As an ecommerce business owner, your primary focus is making sales online. But there are still plenty of offline elements with which you must contend. Chief among these concerns are your products, which you have to source, receive, hold in inventory, ship, and receive again in the case of returns. Then there’s dealing with multiple sales channels — Amazon, eBay, Etsy, and your own Shopify or custom-built site, just to name a few.
Managing all these aspects is a hassle — and that’s before you add bookkeeping into the mix. Plus, there’s no one-size-fits-all approach when it comes to ecommerce bookkeeping.
The goal of this article is to help you smartly tackle that last concern: ecommerce bookkeeping. In the sections below, we provide guidance on what you should consider when doing bookkeeping and some features you should look for in ecommerce bookkeeping software.
4 Considerations For Ecommerce Bookkeeping
1. How will you determine profitability?
Typically, the goal for running an ecommerce business is to make a profit on goods sold. But you can’t know whether you’re profitable — or how much you’ve made — unless you practice good bookkeeping habits. Accurate financial data informs key business decisions such as pricing, sourcing needs, and vendor negotiations.
Here are a few questions to ask that could impact your profitability:
- How many sales do you need to cover your costs and stay out of the red? It’s essential to know your break-even point.
- What sales channels are performing the best overall? Some channels may present more opportunities than others, though those same channels may also be more costly.
- What’s the return rate on all your products? Returns play a large role in profitability, especially as you scale.
Diligent ecommerce bookkeeping means keeping careful track of all this information so you can make the right decisions to boost the bottom line. This could include changing items' prices, increasing your spending on certain marketing channels, or rethinking your product return policies.
2. How will you ensure you’re applying the right sales tax?
One concept you must be mindful of when selling products is nexus or “a situation in which a business has a tax presence in a particular state.” Nexus and sales tax go hand in hand, as sales tax rates can vary not only from state to state but within zip codes.
You’re accountable for applying and collecting the right amount of sales tax to customer purchases and then remitting what you’ve collected to your appropriate taxing jurisdictions. So you must know where rates are applicable. Since guidelines vary from state to state, different physical or economic activities may mean you have nexus in one state but not another.
Even the most diligent individuals will find it challenging to keep up with the proper application of sales taxes, especially selling at higher volumes and across geographies. Your best bet is to use software or a built-in option like the one offered by Shopify. Also, delineate your sales tax from gross sales, merchant fees, and bank deposits.
For example, a customer in a locale with a 7% sales tax orders $100 of product from your website. You collect that amount plus $7 in sales tax, or $107. After accounting for merchant fees (assume 2.6%), your payment platform deposits $104.40 into your account. From a bookkeeping perspective, you should record:
- $100 in gross revenue
- $2.60 in merchant processing fees
- $7 in sales tax
But it’s still up to you to remit the collected taxes to the appropriate taxing authorities. When in doubt, we always recommend working with a tax advisor to help with your tax returns.
3. How will you ensure your inventory is accurate?
Having multiple sales channels is a great way to increase your visibility to customers. It can also make tracking inventory a headache.
Say you had 1,000 t-shirts in inventory on the first of the month. At the end of the month, you have 500 remaining.
- How many t-shirts did you sell on your website?
- How many did you sell on Amazon and other third-party marketplaces?
- How many did you sell at an exhibition or other in-person event?
- Was there any shrinkage or inventory loss?
You must ensure your ending inventory is accurate when using different sales channels or third-party ecommerce platform. With Shopify and other ecommerce systems, you can track your inventory, but these systems typically only account for sales on your site, not those of third-party sellers. That’s why having a centralized inventory management solution connect all your sales channels is important.
Software certainly helps keep track of inventory, but how do you verify whether the system is accurate? At a minimum, you should be doing an inventory count every month, though performing a count more frequently will limit disruption.
If there’s a discrepancy in counts between your accounting system and the warehouse, you can’t simply expense the missing or lost items to the IRS. You need documentation to explain why the numbers are off. *For example, you would need to document if you used your personal credit card or bank account to buy materials to fulfill outstanding customer orders. Keeping clear records is essential to not only profitability but also to a seamless tax experience.
*Pro Tip: Always keep personal and business funds separate to avoid complicated bookkeeping and potential tax errors as mentioned above.
4. How will you handle the bookkeeping?
You’re undoubtedly wearing multiple hats in your business, but donning the bookkeeper hat is typically where most business owners reach their limitations. Not only does it require a particular set of skills, but even with the help of accounting software, it takes a lot of time. Don’t hesitate to consider hiring an expert to handle bookkeeping for your ecommerce business.
The exact point of handoff differs for every business, but once you’ve reached about $300,000 in sales, you should look into hiring a bookkeeper or accountant. This person should be able to monitor your finances on an ongoing basis and prepare you for tax time. Ideally, they should also have specific ecommerce accounting services.
Keep in mind that once you hire an accountant, they need time to analyze and organize your books properly. So don’t wait until you’re drowning in bookkeeping confusion and complex financial reports before getting a helping hand. It can take just as long to fix mistakes as it took you to make them.
See Also: Doing Your Own Bookkeeping: Is It Worth it?
Ecommerce Bookkeeping: 4 Must-Have Software Features
1. Accounts Payable
You’ll need to purchase items from suppliers at some point, whether it’s to produce your product or keep your business running. This necessitates an ecommerce bookkeeping solution that can automate the processing of your invoices and payments. Relevant features will include electronic funds transfer, vendor management, 1099 processing, etc.
2. Inventory Tracking
Choose a tool that can help track inventory across sales channels. Not every bookkeeping system will address inventory tracking and other needs, but options are available. If nothing else, you can choose an inventory tracking solution that integrates with your bookkeeping system.
3. Expense Tracking
It’s easy enough to remember that $5,000 purchase you made last month for your warehouse. But what about the 20+ expenses that were all under $100? Do you remember how much they were and their purpose? That’s why your ecommerce bookkeeping system should be able to help you track, record, and organize expenses.
4. Sales Tax Application
Recall how critical it is to get sales tax right. The last thing you want is to end up owing more sales tax to a taxing authority than you collected. Use a solution that automatically keeps track of sales tax by locality and applies it to customer purchases.
See Also: Real Time Bookkeeping For Startups: What Is It?
Conquer your ecommerce bookkeeping with Zeni.
Stay on top of your finances with Zeni, a team-based, AI-powered finance concierge.
We combine cutting-edge technology with professional human expertise to help you overcome common ecommerce accounting and bookkeeping problems:
- Track all important financial records that affect operating under thin margins all on one dashboard, such as real-time cash flow ins and outs.
- Utilize Zeni’s recommended tech stack to connect with third-party providers who can help grow and scale your inventory.
- Receive dedicated support behind daily cash balances and daily reconciliations to have more visibility into daily cash, collections and payables.
Schedule a personalized, live demo of Zeni’s bookkeeping services to see how we can help you maintain an insightful, full-picture view of your ecommerce business’s financial position.