Bad accounting is the most common pitfall new Shopify and ecommerce business owners face. The best way to avoid it is simple — find an ecommerce accounting solution that fits your needs.
Most new ecommerce businesses can make due with Shopify or Stripe reports (plus a few thrown-together spreadsheets). But as business picks up and sales volume grows, that scrappy approach can lead to problems—and, in some cases, a severely compromised financial position.
Here’s why your ecommerce business needs an accounting solution in place if you hope to thrive in the long run (and what to look for when the time is right).
What is ecommerce accounting?
As a catch-all, “accounting” is used here to describe all the financial admin your ecommerce needs to run. That includes bookkeeping and bookkeeping tasks, accounting, and tax prep.
A quick breakdown:
- Bookkeeping is the day-to-day tasks of recording and categorizing business transactions. Every time you make a sale or buy new stock, the money earned (revenue) or spent (expenses) is recorded on the books.
- Accounting refers to the process of generating financial reports (cash flow statements, income statements, profit and loss statements, etc), based on your books and making long-term business decisions with the help of financial projections.
- Tax prep for e-commerce businesses includes the process of planning how to claim deductions and apply tax credits, preparing your annual tax filing, and paying quarterly estimated taxes.
Note that there is overlap between each of these categories. A bookkeeper may record day-to-day transactions as well as prepare financial reports, for instance.
Ecommerce Accounting Solutions
As you consider different e-commerce accounting solutions, consider these core elements and how a potential solution goes about handling them:
- Daily bookkeeping that syncs with your store account (eg. Shopify), payment services (eg. Stripe, Paypal), and/or bank accounts. This way, all your transactions can be automatically imported and categorized
- Financial statements, including profit and loss statements (P&L) and balance sheets. Ideally these can be generated at any time so you always have up-to-date information on your business
- An end-of-year financial report that gives you all the information you need, on the first day of the new financial year, to prepare your tax filing
Picking the right e-commerce accounting solution depends on a handful of factors including your business stage, recent revenue growth, or accounting history. Regardless, keeping the above in mind will function as a great first step in gauging whether or not an e-commerce accounting solution is worth looking into.
The benefits of ecommerce accounting
E-commerce businesses that don’t bother to set up an accounting solution early on usually fail later.
Why?
Because the benefits you gain from having an accounting solution in place are so significant that, without them, it’s almost impossible to make informed financial decisions and compete with other companies (think maximizing profit margins, reducing shipping costs, making more strategic inventory management decisions, etc) On top of that, a lack of good accounting often leads to major financial problems that can make any business flounder and fail.
Here are the benefits you gain when you set up a professional ecommerce accounting solution for your business.
Projections that help you plan for growth
A detailed history of how your business has performed in the past is essential if you want financial projections that help you plan for the future.
You can only really make financial projections by using past financial transactions and other historical financial info to inform future predictions. For instance, you might look at your profits from January through June to determine an average monthly profit. You can then use that as a benchmark for the rest of the months in the year.
Projections also help you plan for seasonality. If your online store sells sunglasses, for instance, you can reasonably expect to have more sales in the months leading up to summer. By looking at past bumps in revenue, you can anticipate what your busy season will look like this year. You can also plan for dips in revenue, and prepare accordingly—for instance, with sales or special offers, or by reducing your cash outlay during those periods.
Without financial projections, you run the risk of being caught unaware by factors like seasonality. It also becomes hard to set long-term goals—target profits for the following year, plan inventory purchases, or target reductions in operating costs—making it much harder to build your business in a planned, sustainable way.
Insights that give you the chance to really compete
You probably already know how competitive your particular ecommerce niche can be. Likely, there are already major players that make it hard for a smaller, newer store to find its footing and establish a customer base.
Ecommerce competition is fierce, and every dollar spent matters. That’s why staying on top of your sales, expenses and margins is crucial for leading the charge and boosting business performance. Which of your SKUs have the highest margin, and should you put marketing dollars behind? Which of your ad campaigns is the most efficient? When and how much inventory should you reorder? Without having access to clean financial statements, you’ll lack an accurate picture of your business and be unable to answer these questions — leaving you in the dark against entrenched competitors.
Business insights, financial projections, access to capital, frictionless filing, and freedom from accounting tasks and all the annoying, little mistakes and oversights that put a drain on your business—all of these add up and improve your chances of success, and give you more resources to help avoid pitfalls and drive growth.
More access to capital from lenders and investors
Before a financial institution will give you a business loan, they typically want proof that your business is profitable. It’s their way of proving that you’ll actually pay that money back. Similarly, before investors back your business, they’ll want to understand the likelihood that their investment will pay off.
In order to give lenders or investors the information they need, you need a complete set of financial records to prove your business is profitable. You may also be expected to provide your financial projections. This will add legitimacy to your pitched plans for growing your business and making the most of their capital.
Without an accounting solution, almost none of the above is possible. Besides meeting lenders’ and investors’ information requirements, a tidy set of books and financial reports helps to prove you’re serious about your business. That will go a long way to helping to access capital, particularly when your company is still young.
Freedom from costly bookkeeping errors
A minor bookkeeping error can have major impacts later on.
Simply miscategorizing a transaction may mean the amount of cash recorded on the books doesn’t reflect what you have in your bank account. The result? Hours of combing through bookkeeping entries or payment processors in order to fix the problem.
And bad bookkeeping can lead to inaccurate financial statements. If you’re using your financial statements to plan how to reinvest revenue in your business, how to cut operating costs and save money, or how to save for an important investment later on, inaccurate statements can lead to critical errors that endanger your business.
With a professional ecommerce accounting solution in place, these dangers are reduced to nil.
More time for what matters to you
You launched your e-commerce business because you have unique insights into what customers want and because you recognized an opportunity to compete in the market. Not because you love accounting or the fascinating nuances of accrual accounting. (Of course, if you've always aspired to join the ranks of ecommerce accountants, then more power to you!)
The hours of work you put into your e-commerce business are used more profitably on tasks other than manual data entry—sourcing great products, growing sales channels, building relationships with suppliers, creating an unforgettable customer experience, launching a viral marketing campaign that sells out your store in hours.
It’s more likely your talents lie in the parts of your business listed above rather than in bookkeeping, and not knowing the ins and outs of bank statements or the accrual method of bookkeeping. However, staying on top of the daily numbers of your business is mission critical to growth. When you have a real time, professional accounting solution in place, you get the daily information you need without the hours of manual data entry required.
Satisfied customers that keep coming back
Good accounting gives you a failsafe against common errors new ecommerce companies tend to make when they’re still sorting out their workflows.
Purchase orders get misplaced, special discounts fail to be applied, or customers get double charged for purchases. Even with comprehensive ecommerce platforms, these problems happen. The result could make a huge negative impact on the performance of your core sales channels.
But when you’re keeping up-to-date books and generating financial reports, your accounting system acts like an added source of truth—somewhere you can turn to to see when transactions occurred, for how much, and whether or not money changed hands.
That means fewer errors, happier customers who are more likely to return to your store, and a smoother operation overall.
A stress-free tax season
Tax season is a nightmare for millions of unprepared small business owners. If January 1st rolls around and your financial records and books aren’t up to date, you don’t have the information you need to file an accurate return. That means a huge rush to go back and categorize transactions, prepare reports, and make sure all your information is accurate before you file. In short, peak stress.
All that rush also means you might miss out on tax deductions or credits (because the goal of filing anything on time will be the priority instead of preparing a thorough, dialed return that actually benefits your business). Tax season can be absolutely miserable for the unprepared. From accurately collecting sales taxes to ensuring your business reaches sales tax compliance, up-to-date and organized accounting can make filing a surprisingly profitable breeze.
Error-free filing that won’t cost you later
When you make errors filing your taxes—particularly if you fail to report some of your income—it can result in hefty IRS penalties and, in some cases, an audit. And guess what, the single best way to avoid filing errors is, you guessed it, having a solid accounting solution in-place.
Similarly, you’ll also need a record of your expenses (and the documentation to back them up) if you plan to claim deductible expenses. Failing to provide accurate records to support claimed deductions is one of the most common errors new e-commerce businesses make.Filing errors can be costly, time-consuming, and stressful. Accounting is your best defense against them.
What to look for in ecommerce accounting solutions
Not all accounting solutions are created equal (and no, you don't have to default to Quickbooks Online).
Your local accounting firm may have plenty of experience working with retail businesses, but almost none when it comes to ecommerce. On the other hand, freelance ecommerce accountants may understand the accounting and e-commerce businesses down to a tee, but that doesn’t guarantee they’ll be able to provide you with accurate, up to date information. And then there are non specialized, DIY or cloud-based accounting software solutions like Quickbooks. But we’ll leave that for another article…
Here are three criteria to look out for when choosing an accounting solution for your e-commerce business:
- Knowledge of the industry. The accounting service you’re hiring is familiar with ecommerce sales cycles and fulfillment, typical expenses and overhead, the nuances of cash basis accounting vs accrual accounting, and common tax deductions and credits for the industry. Ideally, whichever solution you settle on should specialize in e-commerce business clients exclusively.
- An online dashboard. The e-commerce business playing field changes quickly. When you want to order new stock to meet new trends and customer demands, you shouldn’t be left waiting on the P&L and balance sheet your accountant emails you each month. You need to be able to login and see accurate, up-to-date information on your business’s financial performance, 24/7 — so you can make informed business decisions.
- Stellar customer support. The most common complaint clients have about their bookkeepers and accountants is poor communication. Vaguely-worded emails, full voicemail inboxes, and missing attachments: they’re the bane of a new business owner who needs information ASAP. Any accounting solution you settle on needs to provide on-the-ball customer support that’s ready to help any time of the day.
Your decision will depend on your own particular needs and budget, but as long as the accounting solution you settle on is able to guarantee all of the above, your ecommerce business is in good hands.
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Setting up a comprehensive accounting solution as soon as you start your ecommerce business is one of the best investments you can make in your company’s future.
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