How to manage your accounting as an e-commerce business

Starting an e-commerce business can be lucrative but comes along with some challenges. For instance, e-commerce accounting and bookkeeping can be complex and tedious. But keep in mind that these activities are among the dominant pillars in the success of your e-commerce business. Managing your finances correctly will help dictate the future of your business.

E-commerce accounting and bookkeeping also help you keep track of your income and expenses. When you keep your financial house in order, you can explore and expand other business areas.

What is e-commerce accounting?

E-commerce accounting is the process of collecting, analysing, managing, and reporting financial data regarding business transactions and assets in an e-commerce business. E-commerce is like any other industry, and managing financial data is important in making financial decisions in your business.

Evaluating financial data helps determine whether the business is on track for success or headed for financial difficulty. In addition, you will categorise your financial transactions to help determine income and expenses. Below are key terms used in e-commerce accounting:

Purchase order

A purchase order is the document a buyer sends a supplier, stating the type and quantity of items it wants to buy and the agreed prices. As an online seller, you’ll usually raise purchase orders when you restock from your suppliers. Once the supplier accepts it, the order generally forms part of the contract. It is not a payment, but it should set out the payment terms.

Sales order

This document is prepared by the seller in response to a customer’s order. It showcases all the details of a sale and should incorporate client information, type and quantity of goods, payment information, date, and delivery address.

Cost of goods sold (COGS)

COGS is the cost of the stock you actually sold in a period. For an online retailer, it is the purchase price of the goods plus the costs of getting them to your warehouse ready to sell, such as inbound freight and import duties. It does not include office costs, software licences, marketing or general wages.

Outbound shipping to customers, payment processing fees and platform selling fees (such as Amazon or eBay fees) are selling costs rather than COGS. Many online sellers track them as variable costs just below gross profit, so they can see the contribution each order really makes.

Categories of e-commerce accounting

E-commerce accounting is like any other business accounting, which requires preparing and managing financial information and tax management. There are three main e-commerce accounting categories: bookkeeping, reporting, and submitting tax returns.

Bookkeeping

Bookkeeping is imperative in business planning and operations. It helps assess balance sheets, inventory management, income, and expenditure. When you do not track your bookkeeping properly, you can experience difficulties analysing sales, inventories, tax records, and expenses.

Submitting tax returns

Numerous mistakes can arise when lodging and interpreting tax requirements. This may seriously impact your business, but e-commerce accounting helps you plan and prepare for these taxes. You will be able to keep track of the taxes that apply to you, such as GST, income tax, PAYG withholding if you employ staff, and state payroll tax if your wages exceed your state’s threshold. For GST, check both current turnover (this month plus the previous 11 months) and projected turnover (this month plus the next 11 months), applying the statutory exclusions. The registration threshold is $75,000; register within 21 days of becoming required to register, including under the projected test. A current-turnover result alone does not require registration if the Commissioner is satisfied projected turnover is below the threshold.

Reporting

After analysing your books and lodging required tax returns, reporting is essential in helping plan for growth. It is also the perfect instance for gathering all the necessary information required to scale your e-commerce business. This is important in defining your business goals as you have answers to questions such as:

• The most profitable products and services for your business
• Expenses that consume most of the expenditure
• How to increase your profit over time
• Other ideas that can be incorporated into your business to boost profit margins

When you have adequate data for your business progress, you will also decide whether to venture into new opportunities or rather improve current undertakings.

Basics of accounting in e-commerce

1. Track your cash flows

Watching your cash flow helps determine the direction that your e-commerce business is heading. Cash flow and profit are not the same thing: an online store can be profitable on paper and still run short of cash if money is tied up in stock or held back by payment platforms. Your profit and loss statement shows whether you are making a profit; your cash flow shows whether you can pay your bills on time. Aim to have more money coming in than going out. Additionally, have targets in the amount you intend to spend within a certain timeframe. A separate business bank account is critical to tracking your cash flow.

2. Choose accounting software

Many sellers start out with spreadsheets for e-commerce accounting. Accounting software is more reliable as it will help you track costs, sales, and inventories, with many now integrating with ecommerce platforms directly. There are many available accounting software tools in the market. Choose the one that aligns with your business needs and preferences to get the best results.

3. Compute all the expenses

There are different expenses in an e-commerce business, such as the cost of goods sold, among other related costs. There are also others referred to as fixed expenses that do not go up when you make sales or decrease when the sales are low. These may be factors such as rent, utilities, insurance, council rates, and salaries. However, they must be factored in when calculating all the expenses. Understanding the costs incurred when running your business is important.

4. Monitor your sales and profit before tax

Monitoring your sales before paying taxes will provide early indicators of any issue. It is also important in managing your money. In case there are any issues, you will have time to engage different strategies to ensure you steer towards your long term goals.

5. Plan for your tax payments

Tax payments are determined by a number of different factors. Similarly, tax deductions can vary depending on your size, industry, location, and the type of work you complete. It’s always best to plan and lodge on time to avoid penalties, interest or a tax bill you didn’t budget for. Set aside the GST you collect and money for income tax as you go, so your BAS and tax payments don’t catch your cash flow short.

Bottom line

E-commerce accounting is an important element of your business model. This is because it helps you keep track of your business goals, fix any trouble areas and decide on further business expansion. You will also be able to manage your cash flow, expenses, and income seamlessly.

Visory runs bookkeeping, payroll, accounts payable and receivable for growing businesses, including online sellers, with a dedicated team and its AI, Delphi, overseen by that team. Visory Insights and a Business Performance Partner then turn your numbers into decisions.

Book a discovery call to see how Visory could run the finance function for your e-commerce business.