Last editedOct 20223 min read
Starting a business does not happen overnight. Several important milestones are spaced days, weeks or even months apart from each other, and hitting each one marks the next step on your journey to becoming a fully-fledged SME (Small to Medium-sized Enterprise).
From the day you first open your online store to your first sale to reaching your first major financial goal, it’s a rollercoaster that never puts on the brakes. In all that excitement, it can be easy to forget to manage your income and expenses. If you lose track of them, you may lose your foothold on the ladder to greatness.
What all online businesses need is an ecommerce accounting system that records, organises and manages their financial data and transactions.
What is ecommerce accounting?
All businesses, no matter how small, need to keep an account of their incomings and outgoings. For online businesses, this is a little easier, as the data is put into a system by the customer automatically when the purchase has been made. But that doesn’t mean it’s something you can just ‘set and forget’.
As with all accounting, ecommerce accounting involves bookkeeping tasks such as payroll and managing invoices, as well as making reports and analysing the financial trends of the company. The three main areas of ecommerce accounting are:
Tax management – Tracking and remitting all applicable taxes and filing both quarterly and year-end taxes
Bookkeeping – Tracking and categorising all income and expenses using an accounting system
Growth planning – Gathering all the financial information required to scale the business effectively
Ecommerce accounting terms
Here are a few typical accounting terms to know.
Purchase order and sales order
A purchase order is a document indicating the type of item or service purchased and the quantity of that item of service. This is a legally binding document that also includes payment details and total price of the sale. A sales order includes the finer details of the sale such as customer information, description of the goods and services, and a delivery address.
This stands for cost of goods sold and refers to the complete cost of the production and distribution of a product or service. It includes everything from the direct and indirect costs involved in production like the cost of production equipment and shipping, but doesn’t include overheads like wages and marketing.
Cash flow is the movement of money in and out of the business. This is easy to keep track of, thanks to advances in modern accounting software such as Xero, which automates your cash flow management and helps you to meet all your financial obligations without incurring any debts.
Gross profit and margin
Gross profit is the total revenue minus the cost of goods sold. Gross margin is expressed as a percentage of your total revenue.
This is the financial statement reporting a company’s assets and liabilities, and shareholder equity. It’s one of the three main financial statements used to evaluate a business.
Profit and loss
Another main statement providing an overall view of a business’s profitability, a profit and loss statement calculates the total revenue minus all costs associated with your business. If this statement is in the black then you’ve made a profit, and if it’s in the red, you’ve made a loss.
Regardless of whether you’re doing your own ecommerce accounting, paying a third-party accountancy firm to do it for you or plan on using an accounting software platform, you need to first settle on an accounting method – cash basis or accrual accounting.
This is the simpler and more common form of ecommerce accounting that measures the direct transfer of cash. With a cash basis method, only record income when the payment for a product or service has actually been made.
Accrual accounting measures transactions when the transaction is incurred, not necessarily when payment is made. This is not recommended for smaller businesses: while it might provide a more accurate long-term picture of your finances, it could mislead you about how well you’re really doing.
We can help
GoCardless is a global payments solution that helps you automate payment collection, cutting down on the amount of financial admin your team needs to deal with.
GoCardless also syncs seamlessly with Xero, one of the world’s leading cloud-based accountancy software solutions so, when used together, they offer a complete and affordable financial solution.
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