Accounting is one of the most important components of the e-commerce business cycle. By keeping accurate books and paying close attention to your business’s financial situation, you will be able to operate more efficiently and achieve your long-term goals.
This may not be the most exciting part of running a digital business, but it is certainly one that cannot be ignored. In this article, we will discuss five ways you can immediately improve your back office accounting practices. Once your business is able to create a solid back office foundation, achieving other objectives should become much easier.
1. Invest in quality accounting software
Even if you’re already comfortable keeping track of your cash flow with Microsoft Excel, quality accounting software is something you will eventually need to purchase. Accounting software makes it easier to monitor accounts, generate detailed financial reports, and also make data-supported business decisions.
QuickBooks is the most popular brand of e-commerce accounting software, but there are many other options including FreshBooks, Xero, and various others. Most offer a free trial, allowing you to experiment and see which software works best for you. If your business uses an e-commerce platform, such as Shopify, Amazon, and others, you will want to be sure to choose accounting software that makes it easy to transfer data directly into your books. Once the software has been installed, you will be able to develop a fully integrated system that can save you both time and money.
2. Reevaluate your inventory practices
When businesses first start out, they may arbitrarily choose a system for managing their inventory. However, only a few of these businesses will revisit their inventory practices after their business has started to grow. Inefficient inventory choices can cost your business money and even cause you to pay more in taxes than you need to.
Inventory management is among the most important parts of the overall accounting process. Choosing your target product turnover rate, your ideal inventory system (FIFO vs. LIFO), and your preferred depreciation schedule can have a major impact on your bottom line. Modeling your practices off of other firms in your industry will help your business operate more efficiently. If you are looking for creative methods to improve your books, making inventory adjustments might be your most accessible option.
3. Closely follow all cash flows
At the end of the day, a business is the sum of its cash flows. While revenues and expenses need to be accounted for at all times, keeping a close eye on the actual movement of incoming and outgoing cash can give you a more comprehensive understanding of your financial situation.
Dividing your revenues and expenses into multiple components can help you gauge liquidity levels and understand the general payment cycle. Isolating accounts receivable and accounts payable will make it much easier for your business to plan for the future. If you have never generated a statement of cash flows before, getting assistance from an accountant may be necessary. Accurate cash flow statements will help assure your future forecasts are evidence-based and reliable.
4. Track the impact of taxes on your bottom line
It is impossible to understand your financial position—and make objective decisions—without first understanding the impact that taxes have on your bottom line. While the tax code consists of a rigorous set of laws and regulations, businesses still have a considerable amount of flexibility when it comes to how their taxes are completed.
Following an incoming flow of revenues, your business will be able to calculate its EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). After making each of these financial adjustments to your balance sheet (EBITDA adjustments), this figure will significantly decrease. Knowing the difference between your total revenue and how much cash you actually get to take home will be important when making financial decisions. Furthermore, your business should track and carefully categorize each of its expenses throughout the course of the year. When tax season inevitably rolls around, you might be surprised just how many tax credits and tax deductibles are readily available.
5. Update your books as often as possible
In order for any of your books and accounting data to be useful, they will need to reflect the current state of your business. Putting off your bookkeeping duties until the end of the month can cause your business to make reckless financial decisions along the way.
Keeping an updated balance sheet can help your business get an accurate “snapshot” of your asset, liability, and equity situation at any given point in time. Fortunately, many types of e-commerce accounting software can make it possible to link your books to your digital store and update in real time.
The back office components of your businesses may not be the most exciting, but they are certainly very important. Developing good accounting practices will often mark the difference between whether your business succeeds or experiences major financial issues. If you keep these simple tips in mind, you’ll push your business to be more efficient and more capable of lasting success.