How E-commerce Accounting Helps You Track Your Finances
Your e-business needs more than a day-to-day sales record.
As a business owner, your business needs to go beyond sales record documentation. There are a lot of other bookkeeping processes that should be involved in your documentation process. Some business owners focus solely on their sales records and use the ‘soaring numbers’ to make an uninformed judgment about the actual state of their finances. That shouldn’t be you.
You can have a soaring sales record and still struggle to keep your business running. Here is why: your business needs to account for marketing expenses, cost of operation, and payroll while comparing with the cash inflow. If the marketing expenses, payroll, or operating costs have a higher volume compared to your sales, your business is on a staggering ground. It’s a close shave to bankruptcy.
So, how do you better account for your business’s finances?
E-commerce accounting is a large-scale process that is beneficial to your business by providing accurate financial tracking, profitability analysis, and data-driven decisions. In this article, we’ll delve into how e-commerce accounting is pivotal in providing improved cash flow management.
Understand Your Numbers
Numbers provide clarity and definitive judgment.
Your business’s journey depends on the numbers and how they are managed. What numbers come in – daily, weekly, or monthly? What is the equivalent for the outgoing numbers within the same period?
Most importantly, how do you know and understand your numbers? In this guide for e-commerce accounting, you’ll learn how knowing your numbers can help you identify growth opportunities for your business. You get to know more about your numbers by keeping an accurate track of your sales order, purchase order, cost of goods sold, e-commerce sales tax, accounts payable, and accounts receivable.
They are known as the components of e-commerce accounting.
Tracking Your Finances – Accurately
It is important to track your finances so you know where they are headed or coming from. Accurate bookkeeping makes this a possible feat.
Accurate tracking of your finances helps to avoid mismanaged transactions and inaccurate financial insights. Aside from those, business owners like you also need to worry about the legality that comes with running a business. You need to understand the sales tax rates passed by the government in your area.
What are the things you need to keep track of?
The State of Your Cash Flow
Is it a steady flow or a staggering one? How do you keep track of your cash flow?
Cash flow involves the movement of money in and out of your business. Sturdy cash management helps you avoid incurring unintended debt and legal repercussions. To keep track of your cash flow, these tips offer handy practical solutions:
- Cash flow statement
A cash flow statement tracks the movement [inflow and outflow] of your cash within a specific period. This statement provides a clear picture of your financial status.
- Accounting software
There are digital tools available these days that can help you to accurately record, categorize, and analyze all financial transactions made online.
- Forecast cash flow
The benefit of recording every transaction means that you have pre-recorded data from months or years back to work with. This data can be used to create cash flow projections for the upcoming weeks, months, or years. This allows you to avoid shortfalls.
Your Gross Profit Determines Your Gross Margin
Beyond cash flow, you also need to track your gross profit and margin. The idea of tracking across the key components of your business is to help you have a complete view of your finances.
Gross profit is a key business metric that provides a strong insight into the cash you have left after deducting the cost of goods sold. Presented as a formula, gross profit = revenue – cost of goods sold. It’s important to always track your gross profit so you have a better understanding of how much profit is made.
Gross margin is the percentage representation of your total revenue. It is tracked using the same data used to calculate your gross profit. Gross margins = revenue – cost of goods sold / 100.
In this case, if your gross profit is $2,000, your gross margin is 20%.
A Balanced Sheet for a Balanced View
Balanced sheets are an important part of your e-commerce accounting. It involves three integral parts of your business: assets [cash inflow], liabilities [wages and tax], and equity of all your business’s shareholders.
Balanced sheets show the financial position of your business at a specific time. The critical aspect of your balanced sheet is when your business’s assets align with liability and equity. This fundamental balance reveals your business’s financial condition and helps you determine or achieve a balanced view of your finances.
This comprehensive recording also helps with the tracking of your sales profit or loss. A cash-basis accounting method will give you access to a comprehensive record of your daily profits and losses. Profits and loss statements help you stay ahead of any eventuality in the event of a loss or mismanaged transaction.
Click here for a comprehensive breakdown of a balanced sheet process for accurate recording.
Accounting Methods Used for E-Commerce Businesses
There are two main methods of accounting used for e-commerce businesses like yours.
- Cash-Basis Accounting
This is based on your business’s cash flow. It involves real-time recording of your sales and expenses when the payment is received. It’s your business’s bank statement where every cash inflow and outflow is recorded. One benefit of this is how it helps with monthly or yearly reporting.
This method, however, is not a streamlined recording process for e-commerce businesses that are not cash-based but operate multiple sales channels on different platforms.
It is ideally effective for small businesses just starting with a simple financial transaction process. There is, however, a method that works for e-commerce businesses with different sales channels.
- Accrual Basis Accounting
Unlike the cash-basis method, accrual basis accounting takes on a different comprehensive approach. With this method, recording doesn’t wait until payment is received or made.
The recording happens as soon as a sale is made, not when the payment is received. With this, you have an idea of when to expect the payment and what payment method is involved.
An expense is recorded when it is incurred, not necessarily when there is an outflow of cash for the expense incurred. This method is used in large e-commerce businesses with a more complex model.
Read https://www.investopedia.com/terms/a/accrualaccounting.asp for a holistic view of how accrual accounting benefits businesses.
Final Notes
One thing is certain: an organized business financial record only propels your business forward.
E-commerce accounting puts you in control of your business by giving you a holistic view of your business’s parameters – the inflow and outflow, buying patterns/spending trends, growth opportunities, successes and shortfalls. Prove eligibility for tax rebates and tax exemptions with properly organized accounting records.
A one-way ticket to bankruptcy is the absence of proper accounting.
Some benefits outlined in the paragraphs above that are beneficial for your business include improved cash flow management, profitability analysis, financial planning, and forecasting. What awaits your business is a financially savvy e-commerce business with a sturdy grasp of the future.
