The journey to a fully oiled, successful online business is chock-full of milestones. From the day your product is market-ready to the day your website goes live to the day you make your first dollar, every step along the way is full of excitement.
But here’s the catch: If you can’t track your cash flow, revenue, inventory, and tax obligations correctly, growth becomes a guessing game. In this guide to ecommerce accounting, we’ll break down how to get your financial systems in order, which tools to use, and how to make better business decisions based on real numbers.
That’s where proper accounting for ecommerce businesses comes in. It’s crucial to have a deep understanding of your numbers to grow your business. Accounting for ecommerce may not be the most attractive part of growing your biz, but it’s a necessity.
Let’s dive into understanding the basics, plus some tools you can use to make accounting simpler to track, control, and understand.
Ecommerce accounting is the act of gathering, organizing, evaluating, and reporting your business’s financial data.
However, ecommerce accounting goes beyond tasks like bookkeeping, managing inventory, and filing taxes. It also includes bigger-picture items like creating and reviewing reports that help grow your business. “Think of accounting as the process that lets you review your business’s financial health, involving reports, taxes, and figures for growth planning,” says Fintech Start-up Osome.
Not unlike their brick-and-mortar counterparts, online businesses demand the careful organization of all their financial puzzle pieces. However, ecommerce accounting has its own unique rules and challenges due to the realities of the online shopping industry.
Inventory: Online businesses see higher volumes of transactions because they’re open 24/7. Inventory can be a mess to report accurately, between items in production, final products being shipped to you, and even the items sitting for days in a customer’s cart.
Sales tax: Determining when to charge sales tax to customers can be a big pain point for e-ommerce vendors because the rules vary by state. To ensure you’re meeting sales tax compliance, picking e-commerce accounting software that can track and file correctly may alleviate some of the headaches (more on that later).
International transactions: Ecommerce businesses attract customers from all over the world. And with foreign transactions come foreign transaction fees. If you’re doing the accounting for your ecommerce business, you’ll need to consider the most cost-effective ways to allow non-U.S. customers to purchase from your site.
Did you know cybersecurity is often cited as the number one hurdle for ecommerce businesses? Hackers are looking for vulnerabilities in ecommerce websites and their accounting programs.
Protecting your customer’s data, as well as your own company’s financial standing, is worth being proactive to avoid the colossal headache of a data breach, no matter the size of your company. Considering there were roughly 30,000 cyberattacks daily in 2021, shield your company from the financial impact along with the unfortunate effect it can have on a business’ reputation.
To safeguard yourself and your company from online scams and cyberattacks, here are a few tips:
Before you can choose an accounting firm or software to support your business, you’ll need to settle on an accounting method. Don’t panic! It’s entirely up to you, but there’s one method that’s the most friendly to beginners.
Cash basis accounting keeps things simple, especially if you’re new to managing a business’ finances. Whenever there’s a change to your bank account, that populates a new record in your accounting system. A sale is tracked if there’s money being added in, and likewise, if cash is debited, that transaction is marked as an expense.
The only drawback is that you can’t account for items like future transactions, a purchase order that hasn’t been paid yet, or customers or invoices that haven’t been billed. It’s only a reflection of the physical money moving in and out of your company, leaving a need to project sales and plan ahead via the expertise of an accountant or additional reporting software.
If you feel like you have your bearings with ecommerce accounting or are able to hire experts to manage it all, the more involved method is accrual accounting. Accrual accounting captures a more accurate representation of your business at any given time, though your bank account won’t always reflect it. This method is more commonly used by larger companies because they have the manpower, tools, and knowledge to finely review all the details that accrual accounting requires.
Remember: if you change your mind and want to switch, you have to file official paperwork with the IRS. No one takes that lightly.
Reliable business accounting software and bookkeeping practices are must-haves for any online business owner. While good old Excel or paper filings may have gotten you started, your balance sheet will inevitably become more complicated. So, you don’t want to rely on manual methods of accounting for your ecommerce business for too long.
Making a shift from a spreadsheet might be rocky at first, but it will pay off – quite literally. “With proper ecommerce accounting, entrepreneurs can develop strategies to boost their profits while also ensuring they are following all pertinent laws and regulations,” says the Online Master of Accountancy Department at Ohio University.
Luckily, there are many tools available to streamline accounting for ecommerce businesses. Here are a few places to start:
While there is no shame in hiring an accountant who can start the process for you, explain the inner workings, and act as a consultant as your business grows, below are a few things to consider when searching for the accounting software best suited for your business:
Start with reliable accounting software like QuickBooks or Xero, and track key metrics like cash flow, inventory, and tax obligations.
It depends. Many tools integrate with Shopify, but an accountant or CFO tool like FinHub can simplify growth decisions.
Bookkeeping tracks transactions. Accounting turns that data into insights and reports for decision-making.
Buying online is so, so easy. So why can’t accounting for ecommerce be just as simple? Start with some of these guidelines and tips to build out your tech stack so you’re running smoothly from the ground up. And if you are ready to go from just tracking to growth planning, give Triple Whale a try.
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