Best Practices for Working with E-Commerce Clients
E-commerce is one of the largest expanding industries in the world. A lot of capital is flowing in, and if your firm wants to take advantage of this growing sector, you will need to learn the nuances of e-commerce accounting.
E-commerce is one of the largest expanding industries in the world. The largest companies today, including Amazon, Alibaba and Souq, are taking over the retail centers in all categories. Electronics, hardware, cosmetics, medicine and even groceries have become available online. A lot of capital is flowing into the industry, and if your firm wants to take advantage of this growing sector, you will need to learn the nuances of e-commerce accounting.
What is E-Commerce Accounting?
E-commerce accounting involves the use of a digital platform that can be accessed by both the buyer and the seller. Properly documenting all transactions will be extremely important, since it’s very easy to forget what has taken place. It’s important to always incorporate accounting software that can not only record but also analyze the transactions taking place.
E-Commerce Accounting Methods
To ensure efficient workflow, it's crucial to choose the right accounting method. There are two main ones.
The first is the cash method. This method lets you record transactions after they’re made. Hence, when cash is deposited or withdrawn from your financial holdings, it will be recorded after the vendor has invoiced your client.
The other method, called the accrual method, records transactions as they occur. Hence, the moment that the money leaves the financial holdings, you can record invoices as an expense. Even if it hasn’t left your client's account yet, the balance will be shown to be modified at once.
Standard Accounting Tasks
There are a few basic yet vital tasks you'll need to do to ensure your client remains compliant. Sit them down and discuss the paperwork that will be necessary as well as how they can help you to make sure everything runs smoothly.
When any money leaves or comes into a business, it has to be recorded. Using a digital accounting portal will make it easy for both you and whatever e=commerce company you are working with to reliably track all cash flows.
You can even report that money by taking the official records from the client's bank account. You can also choose to use top-notch accounting software to make that happen automatically. This will help you rid yourself of the hassle of keeping track manually. You can either do this manually or set it to happen daily, weekly or monthly. No matter what you do though, you should set a regular interval between the accountings that you do. This can depend entirely on the volume of business that you record every day, week or month.
Other than recording the transactions, you need to categorize them. They need to be put in to two broad categories of income or expenses. The accounting software won’t, in most cases, categorize the transactions for you.
Updating Returns and Chargebacks on the Books
Don’t forget that returns and chargebacks exist as well. In e-commerce, it’s estimated that retail chargebacks reached $40 billion per year in 2018. Returns fare even worse. They reached a value of $260 billion in 2016, and that’s just in the US.
Hence, these two need to be categorized as well. E-commerce entrepreneurs need to deal with this immediately. Without the categorization, it’s impossible to know which items aren’t selling well and which are. It’s also impossible to weed out the problems in the supply chain and the delivery without this method. With reliable, accurate data in hand, your business can accurately determine its expected profit margins and make strategic changes as needed. Both need to be categorized in Returns and Allowances.
Other Aspects of E-Commerce Accounting
It’s very important that your client's bank statements match up with their books. Hence, the reconciliation has to be recorded regularly. Typically, it's best to handle these every month. Additionally, request your client's financial statements be sent to you each month.
Paying Quarterly Taxes
Depending on the size of the E-commerce business your client runs, they will have to pay estimated quarterly taxes. You can estimate the size of their business by how much it’s going to earn in the year and then follow up to make sure they pay taxes on that amount every three months.
Filing Sales Tax
If your client's company is doing well, they may need to file sales tax on a monthly, quarterly or even annual basis. This should be one of the top tasks on your to-do list.
This isn’t just to be vigilant; it’s because the activity of filing sales taxes is usually intense. Your client will need to collect the sales tax first. They will have to report on how much they've collected. This includes identifying the source of the transactions as well. If they're selling their products through multiple e-commerce channels, this process becomes even more complicated.
This process can be made very efficient through the use of accounting software.
Maintaining a Budget
Maintaining a budget is extremely important in an e-commerce business, since these are often seasonal. There is no product that is in demand all year—even staples such as food will experience fluctuations over the course of the year. Here are a few budgeting tasks you should recommend to clients to make the accounting work simpler.
Over- or under-stocking inventory is one of the main problems with retail. Whether it's a brick-and-mortar store or an online business, this problem never goes away. However, if done regularly, accounting mitigates this problem significantly. Planning inventory can save you from spending too much or too little and thus disappointing customers or investors.
Checking Cash Flow
You need to check the cash flow in a business every single month. If you use the accrual method, then you may appear to have a lot on paper, but not in actuality. However, if you use the cash method, you will keep an accurate track of your in hand cash.
Accounting Tips for E-Commerce
By keeping these tips in mind, you’ll be able to effectively work with an e-commerce business and remain competitive in this rapidly growing space.
Most e-commerce businesses purchase goods from the same suppliers regularly. These are usually paid for when they’re purchased or shortly after they’re delivered to the customer. In a few cases, however, the item can be paid for after you’ve received an invoice from the supplier.
Checking Out Products
Once a customer has finalized their order, they have to fill out an online form for confirmation. In a few cases, your client may receive payment at this time. In fact, this is the best way for the customers to place the order. That way, you don’t need to worry about giving them change back on delivery. Encourage your customers to go cashless. Switch the option for digital payments to default.
Before shipping occurs, the payments for the product need to be collected. Note that for a business to thrive, collecting payments for a delivery before it is made is very important. The cash flow to the shipping company shouldn’t be interrupted.
Tips for Tax Season
Integrate Accounting Software with the Online Store
You should always connect your accounting software with the online store. This rids you of the manual responsibility of logging every transaction. In case you have a problem or glitch in the books, you can always refer back to your bank.
Accounting software allows the connection of your bank account to your business. This will allow the automatic syncing and download of all your transactions. It saves you from manually entering the banking transactions and hence saves a lot of man hours and time. This helps tremendously when reconciling your accounts.
Frequently Update Tax Settings
You need to keep tax settings updated according to the countries your clients operate in and ship to. Mostly, the tax settings are configured based on the countries you operate in. This works for the short term. As the business grows however, the tax settings should be checked wherever shipments are going. This is to make sure your client is not unintentionally breaking any laws.
Keep Track of Deadlines
Deadlines need to be kept. If they’re not, they will tend to sneak up on you. If you work in the US, things are straightforward when keeping the deadline for taxes. You need to file on time otherwise you will be slapped with price penalties.
By following these simple tips and employing the right software, you'll be able to offer more value to your e-commerce clients or successfully break into the niche of e-commerce accounting.
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Vinnie Fisher has been married to Debbi for almost 25 years and has 4 beautiful children. Vinnie has built many businesses and has had the privilege to grow 4 of them to 8 figures.
Today, Vinnie is the CEO and co-founder of Fully Accountable which opened in early 2015. With his team, they built an Outsourced Accounting and Finance firm...