If the pandemic has taught us anything, it’s that having real-time and accurate financial data is key to adaptability and resilience.
E-commerce businesses that have neglected finances and focused all their efforts on growth are now struggling to control their cash flow and stay profitable.
Most are now forced to resort to revenue-based lenders and working capital providers with margin-killing terms ranging from 5 - 15% of gross revenue. And the cost of financing will only increase with the projected interest rate hikes.
But most of the issues could have been avoided had founders paid more attention to their finances.
Running a profitable business is a challenge in and of itself, but navigating through the unprecedented and quite turbulent times without a clear financial plan, financial modeling, and a thorough understanding of the brand’s economics is a guaranteed way to insolvency.
While managerial accounting and finance management are just as important for success, bookkeeping forms the core of all financial decisions at your business.
It’s the first and most important step in the right direction.
In this blog, we’ll cover the top 5 reasons why your e-commerce business needs regular bookkeeping to stay financially sound in 2022.
No matter the size and geography of your e-commerce business, you must comply with the tax regulations of the state you operate in.
Your business is expected to collect and remit sales, payroll, and income taxes at the right intervals (monthly, quarterly, annually).
Plus, the tax authorities can perform an audit of your books at any given time to ensure compliance.
Failure to provide accurate records in a timely manner can result in a “credit score” loss and hefty monetary penalties that will accrue daily interest.
Having up-to-date and accurate bookkeeping records is crucial for proper accounting of all the tax liabilities and payments before the deadline.
Get tax advice and set up your bookkeeping processes from the start to avoid problems with the government down the line.
If your business completes all tax filings and remittances on time, but only uses bookkeeping to stay compliant, chances are you are making poor financial decisions.
Solely relying on analytics from your e-commerce platform is only sufficient to understand your gross profit figures after marketing costs.
But your e-commerce business incurs operating expenses which could make up for 15 - 30% of your gross revenue.
Such a chunk could make or break your net profit margin and the overall profitability of your e-commerce business.
Most e-commerce platforms don’t have the capabilities to include operating costs in their analytics.
And many founders make the mistake of analyzing growth metrics only, completely neglecting operating expenses and their attribution for each sales channel, department, geography, or cost center.
Your accounting software serves as the central system for all transactions, from sales and marketing costs to the cost of goods sold (AKA COGS) and payroll expenses.
Bookkeeping enables you to accurately track, attribute, and analyze all such costs, essentially painting the full picture of your brand's profitability.
It also creates the baseline for your budgeting and financial projections since you can easily identify trends and patterns in your monthly performance.
The income statement, balance sheet, and cash flow statement are 3 main reports that each business must prepare and analyze regularly.
But without proper and timely bookkeeping, those statements will lose their accuracy and relevancy.
If you need to make a cash investment in a new initiative but have no clear understanding of the current cash position, short-term obligations, payables, and receivables of your online business, you run the risk of spending more than your business can generate from its operations in the short term.
This in turn will create a hole in your finances that must be filled externally with a loan or investor money.
A most up-to-date financial report would aid the decision-making process and financial modeling and help evaluate the right time and amount for such an investment.
A detailed breakdown of costs by vendors and categories can help immediately adapt to a new economic reality.
During a recession, cutting all the unnecessary costs is the first step to controlling finances.
Cash is king, and overspending on client meals, travel, unused cloud tools, and other secondary costs through times of uncertainty is a sure way to go out of business.
But if your e-commerce business doesn’t have detailed reporting in place, you will fail to identify the opportunities for savings in the first place.
Bookkeeping helps fill in the gaps and stay on top of the cash outflows as your business scales and burns more cash every day.
In case your e-commerce business needs more working capital or plans to expand beyond available finances, you will need to present your books to creditors and/or investors before they provide you with capital.
Having an accurate, up-to-date, and complete breakdown of your finances will put you in the right place in the negotiations and build more trust in your abilities as an operator.
No creditor or investor wants to deal with business owners who don’t have a grasp on their finances.
After all, their main goal is to generate a return on the invested / extended capital.
Not to mention the potential buyers or e-commerce aggregators. They will expect full transparency with your finances if you pursue selling your business.
Having messy books is a sure red flag that can hurt your chances of raising much-needed funds or completing a successful exit.
Bookkeeping is very underrated, yet important for the financial health of any business. If done properly and regularly, it can help elevate your business to the next level.
From regulatory compliance and reporting to saving money and raising funds, clean and organized books will speed up many processes and help you make timely and profitable financial decisions.
While not many businesses can afford a full-time bookkeeper, it’s a worthy investment that will facilitate managerial accounting and finance management.
This is why we’ve devised a cost-effective solution that can deliver results with a minimal monthly spend. Check out our Accountant package.
Do not hesitate to shoot us a message if you have any questions or need help.SAY HELLO
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