Accounting Basics Every Online Business Owner Needs to Know

If you run an online business, then you'll know that what goes on behind the scenes is hugely important. But along with the nuts and bolts of your enterprise, the accounting can often be overlooked.

In the colourful, fast-paced world of online trading, accounting might appear a little dull, but you mustn't underestimate its importance. Good accounting provides the foundation for your business to grow and thrive, and with ecommerce businesses growing by 43% in 2020, there’s plenty of opportunity to grow.

Here, we look at the accounting basics you need to know for your online business.


Put the Right Accounting Tools in Place

Accounting is a long-established practice, but it keeps pace with developments in business, and in technology.


Streamlined accountancy software can make accounting that much easier for you, enabling you to incorporate best practices seamlessly into your businesses processes.


Cloud-based accountancy technology provides you with consistent, ongoing support and practical tools. It allows you to process financial transactions efficiently and rapidly, and to automate your accounting. This frees up your time and resources to focus on the core objectives of your online business.


How do you know cloud-based accounting tools are a worthwhile investment? Accountants rely on them to support their work. These are accessible tools, but they're also professional.


Using these accounting tools, what are the major aspects of accounting you need to keep a close eye on?


Cash Flow

The saying goes that cash flow is the lifeblood of a business, and that's very true. It's the most common issue that SMEs come up against.


Around 57% of small business owners in the UK experience cash flow problems.


It's crucial to track your cash flow and to keep on top of it. This means having firm and systematic processes for invoicing and chasing payments. Also, consider your payment terms and how these will impact your cash flow.


Inventory Management

Selling products online requires sound inventory management. If you choose a dropshipping model this will be different, but it still requires inventory management.


Your inventory is an accounting basic, because it represents money you spend to buy stock, and money you won't get back until you sell it.


Stock can shift in value before you manage to sell it, which may then mean you can stand to either gain or lose.


Also, if you stock inventory, you can end up with shrinkage, where you've got less stock than you think you have.


Costs and Expenses

Whenever you sell something, you earn money, right? Yes, but there are also costs involved. Therefore, to get a clear picture of what profit you're making, you need to know what your products are costing you to sell.


These costs may include things such as manufacturing, packaging and shipping costs, as well as the cost of the stock items themselves when you buy them.


You also need to account for your other expenses, which aren't directly tied to your sales volume.


For online traders, these core expenses include:


  • Web hosting
  • Transaction and licence fees
  • Apps
  • Support and maintenance.


But there can be others such as insurance, rent, digital marketing, interest on loan repayments and salaries.


Break Even Amount

As part of your budgeting, you should know what your break even sales amount is. This is the amount you need to sell to cover all your costs. You should consider your fixed costs too, as these probably won't change.


To calculate your break even amount, you need to work out your gross margin (net sales revenue minus cost of goods sold) per product, then divide your fixed costs by this amount. This gives you the number of units you'll need to sell to break even.


Profit and Loss

Your profit and loss account is a snapshot of what's coming in and what's going out of your account in a given period of time. Another name for this is an income statement.


You must track the sales you need to make to break even. Tracking your sales accurately will allow you to see whether your over or under-performing in meeting or exceeding that break even figure. You'll also then know your earnings before tax, including any profits.


Tax Planning

In any business, tax planning is a central pillar of sound accounting. There can be a temptation to worry about your tax returns, such as income tax, corporation tax and VAT, only when they're due.


But this is just putting off something that you could be managing much more effectively as an ongoing concern.


Best practice is to set aside the money you'll need for your tax, so you don't feel ambushed when the time comes to pay up.


Balance Sheet

Your balance sheet should be an effective and practical tool for tracking the long-term financial health of your enterprise.


It provides the bigger picture, looking beyond the immediate income you're earning.


The balance sheet contains three main elements:


  • Assets
  • Liabilities
  • Equity.


It offers a broader summary of your finances than your profit and loss account, and it can be valuable in attracting investors or loans. Basically, it will show your ability to manage your debts and generate profit. It reveals how your business is performing at present, but also indicates how it will perform in the future.


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