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Home Benchmark Blog Accounting For eCommerce: A Small Business Guide to Managing
Finances

Ecommerce


ACCOUNTING FOR ECOMMERCE: A SMALL BUSINESS GUIDE TO MANAGING FINANCES

guestauthor

January 10, 2023 5 min read

https://www.benchmarkemail.com/blog/accounting-for-ecommerce/



It’s the beginning of a new year. Which means if you haven’t begun evaluating
your businesses’ finances at the end of 2022, you’re doing so now. 

Appropriate management of cash flow is essential for the success of any
business. For eCommerce startups and small businesses, however, a healthy cash
flow can mean the difference between survival and bankruptcy. 

If you’re one of the 41% of small eCommerce business owners who do their own
accounts, this article is for you.



Image Source 


WHAT IS ECOMMERCE ACCOUNTING?

At its most basic level, accounting refers to bookkeeping tasks like recording
transactions or handling payroll. But accounting goes further than bookkeeping
and if you’re running a small business, you’ll need to handle these
responsibilities as well:

 * Preparing and analyzing balance sheets
 * Reporting income for tax purposes and calculating tax liabilities
 * Preparing financial statements and stakeholder reports
 * Keeping records in line with auditing requirements
 * Analyzing financial data for risk analysis and forecasting

Good cash flow management starts with good bookkeeping. The first step is to
accurately record the cash flowing in and out of your business. There are two
main accounting methods that eCommerce businesses use to keep track of cash
flow.   


CASH BASIS ACCOUNTING

The cash-based method is the starting point for most small eCommerce businesses.
This is when you record cash movements in and out of your business bank account
as they happen. So, you record expenditure when it leaves your business and
income when it clears.

This means that for your end-of-year taxes, you don’t need to report expected
income or pending payments. Businesses tend to start here because of the
simplicity of the system. It’s difficult to scale when companies grow and start
working with multiple accounts, though. 

This method is suitable for a small eCommerce retailer or a business selling
through a larger site like Amazon. Cash basis accounting will give you a clear
picture of how much cash you have on hand day-to-day or month-to-month.   


ACCRUAL ACCOUNTING

Larger businesses need a solution that can account for payables and receivables
where money hasn’t changed hands. This is known as accrual accounting. In this
method, you record transactions as they’re agreed upon, regardless of money
being received/paid. 

This means you can include things like long-term contracts with staged payments.
Data from the accrual method can help you make financial forecasts. You get a
picture of your cash flow in the coming months or years, allowing you to adjust
your budget plans accordingly.

Many larger institutions would think of this as the default method of
accounting. Small businesses should be wary of starting here, though. Focusing
on future income and expenditure can obscure your view of the ready cash in your
business.   


AREAS OF EMPHASIS IN ECOMMERCE ACCOUNTING

As we mentioned above, accounting has a variety of different purposes. It can be
difficult to know where to start if you’re new to financial management. These
are the four main areas to focus on to keep cash flow healthy while preparing
proper accounts.  


TAX MANAGEMENT

As the end of the financial year approaches, taxes are a high priority for small
businesses. Improper reporting can lead to penalties and expenses that a startup
can’t afford. Yet, tax is a complicated subject. Entire accounting firms exist
to handle corporate tax reporting. Utilizing the best accounting software can
simplify this process, ensuring accuracy and compliance.

As a small business owner, you’re probably used to interpreting the tax code,
keeping proper records, and making sure end-of-year filings are correct. Even
so, an accessible self-assessment software solution can help you track your
finances and organize your records more efficiently. 

For the most benefit, find one that comes with 24/7 customer support, so help is
always at hand. That way, you don’t have to handle every problem yourself.   


BUDGETING

Keeping track of your cash flow in real time will help you create cash flow
forecasts. You can use your forecasted data to help plan your budgets. This can
be especially useful for new businesses as you can plan your expenditures around
your available liquid cash.  


BOOKKEEPING

Keeping good records isn’t just useful for tax purposes. Transaction data can be
used for audit trails, analysis, and forecasting. You’ll also need it to help
with customer support issues like returns. On top of that, investors and
creditors will want to see detailed accounts before they put money into your
business. 


SCALING 

Once you start your small eCommerce business, the objective after survival is
always growth. A good accounting system will help you spot strengths in your
products and services. It will also help you identify your biggest expenditures
and pinpoint opportunities to reduce costs. 


5 TIPS TO ACE ECOMMERCE ACCOUNTING

Now you know what accounting means to an eCommerce business. That means you’re
ready for our five best tips to get on top of your small business accounts.  


UNDERSTAND COST OF GOODS SOLD (COGS)

If you’re new to accounting, cost of goods sold (COGS) is an important concept
to grasp. This is how much it costs you to sell items, and you need this figure
to work out your profit margin. 

Here’s a quick example. Let’s say you sell all your stock of one item for
$5,000. It costs you $1000 to buy the goods, $1000 to store them, $1000 to
deliver them, and $1000 to pay your staffing costs. Your total COGS is $4000, so
your profit margin is $1000.  


KEEP TRACK OF ALL EXPENSES

We kept the example above simple, but you know that real business expenses are
more complex. Keeping track of all your expenses with a detailed balance sheet
will help you monitor how changes affect your income. This is how you identify
what expenses are critical to revenue generation. 


RUN REGULAR RECONCILIATION REPORTS

These reports let you identify and explain any discrepancies between budgetary
items and accounts. Essentially, these reports help you track whether your
forecasting and budgets match up with your actual spending, as well as help
maintain inventory and check payroll at year-end.


TRACK YOUR PROFITS BEFORE TAX

Tax liabilities can change based on physical location or trading location. That
means that keeping track of pre-tax profit is a good idea. That way, if you
discover additional requirements or tax savings, you can accurately refer back
to the original figures. 


UTILIZE CLOUD ACCOUNTING SOFTWARE

Cloud-based accounting software can help small eCommerce businesses keep
professional, audit-ready accounts. It’s relatively affordable compared with
contracting accountants and saves time by automating processes and doing
calculations for you. 

Many accounting software options also come with advanced functions like sale
forecasting, advanced reports, and inventory management to help grow your
business. Take the time to choose one that will best fulfill your business needs
and will provide additional features as and when you need them.   

Let’s recap: Start with good bookkeeping, monitor your cash flow, and use the
help of accounting software. Sticking to these tips will help you get started
with managing your small business’s finances. 



Author Bio:

by guestauthor




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