Bookkeeping For Ecommerce Companies
The process of accounting and bookkeeping can be one of the most tedious activities business owners need to take care of in a constant basis. However, these two become more prominent as your business venture expands outward. Finances can become much more complex as you receive more data on sales, payments, miscellaneous fees, and other cash flow transactions. All of these have to catalogued and categorized in an orderly manner as tax authorities will require clean records of your business.
If your business has yet to implement a proper bookkeeping and accounting system, this can cause further disruptions when you do get to organizing your financial data. We’ll be going through some of the benefits of having a proper bookkeeping system, as well as some solutions that you might want to use for your growing ecommerce company.
Why have a good bookkeeping system?
Bookkeeping allows a business owner to make informed decisions using the data gathered over a period of time. Not only does in aid decision-making, it also helps your accountant as organized accounts generate accurate reports that measure your business performance to an accurate degree. Some other benefits include:
- Fine-tuning your business model
The data gathered through bookkeeping procedures help in judging whether or not your current business model is competitive and viable. Accurate data allows you to figure out the strengths and weaknesses of your businesses, what products are performing well or under performing, and potential avenues for improvement using the resources you have on hand. It also makes sure that any fees that may appear during the end of an operating month will not come as a surprise, making sure you stay on top of the operations and taxation front.
- Tax Compliance and Preparations
Keeping a clean record of your financial data will save you both cost and time when tax season comes up. You’ll be able to stay compliant with whatever state tax regulations you may be subject to, steering clear of any potential fees and penalties. Tax Planning is also an open option to those with proper financial records as you and your accountant can come up with strategies to ensure the most ecommerce tax deductions possible for your business.
- Higher potential for a successful sale of the business
Lastly, companies who are looking to sell the business to future investors will be in a great position should they commit to bookkeeping from the start. Bookkeeping is a difficult process for most small business owners, with nearly half of small businesses not employing a bookkeeper or accountant for the task in 2018. Financial statements that are filled with inaccurate data will probably make buyers question whether or not buying your business is worth it, even before any negotiations start. If you are not employing a good bookkeeping system in your business, now is the time to get a start on it.
Bookkeeping Methods for your Ecommerce Company
There are a variety of methods that your ecommerce company can make use of. The choice you make in this aspect depends on the number of transactions your business receives such as revenue and expenditures. There are specific methods that are meant for smaller operations and ones that are more in-line with larger enterprises and companies.
- Single-entry Bookkeeping
This method is meant for newly formed businesses or ones that only take care of a low volume of transactions. Usually, companies at this stage have financial records that have yet to become as complicated as that of larger operations. Here, most transactions are recorded within one category by the means of either a cash book or data entry software. Most business owners tend to use Income and Expenses as their categories of choice, all recorded under a reference number that helps to track down transactions. Bank Reconciliation is also done here to match the total recorded in your cashbook and your end of month bank statement.
- Double-entry Bookkeeping
This system expands upon the single-category system of the previous method, where transactions and financial data is entered into two accounts as either debits or credits. This is mainly for businesses whose volume of transactions are larger than can be accommodated by the single-entry system. It’s also for those companies who deal in credit-based sales where full payment is deferred to a later time.
The second entry is kept on a bookkeeping ledger where it is placed under debits and credits. Professional bookkeepers are knowledgeable in categorizing whether a transaction should be labelled as one or the other. However, there is a guide in figuring out which is which through the “accounting equation” which is made up of the following:
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By the end of this Strategy Session, you will have a clear understanding of the next steps you can take for your business to take advantage of the tax deductions you are missing out on.
In this equation, assets refers to the resources that the business owns. This can include personal cash as well as physical resources such as business computers and your inventory on hand. Liabilities is the amount owned by the company, also known as a financial obligation. This category takes into consideration the accounts payable by the online business. Equity refers to the assets introduced into the business as well as the ownership of these assets. These are also the profits or losses made by the business, denoted by either a net profit or a net loss.
Cash- or Accrual-based Bookkeeping
Depending on the specific product offered by your ecommerce company, you can opt for either a cash or accrual basis for your bookkeeping initiatives. Both of these affect the way your company recognized gained revenue. Using a cash-based method makes it so that the cash you receive is immediately recognized as revenue. Expenses are also recognized and recorded as soon as you pay for them. Only when cash exchanges hands do you record the transaction, making it a simple way of dealing with boookeeping.
For ecommerce businesses that deal with deferred payments or maybe SaaS services, they may want to go through with an accrual-based method. This is where revenue is only recognized once it is earned, whether through the completion of a promised service or through the delivery of a specific product. When employing this method, you may notice that it doesn’t require a specific exchange of cash in order for the transaction to be recorded, with cash not entering or exiting your account until a specified time.
Both of these methods are valid for either single- or double-entry bookkeeping methods. However, it is a common practice to use cash-based bookkeeping for the single-entry method. Accrual-based methods are also better implemented in double-entry bookkeeping systems. Make sure to discuss with your bookkeeper or CPA firm which method is best for your business.
Why You Should Consider Professional Bookkeeping Services
Financial Literacy in the realm of small business owners is surprisingly limited, with 40% of small business owners considering themselves illiterate in this regard. However, there’s also a surprising number of these small business recording and managing their own finances. Professional help in managing your company’s finances can help you survive turbulent times as well as gives you a degree of future proofing for your company.
This is why some small businesses refer to professional bookkeepers and CPA firms in order to aid them in business management. The responsibilities of an ecommerce company include meeting client’s orders, inventory management and tracking, as well as responding to return requests among others. To have a professional manage your financial records and data is great in order to keep your business competitive with others in your trade.
Business Strategy Consultation
Your chosen bookkeeper can help you navigate through financial troubles. CPA firms specialized in dealing with online sellers have the necessary experience to aid you in matters that might affect your operations. Not only that, they can also help mitigate the effects of internal company issues as well as advise you in actions that will maximize returns for your business. Cash flow analysis and Revenue Expansion is but one of the many ways that CPA bookkeepers can help you find the strategies needed to make your business soar.
Maximizing Tax Benefits
Professional Bookkeeping firms aid business owners in filing their taxes and showing them potential exemptions and reductions that can be applied. Business tax is different from that of personal taxes, with some expenses such as utility spending being able to be written off of the final amount of tax owed. CPA Bookkeepers are quite knowledgeable in this and are able to raise your tax deductions by a substantial amount.
Better Relations with Lenders and Banks
The usage of CPA Bookkeepers makes sure that your business has detailed and accurate records of your activities and transactions. This can be a great sight for both banks and lenders who may see small businesses and startups as risky clientele. Your complete set of documentation is sure to make them more eager to consider your request for financial loans or mortgage deals.
If you’re interested with the benefits of proper bookkeeping for ecommerce companies, you may want to check out what Free Cash Flow can offer you. Our team has over 20 years of experience in accounting, taxation, and consultancy services for online business owners.