Accounting For eCommerce: A Small Business Guide to Managing Finances

It’s the beginning of a new year. That means if you haven’t started evaluating your business’s finances at the end of 2022, you should start now. 

Managing cash flow effectively is essential to any business’s success. For eCommerce startups and small businesses, however, a healthy cash flow can mean the difference between survival and bankruptcy. 

If you’re one of the 41% of small eCommerce business owners who do their own accounts, this article is for you.

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What is eCommerce Accounting?

At its most basic level, accounting involves bookkeeping tasks like recording transactions and handling payroll. But accounting goes further than bookkeeping, and if you’re running a small business, you’ll need to handle these responsibilities as well:

• Preparing and analyzing balance sheets
• Reporting income for tax purposes and calculating tax liabilities
• Preparing financial statements and stakeholder reports
• Keeping records in line with auditing requirements
• Analyzing financial data for risk analysis and forecasting

Good cash flow management starts with good bookkeeping. The first step is to accurately record the cash flowing in and out of your business. eCommerce businesses use two main accounting methods to track cash flow.   

Cash Basis Accounting

The cash-based method is the starting point for most small eCommerce businesses. You record cash movements in and out of your business bank account as they happen. You record expenses when they leave your business and income when it clears.

This means that for your end-of-year taxes, you don’t need to report expected income or pending payments. Businesses often start here because it’s simple. However, it’s hard to scale as companies grow and use multiple accounts. 

This method suits a small eCommerce retailer or a business selling through a larger site like Amazon. Cash basis accounting gives you a clear picture of how much cash you have on hand day to day or month to month.   

Accrual Accounting

Larger businesses need a solution that accounts for payables and receivables before money changes hands. This is known as accrual accounting. In this method, you record transactions as they’re agreed upon, regardless of whether you’ve received or paid the money. 

This means you can include things like long-term contracts with staged payments. Accrual data can help you forecast finances. It gives you a picture of your cash flow in the coming months or years, so you can adjust your budget plans accordingly.

Many larger institutions consider this the default accounting method. Small businesses should be wary of starting here, though. Focusing on future income and expenditure can obscure your view of the cash you have on hand.   

Areas of Emphasis in eCommerce Accounting

As mentioned above, accounting serves several purposes. It can be difficult to know where to start if you’re new to financial management. Focus on these four main areas to keep cash flow healthy while preparing accurate accounts.  

Tax Management

As the financial year ends, taxes become a top priority for small businesses. Improper reporting can lead to penalties and expenses that a startup can’t afford. Yet tax is complicated. Entire accounting firms exist to handle corporate tax reporting. The best accounting software can simplify the process and help ensure accuracy and compliance.

As a small business owner, you’re probably used to interpreting the tax code, keeping proper records, and making sure end-of-year filings are correct. Still, accessible self-assessment software can help you track your finances and organize your records more efficiently. 

For the best results, choose one with 24/7 customer support so help is always available. That way, you don’t have to handle every problem yourself.   

Budgeting

Tracking your cash flow in real time helps you create cash flow forecasts. You can use your forecasts to plan your budgets. This is especially useful for new businesses, as you can plan expenditures around your available liquid cash.  

Bookkeeping

Good records aren’t just useful for tax purposes. Transaction data can support audit trails, analysis, and forecasting. You’ll also need it to support customer issues like returns. Investors and creditors will also want to see detailed accounts before they invest in your business. 

Scaling 

Once you start your small eCommerce business, the objective after survival is always growth. A good accounting system will help you spot strengths in your products and services. It will also help you identify your biggest expenses and find opportunities to cut costs. 

5 Tips to Ace eCommerce Accounting

Now you know what accounting means to an eCommerce business. That means you’re ready for our five best tips to get on top of your small business accounts.  

Understand Cost of Goods Sold (COGS)

If you’re new to accounting, cost of goods sold (COGS) is an important concept to grasp. It is how much it costs you to sell items, and you need this figure to calculate your profit margin. 

Here’s a quick example. Let’s say you sell all your stock of one item for $5,000. It costs you $ 1,000 to buy the goods, $ 1,000 to store them, $ 1,000 to deliver them, and $ 1,000 to pay staffing costs. Your total COGS is $ 4,000, so your profit margin is $ 1,000.  

Keep Track of All Expenses

We kept the example above simple, but real business expenses are more complex. Tracking all your expenses with a detailed balance sheet helps you monitor how changes affect your income. This helps you identify which expenses are critical to revenue generation. 

Run Regular Reconciliation Reports

These reports help you identify and explain discrepancies between budget items and accounts. Essentially, these reports help you track whether your forecasts and budgets match your actual spending, maintain inventory, and check payroll at year-end.

Track Your Profits Before Tax

Tax liabilities can change based on physical location or trading location. That means that keeping track of pre-tax profit is a good idea. That way, if you discover additional requirements or tax savings, you can refer back to the original figures accurately. 

Utilize Cloud Accounting Software

Cloud-based accounting software can help small eCommerce businesses keep professional, audit-ready accounts. It’s relatively affordable compared with hiring a contracted accountant and saves time by automating processes and handling calculations for you. 

Many accounting software options also include advanced features like sales forecasting, detailed reports, and inventory management to help you grow your business. Take the time to choose one that best fits your business needs and offers additional features as you need them.   

Let’s recap: Start with good bookkeeping, monitor your cash flow, and use accounting software to help. Following these tips will help you get started managing your small business finances.