Ecommerce bookkeeping isn’t the first thing that comes to mind when you think about the exciting and rapidly growing world of ecommerce business. If you want to be successful in this world, believe us, it better be at the top of your priority list.
Ecommerce shop owners often leave this part of the business as an afterthought and get hurt. Why? Well, many subconsciously connect bookkeeping to old-world industries and accountants in gray, ill-fitting suits.
We want to dispel that myth and help business owners save money and, in many cases, make even more through good ecommerce bookkeeping.
Why is Bookkeeping Important to an Ecommerce Business
Bookkeeping is one of the best ways to make sure your business’s ship sails smoothly. But before we get into the why, we should explain what exactly bookkeeping is and what it’s not.
Bookkeeping and Accounting – Not Quite the Same
Bookkeeping has an image problem. Most people assume that bookkeeping and accounting are interchangeable, so really – the accountant should handle that and be done with it. Founders who take this approach are robbing themselves of a potent tool to optimize their business.
Bookkeeping, in a nutshell, is the recording of financial entries for every part of your business and making sure that all of your transactions add up at the end of a reporting period (“Balancing the books”). Suppose an accountant looks at deep financial forensics to build an accurate balance sheet for a business. In that case, a bookkeeper only focuses on the lifeblood of a business: Its cash flow.
This, of course, isn’t a single action but an entire system to make sure all of your business transactions are being followed and appropriately categorized.
That’s the basics, but it’s what a good bookkeeper does with that information that turns them into such valuable assets for a business.
There is No Hiding from Good Bookkeeping
When you have this kind of information and a system that runs itself, you’ve discovered a superpower for your business.
Ever come across an invoice where you have no idea what it’s for? Has a charge ever shown up in your business bank account that you can’t for the life of you recall paying?
These are minor headaches, sure, but the time it takes to deal with them adds up, and at the end of the day, takes away critical time from you to do what you do best – run a business. Now with good bookkeeping, issues like these become a thing of the past.
Good Bookkeeping Leads to Better Decision Making
Throughout a business’s lifetime, the small details compound and add up in the end. Someone who does good bookkeeping is aware of where every cent of theirs is either going or coming from. That kind of information empowers a founder to make much better business decisions.
Whether we like it or not, many of our decisions are made using incomplete information, sometimes with terrible results. Would you want to take a large loan out to expand your business based on a guess of how your business operates or because the numbers clearly show that you have the cash flow to sustain debt?
An Orderly Business is a Happy Business
A lot of bookkeeping has to do with creating order and maintaining it. It’s simple in principle but can save founders so many headaches down the road. For example, imagine that your tax authority would like more information regarding specific transactions that happened three years ago.
I think you don’t want to make mistakes when it comes to taxes. However, I’m willing to wager that many business owners, unfortunately, don’t have a photographic memory, and even fewer meticulously track every invoice or transaction going back years.
This is where bookkeeping shines in its simplicity: A sound bookkeeping system doesn’t have to be fancy or over the top. It just works and gets you the information you need, when you need it.
What Data Should Be Monitored for Accurate Bookkeeping
Now that we’ve gotten the why out of the way, we’re going to focus on the what.
Cash(flow) is King
First and foremost, you want to look at every dollar coming in and going out of the business, along with where and why the dollars are leaving. At the end of each period you’re tracking, you should be able to tally your credits and debits easily. This is your cash flow and a critical piece of information that every business owner should know.
Additionally, if you want to create a leaner business for whatever reason, all you have to do is look at where your debts are going. With a proper bookkeeping system, you will see what mandatory recurring costs (such as website maintenance, platform fees, digital marketing costs) are and one-time expenses that seem to be popping up too frequently, such as excessive fees from a merchant partner.
This brings us to what you should track next: the trend of your income and expenses. Sudden spikes in expense should demand a closer look, while any surge in income should be accounted for too. This goes back to our point about making better financial decisions.
Following the Money
When you start tracking invoices and payment requests, you can also set up a system that tracks all of your customers and suppliers. When you can easily track who is owed what, missing invoices or making errors in payment becomes a thing of the past.
Likewise, a good bookkeeping service can also accurately track the expense of each employee’s salary.
Founders with a proper bookkeeping system can see at a glance:
- How much each employee is adding to the business in terms of revenue and
- How much they are taking out.
This seems like obvious things to track, but yet so many founders seem to skip over it. However, managing employees in the most productive way possible fall on the business owner.
Finally, because you can track salary expenses easily, making payroll becomes a breeze as every employee is accounted for. Payroll is a big headache for many business owners as the complexity can rapidly spiral out of control. Good bookkeeping aims to simplify that chaos.
In ecommerce, everyone is looking to squeeze the most they can out of their margins. When you start bookkeeping, you can begin to see the margin on everything you sell on an item-by-item basis. This is incredibly powerful because you will quickly notice any small changes in the net margin you extract with each transaction.
All you need to do is add the cost-of-goods-sold and link it to each relevant supplier. This way, you will see just how much money is being spent on selling each item, what items you should focus on and what items may just be slowing you down.
Having that kind of item-by-item comparison is often a solid negotiating tool as well. Many ecommerce businesses offer similar items sold by different suppliers. If you notice a rogue supplier is charging far higher costs, you can be honest and show him the data. Once again, that’s the beauty of good bookkeeping – the information is meant to be clear, concise, and simple.
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Besides tracking cash flow, the one other primary task of any bookkeeping system is payment reconciliation.
This may sound boring or time-consuming, but it isn’t. Payment reconciliation looks at your records and your bank statement over the same period and makes sure both come out with the same number in the end.
Most of the time, a well-managed business will rarely see any difference in both numbers, especially if the business is running a sound bookkeeping system. However, any discrepancy needs to be investigated.
This is another moment in which bookkeeping shines. A good bookkeeping system should make finding what caused the discrepancy a breeze. A founder should scroll through the periods and see precisely where and why the difference occurred.
This can often be a matter of human error – someone inputting the wrong number or a vendor/service provider changing their prices without letting you know. Either way, things like this need to be caught early, as errors have a way of repeating.
The last reason why payment reconciliation is so important is, unfortunately, a topic no business owner wants to have happened to him: Fraudulent activity.
If your business’s account has been compromised somehow, there will be an uncounted expense on your financial statement. A good bookkeeping system always links an expense to a source, so this would raise a major red flag for any business owner.
The ability to prevent fraud should alone give business owners good enough reason to consider beefing up their bookkeeping process.
What Periods Should Be Tracked?
This question depends highly on the business making use of it. The world of ecommerce is so varied that there is no one-size-fits-all answer. If a business specializes in high ticket items and expects to make one large sale a week, it makes no sense to do daily books and reports.
The same is true for a business that sells high-volume, low-margin items. Only balancing the books every month can become an overwhelming exercise in which the owner exposes themselves to the risk of missing critical items.
Bookkeeping Starts with You
We don’t think it’s an exaggeration to say that bookkeeping is the base on which any good business is built. Serious bookkeeping turns that base into a fortress, allowing business owners to optimize, strategize and protect their business better than ever before.
What’s best is that with the advent of technology and new ecommerce platforms, integrating high-quality bookkeeping software directly into your ecommerce store has never been easier. When these programs are properly integrated, the system practically runs itself!
Finally, thanks to remote work, more founders can outsource all of their bookkeeping duties to a professional at a fraction of the cost. While skipping all of the sunk costs of a full-time employee while freeing up founders to do what they do best – run their business.
When you invest in ecommerce bookkeeping, it provides you with an edge to keep winning the competition.
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I’m Evan Bleker, the founder of Etail Express; a company focused on providing excellent bookkeeping services for internet retailers.
My history is starting and running web businesses giving me a unique owner’s perspective on delivering top-rate business support services.
My experience with starting and running web businesses goes back over two decades and has helped shape me into a strong team leader and internet marketer.
I’m also a skilled investor. In my spare time, I manage an investment community focused on helping small retail investors quickly and easily identify high-quality net-net stocks.
My work has been published in Forbes, ValueWalk, SeekingAlpha, Nasdaq.com, plus CMC Markets, and recently published Benjamin Graham’s Net-Net Stock Strategy through Harriman-House.