Of course, accounting mistakes happen to all ecommerce businesses from time to time, but many of those mistakes are preventable.
For example, using accounting software rather than spreadsheets can significantly reduce the number of accounting errors made, and may even save you money in the process.
Here are some of the more common mistakes ecommerce merchants make, along with ways to prevent them from happening in the first place.
1. Trying to DIY with spreadsheets instead of using cloud accounting software
Excel and Google Sheets are great for many things. Spreadsheets can help you organize business data, create budgets, and monitor business trends. But it should never be considered an acceptable substitute for ecommerce accounting software. Cloud accounting software applications allow you to manage your business from any location and require little in the way of maintenance or upkeep since there’s no hardware required and makes it easy to scale up to the next version should your business outgrow its current version.
For example, Xero offers numerous features for merchants, including the handy Xero dashboard that allows you to monitor both incoming sales and spending. Xero can also keep track of all of your daily transactions and can provide a summary of your overall business health. In addition, Xero offers integration with retail apps, offers a convenient mobile app, and has three plans designed for everyone from a one-person shop to an established business. Best of all, because it’s on the cloud, you have round-the-clock access to your data should any late-night issues pop up.
Should you be tempted to use spreadsheets to run your business, ignore the temptation and head over to a cloud accounting software solution like Xero.
2. Putting off bookkeeping until tax time
Putting off the bookkeeping process until tax time is more than an exercise in procrastination. It also can end up costing you dearly.
The key to remaining current on bookkeeping tasks comes down to making the entire process easier. No one wants to spend their time entering mind-numbing data into a computer. That’s why it’s so important to use a system that works with your business.
Another downside to putting off bookkeeping is the very real possibility of ending up with a much larger tax bill than you may have been anticipating. In turn, this can leave you short of cash, often at a precarious time.
Putting off bookkeeping usually results in a last-minute chaotic scramble to locate the appropriate receipts for your deductions. You’ll also need to tally sales totals for the year, which can be a challenge if you have a high number of returns.
Finally, you’ll need to count and possibly adjust your inventory in order to properly report your expenses and assets. But that’s not all. This late year scramble can also result in an inaccurate tax report and even an underpayment of taxes, which no one wants. With adequate resources in place, you’ll be able to manage your sales and expenses throughout the year, eliminating the chaos forever.
3. Not staying compliant
Taxes are part of doing business. As a merchant, you’re expected to remain compliant with all current tax laws that may impact your business. Australian businesses are required to pay the following taxes:
- Company income tax: businesses in Australia are required to pay income tax on any profits earned throughout the year. With different rates for businesses earning less than or more than $10 million in profits, it’s important that income and expenses be calculated accurately throughout the year in order to pay the correct amount of tax.
- Goods & Services Tax (GST): GST is a flat rate tax that is typically added to the cost of your goods and services and passed along to your customers.
- Fringe Benefits tax: If you offer your employees certain benefits such as a gym or health club membership or the use of a company car, you may need to pay fringe benefits tax.
In addition, there may be other business taxes imposed by individual states and territories.
4. Not running regular financial reports
In order to know the financial health of your business, it’s important to run financial reports regularly. For example, how will you know how much money your business has earned without a profit and loss report? And by not running an inventory forecast, you run the risk of running out of product during your peak season or ending up with inventory shrinkage. Here are the top four reports you should run and why they’re so important for your business.
- Profit & Loss: A profit and loss statement provides you with detailed information on both income and expenses for a specific period of time. A profit and loss statement can tell you whether your business is profitable, whether it’s trending in the right direction, or whether it needs a reset.
- Cash Flow Statement: A cash flow statement details the amount of cash that flows through your business. A cash flow statement is divided into sections that allow you to see exactly where incoming cash originates from. This is particularly helpful if much of your cash flow originates from investing or financing activities. A cash flow statement is also important if you’re looking to attract investors, as it’s one of the first reports they look at.
- Balance Sheet: A balance sheet looks at all components of the accounting equation: assets, liabilities, and equity, providing you with details on what you own, what you owe, and the amount of funds that have been invested into the company. A balance sheet is typically distributed to those outside the company, such as financial institutions and investors.
- Inventory Forecast: An inventory forecast looks at past inventory performance and trends in order to predict inventory totals for the future. For instance, if you want to forecast inventory needs for the summer months, you can use historical data from the previous summer to see how much inventory you’ll need. An inventory forecast report can help you maintain accurate inventory levels and reduce the possibility of too much or too little inventory on hand.
5. Overlooking the importance of cash flow forecasting
No one wants to run low on cash. But every time you disregard the importance of cash flow forecasting, you run that risk. Cash flow forecasting allows you to make more informed decisions about your business, plan for potential rough spots, and even predict possible cash shortages. One of the most important reports your business can utilize, the cash flow forecast can help you run your business better.
With all of the things on your plate, why make accounting more difficult than it has to be? Using the right tools and resources can help you avoid common accounting mistakes, leaving you more time to spend on your business.