Top 5 Reasons Why Your E-commerce Business Needs Bookkeeping

If the pandemic has taught us anything, it’s that having real-time and accurate financial data is key to adaptability and resilience.

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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.

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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.

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But most of the issues could have been avoided had founders paid more attention to their finances.

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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.

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While managerial accounting and finance management are just as important for success, bookkeeping forms the core of all financial decisions at your business.

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It’s the first and most important step in the right direction.

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In this blog, we’ll cover the top 5 reasons why your e-commerce business needs regular bookkeeping to stay financially sound in 2022.

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1. Tax Compliance

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No matter the size and geography of your e-commerce business, you must comply with the tax regulations of the state you operate in.

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Your business is expected to collect and remit sales, payroll, and income taxes at the right intervals (monthly, quarterly, annually).

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Plus, the tax authorities can perform an audit of your books at any given time to ensure compliance. 

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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.

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Having up-to-date and accurate bookkeeping records is crucial for proper accounting of all the tax liabilities and payments before the deadline.

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Get tax advice and set up your bookkeeping processes from the start to avoid problems with the government down the line.

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2. Operating Costs Attribution

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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.

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Solely relying on analytics from your e-commerce platform is only sufficient to understand your gross profit figures after marketing costs.

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But your e-commerce business incurs operating expenses which could make up for 15 - 30% of your gross revenue.

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Such a chunk could make or break your net profit margin and the overall profitability of your e-commerce business.

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Most e-commerce platforms don’t have the capabilities to include operating costs in their analytics.

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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.

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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.

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Bookkeeping enables you to accurately track, attribute, and analyze all such costs, essentially painting the full picture of your brand's profitability.

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It also creates the baseline for your budgeting and financial projections since you can easily identify trends and patterns in your monthly performance.

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3. Timely and Accurate Reporting

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The income statement, balance sheet, and cash flow statement are 3 main reports that each business must prepare and analyze regularly.

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But without proper and timely bookkeeping, those statements will lose their accuracy and relevancy. 

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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.

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This in turn will create a hole in your finances that must be filled externally with a loan or investor money.

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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.

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4. Savings Opportunities

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A detailed breakdown of costs by vendors and categories can help immediately adapt to a new economic reality.

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During a recession, cutting all the unnecessary costs is the first step to controlling finances.

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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.

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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.

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Bookkeeping helps fill in the gaps and stay on top of the cash outflows as your business scales and burns more cash every day.

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5. Creditors and Investors

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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.

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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.

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No creditor or investor wants to deal with business owners who don’t have a grasp on their finances.

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After all, their main goal is to generate a return on the invested / extended capital.

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Not to mention the potential buyers or e-commerce aggregators. They will expect full transparency with your finances if you pursue selling your business.

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Having messy books is a sure red flag that can hurt your chances of raising much-needed funds or completing a successful exit.

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Summary

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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.

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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.

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While not many businesses can afford a full-time bookkeeper, it’s a worthy investment that will facilitate managerial accounting and finance management.

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This is why we’ve devised a cost-effective solution that can deliver results with a minimal monthly spend. Check out our Accountant package.