Ecommerce, being an easy and convenient business, is rapidly gaining popularity these days. As lucrative as it sounds, many entrepreneurs suffer losses due to a lack of business knowledge, mainly in accounting and finance. They are unaware of the essential concepts of bookkeeping, cash flows, account receivables, and revenue generation.
However, you don’t need to be an accounting expert to lead a successful business. With a basic understanding of the following ecommerce accounting concepts and strategies, you can generate profits within a few months of your business launch.
1. Timely Monitor Business Cash Flows
Every business's primary goal is to make money, and if you want to know exactly how much money you are making, you need to keep track of your cash flow, everything that comes in and goes out. There are two main ways through which a positive cash flow is achieved:
- By increasing the incoming cash via sales
- By cutting out unnecessary expenses
There are several strategies and steps you can follow to ensure that your cash flows improve, such as checking out your customers' credit terms. It is best to accept payments up-front unless you have regular customers with good credit histories.
The online Master of Business Administration in Accounting offers an extensive course explaining how to manage your cash flows effectively. Briefly described, you need to ensure the following steps to attain a positive graph in your bank accounts.
• Maintain a weekly record of your expenses and earnings; if there is a discrepancy between the two, you know something is wrong.
• Don't pay your bills until they are due. The credit period is 30 days, so rushing is unnecessary and will help you face a cash shortage during the month.
• Offer monthly subscriptions to your customers to ensure that your money comes in on a timely basis.
• Be sure to reserve a little money in case you need it in an emergency.
Additionally, you can try to negotiate better terms with your suppliers for a balance in cash flows. You can offer incentives like longer payment terms, bonus items, or discounts on repurchases. Additionally, you can negotiate about returning goods that do not sell within a specific period.
2. Manage Your Inventory Volume
Inventory management is another vital concept for the success of every business. The inventory consists of both the products held for sale and the raw materials used to produce those products. Stocking up on inventory can negatively impact your liquidity and assets. Similarly, having too little inventory can lead to sales loss. Thus, keeping your inventory in check and deciding on a minimum volume that you need to is essential. A smart rule is to keep as much as you need.
Price fluctuations are a major consideration for managing inventory effectively. A rise in the market price increases the cost of your inventory. It can also go the other way. Therefore, you have to keep yourself updated on the price trends in the market to get the maximum output at minimum rates.
All in all, the successful operation of a business requires a high inventory turnover rate. You will also have to minimize the effect of external factors on your sales at the same time, like price fluctuations.
3. Reduce COGS (Cost Of Goods Sold)
Controlling COGS is as important as improving cash flows and managing your inventory for the success of your business.
In simple terms, the Cost of Goods Sold (COGS) is the price that incurs to produce the goods you will sell. It includes direct labor costs as well as materials costs. However, any cost associated with distribution and sales is not added to COGS.
It can be challenging to calculate your cost of goods sold, especially if you paid different prices for the raw materials or paid different salaries to the people involved in production. In this case, the Weighted Average Method is the best option to calculate correct COGS.
Tracking the correct COGS numbers is crucial to your business's financial reporting accuracy. Additionally, cutting out any unnecessary manufacturing costs is vital for generating good profit.
4. Keep A Track Of Tax Payments
The tax system is complicated and avoidable as an e-commerce business owner, so consult a tax expert. Label all your taxable products. To stay organized, categorize products into tax-exempted and tax-payable.
Your tax payments are mostly determined by your business's location. A safe tactic here is to add the tax amount separately to your customer’s bill. It will help you to distinguish between revenue and tax. It is easy to lose track of the real profit you have made if you mix the tax amount with the product price. Establishing a separate account for your taxes will help you avoid this problem with an e-commerce company.
Final Thoughts On Ecommerce Accounting
Your accounting operations must be on par if you want long-term success in the ecommerce industry. In addition, ecommerce companies should remember that their core business is not accounting. Therefore, you can either outsource your accounting department or get professional software to save your time and energy.
