Online businesses face many accounting challenges. From managing inventory to keeping track of evolving tax laws, your e-commerce business should remain up-to-date with bookkeeping to avoid fines and losses.
Proper accounting will also help you evaluate business performance so you can make the right decisions to maximize profit and reduce your tax bill. Here are six tips to consider when setting up your accounting and bookkeeping workflows.
1. Don't Mix Business With Pleasure
When running an online business, you may find it convenient to mix personal and business transactions. This happens when you use a personal bank account or credit card to process payments and collect revenue.
However, pooling your personal and business expenses makes it challenging to keep track of cash flow, profits/losses, and business receipts. Furthermore, you'll have difficulty reconciling business expenditures for tax purposes.
A better strategy is to set up a business account and use expense-tracking software to compile incoming and outgoing transactions. A dedicated business account will streamline your bookkeeping tasks because you won’t need to comb through personal transactions.
2. Use Efficient Bookkeeping Software
One advantage of running an online business is that most transactions are in digital form. Therefore, you can leverage software to keep track of company operations in a quick and error-free manner. While there are many bookkeeping tools in the market, ensure that your chosen software can automatically reconcile transactions, calculate tax rates, and store records securely in the cloud.
Using the right bookkeeping software will save you time and money while making collaboration easy. For example, you can share financial statements and transaction history with a tax accountant in real time. This helps you receive an ongoing tax review and appropriate guidance throughout the year. You can also adjust permissions for your employees to maintain the accuracy and security of your financial records.
3. Develop a Plan for Reimbursing Business Expenses
During day-to-day operations, you may have to pay for business expenses using personal funds. Because such transactions are tax deductible, it's a good idea to reimburse yourself for these expenses.
Record the dates when reimbursements were made, along with a description of each expense. Reimbursement records will be critical in reducing your tax liability and streamlining the tax filing process.
4. Maintain Liquidity
A healthy cash flow is critical to the success of your online business. With enough cash, you can keep up with business expenses, minimize debt, and invest in growth opportunities.
The challenge your e-commerce business will face is accurately calculating income. For example, a $500 sale doesn't necessarily equate to $500 in revenue. You may need to deduct merchant fees, affiliate marketing fees, or payment processing fees from each transaction.
Good accounting practices will help you manage cash flow and avoid unnecessary spending. Additionally, if you offer payment plans for your products/services, maintain a ledger of accounts receivable and ensure that your customers are making payments on time.
5. Plan Your Expenses and Forecast Sales Revenue
When operating online, don't forget to keep track of critical business expenses such as inventory, website costs, and software licenses. Having a budget will increase transparency and help you manage expenditures.
Use bookkeeping software to balance your revenue versus expenses. You can also identify cost-saving opportunities and forecast sales to estimate profits and losses.
6. Keep Up With Tax Requirements
Tax laws can change quickly in the world of e-commerce. For example, you may have varying tax requirements based on sales volume, business assets, and where you sell your products. Physical assets such as factories and warehouses may also be subject to property taxes. Ensure your business complies with all tax requirements to avoid fines and liens.
