If you run an ecommerce business, then you’ll know that the bottom line is the company finances, although it’s often overlooked.
Good accounting is the bedrock of a successful ecommerce business and with ecommerce businesses growing by 43% in 2020, there’s plenty more opportunities for expansion.
Below, we look at some of the accounting basics vital for any ecommerce business:
Get the Right Tools
Accounting is constantly changing, with cloud accountancy software at the cutting edge of developments.
Streamlined accountancy software can make accounting far simpler than working on a spreadsheet, enabling you to incorporate best practices and assess your financials easily.
Software such as Xero, Quickbooks and LinkmyBooks – ask (your ecommerce accountant which they recommend for your business) – allow you to automate tasks such as invoice creation and reminders, as well as simplifying timely tasks such as self-assessment.
This allows you to switch to focusing on your business’s core objectives instead.
So once you’ve found your ideal piece of ecommerce accounting software, what key aspects of accounting do you need to keep an eye on?
Cash Flow
Cash flow is the number one priority for most ecommerce business owners, particularly for startup businesses.
Around 57% of small business owners in the UK experience cash flow difficulties at some point.
It’s crucial to track cash flow so make sure you have a clear, systematic processes for invoicing, payment terms and overdue invoices.
Always know your limits as a small business – sometimes large contracts can be more hassle than they’re worth as the purchasing costs can be prohibitive – consider getting money up front if possible.
Inventory Management
Being an ecommerce seller means knowing your inventory inside out – ideally pulling these through to your website so customers aren’t ordering out of stock products.
If you run a dropshipping business this will be different, but you still need to consider the stock levels of the manufacturer.
You also need to remember that stock can shift in value before you manage to sell it, so be careful when buying in bulk – foresight is one thing, overconfidence another (see the fidget spinner craze!)
You can also end up with shrinkage, where you’ve got less stock than you think you have due to employee theft, faulty inventory software or administrative errors.
Costs and Expenses
To get a clear idea of your trading profit, you need to understand your costs and expenses for producing that product.
These costs may include things such as manufacturing, packaging and shipping costs (both to you from the manufacturer and to the customer) as well as a margin of error for returns/faulty products and damages.
You also need to account for your operating expenses.
For ecommerce sellers, you will need to consider:
- Website hosting and maintenance
- Transaction and licence fees
- IT costs
- Branding and graphic design
- Accountancy (luckily there are some low-cost fixed fee accountants out there!)
But there can be others such as insurance, premises and staffing costs.
Break Even Amount
Your break-even sales amount is the amount you need to sell to cover all your costs – and it’s a vital piece of information for any ecommerce business owner to know.
To calculate your break even amount, you need to work out your gross margin (net sales revenue minus cost of goods sold) per product, then divide your fixed costs by this amount. This gives you the number of units you’ll need to sell to break even, meaning anything earned over that is profit!
Profit and Loss Account & Balance Sheet
A profit and loss account, also known as an income statement, is a snapshot of the amounts coming in and out a business at a certain time (usually a fiscal quarter or year).
This profit and loss account shows the business’s revenue and ultimately it’s profit-making capabilities.
Beyond the profit and loss account, you should also consider producing a balance sheet which provides a bigger financial picture beyond the day-to-day ins and outs including:
- Assets
- Liabilities
- Equity
Quite simply these financial documents help you to demonstrate how you manage your debts and generate profit both at the present moment and give an indication on the potential of your ecommerce business in the future.
If your ecommerce business is seeking investment, this documents are vital for displaying your company’s financial performance and ultimately how viable it is as a business.
Tax & VAT Planning
In an ecommerce business it can be easy to be blindsided by your tax and VAT liabilities, which can get confusing if selling in multiple countries.
You don’t want to be worrying about not having enough to pay your tax bill when it comes around – so make sure you always keep cash for your required tax and VAT bills.
One thing that often takes ecommerce businesses by surprise is VAT registration – in the UK if your ecommerce business turnover exceeds £85,000 in any 12-month period you are required to register for VAT or incur a penalty from HMRC.
For fast-growing ecommerce businesses it’s easy to be caught out by these penalties.
Why Choose an Ecommerce Accountant?
Accounting basics are what every online business should know and use, but given these tools, they also need to know how to get the best out of them.
Using a dedicated ecommerce accountant will give you support and guidance, bringing a depth of knowledge and professional commitment to helping you manage your accounts more effectively.
For more details, please contact us for a free, no-obligation consultation.
