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eCommerce accounting seems so easy when your startup is kicking off its operations. However, the more successful your business gets, the more complicated eCommerce accounting becomes. Many eCommerce businesses find themselves unwitting victims of their own success, as their growing finances become more than their eCommerce accounting software and the team can handle.
If this sounds like you - don’t worry! We’re here to give some of the best tips for eCommerce startups and a primer on accounting solutions and bookkeeping software in this quick 101 eCommerce accounting guide.
eCommerce Bookkeeping vs. Accounting
Bookkeeping simply refers to the maintenance of financial transactions and records - keeping the books updated, essentially. This can include recording transactions, invoices, accounts receivable and payable, balance sheets, and payroll. eCommerce bookkeeping is simply noting down transactions as they occur.
Accounting is a more detailed process. eCommerce accounting doesn’t just involve taking notes on your finances but using eCommerce accounting software to analyze these records. Accountants create reports, models, forecasts, perform audits, tax planning, tax reporting, financial forecasting, and risk analysis.
A strong accounting department makes you proactive with your finances. It also will allow you to prepare financial statements and models to give your team and investors a much better idea of your financial situation and future.
Cash vs. Accrual Accounting
There are two main types of accounting available to eCommerce companies: cash accounting and accrual accounting. The cash method of eCommerce accounting is pretty simple to understand. Essentially, every time that cash arrives or leaves your bank account, you make a record.
Many eCommerce startups simply start on the cash method and don’t change it until the IRS requires them to, once their revenue is high enough. However, accrual accounting is often the better option, even for a younger company. If you’re not familiar with the term, accrual accounting refers to making records based on sales or invoice expenses - even if the cash hasn’t moved yet.
So why is this method better? Mainly, it’s superior because it gives you something of a “future picture” of your finances. Cash-based accounting can give you a false sense of security in a full bank account - even as you may have expenses looming. Accrual accounting essentially is giving you a much more accurate picture of your startup’s economic health. For a company that is just starting up, when money is often tight, this can be a lifesaver.
Your eCommerce Accounting Starter Checklist
Now that you know what eCommerce accounting is, and what kind of accounting you should be using, now it’s time to boot up your eCommerce accounting software and get your finances recorded. Even with this knowledge, getting started can be a daunting task. Here’s a handy list of some of the most important things to watch out for on your way to eCommerce accounting mastery.
Categorize Your Transactions
First thing’s first, you need to categorize all transaction types. Beyond labeling transaction types as an income or an expense, you should also try to assign some subcategories - for example, expenses could be labeled as salary or marketing.
It’s also important to use the correct Ledger Codes. These codes help everyone stay on the same page when it comes to understanding what is in the transactions, and are an incredibly useful standard to master.
Review Your Cash Flow and Budget
Working capital is the lifeblood of any eCommerce startup. You should always start with your recurring cash spending. Record how much your business is spending and on what - this could include salary, inventory, or marketing - don’t forget taxes as a planned expense either. Then you can record any one-off expenses. Altogether, this will give you an idea of what your budget looks like - and how much revenue you will need to start earning a profit.
Next, it’s important to record everything in your inventory and how much it is worth. Recording your inventory over time will give you a good idea of how much “overstocking “ you are doing - letting inventory sit around without being sold. Remember to also record the cost of goods sold at this point as well.
It’s tempting to just take notes at the end of every month, but this can often lead to discrepancies and a lack of preparedness. Like with accrual accounting, making a note of your inventory numbers with every order, even before items have shipped, lets you hedge your bets on how much stock you have. Automated inventory tracking systems help take this process to the next level.
Track Sales and Profit
Figuring out how much money you’re spending is only one part of your budgeting - you need to also keep track of your sales and profit. Tracking your sales over time will let you measure these numbers against your budget, and let you make major purchasing decisions in confidence.
The last tip here is to wrap up all this info into a clear and concise package, easy for your team and investors to understand. At Punch Financial, we excel at creating financial management dashboards to help make accounting easy and accessible. Contact us today to learn more about our accounting software solutions.
Want More Accounting Tips?
Looking for more tips to add to your accounting checklist? Want to learn more ways to maximize your accounting power?
At Punch Financial we specialize in providing high-growth companies with a modern accounting experience. Instead of hiring an in-house CFO at great expense, you can outsource your strategic needs to a firm with proven results for a fraction of the cost.
Our mission is to help you streamline your back office and to provide you with actionable data and reduce your overhead. Let’s connect to give you a customized quote and free consultation. You have nothing to lose but so much to gain.