Accounting Basics You Need To Know To Run a Successful E-Commerce Business
So, you’ve started an eCommerce business using VPCART. You have paid the necessary attention to ordering inventory, managing inventory, shipping, driving traffic to your products, branding, etc. But at the back of your mind, you know that you will need to do some accounting for your business.... but that’s super easy. You could either rely on the knowledge from your college accounting class some years ago or you could do quick learning about eCommerce accounting or accounting in general. Maybe do a few Google searches. Eventually, you could even hire a bookkeeper when it gets too time-consuming or difficult (great idea actually!).
As part of this process, you will need to be aware of the necessary steps to keep your accounts in check when running your business. These methods will make you feel like you are taking care of your accounting.
1. Keep Records
Once you make a sale, it does not mean that you can then immediately discard the records concerning that transaction.
If you did this, you would not only lose the details of a customer who may buy more in the future and to whom you can send promotional emails, but you will also need to retain the details of the amount of money made for your accounts.
Also, you will need to keep records of the items that you buy for the benefit of your business. This can include materials, tools, and equipment that you use as part of your business. Retain any receipts or invoices that you have relating to all business purchases.
Be aware that it is not necessary to keep hard copy records of all your transactions. Keeping digital records will be simpler and will offer an efficient way to retain details that you will need in the future. Scan and save paper copies of important documents, then you can securely dispose of the originals.
2. Understand your cost of goods sold
The cost of goods sold is the expense directly tied to the products you sold. This is the inventory sold plus how much it cost to make that inventory.
Let’s say you sell a piece of a widget. Whatever it cost you for the parts plus whatever it cost to build it should be the cost of goods sold for that widget.
If the parts of the widget cost $50, packaging cost $10, and you paid someone $25 to put it together, your cost for that widget is $85.
3. Calculate all other expenses
Now you know your costs directly tied to sales volume. Next, you need to understand how much everything else is costing you. Any expenses that don’t increase when you sell more or decrease when you sell less are called ‘fixed expenses.’
For example, if you pay monthly rent, the amount is fixed. It won’t change whether you sell one widget or one million.
These costs aren’t part of the cost of goods sold and aren’t factored into your gross margin.
They do affect your profit and your cash flow, though.
- Property Tax
- Interest on loan payments
These expenses are considered ‘fixed’ since you have to pay them even if you sell nothing next month.
Don’t get this confused with an expense being the same amount every month. An expense like utilities might be more one month than the next. Or it might be more in the winter than in the summer.
It’s still a fixed expense in accounting terms. If any expense changes month-to-month, you should use an average for budgeting.
4. Figure out your break-even sales requirement
Budgeting and planning are important parts of running a business. After all, you’re not going to just want to know if you made a profit last month, you’re going to want to know if you expect to make one this month and next.
Your break-even sales amount is the amount of sales dollars you need to earn to cover all of your costs.
For example, let’s say all your ‘fixed costs’ add up to $5,000 per month.
This means you have to sell enough of your product to cover the cost of making them (including the labor) plus an additional $5,000 just to break-even (no profit and no loss).
Figure out your gross margin per unit (from the fourth basic).
Then divide your fixed costs by that amount to figure out the number of units you need to sell.
If your break-even number of units is 5,000 and you think you can only make or sell 3,000, you know you’re in trouble.
If break-even is 5,000 and you think you can make and sell at least 10,000 then you know you should be making money.
Remember that your fixed costs don’t easily change.
For example, if you’re in a five-year lease, you’re going to struggle to find a way to lower your rent.
This means if your break-even seems too high, you should first look at either raising your prices of trying to lower your costs of goods sold.
You could do this by charging more for shipping, using cheaper materials, or finding cheaper labor.
5. Track your sales and profits before tax
Now you know how many items you need to sell to break even. Next, you need a way to track your sales.
This lets you know early on if you’re going to have an issue. It will also help you manage your money. Let’s say you figured out you need to sell 5,000 units to break even. It’s now the 15th of the month, and you’ve only sold 1500.
If you’re tracking your sales, you’re able to notice this. Now you have time to do something about it.
You still have two weeks left to try and drum up more business with some extra digital marketing efforts.
Just make sure that if it’s paid marketing, you figure the cost of that into your budget.
After all, if you spend $2000 to increase sales by $1000 then it wasn’t worth it, right?
One way to track your sales is by linking Google Analytics to your e-commerce site.
Google Analytics even has a plug-in for your e-commerce site to make it easier.
- Log in to your Google Analytics and go to your Admin Settings.
- Next, go to your e-commerce settings.
- Then turn on the ‘Enable e-commerce’ switch and ‘submit.’
Now that you know sales, cost of goods sold, and all your other ‘fixed’ expenses, you know your earnings before tax as well.
Keep in mind profits don’t mean cash in hand!
Let’s say you sell a service worth $3,000, but you offer a three-month payment plan.
Your sales would show $3,000, but your bank account may only show $1,000.
That means even if your accounting software says you made a profit of $500 after all expenses, you won’t have an extra $500 in your bank account.
If all of your expenses are paid out this month, then your bank out could go into the red.
The timing for when to recognize sales and expenses can get pretty complex. Leave this for your accountant and tax time. It’s not important with the day-to-day management of your business.
If you ever go public, you must know the more advanced accounting reporting requirements, but they’re not needed for managing your business.
6. Stay Aligned
To keep the work you need to do on your accounts to a minimum, it is a good idea to integrate your database with any accounting software that you use. This will streamline the process and limit the need to repeatedly access multiple databases and systems.
It is also necessary to make sure you are in-sync with anyone who works with you. This will help avoid work being duplicated and that any necessary information is noted in the right place.
7. Remember Your Tax Obligations
If you have only ever previously earned a salary from being employed by someone else, you will probably be used to paying tax in a certain way. Though this may change a little when you run a business, it does not mean that the obligation disappears.
One of the main reasons for maintaining good accounting records is to make your life when the time to submit your tax return rolls around.
It is easy to overlook matters when you are doing something different from what you’ve previously known. However, keep your taxes at the forefront of your mind to keep the tax guys off your back!
8. Stay Up To Date
The best way to be efficient and keep your accounts in good order is to update them regularly.
It is a good idea to schedule a regular day for dealing with your accounts, such as once every two weeks or months, depending on how busy your business is.
This regular attention will make it easy to keep track of your earnings, costs, and expenses, which will help you avoid forgetting anything that may come back and bite you later.
Start with basic accounting software . It makes your life a lot simpler. Next, remember ‘cash is king,’ and get a handle on your cash flow. You should manage this weekly unless you have a big cash reserve built up.
Next, you need to understand your sales, expenses, and profits. This is your income statement and lets you understand if you’re making money each week, month, or year.
Don’t forget to plan for taxes. set up your e-commerce site to collect them if you need to. Put the money aside to pay them when you need to.
Finally, build your balance sheet. Or let your accounting software do it for you.