Five Misunderstood Ecommerce Bookkeeping and Accountancy Terms
These terms often refer to specific processes or concepts and as a entrepreneur ready to scale your product-based business, it’s important to know what they mean. However, a lot of them are often misunderstood by business owners. This presents a serious problem when communicating with investors and other people about your business.
So taking the time to understand what these terms mean is important and will help you improve your confidence when talking about your business numbers.
What I thought we could do is a bit of a back to basics - taking a look at some of the most misunderstood ecommerce bookkeeping and accountancy terms, and explain them simply for you, so you know what everything means.
The first commonly misunderstood term that business owners battle with when it comes to accountancy and bookkeeping is "Accounts Receivable". You might think that this is the "available money" that you have. Many clients before I meet them say this is how they thought of it... but don't worry this often confuses most ecommerce owners.
Accounts receivable is actually the money that you are owed. Usually for a growing ecommerce businesses it's money you are owed from dispatching either a product you've sold on your website or from a service you've delivered.
It’s always exciting to see your sales grow in your website admin reports, but what happens if you receive a return or refund request?
Whilst most ecommerce transactions are retail - e.g. immediately paid for via credit card and happily received, sadly some of that money may have to be returned to the customer at somepoint in the future, if the product gets returned.
... and some of that money that you are waiting for may not come in as quickly as you'd hoped. It can get delayed. This is often the case with payment processors like Stripe or Worldpay, who take several days to "land" a customer sale into your bank account. There is a time delay between the "sale" and the hard cash getting into your hands / bank.
Why is this a problem and important to understand? Well, as your business grows, this timing difference between winning the sale and getting the money into your bank account can become a bit of a battle for many entrepreneurs!
Unless the cash is in your bank account, it's not really yours yet, to count on and use... it's possibly yours because you've done the work or sent the product.. but not 100% yours, yet... because things happen. People don't pay, people request refunds, people return products... and yes in the very worst case fraud happens and you can get a chargeback too.
It means we have to not get carried away and assuming that because we have a sale all of that money is available to use in our business for other things - instead we have to closely watch out for overspending or overestimating your profit... just know that some of that money you made from sales, might have to go back to where it came from!
The best way to navigate through all of this is trying to estimate a realistic figure of what you’ll actually receive. If you’re just starting out, try to pick a realistic amount, or keep your spending tight until your second or third month when you can get a better understanding of your % returns and refund requests.
After regularly reviewing the flows in your business for a few months, you will start to see the patterns, the typical amounts of returns you can expect, and get more confident that you CAN count on a proportion of that accounts receivable money becoming hard cash in your bank account.
So, when it comes to accounts payable, this is actually the opposite of accounts receivable. Accounts payable is the amount of money YOU owe to someone else. You might have to pay supplier bills, rent or a loan, or payment for a new stock shipment.
Accounts Payable is also known as a liability, which means you as the business owner are legally responsible for satisfying it, looking after it, paying it. It is your obligation, your responsibility.
So as your ecommerce business grows, this is vitally important to understand and keep ontop of. As business owners, we want to make sure we always have cash coming in to pay these bills, and meet our responsibilities. Keep our promises! Whether that's to our landlord in paying shop rent or our manufacturer for the stock they've produced for us.
Bank reconciliation is one of those things that a lot of clients who are just starting out in their business journey might not even know about, but it is an essential part of accurate ecommerce bookkeeping.
Essentially, when we perform a bank reconciliation we manually go through and cross check all of your bank transactions with what your accounting records (books) say.
For example, we start by looking at your bank statement on 1st June and we see £10 went out of your bank account for X thing, we then ask is there a corresponding receipt or invoice for that £10 and can we see that entry as a line item recorded into your Xero accounting software? The answer is yes - there should always be a match! If you spent it or sold it then we should have recorded it!
If we find an amount that has come in or out of your bank account, but it's not recorded in your accounting books, then we know that item is missing from your records. We then have to fix it to ensure you have a 100% accurate view of your business financial position.
How often should I reconcile to my bank?
You need to do this bank reconciliation regularly, as often as is sensible for your business and to keep on top of it. It's the very best way to locate any duplicate payments that have gone through by mistake, or issues with payments that are missing or incorrect.
As your business grows, the volumes of transactions grow and the opportunity for issues to get hidden in that huge level of activity is clear. So we need to do the checks to keep on top of it. For a small but growing ecommerce business, monthly reconciliations is just fine.
What exactly should you be checking, for an ecommerce business?
It depends on the size of your e-commerce store or business, as well as the frequency and scale of transactions. My view is you should be looking to match transactions for:
- Any Incoming payments matching it up to manually raised customer invoices
- Any credit/debit card sales settled matching them up to customer orders online
- Any outgoing payments where you have spent money matching it to supplier invoices or expense receipts
- Any Bank fees – including sales transaction fees (like paypal fee), monthly bank account fees, interest incurred.
- Earned Interest on savings accounts.
Merchant services fees are a fact of life for all ecommerce business owners and shop owners. We need help processing retail debit and credit cards safely and as entrepreneurs, we have to rely on third parties who have the tools to take payments, to process these transactions securely for us and in accordance with data compliance criteria.
The type of merchant service that you encounter will depend on what platform you are using, for example Shopify has an inbuilt solution called Shopify payments, which safely takes the payment from the customer via debit or credit card and deposits the cash into your bank account a few days later.
Other platforms like Woocommerce integrate with WorldPay and OPayo (formerly sagepay) to process payments - and of course you can add PayPal as another way for your customers to pay...
If you are accounting for eBay sellers / drop shippers or Amazon FBA sellers or as an Amazon Trader or Walmart Trader using seller central, each of these platforms will charge you merchant fees for each transaction you win through their platform.
So as you can see there are lots of options when it comes to Merchant services, depending on the business you are building and everybody experiences and incurs fees from Merchant Services at somepoint if they are in e-commerce.
Essentially, merchant services are the charges that you encounter as part of every day trading operations in ecommerce or in store, each and every time a customer buys something from you.
For every transaction fee, we need to ensure it is accounted for and recorded in your books.
I cannot stress enough how important it is to get payroll right from the start of your business. Lots of business owners we meet for the first time have assumed that when it comes to payroll, they can happily ignore it until they start actually hiring employees!
Not so. What about you?
You may be the sole company director and only person on your team right now but if you take a salary yourself, you need to be on the payroll and decide on the national insurance, tax and pension contributions for your own wages.
Accurately recording your payroll entries is your legal responsibility as business owner and as your business grows, having a tight handle on your responsibilities in this area is essential. If you are in anyway not sure, outsource this important work to a qualified ecommerce bookkeeper to do it (like us!).
You will need to pay your employees accurately and on time, every time. This is one area of your business, that you absolutely can not allow to descend into chaos because there are financial consequences, fines and penalties as a director if you get it wrong!
Make It Happen In Your Business
These are some of the frequently misunderstood terms that come up in ecommerce bookkeeping and accountancy. It’s important to make sure you get these terms right, and if numbers aren't your strong point, we would be more than happy to work with you to make sure that you have this covered. Save time and take the stress out of it all by using our ecommerce bookkeeping and ecommerce accountancy services to take care of all these worries for you.
- Make sure that you are 100% clear on where you have time delays in your business model (e.g. from website sale to cash landing in your bank account) and decide how much you can "rely" upon the money really being there, to be used and invested into spend activities.
- Always budget a % for product returns, refunds, exchange costs and fraudulent claims and chargebacks. This is the nature of the beast for trading online and we have to make sure we allocate a % of our money each month to cover these off.
- Understand all of your financial obligations as a business owner, from paying your bills as promised through to legal obligations as a director of a company covering payroll and taxes. There are no excuses for ignorance.
- If you are not confident, it's time to outsource to an experienced ecommerce bookkeeper and we'd be happy to help you, so please contact us to find out more about how we can support you in growing your business.
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