5 Fundamental Accounting Tips For eCommerce Businesses
Accounting is one of those necessities most people find annoying. Most business owners would rather discuss expanding their product line or pull a tooth instead of focusing on their accounting. But, honestly, there is no avoiding it.
eCommerce is the fastest growing retail market and is projected to hit over $5 trillion in sales by 2020. So, it's inevitable, if you want to run a successful eCommerce business, you must understand the basic accounting principles.
Track Your Cash Flow
The purpose of your business is to make money. To understand precisely how much money your business is making, you need to track your cash. (everything that comes in and out of your business) Many eCommerce businesses think they need to generate more sales to improve cash flow; while this is practical, there are also other ways to do so. The first thing to consider is reducing unnecessary expenses. Cutting down on minor costs can have a significant impact on your expenditures. You also need to put some strategies together for on-time payments. For example, be careful with credit terms, unless your customers have a solid credit history, its best to take the payment upfront.
You can also improve your cash flow by negotiating better terms with your vendors. Incentives like longer payment terms or discounts on additional purchases can free up extra cash flow for your business.
Determine Your Break-Even Point
Your break-even point is the number of units you need to sell to zero out your expenses and get on the road to turning a profit. Calculating your break-even point involves factoring in your costs (fixed and variable), the price of the product and the contribution margin (the value obtained after subtracting your variable cost from the selling price).
To find your break-even point use the following formula:
Break-even Point = Fixed Costs/Contribution Margin
Where, Contribution margin = Average Price – Variable Costs
If your break-even point is high, you can consider raising your prices or lower your variable costs, which can be done by increasing your shipping charges, using cheaper materials, etc.
Balancing Your Finances
The balance sheet tracks the long term health of your company. The balance sheet is made up by calculating your total assets, total liabilities and owner's equity. Assets are anything of value controlled by your business like inventory or office equipment.
Liabilities are your debts owed to other people. Assets and liabilities are defined under a long-term and short-term basis. With your owner's equity being the difference between your assets and liabilities.
Your balance sheet is important because it provided a bigger picture and can pinpoint inaccuracies in your income statement. If your income statement says your eCommerce business is earning profits, but your balance sheet says something else, it's possible something you've entered something incorrectly down the line. Remember, your balance sheet is only correct if your assets equal your liabilities plus owner's equity.
You need inventory; otherwise, you have nothing to sell. However, unnecessary inventory build-up can impact your liquidity and reflect poorly on your books. Therefore, it's imperative you keep your inventory in check and determine what volume you want to keep on hand. You don't want to run out of inventory because you risk losing sales, but having an excessive amount of unsold inventory can create a financial burden as well. Remember, it’s best to keep only what you need on hand. With a robust inventory management systems like Dear Systems, you'll be equipped with instant visibility into stock levels and order statuses, for up-to-the-minute knowledge of your inventory.
Taxes, Taxes, Taxes
Taxes are complicated and avoidable; if you sell different types of products and services, its been to consult a sales tax professional. Make sure you are flagging taxable products. To stay organized it works best if you categorize products that require you to pay tax and those that are exempt from taxes.
Your tax payments depend primarily on the physical location of your business. As a starting point you can assume your tax amount will be as much as the taxes you have collected from your customers. It's essential you recognize that nature of that money that you've set aside as taxes and not a portion of your revenue. If you 'don't this could create a problem for you when its time to make your tax payments.
If you mix the tax amount with the actual product price you can lose track of the real profit you've made. You can avoid this type of problem by opening a separate account for your taxes.
Achieve Long Term Success
To achieve long term success as an eCommerce company, its imperative your accounting hits the mark. If a dedicated internal department feels too expensive, consider outsourced accounting. If your company has crossed the $1 million mark in gross revenue, a part-time bookkeeper may no longer be sufficient for your operations. Growth is essential, and to keep ahead of your operations, you will need a team that is able to help you scale.
Remember, as an eCommerce business, your core is not accounting, and investing time and energy on something you dread distracts you from focusing on your goals.