A man looks at an expense report on his laptop

The Difference: Cash Basis Accounting vs. Accrual Accounting

A man looks at an expense report on his laptop

As a business owner, accounting methods may not rank that high on your list of passions, but understanding cash basis accounting vs. accrual accounting can be vital to your company’s health. 

Keeping track of your cash flow can save you time and money, not only helping you during tax season but also helping you to streamline and strategize in every area of your business.

Cash basis and accrual accounting represent the two major methods of accounting used by financial professionals. If you’re not familiar with these terms, we’ll help you understand their definitions and differences, as well as their impact on your business.

Cash Basis Accounting

Cash basis accounting is the simpler of the two accounting methods. In cash basis accounting, transactions are recorded as cash changes hands. In other words, income is reported when cash is received, and expenses are recorded when you pay your bills.

This means that cash basis accounting doesn’t require any specialized accounting techniques. This method can be done as easily as balancing your personal checkbook. 

For business owners, it also makes it easy to identify when transactions occur, since these will be recorded on your bank statements, too.

Accrual Accounting

In accrual accounting, income and expenses are recorded when they occur, regardless of when money actually changes hands. In fact, it’s not uncommon to record income before you receive payment or to record future expenses before they occur.

Admittedly, this method is slightly more complex than cash basis accounting, but it offers the benefit of greater accuracy. Accrual accounting provides a thorough record of your company’s revenue and liabilities.

One of the reasons that larger companies rely on accrual accounting is that this method gives them a better, more accurate picture of their financial health.

The Effect on Taxes

The differences between cash basis accounting vs. accrual accounting can be particularly noticeable when it comes to paying your taxes. Basically, you’ll pay tax on every source of income, though each method records income slightly differently.

Cash Basis Accounting and Taxes

Cash basis accounting remains the most straightforward method. Income is recorded only when you receive payment, which means that you’ll pay taxes on the cash your business receives. 

For example, if your company sells a product to a customer in December of 2021 and receives payment in January of 2022, this transaction would not be recorded on your business income tax return until the following year.

In other words, with cash basis accounting, your company will only pay tax on the cash you receive, rather than on future transactions.

Accrual Accounting and Taxes

This is where accrual accounting can be a bit tricky, tax-wise. Remember that with accrual accounting, you record income and expenses as they occur, rather than when you actually receive payment. This means that you’ll pay tax on all business income regardless of whether you’ve actually received the money for the transaction yet.

Returning to our above example, if you sell a product to a customer in December of 2021 but don’t receive payment until January of 2022, you would still pay income tax on that sale, even though payment was not rendered during the same tax year.

Understandably, this is why it’s important for companies to manage their finances appropriately to prepare for taxes. One of the ways business owners keep a handle on their tax planning is by choosing to outsource accounting to an online bookkeeping team.

These online accounting firms can provide preparation and guidance to ensure you hold back enough money to cover your tax payments. They can often help you strategize to manage your tax obligations, too.

The Effect on Cash flow

When comparing cash basis accounting vs. accrual accounting, it’s important to understand how each method can impact your cash flow in surprisingly different ways.

Let’s consider the following example, and then look at how each accounting method would calculate cash flow:

  • You sent an invoice to a client in an amount totaling $500
  • You received a bill for $100 for the month
  • You paid $20 in fees for a bill you received the previous month
  • You received $100 from a client for an invoice sent the previous month

Pay attention to when money actually changes hands in our above example. This will greatly impact how cash basis accounting and accrual accounting will record cash flow.

Cash Basis Accounting and Cash Flow

Cash basis accounting will look at the example above and focus on the money changing hands. In our example, the only actual transactions that are recorded are the $20 you paid in fees and the $100 you received from your client, meaning your total profit is $80.

But do you see the danger of this method? Cash basis accounting records cash flow as $80. But look at your upcoming expenses: you have a bill in the amount of $100. You won’t be able to cover this expense until your client pays their $500 invoice.

This means that despite the simplicity of cash basis accounting, it has the potential to overstate your financial health at any given time. With that in mind, let’s take a look at how accrual accounting would handle this same example.

Accrual Accounting and Cash Flow

While cash basis accounting selectively records the transactions in the above example, accrual accounting would record each one, regardless of when money is actually received.

Therefore, in our example, accrual accounting will record income in the amount of $600 ($100 received + $500 invoice), and expenses in the amount of $120 ($20 spent + $100 bill). The final profit for the month would therefore be $480 ($600 – $120 expenses).

This is a sizable difference! The same company would record profits of $80 or $480 depending on their accounting method. 

In comparing cash basis accounting vs. accrual accounting, you can see how accrual accounting provides a more comprehensive picture of a company’s revenue and liabilities but doesn’t necessarily provide an accurate picture of your actual cash on hand.

This is why cash basis accounting works best for small companies or those with simple transactions, while larger companies prefer the accrual method.

Choosing the Right Method for Your Business

Choosing between cash basis accounting vs. accrual accounting can seem challenging, but there are some basic considerations that can help you to decide. 

Keep in mind that if your business earns more than $5 million in annual sales, you must use the accrual method. But if your business earns less than $5 million, you may choose between these two methods.

When to Use Cash Basis Accounting

Cash basis accounting can be beneficial for smaller companies and startups. This can actually be a great method for eCommerce bookkeeping. If your company relies on a lot of online sales, cash basis accounting can make it easier to keep track of your books.

You should consider cash basis accounting if your business fits any of the following criteria:

  • Your company is small
  • You carry little inventory
  • You produce products on demand
  • You run a small eCommerce business (or an Amazon FBA store)

Some small companies start out using the cash basis method, then switch to the accrual accounting method after their businesses start to grow. This is perfectly legitimate, though you may need the assistance of a financial professional to help you make a frictionless transition between methods.

When to Use Accrual Accounting

Accrual accounting is the preferred method for larger businesses, but it can also provide an accurate solution for businesses that do any of the following:

  • Conduct high-volume business
  • Maintain a lot of inventory
  • Conduct larger projects with multiple phases
  • Pay contractors for portions of a project

Construction companies, for example, can benefit from accrual accounting to help manage the money they receive from clients, as well as the expenses incurred from equipment and subcontractors. 

Similarly, web developers can benefit from the accrual method, helping them manage larger, complex projects that require multiple phases to complete.

Understandably, this can be a bit intimidating for business owners who already have a lot on their plates. This is why many entrepreneurs choose to outsource accounting for small business financial services. 

An online accounting firm can provide assistance with your accounting and bookkeeping needs, ensuring that your books stay accurate and up-to-date.

Getting Behind? We’re Here to Help!

Hopefully, now, you’ve got a better grasp on cash basis accounting vs. accrual accounting. But what if after reading this article, you realize you’ve been doing it wrong? And what if you’ve been putting your books off until “tomorrow” and you’re not sure what to do?

First, don’t panic! At Xendoo, we’ve helped countless clients get caught up and back on the right track. The online bookkeeping features offered by our skilled team can ensure that you have all of the help you need to manage your books, monitor your cash flow, and prepare for tax season.

If keeping track of your books gives you anxiety, don’t wait another day. Our free, no-obligation trial can show you how your business can thrive with accurate books. Sign up today and get back to managing your business!

What Type of Accountant Does Your eCommerce Business Need?

Running an eCommerce business can sometimes feel like a juggling routine. You’ll have to stay on top of your transactions, inventory, administrative fees, and more. Chances are that your accounting and bookkeeping needs are low on your list of priorities, but that can come back to bite you.

Managing your own books may seem like a cost-saving strategy, but many online merchants lack the time or expertise to stay up-to-date and in compliance. Your eCommerce business requires the attention of an eCommerce accountant. 

Today, we’ll show you how partnering with an accountant that specializes in eCommerce can help your business to thrive.

Types of Accounting for Your eCommerce Business

One of the first financial decisions you’ll need to make is the accounting method you’ll use for your online business. There are two types of accounting practices to choose from: cash basis and the accrual method.

Determining which method is best for your company depends on several factors, which we’ll explore below.

Cash Basis Accounting

Cash basis accounting is the simpler of the two methods. In this method, you add an accounting entry every time money enters or leaves your bank account. Basically, you’ll be keeping a record of all your transactions, and this record will largely mirror your sales records and bank accounts.

The simplicity of this system is its greatest appeal, since it doesn’t require a lot of accounting knowledge or expertise. It’s actually a great eCommerce accounting strategy for startup businesses. 

You might consider this method if you:

  • Run a small eCommerce business
  • Run an Amazon FBA store
  • Produce products on demand

If your eCommerce store starts to grow, you can always switch to the accrual method down the line, though you may need to consult with an eCommerce accountant to help you with your books.

Accrual Method

In accrual accounting, you record your income and expenses as the transactions take place, regardless of when the money reaches or leaves your bank account. This may sound confusing, but it actually presents a more accurate picture of your company’s cash flow.

The accrual method can also help you make financial projections and better manage your inventory, since you’ll have a regular snapshot of your business activity. That is why the accrual method is generally recommended for larger or growing businesses. It can be particularly helpful when you’re juggling the various moving parts and pieces of running an online business.

The biggest drawback is that the accrual method requires a bit more attention to reconcile income and expenses, which is why you will benefit from the attention of an eCommerce accountant.

Which of these methods is right for your business? A professional accountant, who can provide guidance about the right accounting method to use for every phase of your business.

eCommerce Accounting Best Practices to Remember

Online merchants face some unique business challenges. Here are five of the best practices to use when you’re using accounting for Amazon stores and other online businesses.

Maintain a Budget

A budget is the summary of all of the income and expenses associated with your business. Keeping track of this data is a challenge for any business owner, but eCommerce bookkeeping demands that you keep track of such expenses as:

  • Administrative fees
  • Warehousing fees
  • Shrinkage (inventory lost or damaged)
  • Returns and chargebacks

Staying up-to-date with your books is crucial to understanding the financial health of your business. An eCommerce accountant can help you stay current, while also providing reports to optimize your cash flow and help you grow.

Distinguish Between Returns and Chargebacks

Many online retailers fail to distinguish between returns and chargebacks. The difference is actually quite simple:

  • Returns: A customer may return merchandise for store credit or a full refund
  • Chargebacks: A customer disputes a charge, claiming it was fraudulent

If you give a customer store credit, the original transaction should be listed as an expense and added to your accounts payable list. 

Both refunds and chargebacks should be recorded under “Returns and Allowances.” Chargebacks may include an additional fee, which can be categorized as a business expense.

Categorize Your Transactions

Categorizing your transactions can help you estimate your monthly revenues, day-to-day expenses, and any one-off transactions, which is why it’s a common practice in bookkeeping for eCommerce businesses.

Your transactions will generally fall into one of the following categories:

  • Sales
  • Returns
  • Chargebacks
  • Administrative fees
  • Salary
  • Marketing

You may have additional categories, depending on the type of business you operate. The point is that by placing transactions in these specific categories, you’ll be in a better position to do financial forecasting and hone in your business strategy moving forward.

This can also be an important step in managing your inventory, as your sales figures can be used to project future demand and show you the best times to order new supplies to keep up with seasonal trends.

Stay Current with All Taxes

Retailers often have to deal with two different types of taxes: business taxes and sales tax. Sales tax can be particularly important for eCommerce businesses, since you’ll have to deal with unique circumstances when you operate in one state but sell to customers in another state—or even another country.

Every state has its own regulations when it comes to filing sales taxes. An eCommerce accountant can help you sort through these details to help you stay up-to-date and in full compliance with all tax regulations. 

Your business taxes will be paid on your annual tax return, though businesses that anticipate paying over $1,000 in taxes are encouraged to make quarterly estimated payments. 

Again, an eCommerce accountant can help you with tax planning and preparation, so you can ensure you’re prepared for tax season.

Streamline Your Processes with Accounting Software

The right accounting software can make a world of difference for online retailers. Many business processes can be automated to save you time. The advanced analytical and reporting features of this software can help with financial forecasting and long-range planning, too.

Of course, the best way to have access to the latest software is to partner with an online accounting firm. Modern cloud-based software can provide real-time data on your business, which means that the online bookkeeping features provided by these firms can be accessed anytime, anywhere.

Finding the Right eCommerce Accountant

How do you find the right eCommerce accountant for your business? Here are three things you should consider:

Experience in Your Industry

The right accountant should be familiar with the unique needs of an eCommerce business, but the best accountant will also be familiar with your niche industry. 

For example, if your company sells books, you may have unique accounting needs when compared to someone that sells office supplies. 

Partnering with the right accountant can ensure that your current needs are met. They may also bring advice and expertise from other companies of your size and industry, helping you streamline or even scale your business.

Clear Communication Channels

Every business owner needs to stay on top of their cash flow. That’s why you want to choose an accountant that provides clear communication, so you’re never out of touch with the financial health of your eCommerce business.

At Xendoo, for example, our online accounting team adjusts to your preferred communication method. Your business data is never more than a call, text, or email away, helping you stay on top of every aspect of your business.

The best eCommerce accounting solutions will also provide you with financial reports, such as:

  • Profit/loss statements
  • Cash flow statements
  • Cash flow forecast

These reports are crucial to understanding the viability and health of your business. They can also help you better plan for the future. Additionally, if you ever need a small business loan (e.g., to use to increase your inventory), these financial reports can demonstrate the legitimacy of your business to lenders.

Flexible Pricing

Any retail business will have needs that fluctuate with the seasons, and your needs may grow as your business continues to evolve. The services of an in-house accountant cost around $40 per hour or more, depending on the accountant’s skill level and your exact needs.

This is why many small business owners are turning toward outsourced accounting firms that can perform online accounting for eCommerce for a fraction of the cost of a regular employee. 

Best of all, when your company’s financial needs are handled by a professional team, you can get back to focusing on your core business processes instead of getting sidelined by administrative details.

Flexible pricing means that you can scale your accounting needs as your business expands. Your accounting team should grow with you, helping you reach your full potential while staying up-to-date with your financial records and tax planning.

Get Your Head Back in the Game

If running your eCommerce business is starting to feel like running a circus, it’s time to contact a professional. Xendoo can help you handle your accounting and bookkeeping needs, so you can get your head back in the game and focus on handling your business.

See for yourself by signing up for our no-obligation free trial. You’ll wonder what you ever did without us!

3 Keys to Working Smarter, Not Harder in Business

Work Smarter, Not Harder

At SmartScout, we built our business around the idea of working “smarter”. Easy enough to say. What steps can small business owners take to work smarter? Glad you asked.

The three keys to working smarter, not harder, in business are education, technology, and delegation. In this blog post, we will show you how you can use these keys to expand your knowledge, streamline your workflow, and delegate work to your team to grow their skills.  

1. Never Stop Learning

What counts as educating yourself? It is both more and less than you might think. Reading this blog, for example, counts toward educating yourself. You either came to this blog because you were already following it, or you were searching for the answer to a specific question. It is crucial to stay informed on what is happening in your business niche so you can keep up with the competition and continue to grow your knowledge. However, this tends to keep you on surface level subjects, and when you find a topic that really interests you, you need to dive in deeper.

Watch Youtube videos, listen to podcasts, and take training courses. Even better is to learn from experts who actually walk the walk. Follow industry leaders on social media, and ask them questions when you can. Attend networking events and trade shows to connect with industry leaders and fellow life-long learners.

Most important of all, never stop learning. Self-improvement is a never-ending game, so find the way it works best for you, and keep at it!

2. Automate with Technology

Automate tedious work with technology to save time and minimize human error. One of the beauties of the modern world is that technology can steamline almost any task. There are solutions for every business function, including product research

For example, eCommerce business owners can save time by utilizing an online research tool such as SmartScout. The SmartScout database enables you to find thousands of lucrative products for arbitrage, calculate and reduce FBA fees, and increase product visibility with strategic advertising – just to name a few! Work that once took hours now takes moments with the SmartScout database. 

The goal is to balance time saved with money spent. If the task is outside of your area of expertise or simply takes up too much of your time, utilize tools that will save you time and sanity.  

3. Let Go and Delegate

Just like you need to give thoughtless tasks to technology, give thoughtful tasks to other people, so they can do their highest level thinking. This gets hard when it comes to things you are passionate about. Ask yourself, what are you holding onto that you need to let go of?

This is the reason why people who are promoted for their skills in a field often struggle as managers. They do not communicate with their team, nor do they trust them to follow through on assignments. To be a good delegator, you must become a good manager. Communicate clearly with your team and trust them with the tasks you give them, so they can help grow the business and their skillset.

What about the tasks that you do not like to do? If you lack expertise in a particular area and do not have a team member to take up the responsibility, partner with a professional. 

Many business owners spend countless hours on bookkeeping, which takes time away from running their businesses and enjoying their lives. By partnering with an online bookkeeper, they can effortlessly keep their financials up to date and stay tax-compliant, all with the support of an expert. This gives them the freedom to focus on what they love – growing their business. 

Need to improve your managerial or tech skills? Head back to the top of the list, and the cycle continues!

Always Getting Better

Successful business owners are always looking for ways to improve. The key is to work smarter, not harder! Continue to learn, automate mundane tasks with cutting-edge technology, and delegate work to save time and help your team grow in skill and knowledge. These simple practices can help you become the best business owner you can be!

What does your Amazon business need to succeed? With SmartScout, you have access to more product, brand, and seller data than anything out there. If you are ready to turbocharge your business, we are here to help!

Top 7 Requirements to Secure Ecommerce Funding (Hint: They’re Not What You Think)

In the past, online sellers often had to dig into their own pockets to fund their eCommerce business dreams. 

Since small or growing businesses are technically high-risk investments, banks and other financial institutions were reluctant to part with their cash to help eCommerce sellers. 

But times have changed. 

Today, there is a growing number of funding options eCommerce entrepreneurs can tap into to make even their biggest, hairiest goals reality. Great news, given that 9.5% of businesses without financial capital say it negatively impacts their profitability. 

Yet, many eCommerce sellers are stuck in their ways, seeking capital from red tape-heavy banks or going without any funding support at all. In fact, a staggering 50% of UK SMEs don’t look beyond traditional funders—and the tunnel vision can definitely cost them.

The good news? It doesn’t have to be this way. 

To prepare you to face your next funding application with confidence, let’s jump into some of the requirements you’ll need.

Ready for a flexible funding solution? Learn more about how we help eCommerce owners improve their cash flow.

 

Secure ECommerce Funding the Simple Way

  • How to Fund an Ecommerce Business: Know Your Options
  • What Do I Need to Secure Ecommerce Funding?

1. Proof your business is on the right track

2. Know what eCommerce funding you need (and what for) 

3. Showcase your good moral character

4. Get your paperwork in order

5. Show off a little

6. Clean up your credit, stash away cash, and get collateral (but not for the reasons you think)

7. Be mentally prepared to move on

  • The Blueprint for Getting Your Ecommerce Business Funded  

 

How to Fund an Ecommerce Business: Know Your Options

Ecommerce funding has come a long way since its inception, and there is now a potential capital source to suit every business size and budget. 

Here’s a quick rundown of the most common eCommerce funding options:

 

  • Working capital: The seller receives funding to cover gaps in cash flow for day-to-day business expenses like shipping costs, supplies and utilities, or invest in a new product line, ad campaign or additional inventory for peak sales seasons.
  • Cash advances: The seller receives a lump sum and agrees to pay a percentage of their monthly turnover to the lender until the advance is paid in full—note: cash advances aren’t loans.
  • Invoice factoring: The business owner sells their accounts receivables (due invoices) to a factoring company at a discount with fees added on top. The factoring company then releases the funds to them.
  • Crowdfunding: The entrepreneur pitches their idea on a dedicated online platform to the masses, and individuals can choose to invest. There are three kinds of crowdfunding: debt, donation, and equity crowdfunding.
  • Peer-to-peer lending: Usually facilitated through an online platform, the individual receives funding from a person instead of a financial institution.
  • Angel investing: The business owner sells a stake in their business to a high-net-worth individual in return for capital.

 

Are you struggling to decide between cash advances and working capital loans? We can help.

What Do I Need to Secure Ecommerce Funding?

Thanks to the flexibility of some of the newer, more modern funding options, today’s funding requirements for growing eCommerce businesses tend to be much more flexible than those of traditional funders.

While most alternative eCommerce funders won’t throw out your application for lacking things like management expertise, collateral, or credit, there are some standards you’ll have to meet. 

Let’s break these down:

1. Proof your business is on the right track

 

Alternative funding providers are all about businesses with results that prove they’ve got a promising future.

No matter who you acquire eCommerce funding from, there’s one thing your provider will want to know: that they’ll get their money back plus a fair return

While you don’t have to be the next overnight Amazon sensation to prove your worth, you must show you’re a viable business and a low-risk investment.

Here are some things you can provide to show your business is worth the investment:

  • Calculations that demonstrate your business has a high ROI, net operating income, and Debt Service Coverage Ratio (DSCR). (More on this in a minute 😉).
  • Documents proving your business consistently turns a profit.
  • Store reports showing sales volume and minimal product returns.
  • Statements demonstrating you have sufficient liquidity to repay a loan, plus its interest and charges.
  • Records showing you’ve been in operation for at least 12 months.

If you meet these requirements, securing funding becomes a win-win situation for everyone, and you’ll have better chances of getting approved. 

 

Looking for a faster solution? Find out how you can pre-qualify for up to $1,000,000 in less than 5 minutes.

2. Know what eCommerce funding you need (and why you need it)

 

By the time you’re ready to start sending applications to prospective funding providers, you should have concrete answers to these things:

  • Your reason(s) for applying for external funding.
  • The intended purpose of the cash injection.
  • How much capital you need.

Not only will this help narrow down the type of funding you need (and suitable providers), it’ll also show you’ve done your due diligence.

Taking on funding is no child’s play, and mistakes in this area can cost you. Funding providers want to know you understand the risks involved and are prepared to take on this commitment.

Here’s how to show eCommerce funders you’re ready, step-by-step:

  1. Create a documented breakdown of the capital amount you need for each task (adjusted with a buffer for unplanned bills).
  2. Work out your return on investment (ROI). Are you making enough returns to make funding feasible? Note long term debt reduces ROI.
  3. Analyse your net profit income. How healthy is it? Will you have enough liquidity in your business to operate once you start to repay successfully?
  4. Assess whether any existing debts will inhibit you from making repayments. Calculate your Debt Service Coverage Ratio (DSCR) to help you with this task.

These are the three equations you’ll need:

 

1. ROI % = (Net profit) / Cost Of Goods Sold (COGS) * 100 

I.e. $20,000 / $10,000 *100 = 200%

2. Net Operating Income = Revenue – Cost of Goods Sold (COGS) – Operating Expenses

I.e. $50,000 – $20,000 – $10,000 = $20,000

3. Debt Service Coverage Ratio (DSCR) = Net Operating Income / Annual Debt Obligation

Not a fan of calculations? Try this DSCR calculator.

And, there you have it! A summary of your most important figures that prove your eCommerce business is good to go.

💡 Top tip: For best results, submit funding applications during peak seasons. When your sales volume spikes, you’ll be able to cover the repayments with plenty left over. This extra wiggle room helps funders feel more comfortable funding your business, and removes the stress of worrying about repayments.

 

3. Showcase your good moral character 

 

Most traditional funders will expect you to show good moral character—but some of the newer funding providers take a fresh angle on what this actually means. 

Here’s what a funding provider might look for: 

  • Overdue bills: Zero overdue bills (like student loans or credit card debt).
  • Missed payments: If you’ve gone rogue on payments to another funder, a credit check will reveal this to your prospective funder.

Note: If you have slipped on paying existing debts, don’t beat yourself up. According to Experian, US credit card debt stood at $756 billion. It’s a problem for many. Take active steps to get back on track with your payments and reduce your debt balance before applying for additional funding.

  • Get your paperwork in order

It may seem like an old-school requirement, but being organised can pay off big time in your eCommerce funding journey. 

Not only can getting your ducks in a row make the application process go smoother and faster, it may also earn you brownie points with the people reviewing your application. 

As the saying goes, ‘how you do one thing is how you do everything’. 

Remember, despite your funder being a financial institution or VIP, you’re still dealing with peopleso first impressions count.

Here are the docs you’ll need to prepare as standard:

  • Proof of address
  • Articles of Association (and the names of directors and associated persons)
  • Company bank statements
  • Financial accounts, i.e., Income Statements, Profit and Loss statements
  • Financial projections
  • VAT returns/ Tax returns
  • Business plan

 

  • Show off a little 

To stand out, you need to get comfortable with a pinch of humble bragging. Opportunities to show off about your business only come around rarely, so when they do, grab it with both hands.

For example:

  • Do you have a business degree or business-related qualification(s)? 
  • Have you worked in retail, sales, or management for X amount of years?
  • Is your team excellent at drumming up funds through pre-launches?

These details will let potential funders know you care about success and are willing to invest in yourself to excel.

 

  • Clean up your credit, stash away cash, and get collateral (but not for the reasons you think) 

An increasing number of funding providers are choosing to overlook bad credit or a lack of assets at first glance—but there’s often a catch, and if you’re not careful you might end up with crappy interest rates, terms, or fees.

Having good credit, savings, and assets will put you in a better position to choose funding types and providers as well as negotiate terms. Plus, it’ll demonstrate to your potential funding providers that you:

  • Are in a stable financial position.
  • Have an alternative source of funding and aren’t in dire straits (desperation is never a good look).
  • Have a concrete backup plan should things take a turn for the worst.

Now you know why it pays to clean up your credit, here’s a game plan to go ahead and straighten up your finances: 

  • Start your credit-building journey by getting yourself and your business a credit card to build credit history and pay off existing debts. The debt avalanche and snowball methods are the most commonly used systems for clearing debt fast.
  • Analyse your progress through a credit score tracker.
  • Build a saving pot for your business by putting away a slice of your profits into a business saving account. Treat it like a bill you must pay no matter what.
  • Finally, work on securing assets for your business, like better equipment and storage units. They’ll impress funding providers and help you optimise the running of your business.
  • If you hit any road bumps, motivate yourself by picturing how impressive you’ll look to prospective funders with savings and good credit. 💪

 

  • Be mentally prepared to move on 

Having the relevant paperwork, collateral, and credit is essentialbut it’s only part of the story to secure eCommerce funding.

So what’s missing? Resilience.

You’ll likely hear a lot of no’s on your journey, so be prepared to pick yourself up, keep your goal in sight, and move on to the next. 

Compared to traditional loans, eCommerce funding is still a new gamethat means funding providers are continuously adapting their rules and approaches, and many are yet to catch up with eCommerce’s speed. 

Does this make life as an eCommerce owner more complex? You bet. 

But don’t forget you have a ton of options that give you the advantage. If you’ve tried to secure funding through traditional avenues before, and it’s just not workingmove on.

Your dream funding option is out there, and your perseverance will pay off. After all, only 20% of US-based small businesses don’t use external funding.

The Blueprint for Getting Your Ecommerce Business Funded  

Thanks to a sharp rise in alternative modern solutions, business leaders can now overcome traditional funding requirements and opt for more flexible terms. 

But you aren’t entirely off the hook. 🎣

Today, eCommerce funding is a whole new ballgame with a new set of requirements to fulfill.

So, learn what you need to get approved by each, then execute with precision. Who knows, you may end up with more funding options that you know what to do with!

At Sellers Funding, our application process focuses firmly on sales performance, not credit history or collateral. If you’re not sure which funding option is right for your business, we can help.

 

 

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.

 

An eCommerce seller looks at her items for sale on a tablet

Selling on Amazon vs. eBay: What you need to know

Ready to start selling your products online? Or have you already built a web presence and you’re looking to expand? From marketplaces like Etsy to building and hosting your own website on Squarespace or Shopify, small businesses have plenty of platforms to sell their products online. But eventually, most professional sellers find themselves asking: What are the pros and cons of Amazon vs. eBay?

Amazon vs. eBay: Who has the biggest market for selling potential?

By the sheer number of visitors, selling on Amazon is the winner here: 214.8 million people visit Amazon each month, compared to 106.9 million for eBay. However, both of these numbers represent huge potential audiences, so to really make the right choice about selling on Amazon vs. eBay, you’ll want to break it down. 

eBay’s audience is more international than Amazon: 57% of its revenue comes from international operations. Amazon doesn’t release these figures, but analysts estimate about 33% of its sales are international. eBay is also known for having “niche” customers searching for specialized products and second-hand goods. The real winner here depends on what you sell and who you sell it to.

Amazon vs. eBay: Which channel is more competitive? 

Amazon is much more competitive than eBay. Amazon rewards sellers with the highest-quality items at the lowest price. There are far more sellers on Amazon, and you may be competing with factory-direct prices from China or even with Amazon itself. 

On the other hand, eBay follows an auction format that will show shoppers many different options, conditions from new to used and shipping options, allowing sellers more opportunities to reach them. eBay advertising is also less competitive and therefore cheaper. 

Outside view of an Amazon pick up and return center.

Amazon vs. eBay: Which channel offers the best shipping and fulfillment?

Winner: Amazon.

When sellers opt for fulfillment by Amazon FBA, they’re able to use the retail giant’s warehouses, shipping, and customer service – for a fee, of course. They’re also eligible for Amazon Prime and the benefits that come along with it. Just remember that you may have to pay sales tax in those states if you use Amazon’s warehouses. Make sure you follow eCommerce bookkeeping tips to keep your records in order.

While domestic sellers are responsible for their own packing and shipping on eBay, the company does offer its Global Shipping Program. This allows sellers to use its “hubs” to ship internationally, with eBay taking care of the customs forms and import fees and providing tracking. This is another reason eBay is so popular with international sellers. 

Amazon vs. eBay: Whose fees reign supreme?

Overall, most sellers find that eBay’s fees are lower. But this doesn’t tell the whole story. Both platforms’ fees depend on what’s being sold, the type of account you have, and more. On Amazon, you’ll likely want a Professional Seller account, which will run you $39.99 per month. You’ll also pay a 15% commission on Amazon, plus a closing fee. If you go with Amazon FBA, you’ll pay those fees as well. 

On eBay, you’ll pay about $0.35 for each listing you create. With a $28-per-month Basic Store account, you’ll get 250 free listings. Once your item sells, eBay takes only a 10% commission. However, this doesn’t include payment processing, while Amazon does. You’ll also then need to figure out the shipping yourself. 

Once again, the answer to the age-old question of selling on Amazon vs. eBay depends on your sales volume and type of product. Here’s one point for eBay, however: One survey found that eBay was ranked number one by sellers in terms of ease of use, customer service, and profitability – while Amazon came in seventh. 

An eCommerce seller adds items to her online store.

The verdict: Amazon

Pros:

  • Reach a large audience
  • Amazon FBA is a convenient option for most sellers
  • Easy to use interface and tools

Cons:

  • Highly competitive
  •  Slightly higher fees
  • Less freedom over branding, product descriptions, and policies

Which eCommerce sellers are Amazon right for? 

  • Sellers with a high volume
  • Sellers with high-profit margins
  • Sellers of non-specialty items

The verdict: eBay

Pros:

  • Easier international sales and expansion
  • Control over branding, listings, and return policies
  • Lower fees 

Cons:

  • No domestic shipping program
  • Smaller audience
  • Less straightforward user interface

Which eCommerce sellers are eBay right for?

  • International sellers
  • Sellers of used and customized items, collectibles, and niche products
  • Sellers who desire more freedom over the selling process

You can even decide to settle the Amazon vs. eBay debate by selling on both platforms. No matter what you choose – and especially if you decide to sell on both – you’ll need expert eCommerce online bookkeeping to keep your books in order and ensure you keep up with sales tax laws. At Xendoo, we work with eCommerce sellers on both platforms to manage bookkeeping and accounting, so they can focus on what’s important: selling!

Guide to Accounting for Amazon FBA Sellers

Becoming a third-party seller on Amazon is an exciting opportunity for many small businesses. After evaluating the pros and cons of selling on Amazon, you may decide to go with an Amazon FBA (Fulfilled by Amazon) account. You’ll pay a fee to use Amazon’s warehouses, packaging and shipping, and customer service. One thing that isn’t included? Accounting for Amazon sellers

Amazon FBA offers plenty of benefits for small businesses, including eligibility for Amazon Prime and saving you time that could be better spent on management and growing your business. But there are a few extra considerations when it comes to Amazon FBA accounting:

  • Sales tax: FBA sellers use Amazon’s warehouses to ship goods and may be required to pay Amazon sales tax in the states where those warehouses are located. Check your local guidelines.
  • Consolidated deposits: Amazon pays vendors via a single deposit, once every two weeks. This deposit is more than your sales: It includes chargebacks and returns, fees, and sales tax. Manually sorting it all out takes time and can be complex. 
  • Amazon default reports: Amazon does provide reports, and some small business owners manually import that data into Excel spreadsheets to save money. However, this doesn’t allow you to really dig into the details and predict trends. 

Effective accounting for Amazon sellers doesn’t have to be difficult. You can use accounting software or leave it to the professionals. Let’s go over the DIY steps so you can decide which choice is right for you. 

Choose an online accounting software

You may be an Excel genius, but you need to ditch the spreadsheets if you want to do your Amazon accounting right. The best online accounting software is easy to use and secure, integrates with your bank account and other business and financial software, has good customer service and as a bonus, works with Amazon Seller Central. With software like Xero and QuickBooks Online, you can start small and increase your subscription as your sales grow, so you don’t break the bank. 

Add some helpful add-ons

The right accounting software goes a long way, but there may still be gaps you need to fill in. For example, breaking down those consolidated deposits is a notoriously tricky part of accounting for Amazon sellers. However, an add-on like A2X hooks up to Seller Central and automatically categorizes all the fees and reimbursements. There are also automation solutions like Avalara and TaxJar, which manage your sales tax returns and payments. 

An Amazon seller sets up her accounting reports on her computer

Photo by Karolina Grabowska from Pexels

Set up your reporting

It’s tempting for small business owners to check their bank account, see that big Amazon FBA deposit and assume their company is growing. But thorough Amazon FBA accounting means keeping track of the following: 

  • Profit & Loss Statement: See your revenue and expenses within a given period to spot trends
  • Balance Sheet: See an overview of your assets and liabilities
  • Cash Flow Forecast: Use cash inflows and outflows to model various cash flow scenarios
  • Accounts Receivable and Accounts Payable: See what’s owed to you and what you owe others

Reconcile your bank statements

Reconciliation is the process of comparing two different sources, such as internal financial records and bank statements, to ensure they match up. If the software you use to keep track of your finances has the wrong information, those mistakes will compound over time. Double-entry accounting software, like those mentioned above, can help you with this. However, you’ll still want to run a reconciliation report at tax time to double-check your reporting. 

Outside view of an Amazon pick up and return center.

Keep track of your inventory

Amazon FBA sellers use Amazon’s warehouses, packing, and shipping, so they may not even see their inventory. Amazon’s reports will tell you what you’ve sold, but it’s up to you to properly categorize your inventory and look for trends, so you know what to put on sale, what to keep on the shelves and how to deal with shrinkage. And don’t forget to use the matching method for the cost of goods sold: rather than recording a lump sum cost when you buy the inventory, do not record the COGS until the item is actually sold. 

Stay compliant

With warehouses in many states, cross-border trade, and varying sales tax laws, accounting for Amazon sellers can get complex. This is where sales tax compliance for Amazon FBA sellers comes in. Most FBA businesses sell “tangible goods,” which are taxable in nearly all states, with some exceptions for clothing or groceries. You’ll also need to consider whether you have “substantial nexus” in a state – and having inventory in an Amazon FBA warehouse may be enough.

When to hire a professional Amazon accountant

If you’re feeling confused, we don’t blame you. Sales tax compliance alone can be tough to keep up with, and penalties and fees can kill a small business. Accurate, up-to-date recording is essential, as well as basic knowledge of financial statements. Of course, you could do it all yourself, but remember, time is money. Xendoo is here to help, providing expert Amazon bookkeeping and accounting services and leaving you more time to focus on what matters: Growing your business.

Pros and Cons of Putting Your Small Business on Amazon

Ecommerce is booming. Total revenue will reach nearly $4.6 billion in 2021 and grow at an annual rate of 4.6% over the next five years – reaching $5.6 billion by 2025. It’s easy to see why owners of small and medium businesses are asking themselves how they can get a piece of the eCommerce pie. One popular option—the Amazon small business marketplace. 

In the first quarter of 2021, 55 percent of the units sold on Amazon were from third-party sellers. For a company with sales of more than $300 billion, that’s more than pocket change. But what are the pros and cons? And is it worth the trouble? 

What is Amazon marketplace?

The Amazon marketplace is an eCommerce platform that allows independent vendors and sellers to sell their goods on Amazon. The platform allows Amazon to forego the typical retail model, where it sources materials, then produces and stores each of its products until shipment. Instead, third-party vendors put products on Amazon and take care of the details, while Amazon gets a cut of the profits. 

What are the pros of selling on Amazon as a small business?

There’s no question that Amazon is popular with small businesses: In 2018, nearly three-quarters of Amazon sellers had between one and five employees. And Amazon for small business does have plenty of benefits, like the following. 

You can reach a larger audience

One of the biggest benefits of selling products on Amazon is that it can connect you with a wider audience: There are more than 200 million Amazon Prime members worldwide, and that’s not counting site visitors who don’t subscribe to Prime. That’s a huge audience for Amazon small businesses

Amazon can take a lot of the work off your plate 

Getting set up with Amazon marketplace is relatively easy: Just sign up and add products to the catalog. If you want Amazon to do more work for you, you can sign up for Amazon FBA, or Fulfilled by Amazon, which allows you to use Amazon’s warehousing, packaging, shipping, and customer service. 

Amazon has tools to help you sell 

In addition to Sponsored Ads – which actually make Amazon the third-largest digital advertiser behind only Google and Facebook – Amazon small businesses have access to MerchantWords, a proprietary keyword research tool. It uses actual Amazon data to help you optimize your product names, descriptions, and ads. 

Amazon provides technical support 

Amazon Seller Central is the platform’s support team for Amazon small businesses. It’s available 24 hours a day, although most sellers will be required to submit a request and wait for a callback. Still, most sellers receive a prompt response and are happy with the support they receive 

Closeup of two Amazon labeled AA batteries.

Photo by Syed Ahmad on Unsplash

What are the cons of selling on Amazon as a small business?

Amazon Marketplace sounds pretty great, right? For many small and medium businesses, it is. But it also has a few drawbacks you should be aware of. 

It can be expensive

With charges for selling, referral fees, and Amazon sales tax, the cost of selling on the marketplace can quickly add up. Sellers without a monthly plan will pay 99 cents per item sold, while those with a Professional Plan pay $39.99 per month. If you opt for extra features, like Fulfilled by Amazon, expect to pay more fees. 

It can be time consuming 

Getting set up with Amazon Marketplace is easy – understanding how to be successful there can be more time-consuming. Diving into the tools Amazon provides and optimizing your product take time. Plus you’ll need to figure out Amazon bookkeeping and accounting, inventory management, and more. 

The competition is fierce 

There were 1.1 million active Amazon marketplace sellers in the United States alone in 2019. Amazon Marketplace is also incredibly popular with Chinese merchants, some of whom sell products at super-low, factory-direct prices. You’ll even compete with Amazon’s own private label brands. And fake reviews abound on the platform, with competitors using bots to write thousands of five-star reviews at once. 

It’s Amazon’s world, you’re just selling in it 

Some Amazon small businesses feel they don’t have much power over the selling process. There are reports of Amazon punishing businesses for selling at lower prices on other marketplaces, or pressuring them to sign up for extra services. 

Should I use Amazon for my small business?

There’s no one-size-fits-all answer to whether you should sell products on Amazon. Certain categories, like personal care, beauty, and home goods, seem to have greater success on the platform. Businesses with high margins, who can afford to give Amazon its cut, can also do well. However, success with Amazon for small business depends more on your ability to figure out what works for you than on the type of business.

Xendoo can help dive into your books and help you make a sound decision on whether to sell on Amazon Marketplace. If you’re already a seller, we can ensure your books are in order – allowing you more time to focus on selling.

 

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.

A business owner integrates her accounting software for her eCommerce site

How to Setup Your Online Store to Integrate Accounting Software

You’ve set up your online store set, and orders are starting to come in. But in your rush to pack, ship, and sell, there’s a good chance you haven’t made time to integrate accounting software with your eCommerce software. By downloading a third-party app plug-in, you are just a few clicks away from saving time and money by automatically sharing data between your accounting and eCommerce programs. It sounds like a lot of work, but it’s simple!

Most popular online accounting software options like QuickBooks, Xero, and FreshBooks all have a menu where you can search for compatible app plug-ins. And most popular eCommerce programs like Shopify, Squarespace, and WooCommerce have a corresponding app available from a third-party software developer. So you can easily install an app to sync the two programs! 

What to Look for E-Commerce Accounting Software

As soon as you begin spending or making money, it’s time to set up your eCommerce bookkeeping and start accounting. There are many affordable online eCommerce accounting software options available. Programs such as QuickBooks Online or Xero store a business’s financial data in the cloud and are always connected to the internet. In addition, they automatically receive and update your data by connecting to your bank accounts. Sounds easy, but not all accounting programs are the same, and there is a lot to choose from. When deciding which program is best for you, you’ll want to consider the following:

  • Compatibility – Does the program work with all of the devices you plan to use? How many users can be simultaneously logged in? Can your international team members log in, too?
  • Cost – Many options have a free plan, but the pricing goes up as your business scales and grows.
  • Support – What are the customer service options? Does the program offer expert bookkeepers and accountants you can hire to take on the work when you are ready to delegate? Can they help you file your taxes?
  • Additional Services – All of the programs offer basic bookkeeping and financial reporting, but what kind of extra offerings does the software have? Some eCommerce trends include hefty employee management solutions to help with payroll, time tracking, and benefits, while others may offer project management tools. Some offer payment processing through third-party partnerships.
  • Integrate accounting software with your eCommerce program – Make sure the two programs sync so you can limit the amount of data entry you are doing. Ideally, you will be able to eliminate manual data entry of sales, invoices, customers, products, and more. 
A woman sits at her computer setting up her eCommerce site

Syncing Your Accounting and E-Commerce Programs

Most popular eCommerce software options, such as Squarespace and Shopify, integrate easily with third-party app plug-ins compatible with accounting programs like QuickBooks and Xero. Once synced, your inventory, orders, customers, and shipping can be automatically updated and will stay accurate. And getting started is easy! Most of these integrations only require a quick authorization and a few clicks to import your eCommerce data into your accounting program.

Below is a list of some popular eCommerce platforms that offer integrations with popular online accounting software programs. Keep in mind that this list isn’t exhaustive, but these are the most popular eCommerce platforms that easily integrate with accounting software like Xero and QuickBooks Online. 

Integrating your accounting software with your eCommerce platform can help save you time and money. You’ll be able to get an instant view of your financials, allowing you to plan your sales strategy more effectively. 

A open laptop with a screen showing an eCommerce store.

What Else do I Need to Know About My Accounting Software Integration?

As your eCommerce business grows and you decide to sync your eCommerce software with your accounting software, there are many aspects of eCommerce and accounting that you will want to keep in mind for this integration. For example:

  • Inventory Management – You will want to be able to connect multiple sales channels such as your brick & mortar’s Point of Sale, your Online Store, and your Pop-up location to ensure stock levels always stay up-to-date.
  • Choosing the correct payment gateway – Does the available option match your needs? Will international business be supported?
  • Tax settings – How does the software help you with your sales tax reporting? What role does it play in monitoring important tax deadlines? 

Why You Should Outsource Your E-Commerce Bookkeeping and Accounting

As your eCommerce business grows, you will want to outsource your bookkeeping and accounting to professionals. Even though app integrations with the best accounting software for small businesses are great, many automatic tools such as your monthly reconciliation can be inaccurate. Even a minor error in your bookkeeping can have a ripple effect and lead to everything from your financial reports being inaccurate to your marketing budget and your tax payments. It’s best to have an experienced set of eyes on it! These professionals can even find tax breaks you were missing and help you save even more money! Spend more time growing your business and less time crunching the numbers by working with the team at Xendoo. 

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.

9 Common E-Commerce Accounting Mistakes You Need to Avoid

As a new business owner, you have a lot to manage on your eCommerce site. From making sure that customers can easily find what they need to creating an easy path to purchasing your goods, it may leave less time to tidy up the little things in your accounting processes. However, these mistakes and misses can snowball into significant issues that could cost your eCommerce business profits and customers. To make sure your business is running efficiently from top to bottom, here are nine common eCommerce accounting mistakes that you need to avoid. 

Not adjusting your inventory levels

Inventory levels play a significant role in your profit & loss, balance sheet, and cash flow forecasting. Not adjusting your inventory levels is a mistake that can carry over from one accounting cycle to the next and affect all your reports. 

It may be time-consuming, but doing a physical stock take is essential to avoid this mistake. Fortunately, technology is on your side, and there are many excellent inventory control applications to help you streamline the process.

Sticking with spreadsheet or paper ledgers

While it is good to have a backup, manual entry, especially those not saved to the cloud, can cost you when it comes to tax time. As your business grows, you will need more than a digital spreadsheet to keep your accounts in order. Manually combing through all your sales and entering them is highly time-consuming, and chances are, as an eCommerce business owner, it is time you do not have. Unless you are meticulously keeping up with sales tax and the like, you may end up costing yourself more than you make.

 If you haven’t already, it is time to upgrade to accounting software like Xero for eCommerce or QuickBooks for eCommerce. Both of these accounting softwares can sync with your website, do a lot of the grunt work for you, and help you avoid this eCommerce accounting mistake.

Still, you will need to have an eye on your accounts to make sure everything is accurate. Xendoo’s eCommerce bookkeeping service can help ensure your books are up to date and accurate, giving you more time to focus on your business instead of your books 

A business man uses a credit card to buy something online

Mixing business accounts with your personal accounts

While it may seem convenient to use your personal accounts for business-related purchases, mixing the two can create more problems down the line than it solves. Maintaining separate business and personal accounts is the best practice. 

You can take advantage of several tax benefits with a business account. It allows you to keep the proper line of sight over business income and expenses while avoiding accounting nightmares and potential liability issues if you get audited.

Not monitoring your cash flow

You may be seeing how much money your eCommerce business is generating, but are you keeping track of how much you are spending? Account reconciliation compares your internal financial records against monthly statements from external sources such as banks, credit cards, or other financial institutions, to ensure they match up. 

 Knowing how to reconcile your accounts is essential for the financial health of your eCommerce business. You need to reconcile your accounts to provide a clear picture of how much cash flow you have to reinvest or to pay yourself. If not, making this eCommerce accounting mistake could have you missing out on new investment opportunities, or worse, realize that you don’t have enough money to run your business. If it all sounds a little complicated, then Xendoo can help you get a clear picture of your financials and the overall health of your business. 

No accounting for fees

Many sales channels have different fees, and if you are selling through multiple channels like Amazon, Etsy, eBay, etc., you probably are starting to lose track of which channel charges what. If you aren’t keeping track of all these different channels and adjusting your pricing for each, you may be losing more money than you make. Accounting software can help you manage the multiple-fee structures for each channel. An accountant can help you avoid this eCommerce accounting mistake and figure out what you need to charge to make a profit for every order and which channels you should prioritize. 

A man looks at an expense report on his laptop

Not keeping track of your overhead expenses

We mentioned the importance of tracking your inventory, but you also need to keep track of all the overhead expenses like advertising, shipping, website domain licensing, etc. All these monthly charges can add up fast. If you aren’t tracking your overhead expenses and comparing them to ensure they are not growing at a different rate than your sales, your eCommerce business may be without valuable resources to keep it running. Every day you can’t make a sale, you don’t make a profit, and worse, you may lose potential and existing customers if they go to our website and it isn’t there. 

Not choosing the right business entity type

Picking a legal entity may not be as fun as naming your eCommerce business, but you must try to get it right the first time. Every business entity comes with its own tax benefits, and misclassifying your eCommerce business means you could be missing ways to maximize IRS tax savings. Plus, misclassifying your business is one eCommerce accounting mistake that could lead to compliance issues that can cost you. 

 An accountant can help you choose which business entity is the most beneficial. And you’re just starting an eCommerce business, an accountant, like the ones at Xendoo, can help you switch to a business entity that provides you with the most tax breaks. 

Not making time to focus on your accounting

Accounting and bookkeeping are huge time commitments,  but putting them off is one of the worst eCommerce accounting mistakes you can make. For all the reasons mentioned above, you need to take the time to follow these eCommerce bookkeeping basics, so your financial records are in order.

If you’ve been avoiding your books, it’s not too late. Xendoo provides catch-up bookkeeping for eCommerce businesses to get you on the right track and keep you from making any more eCommerce accounting mistakes.

 

At Xendoo, we know that eCommerce business owners have too much to do and not enough time to do it. But even the smallest eCommerce accounting mistakes can lead to financial repercussions down the line. If you don’t have the time to dig into your books, then let an outsourced bookkeeping and accounting service like Xendoo do it for you. Xendoo has a flat monthly fee and specializes in working with eCommerce businesses, so we have seen it all. Contact us today to learn how we can help get your books back in order.

As a new business owner, you have a lot to manage on your eCommerce site. From making sure that customers can easily find what they need to creating an easy path to purchasing your goods, it may leave less time to tidy up the little things in your accounting processes. However, these mistakes and misses can snowball into significant issues that could cost your eCommerce business profits and customers. To make sure your business is running efficiently from top to bottom, here are nine common eCommerce accounting mistakes that you need to avoid. 

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.

Starting an eCommerce Business? Bookkeeping Basics You Need to Know

Just like a traditional brick-and-mortar business, your eCommerce business needs a good bookkeeping system for essential functions like tracking revenues and expenditures and filing tax returns. There are a lot of compelling reasons you need a bookkeeper, and for most small businesses, it’s generally more cost-effective to outsource the accounting and bookkeeping services to professionals like Xendoo that work with small businesses than trying to do it in-house. If outsourcing just isn’t feasible for your business, here are some bookkeeping basics for eCommerce that you need to know before trying to do it yourself.

Choose an Accounting Method

The first thing you’ll need to do is decide which of two accounting methods is right for your business – cash basis or accrual basis. The key difference between the two lies in when revenues and expenditures are recognized on the books. Let’s take a quick look at the differences between them.

  • Cash Basis: Transactions are recorded at the time the money enters or leaves the bank. If an invoice comes in during December but you pay it in January, the entry would go on January’s books.
  • Accrual Basis: Transactions are recorded at the time they are made, regardless of when cash enters or leaves the bank. An invoice dated in December would go on December’s books, even if it gets paid in January.

Cash basis accounting is simpler and easier to keep track of, but accrual basis gives a more accurate picture of the long-term profitability of the business by factoring in accounts payable and receivable ledgers. Most small business owners choose cash basis, but if you do, you may have to adjust your accounting software. QuickBooks, for example, defaults to accrual basis. Once you choose a method, you have to stick with it unless you are willing to go through a lot of government red tape to change it.

Record Your Transactions

Every time money comes into or leaves your business, whether it’s a retail sale, an invoice from a supplier that gets paid, or a loan payment, it has to be recorded “in the books.” Your “books” could be anything from an old-fashioned paper ledger to an Excel spreadsheet, or a full suite of accounting software. If you opt for manual bookkeeping, you’ll need to import all your information from your bank account into your ledger. Most good accounting software will interface with your bank and automatically enter transactions in your books for you, which can save you a lot of time. Whichever way you go, it’s crucial to stay on top of data entry so that you have an accurate picture of your business’s financial health.

A view of a couch on an eCommerce site

Categorize Your Transactions

You’re probably starting to see a trend in these bookkeeping basics for eCommerce, and that is to stay organized. Every transaction that gets recorded has to also be categorized for financial reports and tax returns. The two most basic categories you’ll need are revenue and expenses, although you’ll almost certainly want subcategories of each for your reports to be useful. You’ll need to be able to tell the difference between expenses for rent, payroll, utilities, debt installments, etc.

Another category that you’ll probably want as an eCommerce seller is “Revenue – Returns and Allowances.” This would encompass things like merchandise returns and credit card chargebacks in the event of fraud, which are not expenses, but rather debits to your revenue as essentially a reversal of the sale. However, if your credit card processor charges you a chargeback fee for the return, this would be an expense separate from the return itself.

Monitor Your Budget

If you haven’t already, you need to create a realistic budget that factors things like the seasonality of the business, how much inventory stock you will need to support your sales, cost of goods sold, and overhead expenses like rent, payroll, and utilities. Remember: a budget should not reflect what you hope will happen, but what is likely to actually happen. Many owners tend to be overly optimistic in their budgets and assume a best-case scenario for everything, which rarely happens.

Once the budget is in place, the company’s financial reports have to be checked against the budget regularly to see whether the business is over or under-performing your expectations. This can be simplified by using a budget calculator spreadsheet that uses formulas to compare actual revenue and expenses to budget figures. That way, you can see at a glance where your budget might need adjusting. 

Reconcile Bank Statements

Each month when the bank statement arrives, it’s crucial to compare what the bank says you have with what your internal books say you should have. This is done on a transaction-by-transaction basis and is critical for detecting problems early. If you find a discrepancy, you need to identify and resolve it quickly because it may be a sign of theft or another internal issue, or there may be a problem with the way you are keeping your books.

Check Your Cash Flow

Cash basis accounting gives a pretty clear snapshot of cash on hand, but if you’ve chosen accrual basis accounting, your books may show more cash on hand than you really have at the moment. This can be a problem if you need to pay a big invoice, so it’s important to run weekly or monthly cash flow reports to see the real amount of cash on hand and implement good inventory control policies.

Save & Organize Records

If there’s one bookkeeping basics for eCommerce rule you need to follow when you are starting out, it’s save everything. Good record-keeping is essential for any business, so you should save everything – receipts, invoices, statements, etc. You might just need to refresh your memory about a transaction you can’t remember, or you might need to validate your tax return for an audit.ecommerce business tips

You might notice that you are paying more than usual for a particular supply item and want to see what you paid for it in the past. You just never know, so be prepared. Here is a sample list of folders you should have in your filing cabinet for the basics of bookkeeping for eCommerce:

  • Invoices
  • Receipts
  • Other proofs of payment
  • Bank and credit card statements
  • Financial reports and statements
  • Shopify or Square revenue records
  • Cryptocurrency transactions
  • Previous tax returns
  • W-2 and 1099 forms for employees and contractors
  • Other supporting documents for income, deductions, or credits

Be sure to keep these bookkeeping documents in an area where you can easily find them.

File Sales Tax

Since the Supreme Court decision in Wayfair, Inc. v. South Dakota (2018), eCommerce retailers are subject to the sales tax requirements of each state in which they sell goods. That means that potentially, you might have to file 50 different sales tax returns monthly, quarterly, or annually, depending on the state. This is incredibly time-consuming for a small business and creates a lot of extra accounting overhead, which is just one of the reasons it’s generally more cost-effective to outsource your accounting and bookkeeping to a professional service like Xendoo.

Several tax documents are on a desk.

Pay Income Tax

Most businesses pay estimated quarterly income taxes and then file an annual return in April, in much the same way individuals have estimated withholding every pay period and then file a return in April. To calculate how much to pay each quarter, you’ll need to estimate your annual business income for the year. If you’ve been in business for a while this may not be too difficult, but if you’re just starting up you may need to make some careful calculations. The IRS has worksheets to help you calculate your quarterly taxes – Form 1040-ES for individuals and Form 1120-W for corporations. 

Generate Financial Statements

This may need to be done manually if you’ve opted to keep your books by hand, but generally, your accounting software will be able to generate these for you. You’ll need to go over your monthly profit and loss statements, balance sheets, cash flow statements, and other documents. Once you have insight into all of these, you’ll be able to plan ahead to make your business more efficient. Without them, you’re flying blind. Your P&L statement can reveal several key things:

  • Administrative Expenses (too high if they are over 20% of gross revenue)
  • Cost of goods sold (should be less than 75% of gross revenue)
  • How much you can afford to reinvest in the businesses

Similarly, your balance sheet can provide you with a snapshot of your company’s total assets and liabilities, including debt and equity positions. With this information in hand, you can calculate some key ratios that a lender will look at when you apply for a loan, including:

  • Assets to Liabilities Ratio (the company’s solvency or ability to pay bills)
  • Debt to Equity Ratio (financing from creditors in relation to stockholders)
  • Asset Turnover Ratio (how efficiently you generate sales from assets)

These are the bookkeeping basics for eCommerce that you need to know before you start your online business, but to grow your business and sustain success, you’ll probably need to do more than just manage your books.

 At Xendoo, we specialize in small business accounting for eCommerce and offer a full suite of accounting and bookkeeping solutions. We can help you every step of the way with automatic bookkeeping entries, tax reporting, financial statements, and much more to keep your new business lean and mean. It’s also a lot more affordable than you probably think because Xendoo’s low flat monthly fee is less than half of what you would typically pay an hourly accountant. 

Sign up for a free trial today and see how Xendoo can help your online business grow.

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.