With a big push from the COVID-19 pandemic, e-commerce has had a massive growth spurt. Whether you've added an e-commerce component to your existing business or designed your business around e-commerce from the start, the following bookkeeping tips will help you keep up with the demands of doing business in a digital world — and get the most from the resulting data.
1. Know Your Tax Liabilities
What was once an open question — are e-commerce businesses obligated to collect sales taxes from every state that they ship products to? — is rapidly becoming settled law. The short answer is, yes.
Properly collecting sales tax from customers and then remitting that sales tax is becoming a normal part of doing business in most states across the U.S. Each state, and many local jurisdictions, define their own sales tax rules and expect all sellers to follow them, even out-of-state e-commerce sellers. E-commerce companies can prepare by lining up capable bookkeeping and controller services.
First, consider that sales tax is actually a transaction tax that state and local jurisdictions impose on the consumer. But since it would be nearly impossible for states to track and collect that tax directly from each individual consumer, they instead hold the seller responsible for calculating, collecting and remitting the tax on behalf of the consumer.
While some states (e.g., Nevada) have used amnesty programs, waiving penalties and interest charges to encourage online sellers to comply with sales tax requirements, most states are expected to begin taking a harder line. Typically, a state sales tax audit will require sellers to pay the sales taxes themselves even if they never collected the tax from consumers. Ignorance of the law is not a valid excuse. Moreover, many states are broadening tax laws to include online ads, software-as-a-service (SAAS) and other digital offerings. So proactive compliance is the best course.
2. Anticipate What You'll Need to Scale
This is an underappreciated aspect of e-commerce growth. Traditional brick-and-mortar businesses grow within the limits of both a defined physical space and the laws in that local jurisdiction. But e-commerce businesses are capable of unconstrained growth that can compound complexity in both operations and compliance as they scale up and cross state lines. Instead of wrestling with spreadsheets and manual data analysis that demand increasing amounts of time and money at scale, look to implement processes, systems and experts early on that can more efficiently keep pace with your growth.
Again, your bookkeeping partner can play a huge role here. By using the latest digital tools, cloud-based technology and real-time reporting, they can provide a level of support that's in sync with your e-commerce infrastructure.
3. Distinguish Between Different Sales Channels in Your Financial Data
It seems like sound business sense for an e-commerce business to offer direct-to-consumer sales through a variety of outlets. But is that always the best move for your business? By tracking performance and comparing results across each sales channel, you'll see how profit margins vary from one to another.
Being thoughtful in how you track the results in key performance indicator (KPI) dashboards and financial analysis equips you to make timely decisions to maximize your return on future marketing spend. You might find that marketplaces like Amazon and eBay are cannibalizing sales from your own website, yielding you lower net profit margins for the same ad spend. One effective strategy to counterbalance this is offering exclusive bundles or packages only available on your own website that will encourage consumers to spend directly with you rather than through outside channels.
4. Also Distinguish Between Prepaid Subscriptions, Recurring Charges and One-Time Sales
Recurring revenue is fantastic for any business, and prepaid multi-month bundles can be an excellent way to fund your business with non-dilutive capital from your customers. And while there are plenty of available software tools to easily manage subscription payments, it's just as easy for businesses to lose visibility on their true profit margins and cash flow if they're not properly reporting revenue and associated costs on an accrual basis.
Recording and reporting different types of sales and corresponding costs at the right level of detail will protect you from cash flow surprises while helping to create a compelling value story for potential investors. As a startup CFO and angel investor myself, I can’t count the number of potential deals I’ve seen implode simply because the investors didn’t clearly enough understand the company’s financial trends — don’t lose investor confidence by keeping sloppy books!
5. Track Your Storage and Distribution Costs
It's common for businesses to use third-party manufacturers and/or logistics (3PL) facilities that warehouse inventory and handle shipping and returns. While those services can be great, you still need a capable bookkeeping team that can reconcile the inventory activity to give you an accurate read on inventory asset value, report losses due to breakage/spoilage and properly record cost of goods sold (COGS) to provide you with accurate gross profit margins.
It's also valuable to have your bookkeeping and controller services provider conduct a cost/benefit analysis to determine the most economical inventory procurement strategy. If, for example, you're buying inventory in large volume at a discount, you might actually be losing money if warehousing that much inventory incurs storage fees that exceed the discount over the time it takes you to sell through all that product.
6. Check All the Links in Your Supply Chain
Logistics issues can become more complex as your business scales up. Eventually, you might have inventory in multiple warehouses at different stages of the manufacturing, storage and fulfillment process. E-commerce businesses anticipating high growth might be wise to put an industry-leading inventory accounting software solution in place early to avoid drowning in spreadsheets and manual analysis when they need detailed financial intelligence quickly. Streamlined, scalable systems are the bedrock of e-commerce.
You need robust, real-time data to inform decisions involving everything from ordering raw materials to moving those materials through the production line to finished goods and then shipping those products to your customers as efficiently as possible. Scalable outsourced bookkeeping services are a key component of that process and can help you select and implement the best solutions for your specific needs. They not only provide actionable financial intelligence today, but also prepare you for approaching prospective investors and lending institutions as you grow tomorrow.
7. Know Your CAC From Your LTV
Successful e-commerce businesses capitalize on business intelligence. Customer acquisition cost (CAC) and customer lifetime value (CLTV) are usually at the top of the list, but there are many other KPIs that can make or break your e-commerce business.
Too many e-commerce businesses spend more money to acquire each customer than those customers will ever return over their customer lifespan. Whether you expect the same customer to make repeat purchases over time (without your having to spend more money marketing to them again) or you have a subscription product that delivers a higher LTV the longer your customers remain active, your business will never achieve profitability if CAC is higher than CLTV. Lean on a team of expert bookkeepers and controllers to keep you out of the red here.
Take That First Step Now
E-commerce is clearly the wave of the future. But you need to get up to speed on the underlying systems and processes today — and it all starts with professional bookkeeping support.
At Supporting Strategies, our experienced, U.S.-based professionals use secure, best-of-breed technology and a proven process to provide a full suite of bookkeeping and controller services. Are you ready to learn how you can move your business forward? Contact Supporting Strategies today.
Mark Wald, Managing Director, Supporting Strategies | Santa Monica, LA, and Ventura County, provides bookkeeping and controller services to growing businesses.
This website is created by Supporting Strategies to provide general bookkeeping and accounting information only. Supporting Strategies does not provide tax, legal or accounting advice, and the information contained herein is not intended to do so. As such, the information provided should not be used as a substitute for consultation with professional tax, legal, and accounting advisors, and you should consult with a tax, legal and accounting professional before engaging in any transaction.
Supporting Strategies is not a CPA firm.