Basics of eCommerce Accounting for Businesses Using Shopify
Starting an online store can be a great way to make money, but it’s essential to understand the accounting implications of doing so. This post will walk you through the basics of eCommerce accounting for Shopify stores.
By understanding the basics of eCommerce accounting, you can ensure that your online store is running as smoothly and profitably as possible.
The Importance of Accounting and Bookkeeping for eCommerce Businesses Using Shopify
Accounting and bookkeeping are essential for eCommerce businesses because they provide an accurate financial record of their activities. This information is vital to making sound business decisions, assessing profits and losses, and filing taxes.
Shopify is a popular eCommerce platform that allows businesses to create online stores. It provides users with many features, including payment processing, marketing tools, and inventory management.
However, it is essential to remember that Shopify is only a platform. The business owner’s responsibility is to ensure that all accounting and bookkeeping procedures are in place.
By keeping accurate financial records, eCommerce businesses can make sound decisions based on actual data rather than assumptions. This can be critical for growing a business, especially in the early stages.
The Benefits of Using Accounting Software for eCommerce Businesses Using Shopify
Using accounting software allows eCommerce business owners to easily keep track of their financial records, making maintaining accurate records much simpler. This can be particularly important for businesses that are not familiar with managing their finances or paying taxes properly.
There are many different types of accounting software available, including cloud-based programs that allow users to work on spreadsheets online. There are also stand-alone applications installed on individual computers or devices.
Choosing the right accounting package is essential – it needs to provide all of the features you need at an affordable price. Here are additional benefits of using accounting software for eCommerce businesses that use Shopify:
- Detailed reports: Accounting software provides detailed financial reports that allow business owners to analyze their sales, expenses, and profitability over time. This information can be used to make smart decisions about what products are selling well and which ones aren’t, as well as helping identify trends in your customers’ buying habits.
- Easier tax preparation: Maintaining accurate records makes preparing taxes much more manageable than relying on an estimate or memory. Small business owners often find themselves overwhelmed by filing taxes during busy seasons, but this is less likely to happen if you keep track of everything throughout the year.
- Accurate budgeting: It’s almost impossible for businesses to create a realistic budget if they aren’t keeping track of their expenses. This can be a problem for eCommerce businesses that operate on small profit margins and have limited cash flow. Business owners who rely on budgets may find it difficult to determine how much money is required to cover expenses and whether or not their plans will work.
- Improved decision-making: In today’s connected world, business owners need real-time information to make good decisions about their products and marketing campaigns. However, this is usually impossible without accurate financial records from the past few months or years.
- Easier expansion: Growing a business is exciting, but it also comes with its set of challenges. It can be challenging to make expansion decisions based on assumptions and estimates, but using accounting software allows you to make informed choices about whether or not it is the right time to add new products and hire additional staff.
What is the Right Way to Do Accounting for Shopify Businesses?
There are a few things to keep in mind when doing accounting for Shopify businesses. First, you’ll need to ensure that you’re tracking inventory and sales correctly. You’ll also need to track expenses and payments accurately. Here are a few tips on how to do this:
Create Your Accounting Technology Stack
The best accounting technology for Shopify businesses will vary depending on the size and complexity of the company. However, here are some tips on how to build your accounting tech stack:
- Use a cloud-based accounting solution. This will allow you to access your books from anywhere and make it easy to share financial data with your accountant.
- Automate as much of your bookkeeping as possible. There are several great automation tools out there that can help you streamline everything from invoicing to expense tracking.
- Invest in good quality bookkeeping software. This will help you keep track of your transactions and run financial reports on demand.
- Implement time tracking software so that it’s easy to track the hours you spend working on each client project. Or create an automated time-tracking system.
Follow Accounting Standards for eCommerce
Here are some tips that can help you alleviate any headaches before they start:
- Keep your books up-to-date: If you’re using accounting software to manage your business’ books, make sure that you’re updating them every day! This way, if there is ever a discrepancy between monthly financial statements (like your bank account), you’ll be able to track it down right away.
- Stick with accrual accounting: To stay compliant, make sure that you’re tracking revenue at the time of sale and expenses when they happen. If you wait too long to book a transaction or payment, your books might not match your bank records and tax documents later on. This can cause serious headaches, so avoid any unnecessary issues by sticking with accrual accounting from the beginning!
- Maintain proper inventory reporting: If your business sells physical products, then this is crucial to getting accurate financial reports every month. Remember that if there are discrepancies in your inventory numbers, all other financial reports will also have corresponding errors. So take extra care to keep track of your inventory numbers.
- Set up fraud prevention measures: Fraud is a real threat for any business selling online or accepting payments through Shopify. Make sure you have proper security measures in place so that you can spot suspicious behavior right away. This will help reduce the risk of fraudulent transactions getting approved in your store, which can cause serious issues later on when reconciling your financial reports.
Create Consistent Financial Systems and Processes
One of the best ways to set up your accounting for your Shopify business is to create repeatable financial systems. This means having a plan in place for recording your income and expenses regularly and having a system for tracking your inventory and sales.
An excellent way to get started is to use an Excel spreadsheet or track your finances in accounting software. You can also use Shopify’s built-in accounting features to help you stay organized. Whichever method you choose, be sure to stick with it so that you can maintain accurate records of your business finances.
Create a financial reporting frequency for each week or month: It’s vital to create repeatable financial systems and processes to ensure timely and accurate financial reporting. By establishing a regular financial reporting cadence, you can ensure that your team can produce timely and accurate reports while maintaining a high accuracy level.
A regular financial reporting cadence can also help you identify potential problems or issues early on to take corrective action before they negatively impact your business. By establishing clear expectations and protocols for financial reporting, you can help your team work more efficiently and effectively.
Reconcile your bank records regularly: Keeping track of your cash flow is vital for many eCommerce businesses, especially those that operate on a model with few physical assets or inventory.
This means that you need to reconcile your business accounts, including checking and savings accounts, merchant accounts, etc., every month or quarter, depending on the size of your business.
Your financial reports are only as good as the data displayed in them, so it’s essential to ensure they’re accurate by reconciling all of your accounts consistently throughout the year. To properly reconcile your accounts, you’ll need to compare each transaction listed on a statement with the transactions included in one of two places:
- A separate record of the transaction, which could be an invoice or bank deposit slip.
- The general ledger, if your accounting software provides automatic transaction imports.
Avoid unpleasant tax-time surprises: Taxes are one of the least enjoyable aspects of running a business, but they’re still an inevitable part of doing business!
If you want to avoid any unpleasant surprises when submitting your taxes, then it’s crucial to save every document related to your income and expenses throughout the year, from receipts and invoices for purchases or services procured by the business to mileage logs for any work-related driving done with a personal vehicle.
Then submit this information with your tax returns and try not to worry too much!
What Happens When Everything Goes Wrong?
It’s always a good idea to stay on top of your eCommerce accounting, even when things are going well. That way, you’re prepared for when things go wrong. And believe me, they will go wrong at some point if you’re running an online business.
Usually, when people talk about cash flow problems, you cannot pay your suppliers on time because you don’t have enough money in your bank account then.
This is a serious problem because it means your suppliers do not want to work with you anymore since there’s a risk of not being paid within the agreed terms. In extreme cases, it could lead to legal action being taken against you or your company.
This is where acquiring finance comes in handy so that you can cover the amount owed to your suppliers, plus charges.
It’s usually not a good option for businesses to use high-interest credit cards or other forms of debt to finance temporary cash flow problems because it means that if things are not repaired within a reasonable timeframe, then all that accumulated debt will have to be paid off at once, which could put the entire company at risk.
So this isn’t recommended as an option, although it can be helpful when there are no other alternatives available (in very critical situations).
Shortfall in Cash Flow
Cash flow problems are usually due to insufficient sales or not turning inventory into sales quickly enough. There are many reasons why businesses experience cash flow shortages, but the main ones are:
- Lack of effective marketing & branding strategies (design, communications, website, etc.) so that customers don’t know your brand exists and you could not convert all the leads coming through your doors into actual sales revenue. Then you have too much inventory, which means you’re selling at a loss because prices need to be reduced to sell the stock off before it becomes completely worthless.
- Selling products that customers don’t want or need because they quickly become obsolete or unfashionable (which is why you need to do research and stay on top of trends in your industry).
- Selling products at prices customers can’t afford or don’t want to pay. Discounting the product price to get it sold fast doesn’t help either because you’re not making enough money for all that work involved in finding & manufacturing the product, plus stocking & storing it.
- Spending too much time thinking about new products instead of working out how to sell what’s already available more effectively, so cash flow improves faster. One way around this would be having an eCommerce marketing service run your marketing campaigns for you instead, so there’s always new content being published, attracting search engine traffic which means people can find your website easily. You’re not just sitting idle all day wondering what to do next.
Competing on Price
Businesses go wrong because they risk losing money on every product sold to gain market shares, which means expenses exceed income.
Many business owners are willing to work for a lower wage than what is fair. They are often under pressure from shareholders or have taken out loans to start their businesses. It is also hard to run a business without any education, training, or experience.
That’s why I think it’s essential to get your finances in order before you start making any big decisions about pricing. This way, you won’t run out of cash and have nothing to show for all your hard work. You can do this by hiring an accountant who specializes in eCommerce accounting.
Even if you lower the price, there is no guarantee that buyers will like it enough to make a purchase. Why take unnecessary risks?
Hiring an accountant to handle your bookkeeping is a good idea. The accountant will ensure that the money coming in and going out is balanced each month. This happens by accurately putting all the information into accounting software.
Plus, if one business owner decides not to reduce their product price, somebody else in the same industry might take advantage of this and increase their own price.
If you can get to the point where customers are willing to pay the higher price, then it’s even more money for you which means you’ll make better decisions about what to do next with your business.
So what do you do if you’ve neglected your accounting and now everything has gone downhill? Here are a few tips:
- Take a deep breath, and don’t panic. It’s not the end of the world.
- Get organized and figure out exactly where you stand financially.
- Address the problems that led to the mess in the first place. Make sure you have solid bookkeeping practices in place, so it doesn’t happen again.
- Rebuild trust with your customers and other stakeholders. Be open about what happened, apologize for the inconvenience, and give them a compelling reason to continue doing business with you. You might need to offer discounts or freebies this time around (not forever!).
- Move on!
Why Should You Hire JTT Accounting for eCommerce Accounting Using Shopify?
When running an online store, it’s essential to have a trusted accounting partner to help you manage your finances. JTT Accounting has the experience and expertise necessary to help you make the most of your eCommerce business.
Here are just a few of the reasons why you should consider hiring JTT Accounting for your eCommerce accounting needs using Shopify:
- We have extensive experience in online retail accounting.
- We’re well-versed in all of the latest eCommerce trends and technologies.
- We’re highly familiar with domestic and international tax laws governing online businesses.
- We offer a wide range of services tailored specifically for eCommerce businesses, including bookkeeping, financial analysis, cash flow management, tax preparation and filing, financial forecasting, corporate coaching, business strategy consulting, and more.
We handle all of the time-consuming tasks required for running a successful eCommerce business so you can focus your attention on what you do best – designing innovative products/services, marketing your brand to gain new customers, fulfilling orders quickly and efficiently.
At JTT Accounting, our mission is to help entrepreneurs passionate about their work achieve success by delivering the highest level of personalized service through efficient budgeting practices coupled with our extensive knowledge base in eCommerce accounting.