Managing your business’s inventory levels is key to knowing how much and when to order more product. But things get more complicated when you have to manage inventory from different sales channels.

If you run an online store, you know how important it is to keep track of your finances. But e-commerce accounting is more than just tracking accounts payable and recording sales and expenses. It’s also understanding how your business operates, what drives your profitability, and how to plan for the future.

In this article, we’ll explain what e-commerce accounting is, how it differs from bookkeeping, and what tasks you need to start with. We’ll also share some best practices and tips to help you avoid common pitfalls and run your business with confidence.

How e-commerce accounting works and what it entails

E-commerce accounting is about managing the financial aspects of online businesses, encompassing sales, inventory, taxes, and reporting. It ensures accurate and efficient record-keeping, which is crucial for the successful operation and growth of any e-commerce venture.

Bookkeeping

The e-commerce bookkeeping vs. accounting distinction is: E-commerce accounting is the process of tracking, analyzing, and interpreting financial transactions for your online store, while bookkeeping is the timely recording of transactions.

E-commerce bookkeeping handles day-to-day financial transactions. Examples of bookkeeping tasks include managing invoices, inventory, payroll, accounts receivable, and accounts payable.

E-commerce accounting looks at bigger-picture items like:

Tax laws and regulations
Financial statements and reports
Business risk factors
Strategy development

Bookkeeping is about collecting and organizing financial transactions. Accounting involves analyzing those transactions. A big part of that is assessing financial statements, such as the balance sheet, profit and loss statement, and cash flow statement.

Tax planning

Tax management for e-commerce stores can be difficult, but it’s much easier if you have accounting software to manage the process. However, you must still track and pay state and local taxes, as well as make tax-related filings, such as sending Form 1099 to contractors.

Sales taxes are usually the biggest headache. You will need to ensure you’re collecting and paying both state and local sales tax if it applies.

Staying on top of your e-commerce taxes means:

Use the correct sales tax rates: You’ll want to ensure you are using the correct tax rates for customers to calculate sales tax, which depends on their shipping address. Many online store platforms will automatically calculate this for you.
Pay your taxes quarterly: If you expect to owe more than $1,000 in business taxes to the IRS, you’ll need to make quarterly tax payments.
Pay sales taxes: Make sales tax payments to the appropriate jurisdictions before the due date. Most have a monthly due date.

Cash flow planning

Accounting software will also help you plan for growth and manage your cash flow.

With proper e-commerce accounting, you can do such things as:

Find and track recurring expenses
Analyze cash flow patterns for seasonality
Get inventory management tips and insight
Budget for unplanned expenses
Set long-term goals

E-commerce businesses can be seasonal, meaning cash flow will fluctuate. Maybe the holidays will bring in more revenue, or maybe it’s the summertime that does best. Either way, cash flow planning will help you manage the months when cash flow is lower.

How to set up your e-commerce accounting

Before you get started, you’ll want to complete these three e-commerce accounting tasks:

Get a business tax ID number: The business tax ID is also known as an Employer Identification Number (EIN). You can get an EIN directly from the IRS. An EIN is kind of like a Social Security number for businesses.
Set up a business bank account: Keeping your personal and business finances separate is an important aspect of business accounting. Many banks offer fee-free accounts.
Choose an accounting software: Pick an accounting software for e-commerce businesses or one that integrates with online stores. For example, QuickBooks Commerce accounting software offers commerce accounting features that can automatically sync your online channel payouts to QuickBooks for faster bookkeeping

Once you have the three items above, you’ll be ready to set up your accounting for your e-commerce business.

1. Pick an accounting system

The first step in setting up your e-commerce accounting is to pick an accounting system. The two main options you have are cash accounting and accrual accounting. Although e-commerce accounting software will typically let you choose either method, many default to accrual accounting.

With cash accounting, you record income in your accounting software when you receive payment. Cash accounting does not allow for accounts payable or accounts receivable. Accrual accounting is an accounting method that records financial transactions when they are incurred, rather than when cash is exchanged.

Accrual accounting allows for a more accurate reflection of a company’s financial health by recognizing revenues and expenses when they are earned or incurred, regardless of when the cash is received or paid.

As well, investors and lenders will want to see more than just money in the bank, such as strong sales metrics. The choice between cash and accrual accounting can be personal preference, but most ecommerce stores operate on an accrual basis as sales channels will deposit to the bank account days/weeks after sales are made. Ultimately, you may want to speak to an accountant before deciding.

2. Categorize expenses

One of the most important aspects of e-commerce accounting is categorizing expenses correctly. This means assigning each expense to a specific category or account, such as:

Cost of goods sold (COGS): The direct costs of acquiring, producing or manufacturing your products.
Operating expenses: The indirect costs of running your online store, such as rent, utilities, marketing, software subscriptions, etc.
Capital expenses: The costs associated with purchasing or improving long-term assets, such as equipment, machinery, and vehicles.

Categorizing expenses correctly means you can calculate the four ways to measure profitability, including the margins: gross profit margin, operating profit margin, and net profit margin. These metrics help you measure how profitable your online business is and how efficiently you use your resources.

3. Set a budget

Another essential task for e-commerce accounting is budgeting. Budgeting is the process of creating a plan for how much money you expect to earn and spend in a given period (usually a month or a year). A budget helps you:

Set realistic goals for your online business
Track your progress toward achieving those goals
Identify potential gaps or problems in your cash flow
Adjust your spending or revenue strategies accordingly

To create a budget for your online business, you need to estimate:

Your expected revenue from sales
Your expected COGS from inventory purchases
Your expected operating expenses from running your online business
Your expected capital expenses from investing in long-term assets

You can use historical data from previous periods or industry benchmarks to make these estimates. You should also account for seasonal variations in demand or supply that may affect your revenue or costs.

Once you have created a budget, you should compare it regularly with your actual results and analyze any possible variances. This will help you identify areas where you can improve performance or reduce costs.

Tips and tricks for e-commerce accounting

Setting up an e-commerce accounting system can be intimidating. But there are some tips and tricks for your e-commerce business:

Automate where you can: Automating your accounting can save you serious time, but it also helps cut down on mistakes. Anything you can do to automate your business will also help reduce errors during tax time. That means ensuring your online store calculates sales tax automatically.
Capture all your sales: If you manually enter e-commerce sales individually or in batches, make sure you’re entering them accurately. Many apps or sales platforms will connect directly with ecommerce accounting software like QuickBooks Commerce.
Track key expenses carefully: Some of the biggest expenses for e-commerce stores are marketing spend, inventory purchases, and subscriptions.
Reconcile often: Don’t delay reconciling your accounting books until the end of the year. Doing so increases the chances of making a mistake. Reconciling your books is where you’ll compare your accounting transactions with your bank or credit statements. Spend a few hours each month reviewing your finances and handling bank reconciliations.

Run your business with confidence

E-commerce accounting can be difficult. Many e-commerce business owners find it difficult to find accountants and bookkeepers with experience in e-commerce—and they’re intimidated by DIY accounting, using accounting software, or terms like the cost of goods sold.

With the right e-commerce accounting software, you can confidently run your online business, while also easily integrating your sales channels and platforms with your accounting software.

This article originally appeared on the QuickBooks Resource Center and was syndicated by MediaFeed.org.