Managing any online storefront can be a hectic affair. Sellers need to manage their finances which can be quite difficult for those with little to no knowledge of accounting. As more sellers get on the platform, they will be exposed to one of the most difficult aspects of business ownership for newcomers: Bookkeeping.
The good news here is that the internet is loaded with various bookkeeping solutions to help entrepreneurs start their bookkeeping ventures. Here, we’ll be going through some of the benefits that Shopify Sellers can get when they set up a proper bookkeeping system.
What is Bookkeeping?
Firstly, we have to ask the question of what bookkeeping means to a Shopify Seller. Looking over the financial health of your business is important for maintaining its performance metrics and eventually expanding further. Inaccurate numbers, wrong entries, or missing data can lead to confusion that will spiral into lost profits and increased costs.
Metrics and Key Performance Indicators
When setting up a bookkeeping system, it’s important to know what metrics you need to track. The most important of these metrics are called Key Performance Indicators or KPI which help to track growth. The difference between both is that metrics tend to look at the business processes which are not entirely essential for performance gain. KPI measures the processes which impact your business’s future growth.
What do Shopify Sellers need to track?
The way Shopify makes itself different from other eCommerce platforms is that it is more of an eCommerce platform than an online marketplace. This means that while Shopify does offer tools to help build your online storefront, the seller is the one responsible for promoting their business. Shopify also lets its users create their websites to display their products on.
Shopify sellers are focused on getting as many sales as possible. With that in mind, it’s important to look at the metrics which will affect this goal in the most impactful way. Since a Shopify owner runs their website, a good place to start would be looking through Website-related metrics such as traffic and session duration.
Some Benefits of Good Bookkeeping for Shopify Sellers
Now that we’ve looked at how proper bookkeeping can be done, we can go over what potential benefits Shopify Sellers can gain from this. It’s important to take note that the bookkeeping processes for a Shopify Seller are much different than that of a traditional business.
Business Decisions and Adaptability
For Shopify Sellers, they might find the industry to be quite fast-paced. With the stress of having to deal with competing shops and the number of transactions you get, it can be easy to just let your record-keeping responsibilities fall to the wayside.
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In truth, Shopify sellers need these records as they are intrinsically linked to various aspects of your storefront. Relying on nothing but guesswork isn’t viable, you’re prone to make a wrong assumption somewhere down the road.
Your advertising expenses, warehouse and inventory, and shipping costs are all crucial in developing strategies to improve your business. Having access to accurate numbers can help you in your decision-making process.
Let’s say that you are a bit tight on storage space and a busy season is approaching. With the knowledge you have of your finances, you can steer yourself towards a profitable season by improving your capacity to take orders ahead of time. This is just one example of how accurate financial data makes your organization more adaptive to the fast-paced industry you’re in.
Good bookkeeping also helps Shopify sellers deal with the daily struggle of cash flow management. Sellers will be able to estimate the available funds the business will have within a specific time-frame. It also helps sellers to calculate how much their expenses will be and stop you from overspending. This leaves more resources to be allocated for the execution of your business plans.
Securing Capital and Investments
If you plan on securing a loan for your business venture, then you’ll need to present an outline of your business’s performance. This is to ensure investors and creditors that your business is handled responsibly. Good bookkeeping allows you to have an easier time securing loans as it shows that you are aware of the state of your operations. It also allows you to show them the history of your business and how you have been handling your finances throughout the years you’ve been operating.
Spotting Problems Early Before They Worsen
Another benefit to good bookkeeping practices is the ability to spot problems early on in your business’s lifespan. There are a whole host of common eCommerce challenges that sellers may come across. Some of these include:
- Shipping and Logistical Problems
- Problems with Customer Experience
- Number of Sales and Returns
- Advertising and Marketing
- Competition against other Shopify Sellers
All of these can be traced back to specific consumer metrics, showing you which issues affect sales the most. It can also help you to minimize the cost of shipping and logistics as much as you can, with the saved cash being used for other developments. You can also check out whether your marketing strategies have been effective in driving customer visits and sales up, as well as if you should modify your strategy.
Finding Out Which of Your Products Sell the Most
Bookkeeping also allows you to track the average profit you make on a particular item. Making use of your data on how much you spend on advertising and shipping; you can subtract that from the cost of the item to get an idea of how much you earn.
Another way to look at this is that sellers can judge profitability when looking at other metrics as well. Let’s say that a specific item is known to sell more during particular seasons, but its popularity wanes out afterward. From here, you can decide how much stock to keep and how to drive sales towards the said item. This prevents you from having to put these items at a steep discount just because they’re taking up space in your inventory.
Identifying the products which sell consistently is also a great use of bookkeeping data. These products flow in and out of your inventory the best when compared to your other items. Shopify does have a Reports section which informs you of your sales figures throughout different variables. For our purposes, the most important of these are the ones looking at sales by product, by product vendor, and SKU.
Keeping Track of Tax Obligations
Lastly, good bookkeeping practices can help Shopify Sellers keep track of their pending tax remittances. Detailed and accurate financial records are required when filling up your tax returns. If you don’t keep up with your bookkeeping, you may find yourself looking all over for lost receipts and scattered invoices during tax season. Up-to-date books can help both you and your accountant clear off some of the stress of tax season, as well as save you from having to pay fines on any errors made.
If you’re keeping track of your business expenses, you and your CPA might be able to spot potential tax deductions. Some of the expenses that you can deduct from your business income include shipping fees, business-related travel fees, website hosting costs, and even utility expenses. Make sure to contact a dedicated CPA firm to figure out more on the tax deductions and strategies that you can implement for your Shopify business.
Protection from IRS Audits
The chances of an IRS audit are considerably low with current statistics putting it at about 2.5%. However, this does not mean that your business should skimp out on preparations in the event of one. Sole proprietors who do their accounting are at risk as they are more susceptible to mistakes during the tax process.
A good bookkeeping system can be thought of as an investment in protecting yourself in the event of an audit. Having accurate and organized records of your transactions help in answering any queries the IRS might ask. You’ll be able to more easily respond to the audit process and solve issues as soon as they appear.
One more benefit is that bookkeeping makes it easier for you to justify your declared tax deductions. This is especially true for businesses that could be mistaken as a hobby. The consensus by the IRS is that a business is differentiated from a hobby by the intention to make a profit. Bookkeeping helps in this regard as it helps prove your business’s legitimacy by tracking profit margins.
We’ve only gone through some of the benefits that bookkeeping can give to Shopify Sellers when it comes to improving their sales. A clean book will save you a lot of time and money, especially during times where a good decision can mean either success or failure. Sellers looking to grow their business can do their bookkeeping processes by themselves, but it may leave less time for other important matters. A CPA firm dedicated to serving online businesses can be of great help with this, providing clients with bookkeeping and accountancy services around the clock. Feel free to book a free 30-minute online session to discuss with us your business goals and how you can attain them.