The accounting game can be difficult, but it’s not impossible. And if you want the best chance of success? You need to understand your numbers and how they work in conjunction with each other so that any problems are easier to solve when they arise! So, to help new e-commerce sellers avoid potential pitfalls like missing or incorrect information about inventory levels, for example – we’ve put together this guide on some key definitions & systems found within an online store’s financial records (or tax return).
If you want a running start in your business, bookkeeping is essential. First, you’ll get an overview of how it works and what should be going on with all aspects from financial reports to tracking inventory by category, so there are no headaches later when tax time rolls around again:
See Also: Warehouse Management System
CASH, ACCRUAL, OR MODIFIED CASH ACCOUNTING:
You need to know your business’s financial data, but do you have a choice? There are many different bookkeeping methods across the board for businesses. One type of calculation that can be done with these accounting techniques is forecasting – this will give an idea about how accurate or inaccurate any forecasted figures may turn out to be if they happen at all! Ecommerce companies should use one method more than others: accrual basis accounting, which records every transaction as soon as it happens rather than waiting until the cash comes through from somewhere else down the line (such as suppliers).
MOST COMMON BOOKKEEPING METHODS
CASH ACCOUNTING
Counting your cash flow is a way to easily understand how much money you have coming in and going out. For example, when people receive income, it’s considered as an expense because that’s when they get paid for their work done with the product of what was sold at some point during production or distribution stages—and then there are also things like interest rates on loans which can change depending upon many factors such as duration desired etcetera.
ACCRUAL ACCOUNTING
Inventory management can be a pain, and often it is not very clear what type of impact an inventory purchase or sale will have on financial performance. The double-entry method, which relies heavily upon recording revenue from sales when they occur with expenses recorded when cash comes in, helps you understand how long-term your spending habits may affect the company’s bottom line. Most people know that buying merchandise for resale requires some level of understanding about managing finances, but did you also realize there’s more than one way? One popular approach involves using two spreadsheets: one containing raw data such as cost codes/prices paid; another categorized by months into categories like “Inventory” followed.
WHAT SELLERS NEED TO DO
With accurate forecasts, you can make more informed decisions about your finances. Your cash flow will be better prepared for the peaks and valleys that are sure to come in business cycles.
COST OF GOODS SOLD (COGS)
One of the more overlooked elements in your finances is COGS. It tells a story about how much money you’re making and where those profits go, which can be invaluable for any entrepreneur.
The price of a product is the amount you must pay for it, so knowing whether your company can afford something should be important in business decisions. Likewise, understanding how much profit (or COGS) there was after acquiring and selling these products will help decide what’s best moving forward.
“Item price – COGS = gross margin”
WHAT SELLERS NEED TO DO
If you’re not feeling confident in keeping track of your COGS, then it may be time to consider a solution for this. Some accounting software providers will integrate with an e-commerce platform and do all the necessary calculations on behalf of their clients.
GROSS MARGINS
With successful accounting, you need to know and plan your gross margins. Maximise your profits with the costs associated with selling a product must be properly calculated. Without understanding these margins and what they look like for each item sold or service offered on an ongoing basis then we cannot accurately calculate our potential earnings from any given sale, which could lead us to make bad decisions when trying new products or services as well as focusing too heavily one type of business over another simply because those opportunities may have higher margins than others at first glance but if left unchecked might eventually cost much more in their entirety due even before considering inventory counts! So, it pays off big-time not only now but in the future.
WHAT SELLERS NEED TO DO
E-commerce sellers need to maintain a steady margin by tracking their gross margins. Gross margins are the difference between production costs and sales revenue, so when these numbers change drastically, it can affect your whole business’ bottom line. By analysing what’s going wrong with the metrics in different areas of online retailing like marketing or customer service, it is beneficial to keep an eye on all aspects, which helps to grow faster while maintaining profitability over time.
VARIABLE EXPENSES
All e-commerce costs are not created equally as these need to be properly prepared in a way that reflects accurately on your business and ensures the best possible return on investment for you.
Expenses are something many people worry about, but what’s the most important thing to remember? First, the expense is not just an expense.
VARIABLE COSTS WORK DIFFERENTLY FROM FIXED COSTS WHEN CALCULATED:
Fixed costs are the easiest to understand because they’re just added together. In addition, fixed expenses will not change regardless of how many hours or days you use them in each period for work-related purposes, so their value doesn’t fluctuate based on what your company does with its assets throughout any period. But variable costs should be taken into consideration, as illustrated below:
Total variable costs = quantity of products produced x variable cost per unit.
This may seem counterintuitive, but the business with higher variable costs than fixed will likely be more profitable. For example: say your company makes £1 million in revenue and spends 50% on salaries while maintaining 10% for manufacturing overhead like rent or electricity if they also pay themselves 100%. This leaves them only needing to cover 20%, which would make their profit margin rise. On top of this, there’s always an opportunity cost since you could instead invest those resources elsewhere, such as advertising campaigns where we might get higher return rates.
WHAT SELLERS NEED TO DO
When it comes to costs of production, stay mindful and lookout for opportunities to renegotiate them. You don’t want your margins eaten away by hidden expenses.
FINANCIAL STATEMENTS: PROFIT AND LOSS (P&L)
This is what you need to know about the P&Ls. Profit and loss statements summarise revenue, expenses incurred in a particular period – usually a financial quarter or year. Ecommerce sellers use them to show whether they can generate profit based on their business management skills, essentially helping them compare performance month-to-month and yearly.
WHAT SELLERS NEED TO DO
Accounting software with a built-in feature will allow you to easily track your sales strategy and see how it’s affecting both net incomes, as well as expenses. If there is an imbalance between these two numbers, look no further than what might be causing them.
FINANCIAL STATEMENTS: BALANCE SHEETS
A balance sheet is a snapshot of what you own, owe, and have at any point in time. eCommerce Accountants often use balance sheets to track the financial health of companies during sampling periods because they’re easy to summarise quickly while staying accurate over long periods or looking through itemised reports which can take up more room on paper – not to mention how much work goes into piecing together where every penny went. A key thing about this report card, though? It doesn’t tell us anything if there’s no money coming in, so make sure your company has enough incoming cash injections before getting too wrapped up analysing these numbers.
Your assets will always equal your liabilities + equity.
WHAT SELLERS NEED TO DO
Always be aware of the things that will help your business grow. One thing you should keep an eye on is checking for any equity or trends in growth because if there’s a sudden reduction, then it may be time to assess what caused this decline and act accordingly before more harm can come about, as well as how much money needs to be saved up immediately so debts aren’t compromised by unpaid invoices which could lead into bankruptcy proceedings.
CLOUD ACCOUNTING SOFTWARE
Many people think that spreadsheets are a good way to keep track of one’s finances because they’re free and easy. However, this is not true! It turns out you cannot use them for long periods without investing money into better software, plus there’s no flexibility when it comes down to what information needs displaying. So, if your goal as an entrepreneur/small business owner ideally ones focused on growing revenue through increased productivity, check out some reputable options.
WHAT SELLERS NEED TO DO
If you’re an e-commerce seller, we recommend using Xero Accounting software or FreeAgent. Both platforms have tools and resources that will help your business grow.
SUMMARY
Starting strong is key when you are just starting your business. This means finding an accountant who will work with all aspects of e-commerce, including bookkeeping and tax obligation laws, so that no matter what goal or profit margin is needed, they can get it done for their client’s needs quickly while still meeting deadlines time. The right approach to your accounting will make all the difference in how long it takes for you to turn a profit. Working with an e-commerce specialist accountant might not be possible straight away, but there are options – and they’re about starting strong. Book your 30 mins free consultation with expert E-commerce accountant
Bradley attended Boston University where he received a Bachelor’s degree in Economics and Political Science as well as a Master’s degree in Business Administration from Columbia University Graduate School of Business (currently attending). He loves to write about everything business related.
