E-commerce business owners enjoy greater freedom and flexibility compared to traditional brick-and-mortar shops and offices.
With no need to pay rent and the ability to fulfil orders from a warehouse or home, running a successful online store has become an increasingly appealing option for many young entrepreneurs and aspiring business owners. Due to the availability of low-cost start-up options and the many online selling platforms now available, Australia has experienced a significant increase in the number of e-commerce businesses operating online in recent years.
But, for owners of e-commerce businesses, establishing an effective accounting system can be a daunting task. In this article, we’ll share eight key areas where you can master the accounting for your e-commerce business.
1. Craft a business plan
A well-crafted business strategy will play a crucial role in setting up a successful accounting system for your business. This plan should include a clear timeline, financial goals, potential obstacles and a roadmap for the future.
Whilst a business plan may feel like it is optional for a simple e-commerce business, it offers valuable insights into potential growth opportunities and the identification of future financial challenges. This information will be vital when making informed financial decisions, such as those related to pricing, marketing, and expenditure.
2. Get online accounting software
As the owner of a start-up e-commerce business, investing in accounting software is usually a wise decision. Unlike the traditional methods of manually tracking all sales and expenses through notebooks and paperwork, the online accounting software available now has dramatically simplified accounting for business owners.
A good online accounting platform will also be able to integrate with other online tools to help you perform a wide range of accounting functions and save you immeasurable time. The capabilities of the best accounting software platforms can include:
- Invoicing: Generating invoices for customers and tracking payments.
- Expense management: Recording and tracking business expenses.
- Financial reporting: Generating financial statements and reports, such as balance sheets, profit and loss statements, and cash flow reports.
- Tax management: Calculating and filing business taxes.
- Inventory management: Tracking stock levels, sales, and purchase orders.
- Payroll management: Calculating and processing employee payroll.
- Customer management: Keeping track of customer information, including contact details and purchase history.
- Multi-currency support: Handling transactions in multiple currencies.
- Integrations with other tools: Integrating with e-commerce platforms, payment gateways, and other business tools.
- Data security: Providing secure storage and access to financial data.
For us personally at Elephant Advisory, we use and recommend Xero’s accounting software for its ease of use and collaborative capabilities.
3. Establish a system for your bookkeeping
Bookkeeping is a tedious but essential component in managing your business's financial health. Fortunately, many of these duties can be automated through the use of online accounting software.
Some of the most important bookkeeping functions you’ll need to perform include:
- Keeping records of every transaction your business is involved in
- Bank reconciliation
- Managing your payroll
- Processing your accounts payable and receivable
- Generating financial reports
As your business grows and your finances grow more complex, you’ll likely need to consider hiring an accountant to help you stay on top of your bookkeeping responsibilities.
For more detail on how to manage the bookkeeping for your business, you can check out another blog written by our accounting experts here.
4. Figure out your break-even point
The break-even sales value is a critical metric for e-commerce businesses, as it represents the minimum amount of sales revenue required to cover all of your costs. This includes direct costs, such as materials and labour, as well as indirect costs, such as overhead expenses. Understanding your break-even point will be crucial in helping you determine how much you need to sell in order to stay in business and avoid operating at a loss.
Your break-even point can be calculated by dividing your total fixed costs by your gross margin per unit.
For example, suppose your online footwear business has fixed monthly costs (such as storage hire, utilities and loan repayments) totalling $3,000. Meanwhile, you make a gross margin of $100 on every pair of shoes that you sell. In this scenario, you would divide 3000 by 100, which equals 30. This would mean that you would need to sell at least 30 items every month in order for your business to avoid making a loss.
Ultimately, understanding the total value of your break-even point is a key data point that will help you set goals and track the performance of your venture.
5. Plan and track your cash flow
Cash flow is the lifeblood of any business, and it’s no different in the world of e-commerce.
Maintaining a healthy cash flow is what will ensure you always have the means to invest in your business, as well as pay off your debt and tax obligations. Unfortunately, poor cash flow management can have disastrous consequences, leading to financial difficulties and, in many cases, business failure, making it a critical area of focus for small businesses.
Here are five important tips we’ve outlined previously to help you manage your cash flow effectively:
- Separate your business and personal bank accounts
- Forecast and track your cash flow with an accountant
- Build a cash reserve
- Plan your tax and superannuation payments
- Understand the difference between cash flow and profit
When it comes to planning your cash flow, an accountant you trust will be worth their weight in gold. You can also find more detail on our effective cash flow management tips here.
6. Get the right insurance
As an e-commerce business, you are exposed to the many risks that come with selling goods online. Insurance can play a crucial role in this aspect, serving as a safety net in case something unexpected occurs.
Liability for damages, hacking and cyber theft are just some of the potential risks that need to be addressed with care and diligence. Having insurance in place not only safeguards your business but also provides peace of mind, allowing you to focus on growth and expansion without worrying about potential losses.
7. Choose a payment gateway
Payment gateways allow e-commerce businesses to process credit card payments safely and securely from anywhere in the world. However, with many options available in the market, e-commerce business owners need to be aware of the differences in fees, charges, and rules for each gateway.
As each payment gateway will have its own pros and cons, it’s important to take the time to decide which option is right for you.
Lastly, integrate your chosen payment gateway with your accounting software partner in order to easily record and track every payment made to your business.
8. Get help from an accountant
Every year, millions of businesses rely on accountants to manage their financial and legal responsibilities effectively. The importance of accounting support is especially pronounced in the realm of online business, where tax rules and legislation can be tricky to handle.
As your business grows and becomes more complex, professional help may become necessary to assist you with everything from tax returns, BAS statements, financial reporting, budgeting, pricing and more.
At Elephant Advisory, we offer comprehensive e-commerce accounting services to support our clients with all their accounting needs. Our team of experienced e-commerce accountants and business advisors are equipped to provide guidance and support for a seamless unfolding of all your accounting needs.