It’s the end of your financial year and you’re happy with the results. You know it’s been a good year, but you don’t have official numbers yet. Before celebrating, make sure your financial records are in place or your whole celebration could become a headache.
E-commerce accounting is a real thing and conducting a good review is extremely important. It helps you get a more accurate idea, but at the same time, you’ll ensure you follow the law and respect tax compliance, which will keep you out of trouble.
With these thoughts in mind, here’s how to prepare for your e-commerce accounting time of the year.
Educate Yourself on Tax Requirements
Generally speaking, online commerce is an international business idea, yet many online vendors only deal locally. Either way, it’s important to understand tax requirements, which may vary based on what you sell too.
Based on the business structure, you may need to learn more about VAT, corporation tax, business rates, contributions to salaries and so on.
Review Financial Records
Get sales records from every platform, as well as documents like bank statements or payment gateway reports. Compare statements to accounting records as well, only to ensure payments are recorded by the book. Carefully check for errors and if you find a discrepancy, investigate it straight away.
Ideally, you should conduct such checks on a regular basis. It saves all the hard work prior to the tax season. Make a habit of doing it weekly or monthly, depending on your sales amount. It keeps everything under control and saves plenty of stress later.
Check Outstanding Records
Once you have the compiled financial statements, you need to review every outstanding bit. This could mean anything, from receivable items to invoices. Failing to do so will affect the cash flow negatively. Overdue things should be sent reminders. Plan for clear communication strategies to encourage timely settlements. Create professional yet direct messages that motivate clients to pay quickly.
You can also offer some discounts for those who make early payments, not to mention writing off a bad debt if any.
Manage Your Stock
E-commerce accounting is also about physical inventory. Conduct a physical count and write off what can’t be sold, such as damaged stuff, expired goods, or items that no longer meet quality standards. Adjust the stock accordingly.
Different people use different valuation methods. Double check the inventory turnover too, this will help you later. Choose a method that best represents your business model and stick to it consistently.
Take inventory shrinkage into consideration and try to work on it, whether it’s caused by errors or theft. Most issues can be prevented if you do all these on a regular basis.
Check VAT Compliance
E-commerce accounting requires attention to VAT too, especially if you sell in more countries. Review tax regulations wherever you sell. Some countries have straightforward VAT systems, while others involve intricate reporting mechanisms.
Again, tax compliance software could be a better idea than doing it yourself. These tools automate VAT calculations, track changing regulations and help generate accurate tax reports.
If you have an accountant, they should help you cover such issues.
Review Statements
Statements documenting profits and losses are mandatory in the process because they’ll help you understand the financial health of your business. Keep an eye on revenue streams, but also on big expenses. This way, you’ll be able to identify weak and strong areas within the business.
Don’t forget to assess the performance of certain things or perhaps categories of items. Some categories will drive the business forward. Others could be useless and just a waste of space and money, with no actual profits.
Prepare for the Tax Declaration
Getting ready for the tax season is one of the main things to consider in e-commerce accounting. This means you’ll have to gather countless documents, especially in terms of finances. Statements, reports, records, receipts, all these things add up and must be taken in consideration.
Try to look for tax deductions if any, not to mention credits. E-commerce businesses can benefit from numerous offers from this point of view, whether it comes to purchasing equipment or other similar expenses.
Again, based on the profile of the business and industry, there are different elements to think about. Unless you’re an accountant yourself, it pays off discussing these potential options with a tax professional. Otherwise, you might be losing on some great offers.
Potential Discounts
The government gives out all sorts of discounts and tax exemptions. It doesn’t necessarily mean you can benefit from them, but it’s always worth checking. On the same note, you might be eligible for tax claims, depending on the nature of your business and expenses.
For example, you may have to pay tax on profits only, meaning expenses are deducted first.
Some of these considerations include office or travel costs, things you buy in order to sell, training courses or even advertising. Again, it depends on the industry.
It might be difficult to identify discounts or potential claims yourself, so it’s wiser to have an accountant look into all these. There are all sorts of small bits you can do in order to claim money later.
Payment Processor Fees, Often Overlooked
This element must be part of the checklist. You don’t want any unpleasant surprises kicking in out of nowhere. If you fail to think about these fees, chances are they’ll end up eating into the actual profit.
Payment processor fees vary from one company to another and could be affected by the volume of transactions, but also the industry. Normally, they’re around 3% of the transaction, but they also have a fixed fee for each transaction. The exact percentage can fluctuate based on transaction volume and specific industry characteristics.
If your business processes plenty of transactions, you have the power to shop around and negotiate. This means you can potentially reduce your per-transaction costs through proactive discussions.
Payroll and Contractors
Don’t forget to review the payroll, but keep an eye on contractor payments too. Your e-commerce accounting task should cover these elements or you’ll end up with errors and discrepancies in your tax report.
Believe it or not, more than 80% of all businesses experience some sort of payroll errors, leading to contractors and employees being paid incorrectly. While most of these errors are corrected, companies spend around 12 hours per month on average to repair these issues.
It’s an issue that can be fixed by keeping everything under control, rather than leaving it until the last moment. Consider using specialized payroll management software to reduce human error. These tools can automate calculations, track payment histories, and generate accurate reports.
Make Some Estimations
If this is your first year in business, making estimations is difficult, but definitely not impossible. There are all sorts of accounting software (some of it could be free) to help you get an idea about what you have to pay.
If you have an accountant, you can give them a brief idea about the money you’re handling in order to help them make an assessment. It won’t be the most accurate one, but at least you’ll have an idea.
However, if you’re not in your first year and you’ve been through a tax season already, you can make some estimates yourself. Think about your profits for the previous year and look at the tax you paid. Proportionally, you can have a rough figure of what you’ve made this year.
This way, you can have an idea about what you may need to pay. It makes things easier, rather than getting slapped with a big bill at the end of the tax year.
Set Some Funds Aside
Last, but not least, it’s very good practice to set aside some funds for your tax season. Again, you may end up slapped with a big bill you can’t afford. Ideally, you should do it month by month, yet many business owners start saving in the last few months before the tax season.
If you’ve paid taxes before, you should have a rough idea about what to expect. Proportionally, you can set some money aside month by month.
But if you haven’t paid taxes yet, this could be a surprise.
To keep things under control, you may want to start a new bank account. Make it a dedicated tax account to set funds aside and let it build up. When the tax season kicks in, you’ll realize it’s much easier to just add a bit of extra in case it doesn’t cover your expenses.
In the end, preparing for tax season isn’t just about numbers, it’s about setting your business up for future success. Stay organized, be proactive, and don’t fear the process. Whether it’s tracking inventory, reviewing financial records, or understanding tax requirements, each step builds a stronger financial foundation.
Remember, smart preparation today prevents headaches tomorrow and positions your e-commerce business for sustainable growth.
