Accounting is one of those daunting tasks that you must do to keep your company running.
eCommerce is a fast-growing segment of the retail industry.
If you want to run a successful eCommerce business, you need to know the fundamentals of accounting.
What is Ecommerce Accounting?
Ecommerce accounting is the method of gathering, reviewing, arranging, and documenting financial data related to eCommerce transactions and assets.
All of the financial data collected by eCommerce entrepreneurs via these processes serve as a solid basis for future business decisions.
Accounting divides into three categories:
- Tax returns
Before you start with eCommerce Business, you’ll need the following critical considerations on accounting.
Keeping track of your cash flow is imperative.
To know exactly how much money your company is making, you must watch the cash flow.
Whether it is an eCommerce or any company, the majority will prioritize increasing revenue to boost cash flow.
Although this approach has the potential to be successful, there are other, more realistic alternatives.
The first move is to try to cut any extra expenses.
Also, small cost reductions can have a significant effect on your expenditure.
You can also build some payment-on-time strategies.
Consider the credit terms you give your clients, for example. It’s better to take payment in advance unless they purchase your goods regularly and have a clear credit history.
You should also keep track of your cash flows’ pacing, such as the dates of bills and receivables due and when it is necessary to pay your employees?
It would help if you tried the following to handle your cash more effectively:
- Daily, keep track of your expenses and earnings. You will know there is a problem if there’s a difference between the two.
- Don’t pay bills until the last possible moment. You do not need to hurry if the credit period is 30 days. This is significant because you can run out of funds when you need it.
- Customers should sign up for monthly subscriptions so that money comes in on a well-timed basis.
- Maintain a cash balance in your bank account in the event of a cash emergency.
Finally, better terms with your suppliers will help you increase your cash flow.
More extended payment periods, bonus products or services, and repurchase discounts can all help the company free up cash flow.
You may also offer to return unsold goods after a certain period.
Carrying out a cash flow forecast regularly is a significant component for minimizing cash flow problems.
The items available for sale and the raw materials used to make these goods includes in the inventory.
Unnecessary inventory builds up and harms your liquidity and properties.
Consequently, it’s essential that you keep track of your inventory and set a minimum size you want to maintain.
The rule of thumb here is only to hold as much as you require.
You don’t want to have an excessive amount of unsold inventory because you’ll be losing money.
There’s also the issue of market volatility to consider. If the market price increases, the inventory will be worth more than it was yesterday.
It is possible for the reverse to occur. To prosper, a company must have a high inventory turnover rate.
This also helps to reduce the effect of external factors on your revenues.
Finally, there’s inventory shrinkage. Shrinkage occurs when a part of your inventory lost due to theft or injury.
It’s essential to count the stock to keep track of shrinkage losses manually.
Since eCommerce companies run out of warehouses or residences, the risk of shrinkage is negligible.
Value of Goods Sold
the cost of goods sold is the price you pay for the goods you’re going to sell.
This involves the expense of direct materials and the cost of products used in the manufacturing process.
This does not include expenses associated with the distribution and selling of the goods.
Estimating the cost of goods sold can be challenging, mainly if you purchased raw materials at different prices and pay other wages to the people who work on the production line.
The Weighted Average Approach is the most efficient way to solve this problem.
Your organization needs to keep track of the right COGS numbers because they’re vital for reliable financial statements.
Incorrect COGS figures can result in a higher or lower total revenue on your income statement, leading to false assumptions about your company’s net income.
Calculating Other Expenses
Other variable and fixed costs, in addition to the price of products sold, must be addressed.
Fixed costs are expenditures that the company incurs regardless of whether it generates or sells something.
The following are some of the fixed costs associated with an eCommerce business:
- Technology and software costs
- Domain name and hosting
- Rent and services
- Employee salaries
The costs incurred depending on the number of goods sold are known as variable costs. This may involve the following:
- Data warehousing
- Marketing and advertisement
Although it’s challenging to avoid fixed costs, knowing the dynamics of variable expenses will help you reduce them and improve your operations’ performance.
Estimating the Break-Even Point
When your income equals your expenditures, you’ve reached break-even.
When you achieve break-even, your profit is zero, but you’ve covered your expenses with the sales you’ve made.
Break-even calculates by taking into account the fixed and variable costs, the product price, and the contribution margin.
The profit margin is the amount left over after the variable costs subtract from the sale price.
The following formula can use to measure the break-even point:
Fixed Costs/Contribution Margin = Break-even Point.
Average Price – Variable Costs = Contribution Margin.
If your break-even point is too high, either increase your rates or reduce your variable costs.
This can accomplish by increasing your shipping costs, using less expensive materials, and so on.
Tracking Earnings before Income tax and Sales
The next move is to track your sales now that you know how many you need to break even.
Keeping track of your revenues helps you predict whether or not you will achieve your revenue targets.
It also assists you in allocating funds for revenue-generating activities. Assume you know the number of sales needed to break even is 2,000 units.
You’ve only sold 500 units in the first half of the month. You know how far ahead of schedule you are for this month’s sales target because you’re monitoring your sales.
The month isn’t over yet, so putting in more work to advertise your goods might still get you there.
Just make sure that if you spend more money selling your goods, the profits produced will outnumber the marketing costs.
You will now measure your profit before taxes after you’ve measured your sales, cost of goods sold, and expenses (EBT).
This can do by deducting net sales from the cost of goods sold, operating costs, and interest expense from total revenue.
Tax Measures and Returns
Taxes are both inevitable and complicated, which is why they are everyone’s least favorite item. If you market a variety of goods and services, you can seek advice from a specialist.
If a commodity is taxable, make sure to mark it as such. When a consumer buys it, you must provide them with a tax invoice.
To keep organized, categorize goods into those that require payment of a tax and those that are tax-free.
It would help if you presumed that your tax rate would be almost equal to the tax you have received from your customers as a starting point.
This means you must consider the money’s nature and set it aside as tax rather than a part of your earnings.
If you don’t, you can run into difficulties when it comes time to make payments.
When you add the tax rate with the commodity’s actual price, it’s easy to lose track of how much profit you’ve made.
It would help if you considered starting a separate account for your taxes to prevent such issues.
The balance sheet uses to control your company’s long-term health and efficiency.
Calculate your net assets, total liabilities, and owner’s equity to build a balance sheet.
Assets are something of value that is under the company’s control. Cash, inventory, office equipment, and accounts receivable are examples.
The debts you owe to others refer to as liabilities. Long-term and short-term assets and liabilities describe separately.
The difference in your assets and liabilities is your owner’s equity.
The balance sheet is crucial because it gives you a bigger picture and will help you spot any income statement errors.
It is essential to develop accounting operations to achieve long-term success in the eCommerce industry.
It’s also important to note that your main business as an eCommerce company isn’t accounting.
Devoting time and resources to anything you should outsource would divert your attention away from your objectives.
After all, it is your focus competencies that will aid in the expansion of your business.