It’s an exciting time to be an ecommerce entrepreneur, especially when you start seeing the sales rolling in consistently.
But unless you’re following accounting and bookkeeping best practices, you could be causing serious damage to your business.
There are tried-and-true ecommerce accounting best practices that we advise working into your workflow. In this post, Here we’re outlining the top problems we see when this doesn’t happen.
Knowing your numbers is important for a variety of reasons. At the top of these is that you’re going to make better decisions when you know how you’re doing financially at all times. It could be the difference between purchasing extra warehouse space when you can’t afford it and deciding instead to focus on product development before expanding.
Keeping good records also is going to help you get a pulse on what’s doing well and what’s not. While it may be exciting to have a wide variety of SKUs (stock keeping units), maybe the right move for you is to focus on one SKU that sells really well. In order to know, you need to have the kind of reliable sales information that proper accounting provides.
Finally, having confidence in your numbers is just good business, and it’s going to increase your chances of a healthy growth trajectory. Like an apple that rots from the inside, it’s not always immediately clear when you have an accounting problem. But once that problem makes itself visible, it’s usually too late. And worse, any other problems your business may have could be compounded by the pressures of accounting issues.
Wondering what could go wrong by neglecting to keep your numbers straight? From costly inefficiencies to even legal trouble, there’s a lot that can happen. And even if you may not suffer the more dramatic scenarios, it could mean a lot of lost opportunity and slowed business growth. Here are the top issues we see when ecommerce businesses neglect accounting and bookkeeping best practices.
We explain each of these mistakes in more detail in the following sections.
The most practical reason for keeping your business and personal finances separate is that it’s hard to get clarity on either when they’re intermingled. Not only can this lead to bad business decisions, but it can lead to bad personal financial decisions. Instead, we recommend opening a separate account for your business, including at least a debit card that’s dedicated only to business expenses. Since cloud accounting software can integrate with bank accounts, this will help keep your bookkeeping clean.
When you get to a point where your product sales are bringing in more than just a little side money, it’s critical to get incorporated as a legal business entity. Otherwise, if your business and personal finances are intermingled and you get sued, you can lose both your business and personal funds and assets.
Keeping your business and personal expenses separate also is going to make for a much smoother tax time. Having to tease out what’s business and what’s personal in your accounts could take countless hours — even with cloud accounting software. Not only is it a logistical nightmare, but it can also be an expensive one in terms of your time and/or hiring extra help.
Not paying yourself a salary may sound valiant to a casual onlooker. It could signal that you’re so dedicated to your business that you don’t even pay yourself. The problem with this is that it’s not sustainable. You need to account for all of your salary needs as you are planning your and your businesses’ long-term financial future. This not only draws clear lines in your spending but it ensures you’re going to get paid at some point.
Case in point: If you end up spending all of your savings to start your business, you may find that you need more money down this line. This could be a high-pressure situation where you need to either keep (or get) a job to both support your living expenses and grow your business. This can lead to a crippling cycle of borrowing, which could hold you back in the future.
Not only is falling into a rough debt cycle detrimental to both your personal and business financial health, but it also looks bad to investors. If you ever decide to fundraise, investors want to see financially stable and savvy business owners who have accounted for their salary and aren’t having to work another job just to stay afloat.
At its very core, spreadsheets or pen-and-paper just opens themselves to too many bookkeeping errors. Consider how many surprise transactions you see when looking through your banking statements. Between subscriptions, banking fees, recurring bills, and more, it’s typically too much to accurately track without the help of software.
Even if you can do it yourself, it doesn’t necessarily mean that you should. Spending hours on monthly bookkeeping is time that could be spent growing other aspects of business or creating new products (or whatever it is that you do best).
Furthermore, we recommend not passing this work off to a virtual assistant, which just compounds the problem of losing time and money when software would suffice.
Spreadsheets and paper trails also aren’t helpful at tax time. And they can actually hold your business back from staying compliant to tax entities and the governing bodies of your specific industry. Getting either tax or legal issues wrong can mean hefty fines or even the shuttering of your business.
As we mentioned earlier, waiting until tax time to start cleaning up your finances is ill-advised. It might be a task that, on the surface, doesn’t seem daunting, but it can quickly become one rat’s nest after another. Even if you cleared time in your schedule for all the rat’s nests, you might find yourself needing others to come through with information to help you. That’s a tall order if you’re on a tight deadline.
If you don’t keep your records clean, it could also cost you dearly when it’s time to meet with your CPA (certified public accountant). That’s assuming they are available if you waited until the last minute. If you do get the help you need, you could end up paying significantly more for delivering messy records at the last minute.
Most importantly, if your books are unkempt and you unwittingly submit inaccurate information at tax time, you could raise some red flags with the government. This may subject your business to an audit, which could lead to hefty penalties if you’re found to be at-fault for submitting inaccurate tax information.
Using accountancy platforms and cloud software tools such as Xero or Quickbooks can help you stay in compliance, even if only indirectly. Not only are these platforms typically built with common compliance issues in mind, but they also integrate nicely with other software you might be using to run your business – like Shopify Gusto, or TaxJar.
Another compliance area that requires special attention is sales tax for U.S. businesses. Not being thorough in your sales tax record-keeping and sales tax payments can mean serious penalties down the line. The good news is that connecting with the right tools — like TaxJar or Avalara — and experts can give you the peace of mind that you’re on the right track. However, using cloud accounting software is typically a prerequisite for that to happen.
Cash flow and inventory forecasting are two sides of a coin, but their goals are the same: to help you financially plan for the future by looking at the best-case, worst-case and middle-of-the-road scenarios. This gives you a pulse on how you’re actually doing versus how you think you’re doing.
For cash flow, forecasting is absolutely critical. Imagine thinking you are doing a lot of sales and assuming the business is good only to find out at the end of the year you are severely in the red. People could get laid off. You may have to borrow money just to keep your business operational.
Conversely, imagine not buying enough of a product only to learn that it’s flying off the shelves. It could mean a lot of lost opportunity. On the flip side, you wouldn’t want to buy too much inventory based on poor data and not be able to get rid of it. You could lose a lot of money — real or potential — by skipping inventory forecasting.
Another problem we see is ecommerce entrepreneurs conflating profit with cash flow. Bank balance accounting is not a sufficient way to keep track of your books. And even if you can handle the mental maths, is that a risk you’re willing to take with your money?
In addition to your accounts receivable, there is way more to the financial big picture. You also must consider accounts payable (what you owe your suppliers), payroll, taxes, business overhead, and more. Even shipping costs impact your business’ bottom line.
We recommend the Profit First Framework for a quick way to work out the profit part of the equation. Most accounting systems use the formula of sales minus expenses equals profit. With Profit First, you flip the equation on its head — sales minus profit equals expenses. This helps ensure you keep your business costs in check, yielding the profit that you want to have.
In sum, one of the best things you can do for the long-term health of your business is establishing a solid financial foundation. It may be tempting to stick to more comfortable alternatives such as spreadsheets, but in the long run, it can be costly. In the worst-case scenario, it could even cost you your business.
Author bio: This article was written by Wayne Richard.