What is eCommerce Accounting and How to do it Effectively?
Starting an eCommerce store is an exciting opportunity for any entrepreneur. With an online shop, you can sell products day and night, year-round, to an array of customers. The world of the internet allows you to reach a wide audience, drop-ship orders, and do it all.
Setting up a website, purchasing a web domain, and hosting are all very important steps to take, but without proper financial planning, your eCommerce store won’t gain much traction. To help you, we will be sharing here a few tips on how you can effectively manage the eCommerce accounting procedures.
5 eCommerce Accounting Tips You Need to Know
Choosing the Right Accounting Software
The accounting software that caters to your company’s needs is essential to manage your accounting tasks effectively. Many accounting applications are there for different accounting needs. But before choosing, you must identify the type of accounting and reporting you will need for your online business. You can consider different software that provides the following features to ease your accounting process:
- Invoice Creation
- Generate Accounting Reports
- Sales Tracking
- Inventory Monitoring
Tracking Your Cash Flow
Tracking your cash flow is important for your business. This way you can determine how much money you receive and spend during a specific period. There are several ways you can keep track of cash flow for your online business:
- Avoid Paying in Advance – Although keeping a record of your payments is important, it is unnecessary to pay for them in advance. Paying your bills on their determined due dates will give you more time to plan out your finances.
- Consider Monthly Installments – It is also important to provide your customers an option to pay for products or services on a monthly basis. It ensures that you will be receiving constant revenue.
- Maintain Your Business’ Bank Account – It’s always better to leave some portion of money in your business bank account to manage any unforeseeable expenses you may encounter in future.
- Avoid Managing a Complex Cash Flow Statement – Keeping your cash flow statements as simple and straightforward as possible is more beneficial than managing a technical cash flow statement.
Keeping track of your cash flow is essential to maintain your eCommerce business. This will give you a clear view of how your business is doing online. Plus, it gives you a way to plan your finances and identify specific financial issues that your company may encounter.
Monitoring your inventory is also an important step to help your online business operate successfully. You should also consider the inventory materials you need to manufacture your product. It is imperative to monitor your inventory. The items that you will require for your business should be considered in advance to avoid delays or any unwanted costs.
When running an online business, it is best to analyze the minimum and maximum amount of inventory items you would want. Setting such an analysis will help you decide whether it is time to reorder before running out.
Understanding Your COGS
The Cost of Goods Sold (COGS) refers to the cost of producing goods sold by a company. This includes the cost of materials and labor applied to manufacture the goods. There are some indirect expenses, such as inventory distribution costs, and sales costs that are excluded from the cost of goods.
For an online entrepreneur, it is important to know your company’s COGS to determine your company’s profit margin. If you have higher COGS, it shows lower profit margins that could be bad for business.
Calculating Sales Requirements
After determining the costs of your goods, it’s time to analyze how much your sales expenses are costing you. Usually, these expenses include utilities, tax on property, loan amount insurance, and additional costs.
These expenses can also be defined as “fixed expenses” that have a fixed amount and due date that you will have to pay for regardless of your earnings. You will also need to calculate the “break-even” amount that refers to how much you will need to earn in a month to cover operations costs.
E-commerce accounting consists of numerous procedures. Online business owners need to analyze these elements before implementing them in their business. With these tips, and instructions shared in this guide, entrepreneurs working in the eCommerce domain can have everything they need to handle their accounting procedures.