IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities. Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses. The following blog article has been provided by Eric Moore of Accounting Solution Partners (www.asp-nw.com):
Bookkeeping Considerations for an E-Commerce Entrepreneur
Business owners that are new to the world of e-commerce often mistakenly believe that e-commerce bookkeeping is vastly different than traditional retail bookkeeping and accounting.
While e-commerce certainly has some extra steps to get started and nuanced differences along the way, business finances are similar whether they are online or offline. Essentially, e-commerce accounting best practices are basically just accounting best practices.
However, evaluating business options early on will be the most effective way to ensure that accounting needs are taken into consideration during the launch and while starting up operations.
- Payment Processors & Merchant Accounts
When starting an e-commerce business or creating an ecommerce presence for your existing business, you will need to evaluate and select a payment processor and merchant account provider. Find out if the e-commerce store platform you will be using provides their own payment processing, or whether you will need a third-party provider. The rates for third-party providers will likely be lower but using a third-party may require more technical know-how and can create a headache if there is an error or glitch.
Look at merchant fees as well as underwriting requirements before deciding. If your business is brand new, is operating in a risky space, or has a less than stellar past credit history it is not uncommon to be required to maintain a reserve account with your merchant account provider before they will take you on as a client.
Understand how merchant fees are calculated and applied. With some providers, merchant fees are not refunded when items are returned, which increases the cost of doing business and creates an added expense that will need to be accounted for in your books. This can create a real hassle when sales across multiple platforms complicate matters even further.
- International Sales & Foreign Currency
Before launching an online business, decide whether you will accept international sales and foreign currency. Remember, these are two different considerations. Some online stores accept orders from outside the US but are only configured to charge customers in USD. The approach puts the onus on the cardholder’s credit card company or bank to charge whatever associated fees they have for processing foreign currency. Other ecommerce businesses allow sales internationally in a variety of other currencies.
This is one area where e-commerce accounting varies from traditional retail accounting, because online stores are far more likely to accept international orders and process foreign currencies. When foreign currencies are processed, the ecommerce store will need to track the gross sale amount, the merchant fees incurred, and the exchange rate that was used to convert between currencies.
Some banks can assist with this, but for large numbers of foreign transactions you may want to use an additional tool like Veem, Plooto, or Bill.com to streamline efforts. Due to rounding during calculation, there can be a difference between the order value and the amount that the business received. When this happens, it needs to be recorded as a Gain or Loss on Foreign Exchange on your books.
- Accounting Software
Using the right accounting software is crucial to running an ecommerce store efficiently. While big name software like QuickBooks is always popular, your specific business needs may make a more niche software a better option. If you are operating an online store as well as a brick-and-mortar store, find a retail accounting software that works for both to provide seamless management.
- Inventory Software
While most e-commerce software will have an inventory management component, it may not be sophisticated enough to handle your business needs. If you are selling across multiple platforms, your website will not be able to track inventory in real-time across everywhere where your products are sold.
For this reason, it is vital to use a centralized inventory tracking system to keep track of sales and returns across locations like Amazon, Etsy, Facebook Marketplace, eBay, etc. if you plan on selling on multiple platforms. Entering or altering this manually increases the risk of error significantly, compromising the integrity of financial statements.
Accurate inventory information is a key component of budgeting, making it a top priority when running an ecommerce business.
Create and use templates for quotes, invoices, sales orders, receipts, and other recurring functions. Update these as needed to reflect current business operations and include a link to the company’s terms and conditions to provide legal protection in the case of a financial dispute.
- Inventory Costing
To prepare your books you will need to determine which inventory costing method to use: LIFO (Last In First Out), FIFO (First In First Out), weighted average, or the retail method. While there is not a “correct” approach or “best” method, the calculations associated with each costing approach may make one system better suited for certain types of products or business circumstances. The inventory costing method used will affect financial calculations that are integral to running the business.
- Inventory Tracking
Once you know how you will calculate the cost of your inventory, you will need to determine how you will track your inventory as well – with periodic inventory tracking or perpetual inventory tracking. Selecting an inventory tracking method and consistently adhering to it is the surest way to understand what you have and how long you have been holding it.
Periodic inventory tracking requires taking a physical count of how many units you have on hand monthly, quarterly, or annually. The more often you count your inventory, the more accurate your data will be and the better your decision-making capabilities will be as a result.
Perpetual inventory tracking uses automation to constantly count inventory. Every time a shipment of product is received, or a package is sent out, a scan enters this information into the system to update inventory information in real-time, leading to superior accuracy and enabling timely decision-making.
While this is a more efficient solution, it also requires additional technology and system requirements, which may be overkill for smaller or newer operations. Inventory accuracy is paramount for financial accuracy, making it an essential consideration for ecommerce bookkeeping.
If you have questions relating to the content of this article, Eric Moore of Accounting Solutions Partners would welcome the opportunity to answer them. Mr. Moore can be reached at (425) 492-1901 or firstname.lastname@example.org.
IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, and real estate communities on subjects relevant to the purchase & sale of privately held companies and family owned businesses. IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.