeeping, let us also check out what are the advantages you get by doing this-
- Provides a systematic view of your revenue growth
- Helps plan better
- Highlights shortcomings if any
- Extremely handy for taxation purpose
- Mandatory from audit purpose
- A good point to showcase customers to improve business credibility
No doubt Bookkeeping for e-commerce plays an important role in business. There are few tricks and tips which are designed as a recipe for bookkeeping for e-commerce entrepreneurs.
Let us quickly glance at each of these
1.Manage your Paperwork
E-commerce business is greatly dependent on paperwork. Dealing with disorganized paperwork can be one of the key reason to increase your cost of business tax filings.
Pending paperwork can take a lot of time and efforts to organize. You can also store this paperwork in digital format. Shoeboxed is one such paid application which helps to maintain digital paperwork. Digital paperwork can be easier to manage, organize and maintain.
If you’re not sure how best to organize your documents, here are some simple categories to get you started. Most online document services will also have a list of pre-set categories to guide you through the process.
These papers include – Invoices, Merchant reports, inventory reports, sales tax reports, marketing expenses, advertising expenses, employee expenses, travel expenses, rent, phone bills, internet bills, miscellaneous bills and many more.
Categorize each paper into a certain predefined category. In most cases, it is preferable to store all the receipts and paperwork intact.
In case, you think you know all your accounts receivable then it is better to reiterate this. This is not the money that is available with you, but the amount of money which is pending to be received. This may be pending for the services you have provided, work you have done or the goods you have sold.
Do not count this as money already available for your expenses. It cannot be spent unless you receive it. A possibility is that you may never receive the whole amount. A best practice to account for your aging of accounts, which will consider how long an account has been receivable for and the decreasing likelihood that you’ll collect its full value.
As a best practice, estimate the amount that is receivable, but you might not collect it for whatever reasons. When you first set up a business, this is difficult to be predicted. However, over a certain duration, you would be able to estimate at least an approximate value.
3.Setup your bank account
Never mix personal and business accounts. As the first step in your e-commerce business, you should set up a bank account exclusively for your e-commerce business. Not only does this makes your bookkeeping simpler but is also required from a legal perspective.
It is a good idea to maintain two accounts for business.
- Checking: This is meant for business expenses such as inventory, travel, shipping costs, packaging etc.
- Savings: For storing your profits and percentage of your earnings which can be used during tax time.
When choosing a bank for your business, be sure to examine their different fee structures, balance requirements, and, for convenience, proximity to where you live. Some state banks offer free business bank accounts, but be sure to read the fine print.
Also keep in mind, about the payment integration. In case you are using integration software then ensure it can be integrated with your bank details. To start your bank account, you would need an established business name, tax id, and personal identification.
These are typically opposite of accounts receivable. They’re money your business owes because of purchases you’ve made. Unlike accounts receivable, which are listed as assets on a balance sheet, your accounts payable are liabilities.
You would need to maintain a balance sheet providing these details. This again is an important aspect since this needs to be considered while computing the overall tax for your business.
As an e-commerce business you would need employees. As you scale up, your number of employees will increase. At this point payroll is important. Paying employee salaries and other allowances are the sole responsibility of the business owner.
Payroll management is complex. This requires you to include employees, remove the once who have quit, manage the payday and so many other factors which need to be considered.
Employee tax deduction, other allowance, employee provident fund are few other factors which need to be accounted for. Payroll software tools such as Gusto make payroll management less tedious. It is better to use professional payroll software which can make payroll management seamless.
As you set up your e-commerce business, you would need a dedicated finance expert. Bank reconciliation is the process of sitting down and matching the balances in your business’s accounting records with a corresponding record in your bank statements.
When you do discover a discrepancy, that’s your chance to dig deeper and determine the root cause and correct the problem in your accounting records. The good news is that the more often you reconcile your accounts, the more likely you are to catch little problems before they can turn into big problems.
Larger businesses may require daily basis reconciliation, whereas a smaller scale business may need a fortnightly reconciliation.
7.Understand Tax requirement
If you are totally unaware about taxation laws applicable to your business based on geographical region, then you would need a tax expert. With the right amount of saving and bookkeeping, taxation can be made easy.
Based on your earnings, you would require computing your net payable tax. This requires accuracy in computation and deduces the exact tax slab along with gross payables. Understanding tax benefits and other tax eligibilities would take some time. If you are starting your business, then definitely these processes would take some time to get streamlined.
8.Monitor the numbers
Bookkeeping for e-commerce helps you monitor the numbers for your business. A lot of analysis and trend patterns can be deduced from these numbers. This analytics not only help you grow your business but also help in understanding the business shortcomings.
The key indicators include –
- Gross Margins -This percentage will help you monitor your margins and get a firm grasp on how much you’re earning from your products. To calculate gross margin, use the formula:
Gross margin (%) = (Revenue — cost of goods sold) / revenue
- Monthly sales – You can monitor sales pattern and deduce fast-moving and slow-moving months. Based on this you can inform the advertising and marketing teams to adopt the required strategy.
- Marketing ROI–Monitor your return on investment from the various marketing efforts. This helps in also understanding which channels are performing better. You can spend more on the channels which are performing better and drop other non-performing channels.
Tools such as Ecwid can create a detailed sales report.
9.Focus on New or variable expenses
Unexpected expenses can come in any form. This should be done monthly. Monitoring these expenses, can provide you great insights into future trends and will help in managing finances accordingly.
A lot of e-commerce businesses do not make sufficient provision to accommodate new or variable expenses. Keeping an eye on such expenses help in making a more informed decision.
10.Track the expenses
With another kind of expenses, you also have expenses such as Food, Travel etc. These are not directly associated with the e-commerce business profit, loss or sales. However, tracking these is equally important.
As a business owner, one should monitor these expenses as well. Be sure to maintain all receipts no matter how small the amount may be.
Some of these are highlighted below-
- Office Expenses: These are office specific expenses. This includes what percentage of your home you use for an office. If you have an external office then all receipts related to these expenses should be considered.
- Vehicle Expenses: This includes vehicle and other expenses such as oil, gas etc you use for office purpose.
- Meals/Entertainment: Business meetings, lunch, and such other things should be added over here.
- Travel: Travel made for business meetings, hotels, flight expenses should be considered over here.
Documenting these small expenses is important not only for tracking but also for year-end tax. An online solution such as Expensify helps in organizing these receipts.
Audit is another aspect where bookkeeping for e-commerce plays a key role. Imagine the level of complexity you would face in case you do not have proper accountability for your expenses and profits.
Bookkeeping for e-commerce again is useful for audits as this is organized and provides a systematic view of complete company financial dealings.
E-commerce closely depends on merchant services. Each payment gateway would have a different transaction fee. Different systems charge different rates. The way choosing the right merchant service is important, an equal emphasis should be given on tracking the amount that would be deducted per transaction.
When you start a new e-commerce venture, these are a few steps that you should consider.
Some of the common mistakes include–
- Poor bookkeeping– Proper bookkeeping strategy should be maintained from the very beginning. This helps in managing the business better, understanding how the business performs, tax computation, audits.
- Reconciling accounts – Timely reconciliation of bank accounts is something that is ignored. With the business pressure, this in many cases is placed as a back burner. However, this is something that is equally crucial for seamless business running.
- No Backups – As a thumb rule always maintain a backup of your data as well as financial records.
- Lack of streamlines procedure– Success of an e-commerce business depends on the process. The process needs to be repeatable which can be easily adapted.
- Lack of expertise – It is best to hire industry standard experts to organize the bookkeeping activity.
- Budget constraint – Many times, business do not allocate sufficient budget for bookkeeping. This again is a common mistake.
Bookkeeping for e-commerce is mistaken to be a low priority item in many e-commerce businesses and this is one of the common mistakes. Bookkeeping for e-commerce in several ways is the essence of running a seamless business. Due to revenue pressures, a lot of e-commerce businesses do not focus much on bookkeeping.
Bookkeeping helps in giving a snapshot of the business performance. In a way, this provides a complete log of business financial dealings along with other crucial documents.
While this helps in to maintain an organized record of activities, this also ensures you can keep an eye on the expenses. There are several tools available which make bookkeeping process seamless.
When you start a business, you may find bookkeeping to be complex and tedious, however over a period, bookkeeping for e-commerce process can be streamlined and altered based on your business needs.
As a thumb rule, in case you are starting a new business, ensure you also set up a bookkeeping process. If this is not done at the very beginning, then it is almost impossible to be incorporated later once the business is established and has scaled up.
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