7 Accounting Basics You Need to Know to Run a Successful E-Commerce Business.
Accounting is a painful necessity.
The following ten accounting basics will cover everything you need to know to understand your money and ask the smart questions.
1. Get yourself accounting software
Do yourself a favor and get accounting software. Quick Books or Xero are marketed to customers who run e-commerce businesses.
You can get yourself a free 30 Days Trial and there are also free courses available on Udemy to give you basic knowledge about the software and how accounting can be performed on it.
If you wish to go with any other software, pick one that will sync directly to your Ecommerce store.
It will make life a whole lot easier.
2. Track your cash flows
If you don’t have a separate bank account for your business yet, get one.
You need to know that your business is making money. And the easiest way to see this is to watch your cash flow.
Track what you expect to spend each week. Track what money you expect to come in each week.
3. Determine how to count inventory
If you’re selling a service, then ignore this step.
Inventory is the product you sell or all the materials you use to build that product. Inventory equals Money.
Don’t forget to include any costs for wrapping or packaging your product.
Decide what minimum volume of inventory you want to have on hand, and make sure you are tracking inventory so you can reorder before you pass this point.
4. Understand your cost of goods sold.
Cost of goods sold is the expense directly tied to the products you sold.
This is the inventory sold plus how much it cost to make that inventory.
Anything that is tied directly to your products and has a cost increase when you make more stuff should be in the cost of goods sold.
5. Calculate all other expenses
Next, you need to understand how much everything else is costing you.
Any expenses that don’t increase when you sell more or decrease when you sell less are called ‘fixed expenses.’
Common Fixed Expenses are Rent, Utilities, Insurance, Property Tax etc etc.
6. Figure out your break-even sales requirement
Budgeting and planning are important parts of running a business.
After all, you’re not going to just want to know if you made a profit last month, you’re going to want to know if you expect to make one this month and next.
Your break-even sales amount is the amount of sales dollars you need to earn to cover all of your costs.
7. Understand your balance sheet
The balance sheet is made up of assets, liabilities, and equity.
Assets are things you have of value, like cash in the bank. Liabilities are debts or payments you owe. Equity is the difference between the two.
‘Negative equity’ means you owe more than you own.This is a bad place to be.
If your business is in this state, it means you’re losing money.
If your income statement makes it look like you’re making a profit but your balance sheet is telling a different story, then you’re missing something in your expenses.
A simple check to make sure your balance sheet is right is to remember that assets = liabilities + equity.
I’ve now covered all the accounting basics you should be following day-to-day and month-to-month.
Start with a basic accounting software like Xero or Quickbooks. It will make your life a lot simpler.
Then, remember ‘cash is king,’ and get a handle on your cash flow.
A good accountant can help you with everything above and beyond the basics if you need it.