How to do the accounting in an e-commerce business setup

Deciding to become an e-commerce entrepreneur is an exciting step. Your e-commerce business setup is a chance to save yourself the hassle and stress down the line. Use this opportunity to create fool-proof and scalable accounting systems that will future-proof your business as it grows.

Whether you opt to set up your business as a sole tradership, a partnership or a limited company, you will need solid accounting systems. The goal is always to have financial facts at your fingertips that are up to date and accurate.

The data

Even in the early days of your e-commerce business setup, you will need to have a keen eye on your business’ financials. You will need to track your inventory, sales, expenses and any tax liabilities you incur.

Regardless of the size and entity choice of your business, you will need access to a Profit and Loss, Balance Sheet and crucially, a Cashflow Statement as to understand your business health.

We’re going to assume that if you are reading this you have already made the decision on the best entity type for your business and have registered it accordingly.

1. Get a bank account

The first step of any e-commerce business setup, from a financial perspective, is to open an appropriate business bank account. While you may think this is unnecessary right out of the gate, it will compartmentalise your business’ finances, reducing the admin time required to track your accounts. If you are operating your business in multiple countries it would be useful to segment bank accounts according to currency or country too, as to aid all future accounts.

All partnerships and limited companies require a separate bank account, but even if you are a sole trader, it is highly recommended that you open a dedicated business account. Shop around and see if you can find one with perks that may benefit your business, such as preferential loan rates.

You may also require a credit card for the business, and if so, you are best once again opening a business-only account.

2. Set up an accounting system

You can’t keep accurate records if you don’t have an appropriate accounting system. Gone are the days of a notepad or spreadsheet being sufficient, especially with the complexities of accounting for e-commerce businesses.

Choose a system that allows you to scale, takes current legislation such as Making Tax Digital into account and is targeted at e-commerce entrepreneurs. We recommend Xero, which starts at £10 a month once you have completed a 30-day trial. It is also included in our monthly package for all clients.

3. Get an accountant

While your business may start small, it won’t stay that way. E-commerce accounting is a tricky landscape to navigate, especially if VAT and/or international sales are involved so getting an accountant on board early will give you peace of mind that you are reporting as required.

Choose an accountant that specialises in e-commerce and always seek advice from an e-commerce accountant in each country you are looking to trade in.

4. Automate your processes

The secret to easy yet accurate accounting for a new e-commerce business setup is automation. You are going to have your hands full as you market your business, create business deals and deal with the sales orders themselves.

Use an app such as Receipt Bank to electronically collect receipts and feed bank transactions directly to your accounting software.

Connect your sales marketplaces as well using apps such as Shopify directly, or by feeding transactions from Amazon and Shopify through A2X.

If you find yourself manually creating any sales or payments in your accounting software, investigate a work-around. Xero has a thriving marketplace teeming with apps that save you man-hours while providing 100% accuracy.

Setup accounting process for e-commerce store
Daria Nepriakhina

5. Manage your taxes

Cashflow can be a challenge for an e-commerce start-up. Once you have spoken to your e-commerce accountant, make sure you take their tax advice on board. Create an accrual for your estimated tax bills and feed cash directly from your sales to ensure you will be able to cover your liability.

If you are registered in multiple countries, make sure an accountant in each country can help you plan for your future tax liabilities, so you won’t get caught out by an unexpected bill.

6. Understand your business

This may not be your first business; maybe you have comprehensive accounting knowledge, but maybe you don’t. Even if you do, you may find that the specifics of e-commerce muddy your understanding of where your business stands.

After your first month, quarter and the fiscal year in business make sure to touch base with your accountant so they can help you grasp the specifics – are there funds to reinvest? Should you increase your take-home pay? Is it time to take on a staff member? Let your e-commerce accountant take the guesswork out of your decision-making and you will ensure your business’ solvency in years to come.

Next steps

You may think that your accounting doesn’t matter at the start, that it is simply because of the number of transactions, but by putting systems and strategies in place now you will make your life easier moving forward.

If you want to discuss setting up your e-commerce business with Xero please get in touch and we will be happy to help.

The best time to act is now.