E-commerce is booming, with $3.5 trillion in retail sales globally in 2019. With that much money floating around, e-commerce businesses must have the proper accounting practices. With these best practices, a company could quickly maintain track of finances and avoid getting in trouble with the IRS. This article will explore 5 Essential Accounting Practices for E-commerce Businesses, from a quick tip to long-term accounting best practices to help your business thrive. Often the Amazing fact about Accounting Practices For Ecommerce Businesses.
The first step to successful e-commerce accounting is setting up your business structure. This involves choosing the right type of entity, ideally something that limits personal liability. For example, a sole proprietorship or limited liability company is ideal for small businesses.
Next, separating your business funds from your funds is a must. Mixing personal and business funds can lead to complex financial problems—and sometimes impossible—to fix. Keeping your business funds separate also helps ensure you follow tax laws and file your taxes correctly.
Once your e-commerce business has established a clear structure, installing an effective bookkeeping system is the next step. This includes determining how you will record and categorize transactions, reconciling accounts payable and receivable, managing inventory, and producing financial reports. In addition, an effective e-commerce bookkeeping system will allow you to identify trends and opportunities for growth quickly.
As an e-commerce business, you must deal with high sales volumes, returns, and refunds. As a result, you’ll need to have systems in place that can record these transactions in real time and sync them with your financial records. This will eliminate the need to manually input this data, which can be time-consuming and error-prone.
The most crucial aspect of e-commerce accounting is tracking your inventory and calculating the cost of goods sold (COGS). COGS is the direct cost of a product’s sale, including materials, labor, and other operating expenses. This metric is an essential indicator of your company’s profitability and can help you make informed decisions regarding pricing, marketing, and different strategies.
Another key metric that e-commerce businesses should track is cash flow. This metric indicates whether or not your e-commerce sales are generating enough revenue to cover debts and other operating expenses. By analyzing your cash flow statement, you can quickly spot any issues and make changes to improve short-term liquidity.
An important aspect of e-commerce accounting is understanding and using accrual and cash-basis accounting methods. Cash-basis accounting measures transactions by what’s actually in your bank account. In contrast, accrual-based accounting focuses on the timing of when your company is expected to receive and pay invoices.
As a general rule of thumb, you should use accrual-based accounting if you have a large volume of transactions and a complex business model. This will provide a more accurate picture of your business’s financial health, which is essential when working with lenders or investors. If you’re unsure which accounting method best fits your company, we recommend talking to an accountant or e-commerce bookkeeping expert.