Best Accounting Practices for an Online Business
Updated: Dec 1, 2020
Entrepreneurs are constantly looking for business opportunities. The world wide web has made it accessible for many entrepreneurs to either start a business or expand their business to the e-commerce world. Online businesses can be appealing to entrepreneurs for many reasons, including working remotely, but are you ensuring that you are following the accounting principles and regulations for your business? Here are some best practices for your online business:
1) Get an accounting software – an accounting software will not only help you manage your invoices and payments, but it can also help you track sales, costs, and inventory. An accounting software can also help manage receivables, process payroll, and reconcile bank accounts. Sage Intacct is one of the leading accounting software for companies of all sizes and it works hand in hand with Shopify, the most commonly e-commerce platform used by online business retailers. At CPA by Choice we always help our clients better understand the benefits of accounting software systems, we help you implement these systems, and we can also help you manage your accounting through these systems.
2) Prepare a budget - a budget will help you project and estimate future expenses and the amount of income or revenue needed to sustain your operations.
3) Manage inventory - Consider establishing procurement and sourcing practices to ensure proper inventory levels are maintained. As a successful business owner you do not want to run out of inventory and lose sales and/or customers. Managing inventory properly will also help with inventory shrinkage and slow-moving inventory.
4) Monitor receivables –Deloitte, one of the big 4 accounting organizations in the world, suggests applying payments to the proper invoice the day they are received. Some strategies for limiting issues with accounts receivable, include: finding ways to take delivery upon payment of services, assigning clear and consistent credit policies, requiring a portion of payment in advance, and ensuring your billing is accurate.
5) Automate payments and invoices – Enroll recurring bills on online automatic payments and customers in electronic invoicing. Practicing this consistently avoids past due bills and unaccounted revenue.
6) Track all expenses – According to the Small Business Association (SBA), you should include the following line items on your spreadsheet: supplier/biller’s name, account number, expense type, date invoice was received and amount owed. Furthermore, it is important to keep all receipts, credit card statements and incoming bills in your accounting system to ensure you’re properly managing cash flow.
7) Maintain accurate records - Good records are key to running a successful business. The IRS suggests you maintain the following for a small business: daily and monthly summary of cash receipts, check disbursements journal, business checkbook, depreciation worksheet and employee compensation records. We recommend that you record transactions daily for the most accurate accounting.
8) Separate business and personal expenses - When running your online business, it can be easy to mingle business and personal expenses. Keeping these things separate not only helps you reduce problems, it also greatly simplifies things and makes it easier to manage your finances. By separating business from personal expenses, it is easier to see the true performance of your business, to track cash flow, to maintain accurate records for tax filing, forecast long-term financial performance for your business and ultimately allow you to provide evidence of that performance for a lender or investor.
9) Stay up-to-date with taxes - Ecommerce business owners have two tax categories to mind, business income taxes and sales taxes. All ecommerce businesses who may owe more than $1,000 in taxes by the end of the year are expected to make quarterly estimated income tax payments. The IRS calculates your dues based on the last return and expects payment according to the calendar. In order to file sales taxes, you need to maintain clear records that you’ve collected sales tax for every customer invoice. All of these records will have to be filled with your local tax jurisdiction according to the due date. The filling frequency varies from state-to-state, but typically it’s by mid- or end of each month. Depending on which ecommerce platform you are using for your store, you can either add all sales taxes manually to the checkout form or have these automatically calculated, based on the customers’ shipping address.
10) Hire a reputable accounting firm - Whether you do your own bookkeeping or have someone do it for you, it pays to have a reputable accounting firm on your side to complete your statutory returns and audit. In addition, a professional accountant can serve as an adviser and consultant when it comes to determining the best financial practices for your business. At CPA by Choice, we make sure your financial accounting data is presented correctly for your reporting needs and accounting records are up-to-date and ready for use in preparation of income taxes.
We know how busy you are running your online business, and we want you to focus on your operations. Please call us/message us and allow us to handle the accounting for your online business.