The Simple Guide to Sales Tax for E-Commerce

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Starting and running an e-commerce business has many fun and exciting aspects, like seeing your target customer segment latch onto your newest product offering or receiving glowing reviews. One less fun aspect of e-commerce is sales tax. This blog post explains e–commerce sales tax and provides a compliance guide.

However, dealing with this administrative hassle from the beginning is crucial. Otherwise, it becomes a major hassle that bites your bottom line. But never fear. This guide will simplify what online sellers need about sales tax, minus all the complicated jargon. (We’ll have to use a little jargon, but we’ll explain it along the way.) 

What is sales tax? 

When most business owners think of tax, they think of their annual tax return due to the IRS. But the sales tax is a different animal altogether. 

Sales tax is a small percentage of a sale charged at the time of the transaction. E-commerce sellers and brick-and-mortar retailers must charge a specified sales tax rate to the customer and then turn around and remit it to state (and sometimes local) tax authorities. 

 

States and local areas, such as cities and counties, use the sales tax collected to pay for budget items like road maintenance and public schools. Because states rely on these funds, they are very invested in e-commerce sellers and meet their legal obligation to collect and remit sales tax.

 

And it’s important to note that the federal government or the IRS has nothing to do with sales tax. Instead, states make their own sales tax rules and laws. Forty-six states and Washington DC all have a sales tax. For that reason, e-commerce sellers must consider each state when recognizing where they’re required to collect sales tax.

When is an e-commerce business required to collect sales tax?

An e-commerce business is required to collect sales tax from customers when they meet two criteria:

  1. They have a sales tax nexus in a state(s)
  2. They sell items that are taxable in their nexus state(s)

 

Sales Tax Nexus

Having “sales tax nexus” in a state means your business is tied to that state. For example, you always have a sales tax nexus in the state where your business is located. 

But sometimes your business has sales tax nexus in other states as well. This can include:

  • Having a location such as a store, office, or warehouse
  • Having personnel such as employees, contractors, salespeople, or installers
  • Storing inventory in a warehouse (even if you don’t own it)
  • A drop shipping relationship with a supplier in a state
  • Having an affiliate in a state who sends you sales in exchange for a percentage commission
  • Doing temporary business, such as selling taxable items at a tradeshow or craft fair
  • Economic nexus – making over a certain sales or transactions threshold in a state 

E-commerce businesses can be complex. Something like hiring your sister in another state to perform customer service duties for you or storing inventory in a warehouse in Nevada to be near a centralized West Coast shipping hub can give your business nexus, and thus the obligation to collect sales tax, in new states.

It’s important to note that when you have nexus in a state, you’re required to collect sales tax from buyers in that state. Say you have nexus in North Carolina (where you live), Iowa (where your sister who does your customer service lives), Kentucky (where you store your goods), and New York (where you have many customers and thus economic nexus.) If you make a sale to a customer in any of those states, you are required to collect sales tax from those buyers.

Taxable Items

Most tangible items are taxable, so as an e-commerce seller, you’d be required to collect sales tax from buyers in most cases.

However, some items are frequently non-taxable. This includes groceries and medications. A handful of states exempt clothing or textbooks from sales tax, too. 

Things get more complicated when it comes to digital goods. Most states didn’t require sales tax on digital items such as e-books or downloaded songs for a while because they were intangible. But as physical media began to pass by the wayside, states realized that they were losing out on revenue and began requiring sales tax on digital products and also software. 

 

As the retailer, you determine what items are taxable in each of your nexus states. 

I have sales tax obligations. What do I do now?

Once you realize you’re required to collect sales tax, it’s time to get sales tax compliant by doing the following:

  1. Registering for a sales tax permit (or permits)
  2. Setting up sales tax collection on your online shopping carts and marketplaces

 

Registering for Sales Tax

Because sales tax is governed at the state level, you must register for a sales tax permit with each state in which you have nexus. Register with the state’s taxing authority. This is usually called the [State] Department of Revenue, but it might go by another name, such as the Texas Comptroller or the California Department of Tax and Fee Administration. 

 

Collecting Sales Tax

Once you have registered for a sales tax permit, your next step is to make sure you are collecting sales tax from your buyers in your nexus states. These days, most online shopping carts like Shopify or WooCommerce allow you to set up sales tax collection directly. 

 

Note: If you only sell on large online marketplaces such as Amazon or Walmart, you may not need to collect sales tax directly from buyers. Due to “marketplace facilitator laws,” marketplaces like Amazon, which host your goods on their site, are generally considered to be the seller of record. However, some states still require marketplace sellers to register for sales tax permits, even if the marketplace collects and remits on your behalf.

How do I remain sales tax compliant? 

Once you’ve identified your nexus states, registered for a sales tax permit, and collected sales tax, it’s time to file and remit your sales tax.

Each state will assign you a filing frequency and sales tax due dates. The filing frequency will generally be monthly, quarterly, or annually. The more sales tax you collect, the more often you must file and remit. (Some states require some megacorporations to file and remit sales tax even more often than monthly.) 

 

The due date is different depending on the state. While most states want you to file and remit sales tax by either the 20th or the last day of the month after the taxable period, others have due dates on the 15th or 23rd. Always double-check your sales tax due date, and remember that every state is different. Just because sales tax is due on the last day of the month in your home state doesn’t mean that it is the due date in any of your other nexus states.

 

The last step is to remit the sales tax you’ve collected. Sales tax isn’t part of your profits. Instead, it’s a “pass-through tax.” That means you collect it from the buyer, hold on to it for a short time, and then pass it on to the state government. When you file your sales tax return, you’ll usually be given the option to pay online. And with that, the cycle starts all over again.

Sales tax is an administrative hassle, but it’s vital to give state governments their due so that you can stay compliant and avoid fines and penalties.  Managing sales tax compliance for an online business can seem daunting, but breaking it down into clear steps makes the process more manageable. While sales tax takes effort, keeping up with your obligations will allow you to run your e-commerce business smoothly and avoid problems. With the right knowledge and preparation, you can handle this crucial aspect of selling online.

 

About the Author

Tom Spang works in sales and partnerships at Hands Off Sales Tax (HOST), which has been solving sales tax compliance for e-commerce sellers for 25 years.  If you have questions about sales tax, feel free to contact HOST for assistance.

xendoo and Hands Off Sales Tax (HOST) have joined forces to empower small and medium-sized businesses (SMBs) with invaluable growth resources. At xendoo, we share your fervor for entrepreneurship and are inspired by your commitment to realizing your dreams. Through our partnership with HOST, we are committed to providing SMBs like yours with the financial visibility and support necessary to flourish.

More Than Just Numbers:

At xendoo, we understand that success is more than just crunching numbers; it’s about fostering meaningful relationships and comprehending each client’s unique needs. With our people-first approach, you can expect personalized attention and expert guidance tailored to your financial journey.

A One-Stop Solution:

xendoo offers a holistic suite of services designed to streamline your financial operations:

  • Full-service bookkeeping and accounting support to liberate your time and resources.
  • Hassle-free tax preparation and filing services.
  • Fractional CFO Services will collaborate on a roadmap for future growth.
  • A comprehensive dashboard delivering real-time financial insights.

Are you passionate about your success? So are we. At xendoo, we’re dedicated to providing SMBs with the financial visibility and support necessary to thrive and scale. Let us alleviate the financial burdens, allowing you to concentrate on what truly matters—steering your business toward success and achieving your aspirations.

Contact xendoo today and unlock the potential for growth while reclaiming valuable time to focus on your business.

 

7 Last-Minute Tax Tips: Quick Actions Small Business Owners Can Take to Meet the April 15th Deadline

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tax tips for small businesses

As the April 15th tax deadline approaches, small business owners are on a tight schedule to get their financial books in order and finalize their tax filings. Timely tax preparation ensures compliance with the Internal Revenue Service (IRS) and can maximize potential tax savings. This becomes a critical period in business, and specific strategic actions must be taken so that small businesses remain compliant, maximize returns, and minimize liabilities when filing taxes. This article provides seven actionable tax tips to help small business owners navigate the crunch time effectively.

Organizing Financial Records

Gathering Necessary Documents and Receipts

As one of the basics for filing taxes, small businesses must gather all pertinent financial documents, such as invoices, bank statements, expense receipts, and payroll details. Gathering these documents helps small businesses aggregate and systemize these records to afford a vast, complete record base for use in tax preparation and filing.

Utilizing Accounting Software for Efficient Record-Keeping

Accounting software simplifies record-keeping, facilitating easier tax preparation and real-time financial tracking. Nowadays, small business owners are privileged to have several programs dedicated to clientele and account record-keeping management. Up-to-date accounting software helps your business to integrate seamlessly with other leading accounting software platforms. It offers you direct access to ensure your business’s financial data is accurate and up to date for filing taxes. Thanks to such tools, financial data can be structured and sorted according to the classification rules in preparation for tax filing.

Creating a Checklist to Ensure Nothing Is Overlooked

For small business owners, a broad checklist will guard against the usual omissions and assure the inclusion of all required documents and information, which are requisites during the preparation to file taxes. A checklist should comprise the fields of income, deductible expenses, tax documents, and any specific information related to their unique business type. At the end of this financial review, the business owner should have a checklist covering all financial records.

Maximizing Deductions and Credits

Identifying Eligible Business Expenses

Understanding what makes up a deductible business expense helps ensure small businesses make the most of tax-saving opportunities. From home computers and vehicles to social networking-related expenditures to staff and benefits, all business owners should be careful to keep relevant documentation as this will enable them to use the deduction system to the utmost extent. Identifying eligible business expenses helps small business owners take advantage of all possible deductions.

Exploring Available Tax Deductions and Credits for Small Businesses

The tax code gives an array of deductions and credits meant to support small businesses. Alongside typical business expenses, SME proprietors must check for available pertinent deductions to their sector. For instance, the Small Business Health Care Tax Credit, the Research and Development Tax Credit, and several state and local incentives are all geared towards the same purpose: promoting small businesses. We guide you to strategically employ the most recent tax benefits to lower your taxable income and increase your tax savings. At xendoo, we also keep up with the latest tax benefits to ensure that businesses signed with us get the most out of the benefits.

Strategizing to Maximize Tax Savings

Strategic tax planning is essential to optimizing small business outcomes. With a thorough knowledge of eligibility for deductions and credits, entrepreneurs can now employ tactics that help them minimize tax liability. This could involve reformatting certain parts of the business systems or making good use of the timing of investments and purchases by aligning them with tax compliance. Our bookkeeping services include expert professional advice on the structure of transactions and operations to maximize available benefits and opportunities by saving more on your tax bill.

Navigating Tax Law Changes

Highlighting Recent Changes in Tax Laws Affecting Small Businesses

Tax laws are constantly changing, and they significantly affect small businesses. Significant updates and modifications are made to initial tax laws as often as monthly. Business owners should consider keeping themselves updated with recent amendments that may frame their filing of return of income, which otherwise can be detrimental to the company due to delayed payments and, in some extreme cases, penalties. Let us help you stay updated with all the changes to ensure your business stays compliant and takes advantage of new opportunities the tax law updates might create.

Understanding Implications and Opportunities Presented by Tax Law Updates

Effective tax planning considers the implications and impacts of the changes in tax laws and their applicability. Each tax legislation change has pros and cons because of its diverse impacts. Both partnerships and LLCs need to be fully informed about these impacts regardless. These changes bring about essential tax savings if carefully considered. Our book-handling services provide you as a business owner with expert analysis on how changes in tax laws impact your business and alert you to opportunities that will see new provisions for tax savings.

Consulting with a Tax Professional for Personalized Guidance

Most tax law changes require interpretation. Accounting for complicated tax laws and the high rate of environmental changes leaves small companies with only one option: to reach out to experienced tax lawyers or accountants. These professional consultants can offer personalized advice and tailor it to the specific needs and circumstances of the business so that any unclaimed deductions and credits are discouraged and errors are avoided. Our people-first mentality ensures you receive personalized attention and expert guidance throughout your financial journey. We share your passion and your dedication to making your dreams a reality inspires us. That’s why we’re committed to providing you with the financial visibility and support you need to thrive. We build meaningful relationships with our clients and understand their needs.

Utilizing Technology for Efficiency

Overview of Tax Preparation Software Options

The right tax preparation software can greatly increase efficiency and accuracy during tax filing. In the digital era, small business owners have many tax preparation software applications that can facilitate filing by shortening the time to prepare the returns. Be it user-friendly tools designed specifically for small businesses or more comprehensive solutions covering complex tax scenarios, these tools make tax preparation a more straightforward job driving the sector’s development. Based on your business’s needs, we have bookkeeping and accounting solutions that best match your business model and streamline tax filing.

Streamlining Tax Filing Processes with Digital Tools

Digital tools help automate many stages of tax preparations, from calculations to final submission. This effort reduces time and creates a lower risk of human mistakes since accuracy is considered higher when filing taxes. With the help of the best technology, xendoo.com is there to make your tax filing process a breeze, assure you that you save time, and reduce the possibility of making a mistake.

Ensuring Data Security and Accuracy When Using Technology

In digital tax preparation, prime concentration is paid toward data security and accuracy. Although technology, in some cases, may provide support in tax preparation, and there are some instances when using data digital tools is indispensable, it’s equally important to keep in mind the necessity for the security of the data and accuracy in using the digital tools. Small business owners need to use due diligence in choosing a software provider based on how the company ensures the data stored on their platforms are secure. at xendoo.com uses advanced security measures to protect your financial data and ensure that your tax filing data is safe and accurate. Our entry systems enable small business owners to double-check their calculations and entries when inputting information to ensure the accuracy of their financial records.

Handling Contractor Forms and Other Documents

Collecting and Verifying 1099 Forms from Contractors

Proper management of the 1099 forms is crucial to accurate tax reports. Small businesses dealing with independent contractors must be cautious; they must collect and review the 1099 forms from each contractor before the year-end tax deadline. These forms provide crucial details about grants whose payments were given to private contractors, and if a mistake is made, it may result in penalties or audits. Small firms could be income earners from various origins, i.e., sales, services, investments, and properties that can be rented. Our bookkeeping services help collect, verify, and organize 1099 forms from your contractors to help achieve compliant and accurate payment reporting to the contractor.

Reporting Income Accurately from Various Sources

Accurate tax filing means accurately reporting income from different sources. It is crucial to meet all income-earning sources to avoid incurring fines and comply with tax laws. Keeping journal entries up to date and comparing individual credit memos to the financials is critical to correct income reporting. Accuracy must be maintained in reporting, thereby minimizing the chances of errors and penalties.

Tips for Addressing Discrepancies or Missing Information

Small business owners must attend immediately to the discrepancies or missing information resulting from contractor forms or other documents. This may involve contacting subcontractors for explanations, private consultation with tax specialists, or appeals to the authority of relevant government agencies to receive the correct and timely reporting. xendoo’s bookkeeping services include the expertise you need to correct discrepancies or fill in missing information to ensure your tax filings are complete and accurate. We provide the financial visibility and support small businesses need to thrive and scale. Let us handle the financial burden so you can focus on what matters most – running your business and achieving your goals.

Avoiding Common Tax Mistakes

Identifying and Avoiding Common Errors in Tax Filing

Due to the intricacy and probability of compounding errors with this process, filing taxes has often been a difficult task for small businesses to deal with. Succinctly stated, the common pitfalls involve underestimated cost of living, forgetting to inform about income sources, neglecting required forms, and misunderstanding of tax laws. These are common mistakes that may lead you to an audit or penalty. xendoo.com will help you avoid such pitfalls and, more so, help you be sure that your tax filing is error-proof.

Double-Checking Calculations and Entries for Accuracy

All business owners want to avoid mistakes by double-checking all calculations, entries, and documents; that is why they should check everything before filing their tax returns. One preparation step is to review the financial statements, check deductions and credits, and ensure that all incomes and expenditures are reported appropriately. Small business owners need to ensure that their business records are accurate down to the last decimal, especially when it comes to entered data and calculated entries.

Learning from Past Mistakes to Improve Future Tax Filings

Analyzing previous tax filing processes and pinpointing mistakes can be crucial steps for small business owners that will allow them to enhance their capabilities. By studying past misstatements and trying to improve the trajectory to rectify them, any future filings will be accessible, and the chance of mistakes being made will be significantly reduced. From analyzing records, we at xendoo offer insights that would prevent past financial record-keeping mistakes from happening; this progressively improves your filing.

Exploring Extensions and Estimated Tax Payments

Understanding the Option to File for a Tax Extension

It does add some time to your tax preparation, but it can do wonders to ensure things are correct. Often, small business owners are granted an extension on their taxes when there is insufficient time to collect all the requisite information or finalize filing the tax return. This can erase the panicky situation for the last minute and not push filers to submit hurried or faulty filings, which can attract penalties and errors. However, small business owners need to ensure that the extension pushes the filing due date rather than the extent of the payment deadlines. xendoo.com can walk with you on how to file an extension and ensure you know what it means and what it takes.

Making Estimated Tax Payments to Avoid Penalties

Small business owners who anticipate owing taxes are advised to consider making estimated tax payments to prevent cheques or interest charges. If the pre-bid meeting or communication is not done correctly, the procurement officer can be liable for heavy fines, even with the extension sought. Calculate and pay estimated tax so that penalties are withheld with the extension. We offer you advice on making those payments and remaining in a positive standing with your business.

Factors to Consider Before Opting for an Extension or Estimated Payments

It is vital to consider whether filing an extension or paying estimated payments would be better for your business. Before deciding to get an extension or making the estimated tax payments, small business people should apply critical thinking only to their particular situation. For instance, whether they have cash flow, the tax returns they file, and whether they need all the necessary documents. Seeking tax advice from professionals not only helps a taxpayer to make the right choice but also to understand various tax implications.

Navigating the tax season requires diligence, strategic planning, and support. By favorable implementation of the seven top last-minute tax strategies, small business owners will confidently navigate the intricacies of tax filing while ensuring compliance and maximizing potential savings. Taking advantage of guidance from an experienced tax advisor is a necessary process that will help reconstruct the tax code and its regulation changes. Remember, the goal is not just to meet the deadline but to do so in a way that benefits your business’s financial health and future growth prospects.

About xendoo

We share your passion for small businesses and are inspired by your dedication to making your dreams a reality. That’s why we’re committed to providing you with the financial visibility and support you need to thrive.

More Than Just Numbers

It’s more than simply crunching numbers. It’s about building meaningful relationships with our clients and understanding their needs. Our people-first mentality ensures you receive personalized attention and expert guidance throughout your financial journey.

A One-Stop Solution

xendoo offers a comprehensive suite of services, including:

  • Full-service bookkeeping and accounting team to free up your time and resources.
  • Hassle-free tax preparation and filing
  • Fractional CFO Services to work with you on a roadmap of future growth
  • A dashboard that provides real-time financial insights

Passionate about your success? xendoo is, too. We provide the financial visibility and support small businesses need to thrive and scale. Let us handle the financial burden so you can focus on what matters most – running your business and achieving your goals.

Contact xendoo today and discover how we can give you time back to grow your business.

Managing Financial Risk in Small Business

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As a small business owner, understanding that financial risk management is essential to ensure the long-term success and sustainability of the business well into the future is paramount. By understanding and actively mitigating financial risks, businesses can safeguard their assets, maintain stability during economic fluctuations, and seize growth opportunities. Examples of financial risks, such as economic downturns and unexpected customer behaviors, among many others, can be most detrimental to the operation of a small business if not managed accordingly. Other necessities of financial risk management for a small business include its broader view concerning the potential dangers it may face in operation, particularly the threat of economic uncertainty, market volatility, natural disasters, operational risks, and unpredicted changes in customer demand.

Business Risk Assessment

Building a successful small business requires strategic foresight and the ability to mitigate potential threats. This is where business risk assessment becomes crucial. It’s a comprehensive process that identifies, analyzes, and evaluates potential risks that could impact your financial stability and operational continuity.

This assessment goes beyond generic factors, delving into market trends, economic indicators, operational vulnerabilities, and external threats. By integrating this process into your financial risk management strategy, you gain valuable insights into the broader business environment and, more importantly, the unique risks specific to your company.

This proactive approach empowers you to fortify your business against the inherent uncertainties of the market. It’s the foundation for cultivating a robust risk management culture, leading to long-term stability and growth.

You can minimize potential financial disruptions by leveraging sound risk assessment principles and implementing effective risk management strategies. This allows you to navigate a dynamic business landscape confidently, build financial resilience, and achieve sustainable growth.

In essence, a proactive business risk assessment empowers you to take control of your future and steer your small business toward long-term success.

Small Business Risk Strategies

1. Diversification of Revenue Streams

Diversification of the revenue stream is one critical strategy a small business should pursue in financial risk management. Depending on one product or service is a great risk, as it may expose the business to great risks, market fluctuations, or changes in consumer demand. This could be further expanded by offering another or a new segment of customers. Business risk assessment and business risk strategies in place should include revenue diversification. This will go a long way to ensure these small enterprises enjoy financial stability and continuity.

2. Building Emergency Funds and Contingency Plans

Small business owners seeking to better their financial risk management would do well in that area to reach emergency funds and contingency plans. Reserving money to get through unexpected financial challenges while trying to hedge off the possibilities of incidents ranging from economic downturns to natural disasters is part and parcel of such a process. Consequently, having a clear contingency in place enables businesses to respond in the best and quickest way to minimize potential financial risks better. would be necessary to make a strong assessment of business risks and make strategies for small business risks, like making an emergency fund and making the contingency plan compulsory for small enterprises to strengthen their financial stability. By doing this, the small business owner would be better prepared for different financial risk possibilities and have a better resistance level in the changing business environment.

3. Strategic Financial Planning and Forecasting

Small businesses need to be strategic about their financial planning and forecasting. Proper planning and forecasting of small businesses can get huge benefits since this allows owners to project future cash flow and simultaneously make proactive decisions in managing financial challenges within robust business risk assessment and small business risk strategies. Moreover, effective financial planning will allow the business to allocate resources wisely, creating an approach toward prioritizing practical risk management initiatives. When these risk management small business strategies are integrated with the main financial planning process, the business may build more resiliency to deal with uncertainties more effectively and strategically. This will enable small businesses to lay a good foundation to strengthen their financial stability and develop their long-term success amidst the cutthroat business competition, thus emphasizing the needs of financial planning and forecasting for small business risk management.

4. Insurance and Risk Transfer

The other aspect of financial risk management for small businesses is suitable coverage through insurance. From the various types of property insurance to different liability covers and business interruption insurance, the purchase of appropriate types of insurance can be a major strategy for risk management. Small businesses can thus manage well by covering possible financial burdens through insurance they possess, per the identified risk profiles in business risk assessments and small business risk strategies. This will enable small business owners to strengthen their enterprises against unforeseen financial adversities through insurance and transfer incorporated as a tool for risk management strategies. Proactive management of potential risks in business with comprehensive insurance demonstrates how to apply the principles of financial risk management in reality—bringing back to life the potentialities of small businesses amid many uncertainties prevailing in the business environment.

Conclusion

Effective financial risk management for small businesses is an all-inclusive effort of business risk assessment that merges tailor-made risk management strategies. In their quest for long-term success, which significantly hinges on effective financial risk management, small business owners are bound to adapt to numerous potential threats by being proactive. By conducting effective business risk assessments, small enterprises can gain valuable insights and develop targeted risk management strategies that help strengthen the enterprise against uncertainties through resilience.

Debt Management Strategies for Small Businesses

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From managing cash flow to securing funding, navigating financial obligations is a daily reality for small businesses in a rapidly evolving entrepreneurial ecosystem. From operational expenses to emergency bills, debt often piles up on even the best small ventures. A large part of business success is in the management of its finances. Debt management is essential in the operation of a successful small business. Putting the right strategies in place leads to ensured stability of financial matters, improved credit standing, and then subsequent sustainable operations. This article provides practical debt management strategies for small businesses, offering tips to tackle debt and transform it into a tool for financial stability and business growth. Understanding Debt

Understanding debt is crucial for any small business to manage it effectively. When looking at growing any business, debt can be helpful, but it must be termed good debt.

Owners should understand the terms and conditions of loans, interest rates, and repayment schedules. They must understand the relationship between debt, financial health, cash flow, profitability, and creditworthiness. This will help the owner develop a customized approach for managing debt to minimize risk and get maximum benefit from using debt to finance their business. Awareness of possible negative implications, like deteriorating credit scores and the possibility of borrowing being severely limited in the future, puts the business owner in a proactive position. These subtleties make a small business owner aware of plotting an ideal course through debt and sowing the seeds of financial stability and longevity.

Budgeting

Effective budgeting is one of the most essential tools in managing small business debt. Only a complete budget will help set aside the required resources on time, prioritize the debts, and finally streamline the finances for a small business owner. A well-constructed budget is the highest strategic tool for cash flow in finding potential places to save money and then putting it into debt reduction. Budgeting facilitates the uptake of convenient debt management tips that go well with the kind of life small businesses are living and eventually drive them to be proactive in ensuring financial wellness and overall achievements. Prudent financial decisions and distribution of resources towards retiring the debt burden for a more secure financial standing of the business are significantly promoted by the management of small business debts through a well-crafted budget. Building and maintaining a comprehensive budget can be time-consuming and complex. Consider partnering with a Fractional CFO service like xendoo to gain expert guidance and support in creating and implementing your budget for optimal financial management. By leveraging xendoo’s Fractional CFO services, you can gain valuable insights and achieve greater financial control and stability, allowing you to scale and grow your business. Effective budgeting combined with xendoo’s Fractional CFO services can empower you to make smarter financial decisions, manage debt effectively, and achieve long-term financial success for your small business.

Avoiding Unnecessary Debt

Small business owners should approach every new business credit line with careful reasoning and vigilance. Unnecessary debts should be avoided, and existing resources should be maximized to fuel expansion. Moreover, further credit seeking is a very selective process to maintain financial risk at a minimum and continue fiscal responsibility. These debt management tips call for entrepreneurs and small business owners to use debt sparingly. Since many businesses rely upon debt for expansion, knowing when to apply for debt is important. For small businesses, debt should not be used for recurring expenditures such as salaries and rent; rather, the money should be used to purchase resources, which will offset the loan and add value to the company. Therefore, only when debt is necessary should it be considered because repayment can be a daunting task, but through small business debt management, this can be averted.

Prioritizing Debts

Prioritization of the repayment of debt means managing several financial obligations strategically. Among the methods that small business owners can use to manage their debts is the method of identification and prioritization, where the owners take note of the various types of debt depending on factors such as the rate of interest, the terms of repayment, and the effect on the overall financial stability of an individual. For instance, prioritizing paying high-interest debts reduces long-term interest costs and hastens financial freedom. Not only that, if one has fewer things to worry about, one will be more effective in channeling one’s resources toward investment opportunities with the potential of a high return on revenue generation. Debt prioritization enables small business owners to control their financial obligations, lessen financial strain, and hence afford better cash flow, leading to its eventual long-term success.

Simplifying Debts

Debt consolidation and refinancing can be a lifesaver for small business owners who want to manage their finances better. This debt management tip may be in the way of consolidating many debts into one manageable loan and renegotiating the existing loans in favorable terms. The basic idea here is to reduce the monthly financial burden and overall interest payments, freeing up critical cash flow for expansion and dedicated debt reduction efforts. Accepting simplification of debts helps set the businesses on their way to increased financial agility that repositions them in a manner capable of fostering continued growth and financial resilience. Restructuring and realigning debt obligations through consolidation and refinancing allow small business owners to reposition their finances along an optimum trajectory and concurrently shore up their financial postures to set up a more fortified and stable financial foundation.

Effective management of small business debts is critical, and some debt management tips are suggested. Knowing which ones to repay first, what the obligations are, how to stay within budget, and the professional advice one should seek when necessary is necessary. Financial stability, improvement in credit standing, and business operationsoperation are born out of these strategies

Boost Profits With The Guide to e-Commerce Accounting

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Managing an eCommerce business extends beyond the simple transaction of goods online. Unlike traditional businesses, eCommerce accounting involves unique challenges, like managing inventory costs, tracking marketing spending across multiple channels, and dealing with complex tax regulations. These complexities can leave you needing help to make sense of your finances and unsure of your business’s true performance.

An important part of managing an eComm business is understanding and visibility of the eComm financial ecosystem, emphasizing the chosen accounting approach.

This in-depth guide will explore the complexities of eCommerce accounting.. From outlining the pivotal role of proper financial oversight to pinpointing the tangible advantages gained from streamlined accounting solutions, this guide is a valuable resource for eCommerce entrepreneurs looking to fortify their financial foundations and propel their businesses toward enduring success and growth.

The Significance of eCommerce Accounting

Running a successful eCommerce business requires clear control and visibility of your finances. It’s easier to make smart decisions for your business with clear and organized accounting.

Think of accounting as your financial roadmap. It helps you track everything from who owes you money (receivables) to whom you owe (payables), expenses, and supplier invoices. This way, you have a clear picture of your cash flow and can make informed decisions about your business, like how much to invest in inventory or marketing.

Investing in a proper accounting system that can handle the increasing complexity as your business grows is crucial. This will save you time and headaches, allowing you to focus on what matters most: growing your business.

Your eCommerce business needs insightful accounting to understand its health. It goes beyond simply keeping track of numbers. Understanding your numbers empowers you to make smart decisions. You can see where your money goes so that you can invest wisely. Accounting also helps you forecast your short-term and long-term income to plan effectively.

Good accounting helps you stay on top of taxes and avoid penalties. This frees up your time and energy to focus on what matters most – growing your business!

Accurate bookkeeping and accounting are your secret weapon against wasted spending and missed opportunities. By combining powerful analytics with your everyday bookkeeping, you will gain valuable knowledge about your business and unlock insights about your customers.

These insights are like gold. They’ll help you become laser-focused on strategies that resonate deeply with your target audience, leading to more meaningful connections and scaling your business.

That’s not all. By knowing your financial data, you can identify areas where your business can become efficient: streamlined operations, reduced costs, and more efficiency.

Plus, having all your financial data in one place gives you a clear bird’s-eye view of your business. This means you can make data-driven decisions perfectly aligned with your customers’ wants and market demands.

Understanding E-commerce Accounting: Your Guide to Profitable Decisions

E-commerce accounting might sound intimidating, but it’s ultimately about understanding your financial data to make smart business decisions that boost your profits. It helps you answer questions like:

  • How much money is coming in and going out?
  • Where can I make cuts without impacting my sales?
  • Am I investing in the right marketing channels?

Here’s a breakdown to make things easier:

Think of bookkeeping as the “how” and accounting as the “what” of your finances. Bookkeeping involves recording and managing daily transactions, like sales, expenses, and payments. Accounting analyzes that data to tell you the “what,” like your overall profitability and growth potential.

The foundation of good accounting is accurate bookkeeping. If you categorize and track your transactions correctly, the insights you get from the data will be reliable. This can lead to missed opportunities or even costly mistakes.

There are two main accounting methods: cash-basis and accrual.

  • Cash-basis accounting: Records income when you receive payment and expenses when you pay them. This is simpler and often used by startups.
  • Accrual accounting: Records income when it’s earned (even if not received yet) and expenses when incurred (even if not paid yet). This provides a more accurate picture of your business’s financial health but is also more complex.

The next section will delve deeper into bookkeeping practices for e-commerce businesses. We’ll explore how to keep your financial data organized and ready for valuable analysis.

Improving Your eCommerce Accounting

Insights into cash flow and comprehensive reporting capabilities are vital for eCommerce businesses to understand their financial health, monitor performance, and identify opportunities for improvement. This level of insight is especially important in the dynamic and fast-paced eCommerce environment, where quick and informed decisions can greatly impact growth and success.

Scalability for Sustainable Growth:

Some robust accounting solutions cater to both new and established businesses. Look for features that can adapt and grow alongside your company. This eliminates the need for major overhauls later on, allowing you to focus on scaling your business seamlessly.

Streamlined Processes and Reduced Errors:

Many platforms offer automated transaction tracking features. This saves you valuable time and reduces the risk of human error in recording sales and expenses.

Navigating Tax Complexities:

E-commerce businesses, especially those operating across state lines or internationally, often face complex tax requirements. Look for solutions that offer tax assistance features to help you stay compliant and avoid unnecessary complications.

Gaining Clear Financial Insights:

Comprehensive reporting capabilities and clear cash flow insights are crucial for understanding your financial health, monitoring performance, and identifying areas for improvement. This is especially important in the fast-paced world of e-commerce, where quick and informed decisions can significantly impact your success.

Multi-Channel Integration for Effortless Data Management:

Managing finances across multiple sales channels can be time-consuming and error-prone. Look for solutions that integrate seamlessly with popular e-commerce platforms like Shopify, Amazon, and eBay. This allows you to systematically consolidate and analyze your financial data from various sources, ensuring accurate and comprehensive financial visibility across your entire business.

In conclusion, choosing the right accounting tools empowers your e-commerce business to manage finances efficiently, gain valuable insights, and fuel sustained growth in the competitive landscape. Explore your options and find the solutions that best suit your needs and goals.

Practical Tips for Immediate Implementation

  • Employ Cash Basis Accounting: This beginner-friendly method simplifies record-keeping by tracking transactions when cash moves, making tax preparation easier.
  • Monitor and Categorize Transactions: Automate this process using accounting software to improve accuracy and potentially save tax through precise expense categorization.
  • Synchronize Sales Channels: Integrate transactions from various platforms into a single database for easier financial oversight and analysis.
  • Automate Tax Calculations: Simplify complex tax requirements across jurisdictions by leveraging accounting software capabilities.
  • Distinguish Chargebacks and Returns: Track and categorize these accurately for proper financial recording and analysis.
  • Generate Detailed Reports: Utilize robust reporting features to gain insights into your business, analyze performance, identify trends, and make informed strategic decisions.
  • Integrate Budgeting and Forecasting: Employ budgeting and forecasting tools within your accounting software to gain insight into future financial projections for informed business decisions. This helps plan for future investments, expansions, and potential challenges.
  • Utilize Inventory Management: Leverage accounting software’s features to track stock levels, manage inventory across locations, and optimize stock control. This ensures effective inventory management, accurate financial reporting, and informed purchasing decisions.
  • Automate Invoice Generation: Automate sending and generating invoices through your accounting software, saving time and ensuring accuracy, professionalism, and, ultimately, improved cash flow and client satisfaction.
  • Track Expenses Meticulously: Use your accounting software to track and categorize business expenses meticulously. This helps identify cost-saving opportunities, ensure compliance with tax regulations, and facilitate accurate financial reporting.

Long-Term eCommerce Accounting Strategies

Detailed Accounting Reports: Regularly analyze reports to gain insights into sales trends, profitability, and inventory management.

Cash Flow Management: Monthly cash flow statements offer a clear view of financial health, highlighting areas for potential improvement.

Scalable Accounting Policies: Regularly review and adjust your accounting practices to accommodate business growth and expansion, ensuring your systems can scale with your business.

Integration with CRM Systems: Integrate Xero with Customer Relationship Management (CRM) software to gain a comprehensive understanding of customer behavior and preferences, enabling targeted marketing strategies and improved customer engagement.

Advanced Data Analytics: Leverage Xero’s advanced analytics capabilities to delve deeper into financial and operational data, gaining profound insights for strategic planning, forecasting, and enhanced decision-making.

Next Steps with xendoo

The next steps involve implementing your newfound understanding of e-commerce accounting to streamline your processes and unlock even greater efficiency and visibility for your business. By harnessing the synergy between robust bookkeeping and your online sales platform, businesses can optimize efficiency and lay the groundwork for sustained success in the dynamic eCommerce landscape. Let xendoo help you remove the guesswork and embrace the power of data-driven e-commerce accounting. It’s time to build a business that’s agile, responsive, and ready to crush its goals.

Types Of Small Business Financing You Need To Know About

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Small business financing is vital as it can make or break your business. When first starting, there are many factors that you need to consider, such as your business plan and your financing options. When creating your business plan, it should outline your goals and objectives to have a clear idea of how to implement your plan. It’s important to plan ahead so you don’t miss any crucial steps that will bring on more than necessary. In this blog post, we will help you navigate the different types of financial assistance options to give you more insight into what could be a good fit for you.

When it comes to financing, it’s important to ensure that you’re choosing the right option for your business. Starting a small business isn’t easy and comes with many challenges, but if you take the right steps in the planning stage, it’ll make the process go more smoothly.

Without the right financing, getting your business off the ground may be hard because you won’t have enough support behind your idea. There are many financing options available, but it’s up to you to find the one you feel will work the best. Some options to fund your business include a small business loan, personal financing, or even a home equity line of credit loan.

Types of Financing Options

A small business loan can be a good option when looking for some additional financing while keeping in mind small business loans have a long list of requirements that have to be met to qualify for the loan. Cross-check the qualifications beforehand, and if all the requirements are met, it could be a good option for you. If you have been running your business for a while but are trying to qualify for a small business loan, the lender may ask to see a recent balance sheet of your business. It’s important that when applying for a small business loan, you understand the information that you’ll have to present.

Financial statements are one of the many requirements needed to qualify, so it’s important that you understand how to read your financial statements so that you will be able to discuss the information with the lender. If you don’t want to look to outside sources for financing assistance and feel that you have the ability to invest in it yourself, then personal financing may be the best choice for you. Personal financing loans are guaranteed through your personal credit history. This often makes them easier to get approved for than a small business loan if you have good credit, which might look at both a personal and business credit score.

For homeowners, another viable option is taking out a home equity line of credit loan. This type of loan allows you to borrow money against the equity you’ve built in your house. You receive the funds as a line of credit, so you’re able to access additional financing for your business as needed. This could be beneficial as it can be easier to qualify for than other loan options.

Keep your Finances Up to date 

In addition to securing the proper financing, it’s important to make sure that you’re keeping your financial history up to date. Managing your finances plays an important role in your business, as being financially sound from the beginning will set you up with a good foundation. While it’s important, it can become difficult to manage if you’re not taking the time to consistently review and record all financial activity. You must be diligent about reviewing your finances to ensure you’re not missing or falling behind on any payments. If you let this aspect of your business fall by the wayside, it’ll be overwhelming to catch up while simultaneously running your business. In order to run a successful business, you need to make sure that you’re paying attention to all aspects, financials included.

If you’re feeling overwhelmed and concerned about managing everything on your own, it may be beneficial to look at outsourcing opportunities. Outsourcing functions of your business, such as bookkeeping, will give you time back in your day to focus on running your business while allowing an online bookkeeper to assist you with the more time-consuming tasks. With the help of an online bookkeeper, they can help to keep your finances up to date so that you don’t have to worry about falling behind or missing payments. Ensuring that all aspects of your finances are taken care of will help you to get your business started on the right track and help you to focus your efforts on the growth of your business rather than worrying about its financial state. 

 

 

Year-End Bookkeeping and Accounting Checklist for Small Business Owners

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The end of the year is a hectic time for small business owners. Between catching your breath after tax season and managing holiday sales, year-end bookkeeping and accounting tasks understandably fall to the bottom of the to-do list. 

xendoo is here to help you avoid the year-end scramble. Check out our year-end bookkeeping checklist to organize your finances and successfully wrap up the year. 

1. Get Your Books Caught Up

The first step is to make sure that your books are up-to-date. You can do this by: 

  • Accounting for all bills and invoices, even if they haven’t been paid yet. 
  • Reviewing bank and credit card statements to confirm that they match. 
  • Recording any expenses that you paid for with personal funds. 

Accurate records ensure reliable financial statements. If your books are behind a few months, or even years, you are not alone—25% of business owners are behind on their books. 

xendoo’s online bookkeepers provide catch up bookkeeping services, so you can focus on the future. 

2. Collect the Necessary Forms

Once January arrives, your accountant will request certain forms to close your books and file your small business taxes. Be sure to collect them as soon as possible to ensure a smooth start to the new year. 

Here are common forms and their deadlines. 

Form W-2

Business owners use form W-2 to report salary information for their employees. It also helps businesses report the taxes they withhold from paychecks. Employees need this information to file their personal tax returns. 

Business owners are responsible for sending this form to the IRS. Employers must provide the form to their employees no later than January 31st so that employees have enough time to file their taxes.

Form W-9

If you worked with an independent contractor or vendor and paid them $600 or more, you will report those payments to the IRS using Form 1099-NEC. 

The information you need to complete this form is on Form W-9, which you can collect from your contractors.

If any W-9s are missing, reach out to your independent contractors and have them complete the form before the end of the year.

Schedule K-1

CPAs provide the Schedule K-1 or Form 1065. The Schedule K-1 must be sent to shareholders and partners by March 15th. 

S-Corporation shareholders and partnership members use it to report their share of the business’s profits and losses. They’ll also include the form with your personal tax return.

Form 1099-K

The 1099-K tracks the payments received through third-party payment networks, like eBay, Stripe, Shopify, PayPal, and others. You should receive one 1099-K from each of the Online Payment Networks you use by January 31st. You are required to complete each one. 

Your gross receipts must be at least as high as the amount that you report on your 1009-K.

The 1099-K shows gross sales, which is the amount before fees are deducted. What appears in your bank account is the Net Amount, the amount after fees are deducted from the Gross Amount. The sales from each vendor must be reported as the Gross Amount, which is what appears on the 1099-K.

If you use freelancer platforms like Upwork or Fiverr to hire independent contractors, they may also send 1099-Ks to your freelancers instead of 1099-NECs. Since they are considered Online Payment Networks, these platforms typically send 1099-Ks to freelancers that make over $20,000 a year and have at least 200 transactions. 

However, if you paid freelancers more than $600 outside of their platforms, then you will need to send out a 1099-NEC. 

Click here to download our Tax Documentation Checklist.

3. Follow Up on Past-Due Invoices

Review past-due invoices to see what you are owed. If there are any outstanding payments, reach out to your customers before the end of the year to successfully close your books. 

4. Account for Inventory

If your business stores inventory, perform an end-of-year inventory count to make sure your totals match your Balance Sheet and your books. This review will provide insight into waste and loss management, as well as reduce inaccuracies in inventory counts and receivings.

Consider utilizing inventory management software to streamline inventory creation and order fulfillment.   

5. Review Your Financial Statements

Once you or your bookkeeper completes your bookkeeping, review your financial statements to confirm your numbers are correct.

You can also take that time to review how your business grew over the course of the year. Was there a steady increase in profits? Can you identify connections between your costs and sales? The financial statements provide visibility to confirm that you are on track to meet your goals, make projections, and prepare for the future.

Click here to learn more about the key financial statements. 

6. Reach Out for Help

Everyone deserves a supportive team of people who care. If you feel overwhelmed with year-end bookkeeping, reach out to an online bookkeeping service. 

xendoo’s bookkeeping and accounting team provides monthly bookkeeping and accurate financial reports. We’ll give you financial visibility throughout the year and deliver insights to make strategic business decisions. 

Ring In Success

Juggling the holidays with running a business can be hectic. Although this year-end bookkeeping and accounting checklist can help you prepare for tax time, you don’t have to do it alone. xendoo has a range of plans with flat monthly fees. You can get certified, professional online bookkeeping, accounting, tax, or CFO services to help you manage your finances and grow your business. 

Schedule a call with one of our online accountants to get started.

 

 

 

What Is Bank Reconciliation: Template and Step-By-Step Guide

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A person works on their laptop.

A person works on their laptop.

This article was updated on October 19, 2022 with new links, resources, and templates. 

Bank reconciliation may sound like a daunting task for a business owner, especially those without an accounting background.

As a business owner who already has too many tasks and not enough time, you may overlook or put off this important task. You need to know how much money in your bank you can spend. Bank reconciliation helps you do that.

Skipping out on bank reconciliation is not something you can afford to do. It is a necessary part of running a business. However, with these bookkeeper-approved tips and tricks, you can make bank reconciliation almost painless. 

We’ll explain what a bank reconciliation is and why you need it for your accounting and bookkeeping. Plus, we’ll share a free bank reconciliation template. 

What is bank reconciliation?

Many business owners check the balance in their online bank account or most recent statements. They assume that the number in front of them is the amount of money they have available to spend.

The problem with this approach is that it doesn’t account for the items that don’t appear on your bank statement yet. 

Let’s say a business has a bank balance of $20,000. The owner writes a check for new equipment that cost $8,000. However, the supplier hasn’t cashed the check yet. So you need to factor it into your balance. The true balance in the account is not $20,000. It’s $12,000 since the $8,000 is already promised to someone.

If the owner forgot about the outstanding check and withdrew $15,000 from the company’s account, the check would bounce.

A bank reconciliation also helps you identify transactions that went through the bank but weren’t recorded in the company’s accounting system. As more businesses opt to pull in direct bank feeds for their companies, this is less of an issue. But even direct pulls from bank accounts can have glitches that leave some transactions unrecorded.

To reconcile the bank, your company should compare the transactions. With bank reconciliation, you compare your bank statement against the transactions in your accounting software to ensure that everything is recorded.

Bank reconciliation terms to know

There are several commonly used terms in bank reconciliations that you should be aware of. 

Deposit in transit: Deposits that have been sent to the bank (either electronically or through a visit to the bank) but that have not been posted to the company’s account at the end of the period. This does not include payments expected to be received in the future from customers.

Outstanding checks: Outstanding checks are any checks written by the company prior to the end of the reconciliation period. They have not been cashed by the recipient yet. 

Not sufficient funds (NSF): A check may be rejected if the account does not have sufficient funds to cover the amount of the check. An NSF check may show up as being cashed by the bank with a reversal of the amount when the check is flagged for NSF. Most banks charge fees for NSF checks and these need to be recorded as well. 

Stale Checks: A stale check is one that has gone uncashed for a long time, usually over six months. Depending on the purpose of the check, the company may consider voiding it. Some checks, such as payroll checks cannot be voided and need to be remitted to state agencies. 

How often should you do bank reconciliation?

While bank reconciliation can be performed at any time, it is usually a monthly task. Your bank generates a monthly statement anyway, so each month you should compare your bank statements to your internal accounting records. 

The process of bank reconciliation is nothing more than confirming that what appears on your bank statements matches what you see in your accounting software. But, how does bank reconciliation work? 

How To Do a Bank Reconciliation

Each month, your business will conduct several transactions, so you’ll see money coming in and going out. Those transactions should all be tracked in online accounting software like QuickBooks or Xero. 

Also, you should see those transactions in your bank account (or accounts), usually a day or two after they occur. 

The details of doing a bank reconciliation will vary from software to software, but the basic process is the same across the board. 

1. Download your bank statement

The very first step of any bank reconciliation is locating your bank statement. The bank statement gives you the beginning and ending bank balances along with the activity for the period (which is usually one month). 

2. Locate reconciliation in your software or spreadsheet

If you are using accounting software such as Xero or QuickBooks, there is a section of the software designed specifically for bank reconciliations.

Once you open up the bank reconciliation module, you will find a list of all the deposits and withdrawals that are in your books. If you are using a spreadsheet to reconcile your bank, create a new copy of your template for the current period.

3. Reconcile the deposits

If you have already recorded all of your deposits in your accounting software, you should be able to match each deposit to a line item on the bank statement.

Bank statements will list cash and electronic deposit separately. Deposits from different electronic sources (credit cards, Paypal, Zelle, wires, etc) will show up as separate deposits on the bank statement. It will also try to include a description (although it’s sometimes a bit vague) of the deposit.

4. Reconcile checks

Reconciling checks is the easiest step in a bank reconciliation. Your bank statement will list each check in numerical order. For each check that appears on the bank statement, you cross off the check number in your accounting software or spreadsheet.

Once you’ve checked off all the cleared checks in your accounting software, you can verify the total amount of checks paid.

5. Reconcile any electronic payments

Though most companies are diligent about recording checks written to vendors and employees, electronic payments are more often overlooked within the company’s records.

Electronic payments include ACH payments, merchant fees, bank fees, and interest payments. If any of these payments have not been recorded, they should be recorded during the bank reconciliation process. 

6. Compare the cleared balance to the bank balance

Once you’ve checked off all the cleared checks, electronic payments, and deposits, you will have calculated a cleared balance for your books. This balance should match the bank statement at the end of the reconciliation period. If the balances don’t match, you’ll need to go back and investigate the source of the discrepancy. If the balances match, you’ve completed your reconciliation.

To make it even easier, we created a free bank reconciliation template here. 

How to use a bank reconciliation template

First, to edit this bank reconciliation Google Sheet, you’ll need to go to “File”, then “Make a copy”. You’ll be able to edit the copy for your purposes. 

The bank reconciliation template has three tabs. 

  • Template – This shows you how to use the template. It has the instructions and explanation for each row of the bank reconciliation.
  • Bank Rec – This tab includes an example of bank reconciliation to show you how to reconcile a bank account. 
  • Checks – In this tab, you can track checks written during the period of time you are tracking.

Update dates and balances

To get started, update the dates for the period you are reconciling. For simplicity, we’ll use the month of January 2021 as an example. 

Start by inputting the bank balance as of December 31, 2020, into Cell B5 and Cell C5. Take the ending bank balance and put the figure in C9. 

Continue grabbing numbers from the bank statement for the deposits (input into B6), checks that cleared the bank (input into B7), and other transactions such as electronic withdrawals (input into B8). Once you’ve entered these numbers, the template should calculate the ending bank balance in Cell B9. The calculated value in B9 should match the ending bank balance you input directly from the bank in C9. If these figures don’t match, go back and review the inputs in B5-B8.

Review your deposits

The next step is to review the deposits in your books. Identify any deposits in January 2021 that your bank has not received. This might include check payments or electronic deposits that are in pending status as of January 31, 2021. Total these payments and put the value in B10. 

It often takes vendors a while to cash checks. You should have a list of checks written prior to January 31, 2021, and note which ones have not been cashed. (See the Checks tab of the workbook for an example of how to track this.) The total of these outstanding checks should be entered in C11. 

In B12, you’ll want to identify any other pending transactions. These may include debit and ACH payments that are in pending status as of January 31, 2021. 

After you’ve entered these figures, calculate the cash available in B13. These are the funds in your bank that are free for your company to spend.

How to record bank reconciliations

In your accounting software, each bank transaction should show up as “cleared” once the bank processes it. In electronic systems, once you’ve processed a bank rec in the system, a “cleared” tag will appear. For manual systems, you will have to manually identify the cleared transactions. See the Checks tab for an example of how to track cleared checks.

A journal entry

You may need to make journal entries to record missing transactions that are in your bank account but recorded (yet) on your books. A common example is the interest payment from the bank each month. You won’t know exactly how much interest the bank has paid you until you have your statement. As a result, you should record the interest income during the bank reconciliation process. 

If your bank paid you $3.64 of interest in the month of January 2021, you would make the following entry:

1/31/2021 Debit Credit
Cash in Bank $3.64
Interest Income $3.64

Other common entries made during the reconciliation process are electronic payments, deposit adjustments, and bank fees.

A bank reconciliation statement

When you complete the bank reconciliation process, you’ll create a statement. 

A bank reconciliation statement is a summary of the reconciliation. It will highlight the reasons for any discrepancies between the bank balance and the cash balance in the accounting system. 

A bank reconciliation statement may include:

  • Bank balance – The balance provided on the bank statement will be noted, along with the date of that balance.
  • Additions and deductions – Any deposits in transit or checks going out that have not yet reached the bank will be noted on the statement and adjusted from the bank statement balance. 
  • Bank activities – Events that occurred on the bank side and that have not yet been accounted for in the company’s books will also be shown on the reconciliation statement. Bank fees and charges that you owe the bank should come out of the account. 
  • Adjusted cash balance – This is where the bank reconciliation statement shows that the books are in order – the adjusted cash balances should match when all outstanding transactions have been included. 

Why is bank reconciliation important?

It’s easy to take bank reconciliation for granted and believe that your accounts are going to match up properly each time. Hopefully, most of the time, they do, but that’s not guaranteed. 

The bank reconciliation process spots issues that directly impact your business’s health and future. Examples of why your business needs bank reconciliation include: 

1. Fraud

Perhaps the most important reason to reconcile bank statements regularly is to track and prevent fraud. If you see a deposit in your accounting software, but it never lands in the bank, where did it go? 

You want to spot this kind of issue right away so you can look into it further. A legitimate, honest mistake may lead to a missing deposit—or someone could have stolen the money. 

2. Missing checks and vendor payments

For example, if you send a check to a vendor, you want to be sure that they received that check in an appropriate amount of time. If a check still hasn’t cleared your bank a couple of weeks after you sent it, follow up to confirm that the vendor received it. Without bank reconciliation, you would miss it and may receive a past-due notice from that vendor.

3. Bank errors and financial statements

Though the main purpose of reconciling your bank is to calculate the cash your business has available, it also gives you the opportunity to verify that the bank has not made any errors. Since most banking is done electronically and through computer systems, bank errors are rare, but not unheard of. 

Common bank errors include checks that clear for the wrong amount or incorrect deposits. 

By checking the bank activity each month, you can contact your financial institution in a timely manner when there is still an opportunity to correct the error.

4. Cash flow management

Running a small business means ensuring that your company has the funds to continue its operations. A bank reconciliation lets you calculate the cash available to cover expenses. Simply checking the bank does not give you the full picture. The balance may not include payments (and deposits) that the bank hasn’t processed yet.

There are many reasons why an accountant is important, and performing regular bank reconciliations is high on that list. 

Top tips for bank reconciliation

Before we wrap up this discussion, we’d like to pass on three quick tips to help make bank reconciliation a useful part of your accounting process. 

  • Do it regularly. You should do bank reconciliations at regular intervals. For most small businesses, that is going to mean once per month – but you can adjust this schedule based on your needs. 
  • Keep your books up to date. Performing a bank reconciliation will take much longer if you need to update your internal books from the previous month before you can compare those records to the bank statement. 
  • Take your time. If performing the reconciliation on your own, set aside enough time so you don’t need to rush through the task. Doing it quickly is going to greatly increase the chances of a mistake. 

Understanding the importance of bank reconciliation and making time in your schedule to complete this task are two different things. All the motivation in the world can’t magically open up time for you to spend going over bank statements and clearing up any issues. 

This is where xendoo comes into the picture. Bank reconciliation is just one of our many bookkeeping services, so we can take this and more off of your plate each month. 

 

How to Set Up Online Payroll for Your Small Business

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Doing payroll may not be your favorite part of running a business. If you haven’t yet, the first step is to learn how to set up payroll. It can be quite bureaucratic juggling all these forms—whether it’s a W-2, W-9, W-4, or something else—and by the end, you might not even know where to start. 

Not only do you have to calculate wages, but you must also account for employment taxes—income, Social Security and Medicare. On top of that, you have to factor in additional deductions for health or retirement plans. Then there’s all the paperwork you need to report to the government. 

How to Set Up Payroll

Luckily, we’ve put together this guide on how to set up payroll, with some insider accountant tips to make it less painstaking for business owners. 

1. Get an Employer Identification Number

The IRS requires businesses to get an employer identification number (EIN). Also known as Employer Tax ID, an EIN is a unique nine-digit number that identifies your business for tax purposes. While its main purpose is to help you with federal income taxes, it also comes in handy when opening bank accounts, credit cards, loans, local taxes, or setting up payroll.

When looking to get one for your business, you must fill out the SS-4 form. This document provides the IRS with information about your business, such as business structure and contact information. You can also apply for an EIN online through the IRS website to receive your number.

2. Look Up Your State ID and Requirements

In addition to EINs, your state and locality may have additional requirements. For example, a few states like Florida do not collect state income taxes. Some states like New York require a business registration number. 

You can use the Small Business Administration’s guide on state tax IDs to look up your state’s requirements and apply for an ID number.

3. Identify Contractors and Employees

Before you can set up payroll for a worker, you need to distinguish them as an employee or a contractor. 

An employee typically works full-time or part-time at your company’s office. A contractor is usually a consultant or freelancer that are self-employed. 

This determines how to set up payroll. You will do payroll and taxes differently for each, so it is important to classify them correctly. In addition, if you accidentally misclassify, the employer is responsible for any back taxes, penalties, and interest. Not to mention, if you misclassify a contractor as an employee, you could end up paying payroll taxes when you shouldn’t. 

4. Collect the Proper Information

Now that you’ve distinguished between employees and contractors, it’s time to collect the information you’ll need in order to set up payroll and do taxes. 

The data you need varies by federal and local regulations and employment status, but most commonly, you’ll need to know: 

  • Name
  • Address
  • Social security number
  • Deductions
  • Contact information

Employees must fill out a W-4 form, while contractors fill out a W-9 form. In addition, employees have taxes withheld from every paycheck by their employer. Independent contractors are responsible for paying their taxes quarterly through estimated tax payments and don’t have any withheld by their employer. 

When tax time approaches, you’ll need to send a 1099-MISC to your contractors and a W-2 to your employees. You’ll also need to file the forms with the IRS before January 31. 

New hires often fill out a W-4 when they start but may need to update it if their circumstances change, such as getting married or having a child. You should collect these forms from your employees and contractors before their first work day. While you’re at it, you should also collect their direct deposit information to set up their paychecks.

5. Set Your Payroll Schedule

Most businesses set their payroll schedule to biweekly, or every two weeks. However, this can differ depending on the nature of your business. 

Plus, some states have strict guidelines on when and how to pay employees. For example, California requires meal and rest breaks. Although these don’t have to be paid, you might be surprised that many states don’t require breaks at all, except in special circumstances.

You’ll find that payday guidelines differ by state, with some requiring weekly, daily, semi-monthly, or nothing at all. These are just a few examples of how much it can vary by state. 

It’s important to familiarize yourself with your state’s payroll and labor laws, especially now that more people are working remotely across state lines. Otherwise, it can lead to costly mistakes and penalties. You can find labor guidelines by visiting your state’s labor department website. 

6. Create an Employee Handbook With Policies

In addition to figuring out how to set up payroll, you’ll need to communicate your payment schedule and other policies with your employees. After all, they need to know how and when they’ll be paid. The best way to do this is by creating an employee handbook with your company’s policies.

An employee handbook is a document that outlines your company’s expectations, rules, and procedures. It ensures everyone is on the same page and knows what’s expected of them. Plus, it can help you avoid legal problems down the road.

There are a few key things you should include in your employee handbook, such as:

  • Salary
  • Holidays off
  • Sick days
  • Overtime policy
  • Vacation days
  • Other benefits and compensation

You’ll also want to outline the exact payroll schedule and how payments are calculated and administered. Methods of compensation you’ll be using may include: 

  • Salary – a set rate or fixed payment that an employee receives for performing their job duties 
  • Hourly – an hourly rate that you calculate based on the number of hours an employee works
  • Commission – often used in sales, a commission is a percentage of the revenue generated from sales
  • Tips – usually given to service industry workers, tips are voluntary gratuities given by customers
  • Supplemental wages – covers anything else such as back pay, severance pay, bonuses, and accumulated sick leave

7. Choose Payroll Software

Fortunately, you no longer have to manage payroll with cumbersome spreadsheets and manual data entry. Payroll software—either as part of your accounting system or a stand-alone app—automates much of the work for you. 

It can also help you comply with applicable regulations and filing requirements. Employees can easily access their pay stubs and W-2 forms come tax time.

When choosing payroll software, there are a few things you should keep in mind: 

  • Ease of use – Look for software that’s easy to set up and use. In most cases, the software should be able to integrate with your existing accounting software.
  • Cost – While you don’t want to skimp on quality, you also don’t want to overspend on features you won’t use. 
  • Compliance – As we mentioned earlier, payroll software should help you stay compliant with applicable regulations. Gusto, for instance, offers compliance support for federal, state, and local taxes. It also provides automatic tax filing and direct deposit.
  • Reporting – Look for comprehensive reporting software to track your payroll data and make informed budgeting decisions about your business. 
  • Security – xendoo, for instance, uses 256-bit SSL encryption to protect your data.

You can also ask these questions to help you decide on the best payroll software for your business.

  • Does the accounting software you already use have payroll functionality? If not, can you add a plug-in to it?
  • Is the stand-alone software compatible with your system as well as the systems your financial consultants use?
  • Is it cloud-based?
  • Does it keep real-time records?
  • Does it provide accurate reports?
  • Does it have features relevant to your business, such as time-sheet processing or direct deposit payments?
  • Is it scalable?

There are many payroll software tools out there. xendoo partners with Gusto. It provides a wide range of features, including direct deposit, time-sheet processing, and comprehensive reporting.

8. Submit Payroll Taxes on Time

The IRS states that employers must report the wages paid and any other related employment taxes such as:

  • Federal income tax withholding
  • Social security and Medicare taxes
  • Federal unemployment (FUTA) tax

Payroll taxes can be tricky to navigate, but it’s vital to ensure that you submit them on time and in full. The IRS offers several resources to help businesses with employment taxes, including an online payment portal, e-file, and direct deposit options. Typically, you’ll need to deposit federal income tax withheld and Medicare taxes monthly or semi-weekly. 

In addition, different payroll forms have different reporting due dates. If any of these are late, you may be subject to penalties.

  • W-2s: January 31
  • 1099-MISC: January 31
  • 940: January 31
  • 941: April 30
  • 943: April 30
  • 944: April 30
  • CT-1120K: April 15
  • CT-1120: April 15
  • Schedule H: April 30

With the right payroll software and a small business bookkeeper, you can automate most of your payroll duties.

9. Archive Payroll Records

Employers are required by the government to keep records for the current and previous three tax years. Your online payroll software will be a big help with this, but may not do everything — especially since local requirements can vary. In addition, you must keep some paper records, such as tax forms. 

Archived information should include:

  • Employee’s name, address, and social security number
  • Dates of hire and termination (if applicable)
  • Copies of all relevant forms supplied to (and by) the employee
  • Amounts and dates of all wage, annuity, and pension payments
  • Fringe benefits and expense reimbursements
  • Sickness or injury payments
  • Tax deposits you made
  • Copies of returns filed and confirmation numbers

As a small business, it’s vital to comply with government regulations. One such regulation is proper payroll management. Setting up and maintaining your company’s payroll doesn’t have to be complicated or time-consuming. 

xendoo plans integrate with various accounting and payroll tools like Xero and Gusto. You can check for current online payroll offers here. With the right tools and resources, you can quickly get started and keep your team on track with their paychecks. If you need help getting started, contact us today or start a free trial. 

This post is intended to be used for informational purposes only and does not constitute as legal, business, or tax advice. Please consult your attorney, business advisor, or tax advisor with respect to matters referenced in our content. xendoo assumes no liability for any actions taken in reliance upon the information contained herein.

 

The Small Business Guide to Revenue vs. Profit

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Two people counting money and writing amounts on paper

When running a small business, you’ll want to track revenue and profit. What is revenue vs. profit? Is one metric more important than the other?  

While revenue and profit measure your business’s financial performance in different ways, the two metrics are closely intertwined. They are often used to gain a better understanding of your overall financial health. 

What precisely is the difference between revenue and profit? Read on as we take a closer look at these two key metrics and explore how you can use them in your business.

What is Revenue? 

Revenue, also known as gross sales, is the total amount of money your business brings in through sales of products or services. 

For example, you’d find your annual revenue by adding up the total sales for the year. It would only include the income derived from your business’s primary activities. It does not include other types of income, such as investment returns or earnings from other sources. Revenue is included in your income statement, along with gross income and net income. 

Revenue and Cost of Goods Sold (COGs)

When calculating revenue, you should also consider the cost of goods sold (COGS), which are the direct costs associated with producing your product or service. 

Deducting COGS from your revenue will give you your gross profit, which is the amount of money you have left after subtracting all the costs associated with creating your product or service. Since COGS is a cost of running a business, it’s recorded as a business expense on your income statement. 

Revenue and Net Income

Since revenue represents the big number at the top of your income statement, it is often referred to as the “top line”. Net income, on the other hand, is known as the “bottom line”. In basic terms, net income is revenue minus expenses.

While revenue alone can’t tell you much about your business’s overall financial health, it is a valuable starting point. You can use it to understand your performance, particularly when compared to other businesses in your industry.

How Do You Calculate Revenue? 

To calculate your revenue, you need to start with the average price of your product or service. Then, multiply this figure by the number of units sold. With this revenue formula, you can calculate the total revenue for the period in question.

Revenue = (average price per unit sold) X (number of units sold)

Your bookkeeper or accounting software will typically handle this calculation and report it on your company’s income statement. You will have the net sales(gross revenue minus any returns), cost of sales, and net revenue on your revenue report. By subtracting the COGS from the net sales, you will have the net revenue for the period.

For example, suppose you own a bakery that sells scones for $5.00 each, and you sell 1000 scones over a month. To calculate the gross revenue for the month, you would multiply 1000 by $5.00 to get $5,000 in total revenue.

  • Example: (1,000) X ($5) = $5,000 gross revenue

You will need to deduct the direct cost of sales associated with producing the scones from gross revenue to get the net revenue. Suppose the cost of flour, sugar, eggs and other ingredients used to make the scones is $1,500 for the month.

  • Gross revenue – direct cost of sales = net revenue 
  • Example: ($5,000) gross revenue – ($1,500) cost of sales = $3,500 net revenue

Dividing the net revenue by the gross revenue will give your business’s gross profit margin, which is an extremely important metric for evaluating profitability.

What is Profit? 

Profit, or simply net income, is the amount of money your business is left with after subtracting all expenses from revenue. In financial slang, it’s called the “bottom line” since it’s represented by the last figures in an income statement. 

While revenue is a critical metric for evaluating the success of your business, profit is what ultimately determines whether or not your company is sustainable in the long run. This is because profit is what’s left after you’ve covered all your costs and expenses. 

You can use it to reinvest back into the business, pay dividends to shareholders, or pay yourself a salary. The higher your profits, the more successful your business will be over the long term.

How Do You Calculate Profit? 

While xendoo sends you a monthly report with your business’s updated profit and loss statement, understanding how to calculate profit is an essential part of being a small business owner.

To calculate your business’s profit, you need to start with your total revenue for the period in question. Then, deduct all expenses from this figure to get your net income.

  • Net income formula: total revenue – total expenses = net income

When you dig into expenses, it can get more complex. For example, you may go a step further and factor in the EBIT (earnings before interest and taxes), depreciation, amortization, rent, and business taxes into the equation. This will give you your business’s net profit for the period.

For example, let’s say your business had total revenue of $100,000 in a year. COGS accounted for $10,000. You had $5,000 in depreciation expense, $5,000 in interest expense, and $18,500 in business taxes. 

To calculate the EBIT, you’d do this: 

  • $90,000 net revenue – $5,000 depreciation= $85,000 EBIT

Therefore your EBIT for the year is $85,000.

  • Net profit = taxable income – business taxes
  • Net revenue – interest: $85,000 – $5,000 = $80,000 (taxable income)
  • Example: ($80,000) taxable income – ($18,500) business taxes =  $61,500 net profit 

Revenue vs. Profit: What is the Difference? 

In the simplest terms, revenue is a business’s total income, while profit is the amount of money a firm keeps after subtracting all costs. 

Revenue is important because it indicates whether or not a business is generating income. However, profit is what’s left after all expenses have been deducted. It indicates the overall success of a business.

If you’re running a small business, it’s critical to understand the difference between revenue vs. profit to make informed decisions about how to grow your business. A business can be generating a significant amount of revenue but still be operating at a loss if it is spending a lot of money on expenses. 

While a single dip in revenue or profit is common, a long-term trend of high revenue but low profit is much more dangerous. If profit is consistently low, it could indicate that your business model is not sustainable. Without a strong understanding of revenue vs. profit, it can be challenging to assess your business or make smart decisions about how to invest in its future.  

Revenue vs. Profit Example 

To help you better understand the difference between revenue vs. profit, let’s take a look at some examples. When public companies release their annual reports, many feature their revenue numbers prominently on the first page.

Revenue 

To understand revenue, let’s look at Microsoft’s financials for 2021. In their annual report, Microsoft reported total revenue of $168,088 million from product and service sales.

Microsoft's annual report

Product revenue accounted for $71,074 million while service and other accrued $97,014 million totaling the $168,088 million. Microsoft’s revenue increased by 17.5% from 2020 when they reported $143,015 million in product and service sales.

Profit 

To understand revenue vs. profit, let’s look at Microsoft’s annual report again. Only this time, we’ll look at net income. The figure appears at the bottom of the income statement, which indicates how much profit a company has earned after accounting for taxes and all expenses.

Microsoft’s net income was $61,271 million in 2021. This was an increase from 2020 when they reported $44,281 million in net income. But how did Microsoft get to this number?

To calculate net income, we take the total revenue and subtract the cost of goods sold (COGS), operating expenses, interest expenses, and taxes. Microsoft reported these numbers (in millions):

  • Total revenue: $168,088
  • Total cost of revenue: $52,232
  • Gross margin: $115,856
  • Research & Development: $20,716
  • Sales and marketing: $20,117
  • General and administrative: $5,107

Subtracting this from the gross margin gives you an operating income of $69,916. But they also had other income of $1,186, so total income before taxes accounted for $71,102. Provision for income taxes totaled $9,831.

To get the net income, we subtract the provision for income taxes from the total income before taxes, which gives us our final figure of $61,271 million.

As you can see, revenue is just the first step in understanding how much profit a company has earned. To get an accurate picture of your business performance, you need to look at revenue and profit.

Although xendoo provides profit and loss statements to all its customers, it’s crucial to understand where these numbers come from and what they mean for your business. 

Keep in mind that Microsoft is a huge public company. Revenue and profit for a small business will likely be much simpler. 

How Do You Increase Revenue? 

While increasing your small business revenue is an excellent way to grow and boost your bottom line, it isn’t easy.

Every business is unique, and there is no one-size-fits-all solution to increasing revenue. However, a few proven strategies can help you increase your revenue.

  • Increase your prices –  If you are priced below competitors, or your prices haven’t increased in a while, it may be time to consider a price increase to drive more revenue. However, avoid very high prices as they might scare away your customers and reduce revenue.
  • Boost sales quantity – In most cases, increasing your sales volume is the best way to grow your revenue without necessarily having to increase your prices. You can run a marketing campaign, boost brand awareness and outreach through online advertising, or hire a salesperson to help you close more deals.

How Do You Increase Profit? 

In addition to focusing on revenue, focus on profit margins and work towards increasing them. It is relatively easy to increase profit compared to revenue, and you can do it in several ways.

  • Reduce your costs – Evaluate your business expenses and work towards reducing them without compromising on quality or hurting your bottom line. You could renegotiate contracts with vendors, cut down on unnecessary expenses, or automate specific processes to reduce your costs.
  • Manage your debts – Debts can significantly drag your profits and hurt your business’s bottom line if not managed properly. Work towards reducing your debts and interest payments by refinancing high-interest loans, consolidating multiple debts into one loan, or exploring government grants and tax incentives.
  • Outsource tasks and services – In some cases, it might be more cost-effective to outsource certain tasks and services rather than doing them in-house. This could help you save on costs and increase your profits. For instance, you can outsource your accounting and bookkeeping to a professional service rather than hiring an in-house accountant.

Revenue and profit are two metrics that every small business owner should track. There are important differences between revenue vs. profit. While revenue is a valuable indicator of how much business you are doing, profit determines your long-term sustainability. 

It is crucial to understand the key strategies and tactics that can help you increase both your revenue and profit margins. Whether it is increasing your prices, boosting sales quantity, or reducing costs and debt, there are several ways that you can grow your business’s top line and bottom line. The key is to stay focused, persistent, and diligent without losing track of your profitability goals.

If you want to better understand your business’s financials, xendoo is here to help you. We are an online accounting and bookkeeping service that can help you understand your revenue and profit margins. Contact us today to get your free trial and let us get bookkeeping hassles off your plate.