Accounting is an arduous task that often gets put on the back burner. As an online business, however, handling your own books is part of the challenge. While you want your online business to grow, growth complicates accounting, making it more difficult to ensure you’re on top of your sales, inventory, returns, banking, as well as paying your suppliers and taxes on time.
To help you master your accounting, we’re going to share the best accounting practices for online businesses to help keep your business profitable and scalable.
Understand The Specific Accounting Needs Of Online Businesses
Accounting for online businesses, especially e-commerce businesses, addresses specific needs, including:
- Higher transaction volume: The ease of e-commerce and the ability to reach a broader audience online means you’re dealing with higher transaction volume. While this is positive for profitability, it calls for an accounting system that can streamline tracking and reporting so you keep on top of your finances.
- Multiple sales channels: Selling or providing services on multiple channels presents a challenge regarding taxes and accurate pricing based on changing currencies. This leads to potential issues with tax compliance and increases the risk of costly penalties. Having the platform in place to translate sales in separate locations is key to compliance for international customers.
- Returns policy: Managing returns is a major pain point for e-commerce businesses. Having a clearly defined returns policy and the systems in place to ensure timely refunds is critical to e-comm success. Because customers must ship returns back to you, you need effective tracking, quality control, and theft detection to ensure refunds align with your returns policy. Since returns have a major impact on cash flow, it’s also important to accurately track the amount of money lost in refunds.
- Operating expenses: You can reduce operation costs as an online business by identifying opportunities that streamline your service processes. For e-commerce, order fulfillment, inventory management, and effective logistics management all impact profitability. However, you can’t overlook expenses for things such as hosting your website/sales platform, paying labour for order fulfillment, shipping fees, etc.
Choose The Right Accounting System For Your Online Business
Your online business accounting system keeps your financials organized. The two most effective systems for online businesses are:
1. Cash basis accounting
Cash basis accounting records each instance when you receive cash from a sale or pay out cash for an incurred expense. This is a like-for-like method that tells you exactly what transactions have taken place. As a result, you always know how much money is physically available at any given moment. This system works until your business starts to expand, at which point your deferred payments, shipping periods, and things such as refunds make it difficult to clearly reflect your financials.
2. Accrual method
Accrual accounting is based on tracking the sales or expenses as they take place, not when money is deposited or withdrawn from your bank accounts. For example, if you accept cheques for COD orders or you pay a supplier monthly, you’ll have a deficit waiting for the cheques to clear and a misleading asset for the money in your bank that will wind up as a payment to your supplier.
Although this sounds confusing, the accrual method introduces accounts receivables and accounts payables as your tracking method. This makes more sense when your business expands as it accurately tracks your financials as you face extended payment terms. As a result, you become better at understanding both your present financials as well as your future obligations to improve your planning skills. That said, if you fail to remember your obligations (or don’t have a reliable software system to track them) you might think you’re more profitable when looking at the money on hand than you actually are.
Switching to this system is necessary to keep your business scalable and ensure you meet your financial obligations.
Separate Transactions Into Expenses And Income
Marking transactions as either income or an expense on your cash flow statement is easy using an accounting app. You can then review your statements to make sure they are accurate and get a better feel for your expenses and monthly revenues to improve planning and budgeting.
Maintain Your Budget And Conduct Audits
Maintaining your budget will ensure you:
- Have a way to monitor cash flow
- Understand your recurring expenses
- Spot unplanned expenses
- Manage your money accordingly
- Set your collected taxes aside, ready for payment
- Avoid unnecessary debt
Your budget audits should be conducted at least monthly and include:
- A review of your cash flow statement, income statement, and balance sheet
- Categorizing your monthly spending to ensure you have money set aside
- Ensuring you have money to pay your taxes according to quarterly schedules
- Tracking returns and chargebacks to understand your profitability
Adopt Accurate Recordkeeping Practices
To leverage local tax breaks, be sure to adopt accurate recordkeeping in case of audits. Records include all receipts, bills, invoices, proof of cancelled or bounced cheques, bank account and credit card statements, online wallet statements, revenue records, etc. These records should be maintained for at least three years.
Follow Best Accounting Practices For Online Businesses
You don’t need to be an accountant to follow best accounting practices to avoid becoming overwhelmed and making mistakes that impact your business. Some guidelines to follow include:
- Use your cash flow statements and trending seasonal changes to help forecast major expenses and the best places to find funding for those expenses
- Plan for things such as a new warehouse to accommodate inventory or increased advertising when you enter a new market
- Never spend money collected for taxes – instead, consider keeping a separate account for this money so it is always on hand
- Keep on track with inventory management to avoid falling into liquidity traps that impact your available assets and your bottom line
- Be diligent in your bookkeeping and reporting reviews to ensure you don’t miss errors that can misinform your decisions and lead to losses
You don’t need to be an accounting whiz to master your online business finances. However, understanding the critical accounting differences in e-commerce/online businesses, choosing the right accounting method, and embracing accounting best practices will ensure you manage your financials effectively.
Outsourcing bookkeeping for online businesses doesn’t hurt, nor does seeking guidance from an online accountant or fractional CFO. These professionals help keep things on track and inform your decisions to make your online business more sustainable.
Call Intrepidium today at 778-800-7976 or click here to schedule a consultation.