The Ecommerce Guide to Bookkeeping
July 24, 2020
You have to wear a lot of hats as an ecommerce business owner, and (for better or worse) bookkeeping is one of them. Cash flow is one of the most prominent startup killers, so getting the books in order is your non-negotiable responsibility.
If tracking and managing your expenses and revenue sounds intimidating, you’re not alone. Close to three-fourths of small business owners don’t feel very confident about their knowledge concerning bookkeeping and accounting — but, it doesn’t have to be this way.
With some basic bookkeeping knowledge and a little know-how, you can manage your ecommerce business’s finances with confidence. And, no, you don’t need to take a 12-week course — you just need to read on.
What is bookkeeping?
Bookkeeping is the act of tracking your company’s financial transactions (in and out) by recording them digitally in accounting software or physically in a ledger. This financial information reveals insights into where you’re spending money and how your business makes revenue. Also, having detailed financial records makes tax season less of a headache.
Recording your financial data is the most fundamental part of bookkeeping, but it won’t do you much good if you can’t access and understand your records. Bookkeeping entails correctly categorizing, organizing, and storing your financial transactions to help with taxes and audits and to provide business insights.
Four reasons bookkeeping is important
Without proper bookkeeping, you’re just aimlessly steering your ecommerce business. You need financial data to discover (and validate) your strengths, weaknesses, threats, and opportunities. Business decisions without data are just guesswork.
1. Identifying tax deductions
Accurate, up-to-date bookkeeping is key to a stress-free tax season. Keeping detailed financial records will help you find and claim all the available small business tax deductions, which means more money for you. Bookkeeping will also help you estimate your taxes throughout the year, so there are no surprises come April.
2. Getting a business loan
Digitally tracking your transactions empowers you to quickly generate relevant financial statements like your profit and loss statement, balance sheet, and cash flow statement. These reports give you quick insights into your business’s financial health, but you’ll also need them to acquire affordable financing like SBA loans or win over ecommerce venture capitalists.
3. Detect fraud and banking errors
Bookkeeping doesn’t prevent fraud, but it does let you know when it’s happened. Without proper records, vendors could tamper with them, or employees could misuse business credit cards — and you’d be none the wiser. Also, the banks aren’t perfect; they make mistakes sometimes too. Up-to-date books will help you correct any discrepancies that might arise.
4. Paint a clear picture of financial health
With bookkeeping, you can get an instant look at your company’s financial status. You’ll see how much money you have, how much you owe, and what trends may be right around the corner. Nothing lends more credibility to your business’s success than well-documented books.
How to do bookkeeping (the right way)
If you’re going to invest your time bookkeeping, you want to make sure you do it well. Getting the small things right from the get-go will prevent your books from turning into a useless mess.
Separate your business and personal finances
As soon as possible, open a business account and split your business and personal finances. Mixing your finances makes it difficult to track your income and expenses. A separate account makes it easy to monitor your transactions, create financial reports, and identify your tax deductibles. Come tax time, you won’t be debating whether that IKEA expense was for your office chair or living room furniture.
Choose a bookkeeping system
Single-entry bookkeeping is a simple and straightforward way to record your inflows and outflows — you simply record each transaction as income or an expense and add or deduct it from your cash balance. Double-entry bookkeeping records each transaction in two accounts as debit and credit to make sure your income, expenses, assets, and liabilities line up appropriately.
Your bookkeeping method isn’t as important as your consistency. Choose a system and stick with it.
Create a general ledger (chart of accounts)
A general ledger summarizes all your financial activities in one place. It makes it easy to find transactions without having to dig through your bank and credit card statements. Breaking it down further, you have sub-ledgers to record category-specific transactions: assets, liabilities, equity, revenue, and expenses. Use a chart of accounts to list all your sub-ledgers’ names and purposes so you and your accountant won’t get lost in the future.
Record (and store) everything
Be sure to record every transaction — big or small, recurring, or one-off. Yes, that includes the cup of coffee you bought on the company’s dollar while you were traveling for business. Categorize your expenses with clear, well-defined tags to view trends of your cash’s comings and goings.
You’ll also want to collect and store receipts in a safe place, and hold on to them for at least three years (the IRS’s typical audit duration). Save all your paperwork, including invoices, statements, orders, tax returns, forms, and applications. You never know if you might need them for an IRS audit.
Bookkeeping is easier when you stay on top of it regularly and consistently. Just like keeping your house clean, it can be a struggle to clean up when you’ve let everything sit unattended for weeks or months. Make it a habit to close your books at the end of each business day, week, month, quarter, and year. This routine keeps your finances neat and tidy and helps you catch any errors before it’s too late.
Produce financial reports (income statement, balance sheet, cash flow statement) each month and quarter to monitor your business’s progress and trends.
Tools and methods for bookkeeping
Bookkeeping is a necessary evil. Almost half of small business owners rank it as their least favorite task. When you were daydreaming about building your ecommerce empire, tracking your income and expenses likely wasn’t part of the fantasy. If that’s the case, don’t worry — there are plenty of bookkeeping solutions to match your preferences.
Spreadsheets are a simple way to track your transactions. It doesn’t take much computer-savviness to perform the necessary functions. Manually tracking via spreadsheets is doable when you’re small, but it’s a problematic bookkeeping method to keep as you scale your business.
Cloud-based accounting software is more feature-rich and automates much of the bookkeeping minutiae. Plus, many software solutions have free pricing tiers. That way, you can work with the basics and get a feel for the programs, and the free service might provide everything your business ever needs.
If bookkeeping is not your thing, hire a bookkeeper. Software solutions like Sunrise and Bench provide bookkeepers on a subscription model which consists of packaging their programs and their professionals in a bundle. Bookkeepers will reconcile all your books for you, categorize your transactions, and deliver real-time financial reports.
Another outsourcing option is to hire a virtual bookkeeping firm. You’ll likely have to pay a higher fee, but you benefit from dealing with a team of experts instead of just one individual.
Six ecommerce bookkeeping best practices
Bookkeeping can be a pain in the neck, but most of it’s pretty intuitive. Just tracking the ins and outs of your cash flow is a great place to start. However, a few best practices can help you gain even greater visibility into your business’s finances.
While your ecommerce business doesn’t have to pay bills for a storefront or utilities, it still has several fees that can eat into your overhead. When calculating your ROI, make sure you remember to factor in all the related costs:
- Merchant fees: Ecommerce platforms like Shopify and BigCommerce charge a fee for payment processing.
- Shipping fees: Providing same-day or two-day shipping (or even free shipping) grants you a competitive advantage, but it comes at a cost.
- Third-party tools: Most useful software solutions require a monthly subscription.
- Chargeback fees: If a customer contacts their credit card company with a dispute (and it’s validated), you may owe the price of the transaction plus a chargeback fee ranging from $15 to $100.
- Return fees: If your business provides free returns, you’re going to have to eat the packaging, shipping, and processing return fees.
Tracking your inventory and maintaining your books go hand in hand. Stock is essentially money, so you need to monitor how it moves in and out of your business.
If you sell on multiple ecommerce platforms, you’ll need a single source of truth to maintain your inventory levels. This is critical to keep your sales, returns, restocks, and assets up-to-date in your financials.
“We utilize ShipBob’s Inventory API, which allows us to programmatically retrieve real-time data on how many units of each product are currently stored at ShipBob’s warehouses. We currently use this API to generate custom reports to tie this inventory data into our accounting platforms.”
Keeping track of your inventory will also help you with your inventory forecasting. Your books can provide detailed historical data you need to create accurate, reliable forecasts.
Consider alternative payment methods
Most of your customers will likely pay with credit cards. But, you’ll want to consider permitting alternative payment methods like cash, checks, PayPal, and gift cards — especially if you do any business offline. Additional payment methods might make your bookkeeping more complicated, but it improves the overall customer experience.
If you accept cash or checks, keep in mind that your books won’t recognize that income until you’ve cashed the deposit. And then, you’ll need to update the transaction with the necessary details and categorization manually.
If you offer gift cards, the sale only gets recognized as unearned revenue when the card is redeemed because you haven’t exchanged any goods until this point.
Collect and pay sales tax
Several ecommerce platforms will calculate and collect the necessary sales tax from your customers. However, the collection is only the first step. You’ll need to make sure you pay that money to the proper tax authority.
Tax money is not the same as revenue; it’s a liability that you owe the government. Your books need to show the difference between revenue, sales tax, fees, and the final cash deposit in your bank account.
Determine your break-even point
Your break-even point is the number of sales you need to make to cover all your costs and start turning a profit. Use your books to find that number. With that number in mind, you’ll know whether you need to reduce your expenses or hike up your prices.
This is a good example of how to use your daily bookkeeping habit to benefit and inform your cash flow forecasts.
Get your loan details right
Recording and tracking small business loans and payments in your books isn’t straightforward. When you receive the loan disbursement, you’ll need to enter the cash as a debit (asset) and the obligation as a liability (credit). When you make a loan payment, you’ll need to debit the loan liability and credit the cash account.
Proper bookkeeping is an essential task if you want to grow your ecommerce business and stay financially healthy. Without it, it can lead to big financial setbacks, such as a tax audit or profit loss.
Fortunately, there are a lot of resources to help you stay on top of your bookkeeping needs, such as working with an accountant and/or partnering with a fulfillment company that helps with inventory tracking and management. Don’t let poor ecommerce accounting get in the way of business growth.