A Beginner’s Guide to Accounting for eCommerce Businesses

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In many ways, running an ecommerce business is just like operating a traditional brick-and-mortar store. You need good financial habits and need to keep an eye on the health of your business if you want to stay profitable. However, there are other ways where your online brand is different and requires more attention. This article will focus primarily on ecommerce accounting and how you can make sound financial decisions even with your items getting shipped across the country.

Online interstate taxes are complicated.

One of the biggest challenges for your ecommerce business finances is sales tax. Different states have different tax rates and guidelines for what tax you need to collect and when. Some states base tax collection on where your business operates while other states expect you to collect and report taxes on any online sales, regardless of where your actual business is. To make this even more confusing, internet sales tax laws continue to change, so your best practices one year might differ in the next.

Unfortunately, your accounting software won’t be able to keep up with new legal changes. This is why you may want to seek outside help. A professional team will understand the complexities of accounting for ecommerce business and will keep your taxes in order while providing clear financial statements. You can stay compliant without worrying about legal changes in states you don’t live in.

Your shipping costs affect your profitability.

Perhaps the biggest difference that an ecommerce business faces when first starting out is shipping, as you never have to pay to mail out items in a brick-and-mortar store. Take time to understand the shipping costs across the country to determine what you should charge for your products. Your shipping costs might vary depending on the weight of certain items.

Not only is calculating shipping important for understanding profitability, but it’s also important for marketing your small business. Many companies offer free shipping on items because customers think they are getting a good deal. If you want to boost sales, you can offer free shipping as an incentive. However, covering shipping costs yourself can break your profitability and cause you to lose money in some cases. Look at the numbers and make sure you can afford to offer this perk.

Your sales don’t indicate profits.

One of the most important foundation aspects of running an ecommerce business is understanding the basics of your financial statements. Your balance sheet and your cash flow statement can help you understand how much money you are making and what your expenses are.

One of the main things to consider as you review these documents is your profitability. Just because you are driving a lot of sales doesn’t mean you are turning a profit. You have to subtract the cost of goods to make the items (COGS), the shipping expenses, the taxes, and the marketing costs for an item. This is why you want to look at your gross margin instead of your sales numbers.

The gross margin can be represented as a dollar amount or a percentage. You might look at the dollar amount for individual products (like a $25 sale having a $15 gross margin) but use the percentage for your overall business. Gross margin reports how much profit you are actually making on sales once your expenses are accounted for. By learning how to read your financial reports, you can make smarter decisions for your small business. You can identify ways to increase your profitability to take home more money.

It’s easy to get overwhelmed by the finances of running a small business. However, once you get your financial statements set up and can track your cost of goods, then you can take steps to become profitable. When in doubt, turn to an accounting expert who can help you.