Tips on best accounting practices for your online business
- 27 Apr 2022
Managing the accounts of your online businesses can be a challenge, especially if you are a small e-commerce business without any accounting experience.
In this article, we will look at some of the best eCommerce accounting practices that you should implement if you own an online business.
Separate Bank Account
You should set up a business bank account to make sure you are not using personal finances for business expenses.
Having a separate business account will make it easier to keep track of all your business expenses, and will also help with tax filing or audits.
Set Up Internal Controls to Reduce Fraud
If you are managing your accounting tasks yourself, you should set up internal controls so that each transaction undergoes the same procedure - both when you are making or receiving payments. Your business success will depend on successfully managing accounting procedures.
Stick to One Accounting Method
It is up to you to decide which method works best for your online business, and you should stick to it from your very first transaction.
Cash Basis accounting
All transactions are recorded when cash is transferred. This is not recommended for an eCommerce business as it works best for a company with predominantly cash payments as the main business income.
This method records all expenses and revenues over the period when they occur, no matter when exactly payments were received or made. It is a slightly more complicated method but works for companies that invoice clients.
Modified Cash Basis Accounting
This system is a mixture of cash and accrual methods. If you use this method, you are mainly on a cash basis, however, all bills are recorded in Accounts Payable. If you send invoices to clients to receive payments, you will also have an Accounts Receivable.
Make Use of Accounting Software
Online accounting software can be a great help as it helps with business expense management. These cloud-based systems are excellent tools for anyone with an online store. The software can help you with keeping track of your cash flow, payroll, tax payments and invoices.
If you plan on expanding your company in the future, make sure that the software can grow with you.
Keep Track of Your Employees' Time
Of course, you do not want to micromanage your employees, but if you can automate time tracking (especially if employees are working remotely), then you can calculate costs and time associated with each of your projects.
Your accounting software can use timesheets to assist with payroll.
Make the Most out of your Chart of Accounts
A lot of eCommerce businesses keep track of their expenses and accounts using an alphabetical list.
Although this can work for a small business, the best accounting practice would be to chart accounts as part of your account management system. It can help you to determine your return on investment, where your break-even point is, and what your customer acquisition costs are.
A large, existing business should group certain accounts (like your sales and marketing) to determine the cost of reaching a new customer. All administrative expenses should also be separate from industry expenses. This will help you to see where you can save money.
Manage Your Expenses and Revenue
A crucial part of the bookkeeping system for any company is to track all Accounts Payable and Receivable.
You should make sure to pay all outstanding accounts on time to avoid interest and fees. If you pay early, you might be able to get a discount on your account.
You should also send out any invoices as soon as possible and make sure to follow up on late payments.
Keep Track of Your Bank Statements
Many banks automatically email statements once a month. Whether you get your statements emailed to you or have to manually download them from your banking application, make sure to check them regularly.
You should compare your statements to your actual invoices (paid and received), and make sure there are no discrepancies.
Prepare for Tax Season
Make sure you understand your tax obligations and regularly check with your tax accountant (if you have one) to make sure you are keeping all the correct financial statements for when tax season rolls around.
Being organised is key when it comes to tracking taxes, and will also help with any audits.
No matter the size of your online business, it is important that you have a sound accounting system that will help you to track your cash flow and save you time and energy when it comes to tax season and audits.