Running an e-commerce business brings with it numerous challenges. One of the most important is accounting for all the transactions to keep things running smoothly. Without a solid understanding of necessary accounting basics, it can be difficult to keep your business fiscally responsible. Fortunately, there are 10 basic accounting rules every e-commerce business owner needs to know to ensure success.
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Record Keeping: Keeping accurate records of all your sales and expenses is essential. This will help you calculate your profits and sales tax liability accurately. Additionally, if you ever need to provide documentation for an audit or other instancs, the records will be readily available.
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Cash Flow: Cash flow is how much money is coming in and going out of your business. You'll need to track this by tracking your sales and expenses. Having sufficient cash on hand to cover short-term expenses is also essential.
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Accounts Payable & Receivable: Accounts receivable refers to any payments you receive from customers, while accounts payable are the amounts you owe to creditors or vendors. You'll need to keep track of this information to remain financially healthy.
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Inventory Costs: It's important to accurately account for the costs of the goods you are selling. If your accounting isn't right, you could end up pricing yourself out of the market.
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Gross & Net Profit: Gross profit is the total profit after subtracting direct costs such as Raw materials and direct labor. Net profit is the total profit after all other expenses such as taxes and overhead are deducted. Understanding which type of profit you are making is essential for setting prices and negotiating deals.
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Cost of Goods Sold (COGS): This is a key term for e-commerce businesses. COGS is the total amount of money spent to acquire or create the goods you are selling. You’ll need to track this to accurately price items, calculate profits and remain competitive.
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Break-Even Point: The break-even point is the point at which your business covers its operating expenses but does not make a profit. Knowing the break-even point can help you set realistic goals and ambitions for your business.
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Balance Sheet: A balance sheet shows the financial health of a business. It includes lists of assets, liabilities and equity. This information is used to determine the net worth of the company and how much money is available for re-investment purposes.
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Payroll: Knowing how to manage payroll is essential. You'll need to set up payroll deductions to cover those items you want to be paid out of your payroll system, such as taxes and benefits. Additionally, you'll need to ensure you are properly calculating overtime and bonuses, if applicable.
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Tax Planning: Careful tax planning involves ensuring you are taking advantage of all available deductions and exemptions that may be available to you. Additionally, you'll need to accurately compute your taxes and submit them on time.
By following these 10 basics, you will be able to properly account for your financial transactions and stay on top of your e-commerce business finances. With that knowledge, you should be able to achieve greater success and profitability in your business.