Why is accountancy for ecommerce so important in 2021? Well, despite the many negatives of the pandemic and lockdown, with many businesses experiencing hardship, it has also been a period of growth for new businesses and entrepreneurs. The ONS announced recently that over 400,000 new businesses were launched during this period – and many of them are online stores.
The pandemic has provided many entrepreneurs with the opportunity to take the leap and launch their own business. Certain industries such as food delivery businesses have seen an increase in demand, with many launching successful ecommerce websites.
Launching an ecommerce business can be a daunting experience, especially when trying to understand how to manage your accounts and ensuring that the business is a success and turn a profit.
To support ecommerce start-ups, we are sharing insight into what you should be aware of when managing the accounts of a new ecommerce business.
Understanding cash flow
Cash flow can make or break a business. You need to ensure from day one that you have a full understanding of a business’s cash flow. Have a system implemented that allows you to monitor the cash coming in and out of the business.
You will then be able to understand periods when you may have low and high cash reserves and you can then implement a budget to ensure that you can pay overheads.
Using accounting for ecommerce software
When launching an ecommerce business, it is advisable to start using accounting software that can help you keep track of everything in one place. Accounting software can help you keep a track of sales, costs and stock.
There is a range of different software available, such as Quickbooks, Xero and FreeAgent. It Is best to research and find one that is suitable for your business needs. Where accountancy for ecommerce is concerned, find an app that can sync with your store so that sales are taken into consideration automatically.
Inventory and stock checking
When running an ecommerce business, it is crucial to keep a check on your stock levels. Ensure that you always have a set level available so that you can meet any sales.
Running low or out of stock can harm your business. No stock equals no sales.
Stock should be recorded at the purchase price or the sale price if its lower, this means it can fluctuate in value. For example, if you buy 20 items from your supplier for £15 but a new version comes out and you have to sell the at a discount of say £10, then the stock value is the number of items left x £10.
Understanding costs of goods
When creating a product for sale, it is important to understand the cost of the goods. Aside from the purchase of the item, what other costs are associated with getting it ready to be sold? Packaging, delivery, storage, labour to make the product etc.
Adding all of these costs together will you the total ‘cost of goods’, which is a fundamental figure you must tracking when optimising accountancy for ecommerce.
Knowing your total cost of the goods will help you set your retail price for customers and give you a gross margin of how much money you make from each item.
Accountancy for ecommerce expenses
In addition to the costs associated with the product you are selling; ecommerce businesses need to understand the other expenses that they will need to cover.
Will you be paying staff, rent, utilities, insurance, tax and salaries? Usually, these expenses are fixed and can be budgeted for each month. It is always best to factor in any unexpected expenses, as these can impact your cash flow.
Ecommerce break-even point
In basic terms, your break-even point is the number of sales you need to make to cover all your business costs and expenses.
Working out your businesses break-even point will allow you to set targets and help understand if your business is at any financial risks. For example, if you need to make 2,000 sales a month to break even and you are only making 1,500 – you need to figure out how to fix this issue.
Tax and tax-rates
Taxes are inevitable that everyone must deal with. Get a head start on these for your ecommerce business and understand what taxes you will need to pay and if these taxes will be covered by your customer, for example VAT.
A UK business will be subject to UK corporation tax on its profits. The rate of corporation tax for all companies is currently 19%.
If you are using accountancy software, it may be able to help you work out the tax rates for your business and customers. If you are unsure, it is advisable to seek professional support, as tax is unavoidable, and you don’t want to get a huge, unexpected tax bill.
If you have are an entrepreneur who has launched an ecommerce business and have accountancy questions, then get in touch.
Give us a call on 01484 441431, or email our team on hello@itsrelative.co.uk. We are here to help.