No matter what your business is or what industry it operates in, accounting and bookkeeping are an imperative part of securing solid foundations to build on. Without healthy and meticulous bookkeeping and accounting practices, you can’t possibly have a clear grasp on the business’s finances or where it stands in terms of tax liability. This lack of oversight will, in turn, leave you open to detrimental things like poor spending decisions and the risk of costly penalties.
The importance of accounting and bookkeeping is paramount for all businesses but perhaps even more critical for ecommerce businesses that are moving in a rapidly-changing digital landscape. Accounting is something that all ecommerce business owners must take extremely seriously if they’re going to not just survive but thrive.
In this guide to all things ecommerce accounting, we cover the following six topics and take a deep dive into each of these areas to make sure you’re up to speed:
- What it means to be an ecommerce business
- What is ecommerce accounting?
- How ecommerce accounting is different to regular accounting
- Why bookkeeping and accounting are so important for ecommerce sellers
- Tips for ecommerce accounting success
- Does an ecommerce business need a specialist accountant?
What is an ecommerce business?
Before we move any further into our explanation of what ecommerce accounting is, let’s first make sure that you’re completely clear on what it means to be an ecommerce business.
So, an ecommerce business is one that sells products or services electronically, primarily over the Internet – hence the name. This means that any transactions that are made are digital exchanges, rather than tangible transactions (in a physical shop, for example). This can apply to both B2B (business-to-business) and B2C (business-to-customer) products or services. However, ecommerce can also encompass C2B (customer-to-business) and C2C (customer-to-customer).
Some of the most popular online marketplaces that ecommerce merchants are using right now include:
The specific nature of electronic commerce also comes with some specificities around accounting and bookkeeping, which is what we’re going to explore for the remainder of this blog post.
Different business account types
When starting up an ecommerce business, one of the very first things you’ll need to do is set up a business bank account. The earlier you can do this the better so that you can ensure that your personal and business finances remain separate.
High street bank account versus online business bank account
When it comes to setting up a bank account for your ecomm venture, there is number of different business account types for you to consider. The main decision you’ll need to make is whether you want to choose a traditional high street bank or opt for an online bank instead.
The pros of a traditional high street business bank account
Most high street banks have a business offering, including HSBC, NatWest, Barclays, Clydesdale Bank, Lloyds Bank, Metro Bank, Royal Bank of Scotland, Santander, the Co-operative Bank, TSB and Yorkshire Bank.
The main advantage of choosing to bank with a high street bank is longstanding reliability, which some business owners find reassuring. At the moment, it’s also easier to manage things like cheque deposits and overdrafts with the support of a traditional bank.
Plus, some people find comfort in knowing they can visit a physical branch and speak to a person in real life if they prefer face-to-face support.
The benefits of banking with an online bank
Digital banks (sometimes referred to as ‘challenger banks’) provide an online alternative to bricks-and-mortar banks. Some benefits of opting for an online bank are:
- Quicker and easier to open than a traditional account
- Integrations with other ecommerce tools like Shopify, Stripe, PayPal, Stripe and Transferwise
- Simple integration with accounting and bookkeeping tools to help automate processes
- Innovative and modern approaches to customer service and support
- Useful features like being able to categorise transactions and scheduled payments
- Retail rewards to help you save money
Popular online banks businesses are choosing right now include Starling, Tide, Revolut, Monzo and Metro Bank but that short list is by no means exhaustive.
Can you open a business savings account?
Yes, you can open a business savings account but there are some things you’ll need to think about before you do. Firstly, business savings accounts tend to have much lower interest rates than a personal savings account. So, for a sole trader, it’s better to save through a personal bank account.
However, many ecommerce businesses will be registered as limited companies, which means they can’t just take money from the business and move it into their personal savings. So, as a limited company, if you are looking to build savings directly from your business income, you’ll need to do some research and find a provider that suits your needs.
Common business savings account providers include Nationwide BS, Virgin Money, Yorkshire Bank and Hampshire Trust Bank – just to name a few.
What is ecommerce accounting?
Ecommerce accounting is the process of accounting (including bookkeeping) that occurs within an ecommerce business. Broadly, it involves maintaining financial records and keeping detailed documentation of what comes in (receivables) and what goes out (payables).
The collation, categorisation and organisation of this financial data (including records of transactions and assets) provide the requisite information for effective reporting, forecasting and strategising. It also encompasses the preparation and submission of annual tax returns and payments.
Other typical ecommerce accounting tasks include (but are not necessarily exclusive to):
- Managing budgets
- Recording returns and chargebacks
- Monitoring cash flow trends
- Managing recurring expenses
- Managing inventory
- Generating reports from selling platforms
A great deal of the overarching accountancy obligations for ecommerce businesses are the same as they would be in a regular (non-ecommerce) business. However, ecommerce business owners also need to be aware of some specific rules and regulations that they must adhere to that don’t necessarily apply to their non-ecomm counterparts.
We explore these specificities in more detail a bit further down – there’s just another topic we’d like to ensure clarity on first and that is:
What are cash flow statements?
A cash flow statement is a type of financial report that presents data around all cash inflows received by a business. This includes from its own business activities but also from external investments and funding, which provide the three main sections that a cash flow statement must be structured into.
When it comes to cash flow statements, something that any business selling products – including ecommerce businesses – will need to consider is inventory cash flow.
What is inventory cash flow?
Inventory cash flow describes how your inventory management impacts your cash flow i.e. the flow of money in and out of your business bank account. The main influential variables are around how much inventory you hold, what your inventory turnover is and your inventory accounting method.
Understanding and interpreting cash flow statements can be tricky – they’re complicated reports, especially when inventory cash flow comes into play. That is one of the reasons we would recommend seeking the support of a specialist ecommerce accountant.
We explore more reasons to hire an ecommerce accountant later on but next, there’s another topic we’d like to provide clarity on first and that is:
Are accounting and bookkeeping the same thing?
We mentioned in our introduction how important both bookkeeping and accounting are for ecommerce businesses – as well as any other type of business – but it’s important to understand that they’re not the same thing. Bookkeeping and accounting, despite being intrinsically linked, are two separate processes and must be treated that way in order to build and maintain valuable (and compliant) financial records.
It’s not uncommon for the terms ‘bookkeeping’ and ‘accounting’ to be used interchangeably but they each have their own place in the system. They’re both an integral part of the financial cycle but support the businesses in different ways and at different points. This applies to ecommerce businesses in the same way it would any other business.
In a nutshell, bookkeeping is like the precursor to accounting. Bookkeeping encompasses the more administrative process used to record and organise financial data and transactional information. This includes things like invoicing, account reconciliation, payroll and balance sheets. Accounting, on the other hand, takes this data and information and uses it more subjectively to generate financial insights and guidance. As we mentioned above, this part of the process includes things like audits, reporting, forecasting, risk analysis and tax return submission.
Of course, this is just a high-level explanation of the functional differences between bookkeeping and accounting but understanding the basic distinction is a great place to start. Later, we’ll look more closely at why it’s so important for ecommerce sellers to factor in both processes.
Is ecommerce accounting different to regular accounting?
The core principles of bookkeeping and accounting are the same for ecommerce and non-ecomm businesses. However, for ecommerce merchants, things are a little more nuanced. For example, ecommerce businesses generally tend to deploy two primary approaches to accounting: cash basis accounting and the accrual method. We break both of these down in more detail below so that you can establish which one would best suit your requirements.
Cash basis accounting
Cash basis accounting records transactions as and when money lands (e.g. sales) or leaves (e.g. expenses) your bank account. This makes it an incredibly easy way to monitor how money is moving through your account in real-time.
Cash basis accounting works particularly well for:
- Small ecommerce businesses
- Start up sellers
- Merchants using the C2C ecommerce business model
- Dropship operations
This is a great method to use for businesses that are just starting out as it’s so simple, easy to manage and makes financial data so easy to digest. However, when using the cash basis accounting approach, this doesn’t consider accounts receivables or account payables – both of which are important for larger, more established ecommerce businesses. That’s where the accrual method comes into play
The accrual accounting method records transactions as and when they happen, rather than when the money actually reaches (or leaves) your account as is the case with cash basis accounting. This is arguably the most common method deployed by businesses – but that’s not necessarily to say it will always be the right one for you.
Accrual accounting is, without doubt, more complex than cash basis accounting but this pays off with much more realistic reflections of the money flowing in and out of your bank account. This increased accuracy enables you to then generate far more realistic financial projections that can then be used to inform smarter business decisions.
The downside of the accrual method is that it offers a less definitive reflection of how much money you actually have at your disposal at any given time.
As accrual accounting records real-time transactions rather than when money lands in or leaves your account, this also means it will show things like future payments and expenses that haven’t yet been actualised. The consequence of this is that, sometimes, your accounts can look more promising than the real picture. Plus, it also calls for far more meticulous monitoring and analysis which naturally requires additional resources and expertise.
The accrual accounting method lends itself best to:
- Larger ecommerce businesses
- More established businesses
- Businesses that plan to expand and grow rapidly
- Those wanting a more realistic representation of cash flow
As you can see from the pros and cons of each, choosing which ecommerce accounting method to use really comes down to the context of your business and personal preference. Either way, bookkeeping and accounting are an integral part of any ecommerce operation and in the next section, we explore why.
Why bookkeeping and accounting are so important for ecommerce sellers
The main reason why bookkeeping and accounting are so important for ecommerce businesses is to provide a robust and reliable system for financial information and records. Both bookkeeping and accounting are of paramount importance even before the business starts trading so that you can maintain firm control of things like ecommerce startup costs and initial investment.
Rachel Philips, Financial Leader and Founder & COO of US ecommerce accounting firm, Fully Accountable summarises the importance of bookkeeping and accounting for ecomm businesses perfectly:
“Bookkeeping and accounting maintain your business’s financial integrity. They provide a reliable system for all records and can help you glean insight without disrupting processes such as payroll and tax audits. eCommerce accounting ensures you stay up to date and prepared for the logistical aspects of your business. (1)”
Good bookkeeping and accounting practices are as integral to an ecommerce business (if not sometimes more so) as they are to any other business type. Below, we break down just three of the main reasons why in more granular detail to truly hammer home just how critical they are to both the short and long-term success of an ecomm venture.
To ensure all necessary tax compliance
This one goes without saying and is arguably the most obvious benefit of hiring an accountant for your ecommerce business.
It is the role and responsibility of an accountant to ensure that your business is running not only tax-efficiently but also tax-optimally at all times. An accountant will not only prepare and submit your tax returns on time so that you can avoid penalties from HM Revenue & Customs (HMRC), they’ll also ensure that you’re capitalising on all applicable tax relief and allowable expenses available.
Not only will this save you time, money and stress, it also means you can concentrate on other areas of the business knowing that you’re ticking all of the necessary tax liability boxes with confidence. That’s a huge weight off your shoulders.
To solidify and bolster your business model
You can build a beautiful house with stunning architectural design but without rock-solid foundations, it will always be left vulnerable. The same goes for an ecommerce business.
You can build a brand, an offering and even a team around a great business model but without stable foundations, you put all of your hard work in danger of collapse. A large part of constructing these foundations for your business comes back to accounting and financial management, which provide stability and steer as you evolve.
To generate valuable and informative financial forecasts
Bookkeeping and accounting provide you with some of the most vital tools you need to build a roadmap for the short and long-term future of your business. It’s in an entrepreneur’s natural instinct to look ahead, especially in an ever-evolving arena like the ecommerce industry, and financial insight is instrumental in this forward-planning.
Accounting provides you with analytical insights, such as projections and forecasts, that will enable you to start building a clear picture of what your financial future will look like. You can then make better business decisions based on this critical knowledge and oversight.
To support ongoing growth strategies
Growing an ecommerce business is no mean feat, especially when you’re contending with such a saturated market. Your brand needs to stand out from the crowd, your product needs to deliver above and beyond and your customer experience needs to be second-to-none.
You also need to ensure that your financial management is watertight – bookkeeping and accounting are the cornerstones of this. When your finances are well-organised with great bookkeeping and your accounting analysis is fully optimised, you can make more informed decisions about how and when to implement various growth tactics.
For example: if you’ve got a granular understanding of your cash flow (current and projected), you’ll know when is the right (or wrong time) to expand your workforce with new recruits or when to invest in product development. It will also enable you to clearly see what products are most profitable for you and therefore where you want to be injecting additional cash for a better return on investment.
Good relationships with your suppliers and manufacturers
Another byproduct of good ecommerce bookkeeping and accounting practices is stronger relationships with the suppliers and manufacturers you work with. When your books are in order, you can pay your bills on time and make fulfilling invoices a seamless process. This will stand you in good stead with your contact and who knows, it might even lead to more favourable prices.
Top tips for ecommerce bookkeeping and accounting success
- Don’t wait until you’ve made your first sale – start from the very beginning, before your business even starts trading.
- Don’t just rely on your bank account to glean profit information – tap into the micro transactional information that can be found in the backend of your selling platform(s).
- Make sure you’re recording the actual date that payment is received by customers rather than the date of transaction so that your actual sales accounts are more accurate.
- Stay well-organised so that your accounts don’t end up getting on top of you. When you let things go awry, you run the risk of making mistakes and missing important deadlines – not to mention making things a whole lot more complicated for you when it comes to assessing your financial progression.
- Keep the roles clear and well-organised. Whether you choose to outsource or not, the separate responsibilities of bookkeeping and accounting should be distinct so that processes can run smoothly and effectively.
- Don’t leave everything until the last minute as this can leave you under-resourced and prone to making critical errors or missing deadlines. Be proactive rather than reactive with your ecommerce accounting.
- Seek the support of a specialist ecommerce accountant.
The trajectory from being able to handle small bookkeeping and accounting responsibilities yourself to needing the intervention of a qualified expert is summarised well here:
“Managing your inventory, setting up standard tax information including payroll taxes, and other basics should be something that you can do on your own with basic accounting tools. However, as your business grows, it’ll become more complicated and harder to manage on your own. Accounting can be a full-time job. (2)”
With this in mind, let’s now take a look at why an ecommerce business would benefit from the skillset of a specialist accountant.
Does an ecommerce business need an accountant?
Now that you’re clear on what ecommerce accounting is and why it’s so important for ecommerce business owners to dedicate sufficient time, energy and money to, it’s time to think about recruiting some support.
Deciding whether or not to outsource ecommerce accounting can be a tricky decision for some sellers, especially those with a limited budget. According to a recent body of research published by OnPay, only 30% of small businesses actually use an external accountant (3). However, the benefits of hiring an accountant are manifold and have the power to make a significant impact on the growth and development of the business.
We’re not just talking about any old accountant here though. Naturally, you’d do your research and find a reputable, qualified accountant that you’d be happy to work with – that goes without saying. What we want to shine the spotlight on specifically here are the many advantages of hiring a niche ecommerce accountant who is qualified to specialise in the world of ecommerce finance and business growth.
What is the difference between an eCommerce accountant and a regular accountant?
It’s as simple as it sounds really: an ecommerce accountant will offer their skills to ecommerce clients exclusively, meaning those merchants selling on the likes of eBay, Amazon, Shopify and Etsy, rather than those with a physical store.
When an accountant specialises in this way, it requires them to hone their skills to provide a more concentrated service that supports their clients more directly, alongside the more general responsibilities. When it comes to ecommerce businesses, this might include things like managing international sales and dealing with import and export liabilities.
The benefits of hiring a specialist ecommerce accountant
Below are just some of the reasons why ecommerce accountants are such a valuable addition to any business in the digital marketplace.
Granular knowledge of the industry – Ecommerce accountants quite literally make it their business to stay on top of the ins and outs of the industry – at least where matters of finance are concerned. This means that they can make sure you’re taking advantage of all possible tax relief opportunities and keep you up to date with any new or refreshed regulations. They’ll also be able to use their skills and experience to simplify and streamline the process when it comes to submitting your Company Tax Return and VAT Return each year.
Not only will this ensure that your business remains tax-compliant, it will also save you a great deal of time and make your life a whole lot easier. This will, in turn, leave you with the luxury of more capacity to focus on moving your business forward.
An understanding of how ecommerce platforms work – Whether you use Amazon, eBay, Etsy, Shopify or any other ecommerce platform, a specialist accountant should be well-acquainted with how they work and their respective functionalities. This means they’ll be able to help you navigate the various systems and reports that are designed to equip you with valuable insights and metrics.
Expert advice on the best tools for your tech stack – As we touched on earlier, finding the right tools and software to support with your bookkeeping and accounting can feel like a complete minefield. Not only will a specialist accountant be able to assist heavily with various ecommerce accounting tasks, they’ll also be best placed to advise you on the right tools for your business. That way, you don’t have to waste valuable time and energy on sussing out software that doesn’t meet your needs.