E-commerce Accounting 101

With technological advancements around the globe, businesses are stepping into the world of the internet. Whether you have a small or large business, going digital is the new trend. E-commerce is the purchase and sale of goods or services over the internet and transferring money and data to complete the transaction. It is also referred to as electronic or internet commerce. Since its inception, online selling has evolved tremendously; the evolution and history of e-commerce are fascinating – and it is advancing at an even faster rate today. Bookkeeping and accounting are two of the most important factors determining your long-term success, irrespective of what stage your business is in. Things can quickly go wrong if you do not have a solid knowledge of accounting for e-commerce businesses.

Digital transformation is a very real trend, and businesses that are not already following the trend will need to enter the e-commerce landscape sooner rather than later. One of the first steps will be to apply the proper e-commerce business model to the online store. However, whether you are just starting with e-commerce models or have an established digital commerce venture and want to expand your online presence, knowing which model best fits your needs and requirements is critical. Here is a list of some common e-commerce business models for your organisation.

Business to consumer (B2C)- Business to consumer (B2C) marketing is when a company markets its products or services directly to end users. It is the most well-known type of business. B2C e-commerce is relatively simple. Every time you buy groceries, eat at a restaurant, go to the movies, or get a haircut, you engage in a B2C transaction. When you are the end user of the products and services offered, you have entered into a B2C transaction.

1. Business to business (B2B)- In this model, a business sells its product or service to another business. However, the buyer is sometimes the end-user, but more often than not, the buyer resells to the consumer. In general, B2B transactions have a longer sales cycle but higher order value and more recurring purchases.
2. Consumer to business (C2B)- This e-commerce model enables individuals to sell goods and services to businesses. In this e-commerce model, a website may allow customers to post the work they want to be done and have businesses bid on the opportunity. One such example could be affiliate marketing services. The C2B e-commerce model’s competitive advantage is in the goods and services pricing. With this approach, customers are empowered to set their own prices or to have businesses compete directly to meet their needs.
3. Consumer to consumer (C2C)- While B2B and B2C business concepts are well-known, customer-to-customer (C2C) is unique to e-commerce. This is primarily due to the overwhelming popularity of platforms like Craigslist, OLX, and eBay. These platforms enable users to trade, buy, sell, and rent products and services. In return, such platforms earn a small commission on all transactions. This type of e-commerce business model is quite complex and requires careful planning to operate.

Now that you know the top e-commerce business models, you can decide which is best for your company’s goals. Since every model has its own advantages and disadvantages, you should decide after carefully considering all relevant factors. Understanding who your customers are and what you are capable of is critical in making the final decision. As your e-commerce business expands, so will your financial obligations. That means you will have a lot on your plate as a business owner. Sales, returns, supplier payments, banking fees, and every other financial aspect you can think of become more complicated as your company grows. Growing an e-commerce business is exciting, but it comes with many responsibilities. Such growth can quickly become a nightmare if you do not follow a good accounting system. Thus, it is essential to have a streamlined accounting for your e-commerce. So, now let us understand accounting for e-commerce businesses and its importance.

Importance Of E-Commerce Accounting

E-commerce accounting is the accounting (including bookkeeping) process in an e-commerce business. Accounting for e-commerce entails keeping financial records and detailed documentation of what comes in (receivables) and what goes out (payables). It also includes preparing and submitting annual tax returns and payments. The collection, categorisation, and organisation of this financial data (including transaction and asset records) provide the information needed for effective reporting, forecasting, and strategising.

The primary reason why accounting for e-commerce business is important is that it provides a solid and dependable system for financial information and records. Even before the e-commerce business begins trading, bookkeeping and accounting are critical to maintaining firm control over things like e-commerce start-up costs and initial investment. Let us dig deeper to understand the importance of e-commerce accounting.

1. Ensure compliance- The most obvious advantage of having an accounting system in place for your e-commerce business is to ensure compliance. An accountant’s responsibility is to ensure that your e-commerce business is tax-efficient and tax-optimal all the time. They will help you prepare and submit your tax returns on time to avoid penalties from Her Majesty’s Revenue & Customs (HMRC) and ensure that you take advantage of all applicable tax breaks and allowable expenses. If you want to know more about what an e-commerce accountant can do for you, check out our blog on the “Top 8 things that an e-commerce accountant can do for you.”
2. Generating financial forecasts- Accounting for e-commerce business provides you with some of the most important tools you will need to create a roadmap for your company’s short and long-term future. It is an entrepreneur’s natural instinct to plan, especially in an ever-changing industry like e-commerce, and financial insight is essential in this planning. Accounting provides analytical insights, such as projections and forecasts, that allow you to begin constructing a clear picture of your financial future.
3. Assist with ongoing growth strategies- Growing an e-commerce business is difficult, especially in a competitive market. Your brand must stand out from the crowd, your product must exceed expectations, and your customer experience must be second to none. The foundations of this are bookkeeping and accounting for e-commerce businesses. When your finances are well-organised, and your accounting analysis is fully optimised, you can make more informed decisions about how and when to implement various growth strategies.

The abovementioned points are strong enough to highlight the importance of accounting for e-commerce. However, many e-commerce businesses follow good accounting practices but fail in the long run. A major reason for such a downfall is sticking to the traditional accounting and bookkeeping techniques and not utilising automated accounting and bookkeeping software. The traditional methods are all about manual intervention, increasing the chances of human mistakes, fraud, and discrepancies. Thus, it is better to avoid them by following the path of automation in the e-commerce industry. Getting new customers and orders is almost always the top priority for any e-commerce business owner. However, systems and business processes become increasingly dreadful and inefficient as you scale. So, how do you find more time to focus on bringing in more customers and orders while keeping everything else running smoothly? E-commerce automation stands out as a fundamental and forward-thinking tool that business leaders should employ.

Automation is a technique that helps to manage your business processes with minimal human assistance. It can be termed a labour-saving technology that uses the latest software to convert all manual and repetitive tasks into automated ones. In a nutshell, it automates every minor to the major task of your e-commerce business in the slightest time duration. Let us learn how it helps you save time and focus on what matters the most.

1. Easy inventory management- Inventory management is one of the most common issues encountered by e-commerce businesses. There is a constant flow of incoming seller shipments and outgoing customer orders through digital and traditional channels, as this necessitates a careful balance to avoid shortages or overstocking and, as a result, overstocking in the store. In such situations, you will have to pay storage fees and will not see a return on investment, but through automated methods where you will see an overall picture of how inventory and fulfillment affect your revenues, cash flow, and profitability, which is impossible to achieve with manual accounting.
2. Control of cash flow- With the help of online bookkeeping services, you will see incoming and outgoing funds without having to collect data from sales channels or rely on guesswork. As a result, controlling cash flow will allow you to discover money that can be reinvested and the money available to replenish inventory or hire more employees.
3. Enhanced profitability insights- Profitability is critical to a company’s long-term success. E-commerce accounting automation facilitates decision-making by allowing you to see your profit margins accurately and adjust your spending accordingly. E-commerce sales channels do not provide line-by-line details of purchasing transactions and spending. With the help of automated accounting, you can combine data from various sources, including fixed expenses such as rent and payroll, and gain total visibility on accounts payable.

Final words

In conclusion, accurate and reliable accounting and bookkeeping practices are crucial for any business owner. With strong accounting for e-commerce business, you can manage and predict cash flows, allowing you to plan for the future and maximise your potential profits and growth. E-commerce accounting can also assist you in managing your tax obligations and thus saving you from hefty fines and penalties. Setting up an accounting system as soon as possible—preferably one designed specifically for an e-commerce company can reduce headaches (and maximise profit) for years to come.