Owning an e-commerce business is both thrilling and stressful. Like all things, there are parts we love and parts we don’t love. There seems to be a common dislike among most business owners, e-commerce or not, and that’s bookkeeping and accounting. However, bookkeeping and accounting are necessities, regardless of how painful.
Yes, bookkeeping can be categorised into the “dull side” of business. Sadly, it unavoidable, particularly if you want to see continued success and growth. On the other hand, most e-commerce entrepreneurs, dread bookkeeping, because they don’t understand or know where to begin. So, we felt that we’d write a short-ish blog on bookkeeping for e-commerce, to help you stay focused, organised. Who knows, you might even start to like numbers.
Often, a lot of business owners, tend to throw their receipts/invoices into a box, and them to their accountant just before the tax deadline. Now, yes, this is an option. However, it isn’t recommending, and that’s coming from an accountant. Even if you have a great relationship with your accountant, you should still understand the basics of bookkeeping. Why, well here’s three reasons:
1. You’re potentially risking the success
2. How can you seek investors, (when/if the time comes) if you don’t understand how can you pitch?
3. Mistakes and unbalanced books can be detrimental
Besides, the reasons above, there are many benefits of understanding bookkeeping basics, which we’ll discuss later. Although bookkeeping, is somewhat complex, the day-to-day and monthly management of your finances isn’t as scary as it seems. Hopefully, at the end of this article, you’ll be able to focus, organise and manage your books, which will help avoid those costly mistakes.
Sadly, improper bookkeeping can have adverse consequences and can be expensive to rectify. For instance, if you’re books aren’t up to date or organised, it can result in you submitting an incorrect tax report. Unfortunately, HMRC doesn’t take kindly to inaccurate tax filings, even if it’s a genuine mistake. However, that genuine mistake could mean you paying that nice tax rebate back, or additional tax payment.
As we’ve said, even if you do opt for an accountant to manage your books, understanding the basics can help your e-commerce business grow. So, yes we understand it’s tedious, but it’s also necessary. After all, you’ve already done the hard part, making the jump of opening your e-commerce venture. Regardless if you’re a Shopify store, eBay trader/drop shipper or Amazon seller, it’s your business, so take ownership (or at least part) of your finances.
So, in this article, we’re going to look at the most misunderstood bookkeeping and accountancy terms. We will also give you our top three bookkeeping on e-commerce tips.
As accountants, we still understand why few e-commerce owners have a genuine love for bookkeeping. It’s undeniably stressful, and depending on your platform, there’s fees, costs of use and other elements to consider. Although, a common misconception is that these platforms will do it for you. Well, yes they’ll tell you the breakdown, but you still need to keep track.
Although, the amount of business owners who love bookkeep is limited. At first, it can seem stressful. However, as you begin to understand the terminology and process of e-commerce bookkeeping, it’s more rewarding. Why? Well, you will not just understand the processes you can enjoy seeing the growth of your e-commerce venture in figures.
Top Five Commonly Misunderstood Accountancy and Bookkeeping on E-commerce Terms
1. Accounts Receivable
So, depending on how long you have been operating your e-commerce business, you may have heard of “accounts receivable.” But, do you actually know what accounts receivable means? Perhaps, you think that it’s mean “available” money – don’t worry this often trips e-commerce owners up, as it’s somewhat misleading.
Account receivable, is actually the money that you are owed, either from sending a product or the service you provided. The phrase, “don’t catch your chickens, before they hatch,” comes to mind.
This phrase is exactly how you should approach accounts receivable. This aspect is what trips many new e-commerce owners up. Understandably, it’s exciting to see your sales mount, but what happens if you receive a return or refund requests?
Sadly, the money or chickens that are waiting to hatch, might not happen or as quickly as you anticipate. So, the best way to view accounts receivable is to let it age. In accountant lingo, this is called “ageing of accounts.” It’s basically what is said, you’re waiting for the account to age, or come into fruition.
If you view accounts receivable in this way, you will reduce the likelihood of overspending or overestimating your profit. There is also another way to look at accounts receivable, and that’s trying to estimate a realistic figure of what you’ll actually receive. If you’re just starting out, try to pick a realistic amount, or don’t spend until your second or third month.
After, six months you’ll be able to work an average or estimate accounts receivable. Again, this is where bookkeeping for your e-commerce business comes in. If you record, monitor and track your incoming sales and outgoing expenses, including return ratio. It becomes much easier to have an accurate view of what accounts are actually receivable.
2. Accounts Payable
Now, this term is the opposite process to accountant receivable. As the name said, it’s what your business is due to pay out. For instance, if you pay for software, manufacturing, suppliers, etc. Therefore, bookkeeping for your e-commerce business comes in handy.
If you keep track of your assets, outgoing payments, and service costs on your balance sheet, (books), then this process is much easier. There is also another term for accounts payable, which is liabilities. So, it’s essential the payments that you are liable to make.
It can be argued, that the world of accounting likes balance. So, without risking a cliché, in your accounts, every account payable, should have an account receivable. Essentially, every transaction in your e-commerce business should always have an opposite.
In laymen’s terms: £1 in accounts payable, should have £1 in account receivable.
Basically, the example brings us back to, don’t count your chickens until they hatch. If you overspend, if you’ve miscalculated or don’t understand the two transactions, you could end up losing money.
Although cash is king, when it comes to accounts receivable and payable, patience is king.
3. Bank Reconciliation
For this term, we’re going to presume that you don’t know what bank reconciliation is or how it applies to your books. Also, if you enjoy this process, if you start to implement bank reconciliation into your bookkeeping, there may be an accountant in you yet!
Now, bank reconciliation is an essential part of accurate bookkeeping. However, what is bank reconciliation exactly?
Bank Reconciliation: is a process where you manually check and cross-reference your transactions against your bank statements.
This process can be done using the software, such as Quickbooks and Xero. Alternatively, you can use your trusty highlighter and match each transaction this way. There’s no denying the benefits of bank reconciliation, as it is great for identifying any duplicate payments or issues early.
Although the idea of more paperwork may not be your idea of fun, it does ensure that you have accurate books. Also, if you’re a new startup, starting to implement this bookkeeping process now, will come in handy, particularly if you eventually seek investments.
How often should I bank reconcile?
Well, the question above has a bit of an open-ended answer. The best answer is whatever works for you and your business. As the need for this process depends on the size of your e-commerce store. If we’re going to give a ballpark recommendation, for small e-commerce businesses, every month.
What do I need to check?
Hopefully, you now have a better understanding of bank reconciliation. So, the next step is working out what you should check. Again, it depends on the size of your e-commerce store or business, as well as the frequency of transaction. A rule of thumb is:
- Incoming payment against invoices or receipts
- Outgoing against invoices or receipts
- Bank fees – including interest rates, transaction fees, monthly payments
- Earned Interest
We’d like to note that the bottom two factors, may depend on your bank. Since every business bank account varies. Also, if you’re a new startup, have you looked into a business account? If not, here’s one of our articles that may help you choose the best business account for you.
4. Merchant Services
Now, this process depends on the type of e-commerce business that you have as there’s a variety of options, including:
- Solely trading on your website
- eBay sellers/drop shippers
- Amazon FBA sellers or Amazon Traders
- Shopify owners
So, depending on your chosen platform, you will likely be charged for every sale that you make. This charge is known as merchant services. This factor is arguably the most complex, as every merchant varies and will likely amend their payments terms.
If you’ve decided to take ownership and feel you’re capable of bookkeeping on e-commerce brilliant! However, we’d like to note you should check out the above links, to double check your merchant services.
Sadly, most platforms tend to disguise some of their merchant fees. Therefore, you need to be on the ball when you’re monitoring accounts receivable and payable, as well as bank reconciliation.
Although, sometimes the best thing to do if you’re unsure about merchant payments with e-commerce, is to seek advice. Moreover, there’s tons of help out there, including other sellers, forums, business management services or accountants.
We cannot stress enough important it is to get payroll right. One big misconception is that you don’t need to think about or do payroll until you hire employees. However, if you take a salary, then yes, you do need payroll.
Regardless if you have employees, or it’s just you, it is your responsibility to accurately record your payroll. Depending on if you decide to hire employees as your e-commerce venture grows, you then need to ensure that you pay your employees accurately and on time.
However, there’s online payroll software or some accountants, like Pearl, who offers real-time payroll options for all business types. Now, the reason payroll is crucial is because it is regulated by HMRC.
Besides your payroll system being HMRC compliant, you need to consider the following:
- Frequency of pay
- What happens if it’s a bank holiday?
- What happens if the monthly/weekly pay falls on a weekend?
Now, some of the above factors do not apply until you begin taking on employees. However, if you understand the processes involved now, and factors it will help in the long run.
Top Three Bookkeeping on E-commerce Tips
Hopefully, you feel a little less stressed about the seemingly complex bookkeeping and accountancy terms. So, in this part, we’re going to be giving you our top three bookkeeping tips for your e-commerce business.
1. Accountancy Software
Our first tip, unless you’re brilliant at maths, is to look into accountancy software for your eBay or Amazon service. If you’re a Shopify owner, we’ve listed the best online accountancy software, here.
However, that being said, if you want to make the bookkeeping process easier and to ensure that’s it’s accurate, online accountancy software is a worthwhile investment. Although bookkeeping is a skill, which you can perfect over time, online software is far more effective.
In fact, there is tailor-made online accountancy software, which targets e-commerce owners like yourself. In this section, we’re going to focus on the best accountancy software if you’re an Amazon seller/FBA trader or an eBay seller/drop shipper.
Amazon Sellers (including Amazon FBA Traders
The most effective online accountancy software, if you prefer to do this process yourself is Xero. Even if you only want too many your daily/weekly bookkeeping needs, most e-commerce accountants should be able to work from Xero.
The main benefits of Xero:
- Simple to reconcile Amazon transactions via Xero
- Integrate your cash flow with the Amazon Seller Centre
- Automatically sync your Amazon inventory to Xero
Besides, the above benefits, Xero can ensure that you have a complete picture of your Amazon e-commerce store.
eBay sellers/drop shippers
The ideal online accountancy software if you are an eBay seller or drop shipper is QuickBooks. So, let’s take a look at why:
The main benefits of QuickBooks:
- Easy to use: it’s a relatively simple set up process, and it’s easy to access once you get started. However, you’re unsure, you could always seek guidance from one of our e-commerce accountants at Pearl.
- Excellent Support: QuickBooks is well known for its excellent support and guidance; they make it very simple to provide an answer or solution to your question. For instance, they will pair you with a certified e-commerce accountant or bookkeeping, as well as sharing helpful videos.
- Integration: you can link your eBay seller or drop shipper account to the QuickBooks app or desktop. Although, there may be instances where it cannot integrate directly, which is why speaking to an accountant or asking their QuickBooks pros to help.
If QuickBooks isn’t really for you, or you don’t want to commit to paid plan straight away, they often offer a free trial.
When it comes to online accountancy software, it comes down to what suits you and the needs of your business. However, rather than relying on your trusty calculator and excel spreadsheet, we recommend trying out an online software. Especially, if this is your first attempt with e-commerce bookkeeping.
2. Track your Cash Flow
When it comes to any business, besides e-commerce, money is king. However, if you don’t take care of your cash, it can lead to problems. So, if you decide to use our first tip, it’s an excellent way to keep track of your daily, monthly and quarterly cash flow.
Even in the initial days, balanced or healthy cash flow will help your business to grow. The last thing that you want is to have a negative cash flow from the offset. However, you can avoid this by taking care of and looking after profit.
Here’s two simple ways to keep track and nourish your cash flow:
- Don’t make early payments, unless you know that you have enough to cover an upcoming payment. Although it’s good practice to pay early, it isn’t when it comes to your business’s cash flow. Always pay on time, but if the invoice is due in 30 days, then make the payment on the agreed amount.
- Keep a “rainy day fund,” if you’ve ever played a game of Monopoly, you will know how those unexpected payments can drain your cash flow. The same applies to your real-life e-commerce business. The best practice is to prepare for the unexpected. For instance, what if you’re manufacturer can’t send you the product on time. But, their refund policy is 30 days, and your only option is another manufacturer. If you have a reserve, it will prevent a deficit cash flow.
The best way to view your cash flow is like a plant/flower. The only way for it grow, is by feeding and watering it. So, don’t let it wilt by failing to track its progress.
3. Identify your break-even point
Following on from tip number two, if you want to track your cash flow, you need to know your break-even point. After all, how can you manage your books, if you don’t understand how much profit your e-commerce store makes?
Your break-even point is: the cost of the sale minus the costs of the product* equals your profit.
*The cost of profit includes manufacturing costs, employees, packaging. Basically, every cost of making your product/service.
The Bottom Line
So, we’ve covered a lot in this article on bookkeeping for an e-commerce business. It’s natural if you still feel unsure about any part. If you need help with any aspect of your e-commerce bookkeeping, our dedicated e-commerce team at Pearl Accountants are here for you.
At Pearl, we will help you to water and nourish your e-commerce finances, to make it consistently grow and flourish.
Shoaib Aslam is the co-founder of Pearl Chartered Accountants, a UK-based chartered accountancy firm that has multiple locations across London. They are experts in helping startups and established businesses with all aspects of growth, strategy, scaling up, accounting and tax planning.