E-commerce businesses have exploded in popularity, and the industry offers ample room for growth in nearly innumerable product lines. Getting your accounting processes set up properly from the beginning of an e-commerce business is vital for long-term success, and it’s a task to tackle even before you make your first sale. Consider the following to help you get started with accounting for an e-commerce business.
Choose an e-commerce business structure and accounting method
Establishing your business structure will be one of the first steps in launching your business. Choosing the right business structure can be one of the most important steps, but fear not—if you need to transition to a different structure down the road, you can do so one time.
You have five basic options to choose from (learn more about the differences between them at the link above):
- Sole proprietorship
Always consider the tax implications of each option and how the structure will work for your long-term business goals. There isn’t a hard and fast rule about the right entity type for e-commerce businesses. It’s a good idea to consult with a tax and/or legal professional for assistance making your choice. Someone who specializes in business formation can help you anticipate consequences that apply to your unique situation.
You will also need to choose between cash accounting and accrual accounting before you begin making business purchases and sales. Both methods have their advantages and disadvantages, so it’s important to know the differences and work with an accountant or financial expert to establish the optimal accounting method. In brief:
Revenue and expenses are documented when cash changes hands—essentially, the transactions on your books have already occurred. Cash-basis accounting is generally more straightforward and commonly used by small businesses.
Revenue and expenses are documented when they occur, typically before the actual movement of cash. Accrual accounting captures outstanding payables and receivables. It can be a bit more complex to track and is more common in larger businesses.
While cash accounting tends to be the more straightforward, it can be misleading when a business has a lot of outstanding payables or receivables. Accrual accounting offers a more holistic look at the finances and enables long-term planning and forecasting.
Strategic tax planning for e-commerce businesses
One of the best ways to save on taxes is by planning ahead. There are strategic tax planning moves that business owners can make throughout the year to ensure they don’t receive a surprise tax bill in the new year. Keeping accurate track of tax-deductible expenses will save you time and can greatly reduce your tax liability. Beyond inventory, a few of the most common e-commerce tax-deductible expenses are:
- Equipment and supplies
- Accounting and legal fees
- Office rent
- Freelancer and subcontractor costs
- Shipping and packaging costs
- Website expenses
- Advertising & marketing
Using cloud-based accounting apps can make recording and keeping track of business expenses simple. A cloud accounting platform, like Xero, links directly to your business bank account and pulls in all transactions. Over time, the system learns how to classify transactions, saving you endless hours in bookkeeping work as your business grows. When it’s time to bring on an advisor, Xero also allows you to collaborate seamlessly in the cloud.
Another critical tax task for e-commerce businesses is to stay on top of regular tax filings. If you have employees, you’ll need to make quarterly payroll filings. E-commerce also means staying on top of your sales tax responsibilities in the states where your customers reside. Falling behind on tax payments is one of the fastest ways to get on the bad side of the IRS. Again, consult with a professional to help you put your best foot forward right from the start.
Finally, don’t forget about your retirement! So many entrepreneurs neglect to put away cash for retirement and consequently miss out on valuable tax savings opportunities. Business owners have the opportunity to use several types of tax-advantaged savings vehicles that can make a big difference both at tax time and retirement age.
Let tech do the heavy lifting of e-commerce bookkeeping
There’s no hiding that we love using technology to boost the bottom line for our clients, and e-commerce businesses have the advantage of already running in the cloud. From making sales, marketing, creating client relationships, managing inventory, and daily back-office functions, there is a tool for everything. Cloud-based accounting apps offer so many great benefits to e-commerce businesses. All product and customer-related information is securely stored in the cloud, making transactions seamless throughout the entire buyer’s journey. If you’re not utilizing cloud-based accounting apps to their full benefit (or at all), it’s time to have a chat.
While apps are generally designed to be easy to use and automate tedious processes, it’s important to ensure you’ve set them up and linked them together properly. Our team supports e-commerce businesses in setting up their workflows to ensure everything runs the way it should. One of the biggest mistakes we see new businesses making is trying to build that tech stack themselves. Things generally work at the beginning, but as the business grows, the tech stack begins to wobble. We strongly recommend investing in professional support to set up your accounting tech stack.
Identify areas of cost savings and profitability
Cutting costs can sound like a painful task, and too often we see business owners cut costs that end up hurting business in the long run. Your financial statements can help you to identify areas of opportunity—or overspending. Maybe the business doesn’t need the 17th-floor office with an abundance of underused space. Sometimes it’s better for some job roles to be combined or outsourced, such as bookkeeping, IT, or financial roles. Whatever it may be, identify the areas of opportunity, and weigh the pros and cons of cutting costs.
Boosting profitability can be done in many different ways. For e-commerce companies, determining best-selling products, what marketing methods are most successful, and researching lower-cost vendors will help to boost profitability. Finding the correlation between an increase in sales and certain marketing activities or seasonal products can highlight areas of opportunity. All of these opportunities require good data—another area where your accounting tech stack and other cloud apps will shine.
Accounting prep work is just as important as the development of your best-selling product when launching an e-commerce business. Whether you’re just starting out or looking to improve your bookkeeping skills, we invite you to take our free 5 weeks to better bookkeeping course. The course is full of bookkeeping basics and tips for setting up your cloud-based accounting tech stack. If you’re ready to open your e-commerce business doors with the help of some time-saving apps, contact us to get started!