As any online business owner will tell you, accounting for an ecommerce store is especially complex and tricky. Between sales channel fees, delayed deposits, and an ever-changing sales tax landscape, it can be tempting to do just enough to meet your obligations, so you can get back to focusing your attention elsewhere. But, ask any business with robust bookkeeping and accounting processes, and they’ll tell you that keeping tidy and accurate books has benefits well beyond simply meeting your legal responsibilities.
As the lifeblood of any successful business, proper accounting practices are crucial in ensuring compliance with tax regulations, identifying growth opportunities, and fostering trust among potential investors and buyers. This article will delve into six compelling reasons why accurate ecommerce accounting is essential for your ecommerce business.
1. Confidence in compliance
Ensuring tax compliance is one of the most critical reasons for maintaining accurate ecommerce accounting. Tax laws and regulations can be complex and sometimes difficult to navigate, especially in ecommerce. In 2018, the Wayfair decision determined that in addition to paying sales tax in their home state, online sellers may be liable for sales tax in any state, depending if sales in that state exceeded a certain threshold.
With all these things in play, it can be difficult to feel sure you’ve fulfilled all your obligations. By keeping precise and up-to-date records of all financial transactions, business owners can confidently submit their tax returns, knowing they have complied with all relevant tax laws and regulations. This not only helps avoid penalties, fines, and legal repercussions, giving good peace of mind, but it also establishes a solid foundation for the business’s financial health, paving the way for the other benefits mentioned below.
2. Pay the right amount in tax
Overpaying or underpaying taxes can have serious financial consequences for an ecommerce business. Overpayment means losing out on valuable capital that could be invested back into the business, while underpayment can result in fines, penalties, and potential damage to the business’s reputation.
Accurate ecommerce accounting allows business owners to strike the right balance, avoiding unnecessary financial burdens and ensuring they pay the appropriate amount of taxes. This protects the company’s bottom line and contributes to maintaining a healthy cash flow, which is critical for the growth and sustainability of any business. The last thing you need is a nasty surprise months or years down the road, and having good and robust bookkeeping ensures you’ll always be on the right track.
3. More profitability
Accurate financial data is crucial for making informed business decisions. By having a clear and reliable picture of the company’s financial performance, business owners can identify areas where they can cut costs, increase revenue, and improve overall profitability. This information is infinitely better than just one or two metrics, as you’ll have a complete, comprehensive picture of your whole business, which stops rash or emotion-driven choices. Data-driven decisions can improve operational efficiency and a more robust bottom line.
Furthermore, accurate ecommerce accounting allows businesses to track and analyze key performance indicators (KPIs), which are essential for monitoring the effectiveness of various strategies and initiatives. By regularly assessing these KPIs, you can identify trends, evaluate their progress, and make necessary adjustments to strategies, ensuring you stay on track to achieve your goals.
4. Great for potential buyers or investors
A well-maintained, transparent set of financial records is a vital aspect of any successful business, and accurate ecommerce accounting can enhance the credibility and attractiveness of your business to potential buyers or investors.
By presenting a clear and accurate picture of the company’s financial health, you demonstrate your commitment to financial management and responsibility, instilling confidence in potential buyers and investors. On the other hand, messy books give a terrible impression and instantly let investors know that work is needed—and there might be other areas of neglect in the business. Scrambling to do a last-minute clean-up of your books could delay access to funding or even give a buyer enough time to pull their offer.
Accurate financial records also allow potential investors to conduct thorough due diligence, assessing the company’s financial stability and growth prospects. This information is invaluable when securing funding or achieving a successful sale, and it provides investors with the data they need to decide whether to invest in or acquire a business.
5. Less risk
Accurate accounting reduces the risk of financial errors and discrepancies, which can have severe consequences for an ecommerce business. By diligently recording and reconciling all financial transactions, business owners can minimize the risk of fraud, embezzlement, or other financial misconduct. In addition, accurate financial records can also help detect early warning signs of financial distress, allowing you to take action before problems escalate.
Using accounting software like A2X can help minimize the risk of errors by automating the manual and error-prone parts of bookkeeping. A2X sits between your sales channel and cloud accounting software, pulling the necessary information from your sales channel, categorizing it into neat summaries that match your payments, and passing it onto Xero or QuickBooks for easy reconciling.
Furthermore, accurate accounting practices can help businesses identify and mitigate various types of risks, such as currency fluctuations, supply chain disruptions, and shifts in customer demand. By closely monitoring financial data, business owners can make informed decisions that account for these risks, ensuring the stability and resilience of their operations.
6. Better performance visibility
Accurate ecommerce accounting gives you greater visibility into your company’s financial performance. This increased transparency lets you track key financial metrics, such as cash flow, profit margins, and inventory turnover. By monitoring these indicators, you can proactively adjust your business strategies, improving performance and maintaining a competitive edge in your marketplace.
Moreover, performance visibility allows businesses to benchmark their performance against industry standards and competitors. This information can help identify areas where your business may be underperforming and uncover opportunities for improvement. By continually monitoring and analyzing financial data, you can drive continuous improvement and ensure their business remains competitive in an ever-evolving ecommerce landscape.
Wrapping up
In summary, not only is accurate ecommerce accounting crucial for any ecommerce business seeking to maintain compliance, but it can also help optimize profitability, attract investment, and minimize risk. By ensuring that financial records are well maintained, they can be analyzed and used to make informed decisions, foster trust among stakeholders, and drive sustainable growth.
Investing in accurate ecommerce accounting is not only a necessary aspect of running a successful business but also a strategic move that can significantly contribute to the long-term success of your ecommerce venture. The investment could be paying for tools like cloud accounting software and A2X or hiring an ecommerce bookkeeper or accountant to take care of everything on your behalf.
As the ecommerce industry continues to evolve and expand, if your business prioritizes accurate financial management, it will be better positioned to adapt to new challenges and capitalize on emerging opportunities. By implementing and maintaining robust accounting practices, ecommerce business owners can secure their company’s financial health and stability, setting the stage for lasting success in an increasingly competitive digital marketplace.
Start a free trial of A2X today and start automating your accounting.
What Is EcomBalance?
EcomBalance is a monthly bookkeeping service specialized for eCommerce companies selling on Amazon, Shopify, Ebay, Etsy, WooCommerce, & other eCommerce channels.
We take monthly bookkeeping off your plate and deliver you your financial statements by the 15th or 20th of each month.
You’ll have your Profit and Loss Statement, Balance Sheet, and Cash Flow Statement ready for analysis each month so you and your business partners can make better business decisions.
Interested in learning more? Schedule a call with our CEO, Nathan Hirsch.
And here’s some free resources:
- Monthly Finance Meeting Agenda
- 9 Steps to Master Your Ecommerce Bookkeeping Checklist
- The Ultimate Guide on Finding an Ecommerce Virtual Bookkeeping Service
- What Is a Profit and Loss Statement?
- How to Read & Interpret a Cash Flow Statement
- How to Read a Balance Sheet & Truly Understand It
