90% of E-commerce businesses fail after 120 days. Running out of cash, poor inventory management, and price and costing issues are up there in the top reasons why. Sadly, a lot of these E-commerce businesses might have survived had they set up their financials properly.
To help your E-commerce business thrive (not just survive), here are some priceless tips to build solid financial foundations for robustness and resilience.
Use the Accrual Method of Accounting
When it comes to E-commerce accounting, accrual accounting is king.
The accrual accounting method has a lot of advantages when compared to cash basis accounting in the world of online business.
Accrual accounting records transactions at the time a sale or order is made, not when money changes hands. While, cash accounting records transactions when money changes hands. It’s all about timing.
So why is accrual accounting best for E-commerce specifically?
Let’s take a closer look at that now.
Delays between orders and payments are not misrepresent your business’s financials if you use accrual method of accounting. In many E-commerce businesses there are quite often delays between when orders are placed and paid for.
Let’s look at a customer named Sam as an example:
- Sam places a $300 order with you on the 3rd of the month.
- Amazon processes his payment and ships the item to him right away.
- Amazon pays out settlements every two weeks.
- Amazon pays you on the 14th of the month for this sale less Amazon’s fees and any other deductions (totaling $67).
Using cash accounting: $233 would be recorded as revenue.
Using accrual accounting: $300 would be recorded as sales, and $67 would be recorded as fees.
It’s honestly though it’s never that simple. Frequently,, payouts can include transactions from two separate months. Additionally it’s likely that you’ll have more customers than just Sam.
When payouts are sent in batched settlements and don’t include platform fees, it makes it difficult to accurately match your expenses if everything coming in is labeled as “revenue.”
With E-commerce accounting, the accrual method is the only option for accurate finances.
Because of the nature of transactions in E-commerce , accrual accounting provides a more complete picture of your business financials. It also makes it easier to forecast your cash flow and avoid any surprises down the road. If you’re new to eCommerce accounting, make sure you know the fundamentals.
Key Takeaway: If you’re new to E-commerce, start of the right way by using the accrual accounting method. If you’re currently using cash basis method, talk to an accountant specializing in E-commerce about switching to accrual, the sooner the better.
Utilizing cloud-based accounting is optimal, as it involves storing your accounting system online rather than relying on Excel spreadsheets or desktop software confined to a particular computer.
Storing your E-commerce accounting in the cloud offers several advantages:
•Access your accounting information anytime, anywhere, and easily share access with team members.
•Reduced risk by avoiding dependence on a single device; the system is automatically updated and backed up.
•Secure encryption, similar to bank accounts, ensures that access requires logging in, enhancing overall security.Why is this something you want to get right?
Key Takeaway: Setting up your accounting system in the cloud ensures it is safe, secure, and accessible. It also allows you to customize it with other useful tools.
Simplify Your Payments by Automating Them
Once you’ve adopted the accrual accounting method in your cloud-based system, let’s assess your efficiency. If transaction processing, including payments to suppliers, eCommerce platform fees, and personal business expenses, is consuming too much time, consider streamlining with apps for automated payment flows throughout your business.
• Facilitate seamless payments to suppliers by integrating your vendor management system with apps in cloud based accounting systems like QuickBooks Online.
• Ensure precise and efficient payments to employees and contractors, eliminating the need for an entire admin day, especially if you’re not a solo operator.
By utilizing apps like QuickBooks Payment the app does all the heavy lifting in your QuickBooks account.
Plan for Sales Tax From the Beginning
Anticipating and addressing your sales tax responsibilities from the outset can avert complications later on, a step that some entrepreneurs unfortunately neglect during the inception of their businesses. Sales tax, essentially a consumption tax on goods and services, is a crucial aspect to consider.
Three traditional approaches for E-commerce sellers regarding sales tax include:
• Obtaining sales tax certificates in every state preemptively (costly and time-consuming).
• Solely registering in one state, disregarding sales tax concerns elsewhere (risky for businesses with economic nexus in various states).
• Initially registering in one state and then in specific states as your business expands, ensuring you have the necessary coverage without unnecessary complexities.
Strategizing and crafting a sales tax plan enables you to control initial expenses and reduce long-term risks simultaneously. Once you’ve established your plan, QuickBooks Online can automate the entire process for you. Keep in mind, the process is notably smoother with the assistance of an eCommerce accountant.
Key Takeaway: Knowing your sales tax obligations from the start and planning ahead QuickBook Online is going to save you time, effort, and potentially money in the long run.
Plan Your Nexus and Permit Registrations
Regarding your E-commerce business, the states where you have “nexus” are those in which you conduct business. Various types of nexus include:
• Economic nexus, signifying an economic connection with a state, obligating you to pay sales tax there.
• Physical nexus, involving a tangible presence in a state, such as a warehouse, making you responsible for sales tax in that state.
• Sales tax nexus, indicating a significant economic or physical link with a state, requiring registration, collection, and remittance of sales tax in that state.
Regarding your E-commerce business, the states where you have “nexus” are those in which you conduct business. Various types of nexus include:
• Economic nexus, signifying an economic connection with a state, obligating you to pay sales tax there.
• Physical nexus, involving a tangible presence in a state, such as a warehouse, making you responsible for sales tax in that state.
• Sales tax nexus, indicating a significant economic or physical link with a state, requiring registration, collection, and remittance of sales tax in that state.
Certain E-commerce platforms function as marketplace facilitators, handling sales tax on your behalf. Nevertheless, this varies across platforms and states, making it essential to comprehend eCommerce sales tax independently. Key steps to fulfill the nexus requirements include:
• Identifying locations with economic nexus.
• Assessing the taxable status of your products.
• Registering for sales tax in relevant states.
• Collecting sales tax (if not managed by your marketplace facilitator—be aware!).
• Timely filing of your sales tax returns.
Key Takeaway: Sales tax is easier when you understand what your obligations are. Get your head around nexus and what your eCommerce platform does for you, and get registered in the necessary states.
Forecast Inventory to Protect Cash Flow
Forecasting extends to various aspects. Having explored the significance of financial planning, let’s zoom in on inventory.
Inventory forecasting offers three key advantages: minimizing overstock, preventing understock, and saving time. Relying on instincts rather than data for purchasing decisions can lead to cash flow issues. Avoiding such pitfalls through inventory forecasting not only prevents business challenges but also instills confidence in your cash flow.
The Key Takeaway: Forecasting your stock, as well as your finances, means you can make informed decisions based on data and have a better chance of success in the early stages of your business.
Know When to Hire an E-commerce Accountant
When should you seek external financial expertise?
Consider hiring an accountant for your E-commerce business when it starts generating substantial profits, around USD $20,000-$50,000. Here are indicators of the right time to enlist their services:
• When you’re ready to delegate specialized tasks to experts.
• Dealing with government-related matters, especially during tax filing.
• Seeking peace of mind regarding audits.
• Contemplating a business loan application.
• Experiencing growth in your company.
• Exploring expansion or contemplating a sale.
Selecting an accountant or bookkeeper requires familiarity with:
• Sales tax
• The cloud-based software and integration apps you utilize
• The unique characteristics of E-commerce , characterized by a higher volume of transactions and variable costs, necessitating increased automation.
They can assist with various E-commerce accounting challenges like monitoring seller fees, managing returns, and manual data entry. Ensure their experience and qualifications align with online selling, and consider their fee structure, preferably offering value-based pricing.
Key Takeaway: When it comes to E-commerce accounting, it’s much better to get an accountant that understands the playing field. Specialist eCommerce accountants will help you navigate through the eCommerce world in a way that regular accountants might not be well versed in.