Imagine for a moment you’re the captain of a sleek, state-of-the-art jetliner—your e-commerce business.
As the captain, you have the power and the control.
Now, what if I told you that one of the most critical controls in your cockpit is your ‘Expense Tracker’?
It’s not the most glamorous part of the journey, I know. It’s not the roaring engines (your products) or the sleek design (your website). But bear with me as I reveal its importance.
Tracking your expenses meticulously acts as your radar, always scanning the horizon for financial turbulence or opportunities for smoother routes.
It helps you manage profitability, maintain healthy cash flow, and even steer clear of potential headaches when tax season rolls around.
In the next few sections, I’m going to guide you through the vast world of e-commerce expenses, why they matter, how to track them efficiently, and when it might be time to call in the air traffic controllers (professional accountants).
With the right tools and knowledge, not only will you speed up your financial processes, but you’ll also be making informed, strategic decisions in no time.
Whether you’re a seasoned captain or getting ready to take off in the e-commerce industry, this comprehensive guide on e-commerce expense tracking is your co-pilot, designed to help you navigate toward peak financial performance.
It’s Not Just About Tax Deductions
Sure, minimizing taxes is a big win (who doesn’t love saving money, right?), but keeping tabs on your expenses is about way more than just tax deductions.
It gives you great insights into your business’s financial health and helps you make better decisions.
Here are a few reasons why e-commerce expense tracking matters.
Tax Compliance and Maximizing Deductions
Tax season comes knocking without mercy. However, diligently tracking your expenses will ensure tax compliance and can keep you from unwanted hassle.
Plus, you won’t miss out on the sweet deductions – it’ll be like finding money you didn’t even know you had.
Investopedia highlights that essential costs for business-related purposes can be expensed and are, therefore, tax deductible.
So, knowing what you spent, where, and why will empower you to identify and capitalize on the benefits of fully and partially deductible business expenses.
Accurate Financial Statements
Expense tracking plays a crucial role in shaping all three of your major financial statements: the income statement, balance sheet, and cash flow statement.
To illustrate this more clearly, let’s consider a real-world example:
Imagine you run an e-commerce business selling handmade candles. Each candle sold costs you $5 in materials (wax, wick, fragrance), $2 in labor (time spent crafting each candle), $3 for packaging and shipping, and $1 for marketing and advertising (social media ads, SEO, etc.). This means each candle costs you a total of $11 to produce and sell.
Let’s see how this reflects over the major 3 statements.
Income Statement:
Your income statement reflects your business’s profits and losses over a certain period.
If in a month you sell 100 candles at $20 each, your revenue is $2000. However, subtracting the total expenses ($11 per candle) from this, your income statement will show a net income of $900 ($2000 revenue – $1100 expenses).
Balance Sheet:
The balance sheet provides a snapshot of your business’s assets, liabilities, and equity at a specific point in time. Let’s expand on our handmade candle business example to understand this better.
Assets
Your assets include everything that your business owns that has value.
For instance, if you’ve purchased $500 worth of raw materials (wax, wick, fragrance) for candle making, this inventory is an asset. If you also have $900 left from your revenue after paying off all the costs, this cash is another asset.
Liabilities
Liabilities cover what your business owes. Imagine you’ve bought your candle-making materials on credit, with an agreement to pay your supplier $500 in the next month. This amount is a liability. Any other outstanding bills, rents, or loans would also fall into this category.
Equity
Your equity is what remains after you subtract your liabilities from your assets, often referred to as the ‘net assets’ of your business. In this case, if you subtract your $500 liability (material costs) from your $1400 assets ($900 cash + $500 inventory), your equity is $900.
The Implications of Inaccurate Expense Tracking
Now, let’s consider what happens if you aren’t diligent in expense tracking.
For instance, suppose you forgot to account for $100 worth of candle-making materials. This oversight means your reported assets will be lower than what they actually are, which in turn lowers your reported equity.
Thus, your balance sheet would paint an inaccurate picture of your financial health. You may miss opportunities to reinvest in your business or take strategic decisions based on incorrect data.
Conversely, if you underestimated your liabilities because you didn’t track your expenses accurately, your equity would be higher than what it actually is.
You might believe you have more financial flexibility than you truly do, which could lead to overspending or overinvestment, potentially destabilizing your financial situation.
Cash Flow Statement:
The cash flow statement provides an understanding of how money is moving in and out of your business. Let’s continue with our example of the handmade candle business to understand this better.
Consider that for the month, you sold 100 candles at $20 each. This gives you a total revenue of $2000, representing your cash inflow. However, it’s crucial to account for all your expenses as your cash outflow. If you’ve spent $11 producing and selling each candle, your total expenses or cash outflow for the 100 candles would be $1100.
Subtracting your cash outflow ($1100) from your cash inflow ($2000), your net cash flow for the month would be $900. This figure tells you that, after all your business expenses have been paid, you have $900 left. This leftover cash can be used to reinvest in your business, pay off any debts, or be saved for future use.
The Consequences of Inaccurate Expense Tracking
Conversely, let’s imagine if you weren’t diligent in tracking your expenses. Suppose you overlooked some costs, like advertising expenses or the costs of packaging materials.
Without accurate expense tracking, you might have calculated your expenses as $9 per candle, leading to a total cash outflow of $900.
This would make your net cash flow appear as $1100 ($2000 – $900), an overestimation of $200.
This inaccurate figure might lead you to make financial decisions based on the belief that you have more money available than you actually do. You might invest in new equipment, hire additional staff, or take on additional expenses, all based on a misconception of your financial situation.
Eventually, you’d find yourself short of cash, potentially leading to debt or cash flow problems.
Better Future Planning
When you know your business expenses, you’ll know which strategies lead to success and which lead to dead ends.
It isn’t about predicting the future but learning from the past for a brighter tomorrow.
The more aware you are of the costs involved, the smarter choices you make moving forward.
Understanding Common eCommerce Expenses
Before we can put e-commerce tax anxieties to rest, we must first understand the landscape of major e-commerce expenses.
These everyday costs form the foundation of your business finances, guiding strategic decision-making and effective financial management.
- Sourcing products. It includes all the costs of acquiring and manufacturing the goods you intend to sell. Think of it as the foundation of a building – the stronger and more cost-effective your sourcing strategy, the more stable your business becomes.
- Storage. This encompasses expenses related to storing your products until they are sold. The concept is similar to paying rent for a physical store.
- Platform/hosting fees. Your ecommerce platform is your virtual storefront. Hosting fees involve paying rent for your online space. This may include expenses related to maintaining a website, from ensuring it runs smoothly to providing a seamless customer experience.
- Plugins/apps. They are the additional features you add to boost your store’s functionality. This may include marketing plugins, payment gateways, and accounting tools.
- Shipping. It involves getting your products from the warehouse to the customers. Things like courier services, packaging materials, and logistics expenses go into shipping expenses.
- Returns/refunds. Every business encounters returns and refunds. So will yours. The costs associated with this process include reverse logistics or potential product damage.
- Bank/processing fees. Just like you pay for credit card transactions in physical stores, ecommerce incurs bank and processing fees for online payments. This typically covers the costs of payment gateway services or financial transactions.
- Marketing/advertising. Marketing is the backbone of your online store. Expenses that go into this category include social media marketing, digital advertising, and other promotion strategies.
- Utilities. You use these services and tools to keep your business up and running. This encompasses customer relationship management (CRM) software, email services, or more obvious expenses like electricity bills.
- Insurance: This is your business’s safety net, covering potential losses due to damage, theft, or other unexpected circumstances.
- Salaries. As your business grows, you’ll likely need to hire more people. Salaries for roles in customer service, logistics, marketing, and more can become a significant part of your expenses.
- Taxes. Like physical stores, e-commerce businesses also have tax obligations. This may include sales tax, income tax, and other applicable taxes.
Why Tracking Ecommerce Expenses Can Be a Real Pain
Understanding e-commerce expenses is essential, but tracking them is easier said than done.
It can sometimes feel like you’re juggling flaming torches — trying to keep everything in the air while avoiding getting burned.
Here are some reasons why tracking expenses can be a daunting task:
Managing a Large Number of Receipts
So, you’re knee-deep into running your ecommerce business, and receipts start piling up. You’ll feel like dealing with a mountain of paperwork that doesn’t seem to come to an end.
What’s worse, finding that one specific receipt can be akin to finding a needle in a haystack.
Not only is it time-consuming, but if your business has high-frequency transactions, it can be overwhelming, too.
Keeping Business and Personal Expenses Separate
Things can get messy when your personal expenses meet business costs. It’s not that you intentionally mix things up, but it isn’t uncommon for it to happen.
For instance, if you invested in a software subscription using the personal credit card you typically use for grocery shopping, it will likely lead to confusion.
Complexity of Tracking Tax-Deductible Expenses
Taxes are an evergreen headache. On top of that, deciphering what’s tax-deductible can get even more complicated.
You know there’s a solution, but it feels mind-boggling.
Every service, every product, and every fee has its unique taxes.
Beyond that, the ever-evolving nature of tax codes can make it challenging to stay abreast of deductible expenses.
Best Practices for Ecommerce Expense Tracking
Implementing best practices for ecommerce expense tracking helps you gain financial clarity and optimize your overall business expenditures.
Here are a few tips for efficient expense tracking.
Keep Personal and Business Expenses Separate
First off, you need to create a boundary between your business and personal spending if you aim to master expense tracking.
This will simplify financial reporting and ensure compliance with tax and legal requirements.
You can, for instance, acquire a business credit card, use a business bank account (exclusive to business transactions), or set up utility accounts in your company’s name.
Besides, consider applying for a DUNS number. It allows you to create a business credit identity separate from your personal credit profile, which is a plus.
Choose the Right Accounting Method
Opt for an accounting method that fits your ecommerce business.
Generally, cash accounting is a bit straightforward to implement, unlike accrual accounting.
However, unlike cash accounting, accrual accounting is more accurate and helpful if you seek to gain deeper insights into the finances and operations of your company.
Categorize Expenses Using Subaccounts for Detailed Financial Reports
Creating subaccounts lets you categorize expenses and comprehend where your money goes.
This means you get to handle your expenses with precision.
It’s similar to having a table of contents that guides you to the exact page of your financial journey.
When it’s time to review, you’ll be able to pinpoint the precise resources that facilitate more informed decision-making.
Keep Track of Receipts
Receipt tracking is an integral part of managing your expenses. Executing a structured filing system and keeping them organized lets you keep track of every transaction.
Besides aiding in routine expense tracking, this proactive approach proves invaluable when substantiating deductions for tax purposes or while auditing.
Remember, the more organized your receipts, the more balanced your business finances.
Know Which Expenses Are Tax-Deductible
Every business owner struggling to keep expenses afloat wouldn’t want to miss out on tax-deductible opportunities.
If you’re in the same boat, be mindful of tax regulations.
This will help you know what qualifies – it’s your way of ensuring your business keeps the money it deserves.
Tools for Tracking Expenses
A few game-changing tools can make e-commerce expense tracking less like a chore and more like a breeze.
Here are a few helpful recommendations.
Use Cloud-Based Accounting Software
Cloud-based accounting software lets your employees access it from any digital device, provided it has access to the internet.
This keeps everyone from the hassle of installing and maintaining software on individual devices and allows tracking regardless of the location.
No more juggling spreadsheets on your desktop – with cloud-based solutions, your financial data is securely stored with you and is accessible from anywhere.
Automation of Transactions With a Bank Feed
A bank feed is like a personal assistant that handles your mundane tasks.
It creates a digital link between your accounting software and your bank account.
This allows the automatic importing of bank transactions into your accounting software. It’s a time saver and a stress-buster.
No more manual data entry – just sit back and let this tool do its thing.
Use of Expense Tracking Apps
Business owners aiming for seamless operations must invest in expense tracking apps.
They let you tackle the receipt and bill chaos, all from the comfort of your smartphone.
Snap a picture of a receipt, and poof – it’s digitalized and categorized.
Popular options include Hubdoc, Dext, and YNAB. You can opt for one that best aligns with your business needs.
When to Seek Professional Help for Expense Tracking
Understanding the right time to take action is as important as the action itself.
Therefore, it’s important to know when to bring professional bookkeepers or accountants into your business.
Remember, they aren’t reserved for big corporations; they can fulfill your business needs, too.
- Managing a large number of receipts. If you find yourself drowning in the sea of crumpled papers, it’s a sign. Professional accounts have the expertise to transform that chaotic pile into organized financial clarity.
- Need for deeper financial insights. When your business reaches a point where you crave deeper insights into forecasts, trends, and financial scenarios, a professional accountant can be your savior. They bring a level of financial analysis that goes beyond the basics.
- Rapid business scaling or entering new markets. With growth comes complexity. This is where professional help shines. Scaling up means more transactions, more intricacies, and more financial headaches. A skilled accountant can help you navigate that and more like a pro.
Conclusion: Charting Your Path to Financial Success
Digilent ecommerce expense tracking isn’t just a task; it’s an informed move that ensures a successful business.
Without it, you run the risk of making decisions based on inaccurate information, which can lead to financial instability or even threaten your business’s survival.
Up-to-date and accurate books let you focus on other critical things like expanding operations, saving more money, and serving more customers.
At UpCounting, our professional tax accounting and e-commerce bookkeeping services aim to provide meticulous expense tracking and comprehensive financial analysis.
We provide you with the tools to ensure financial accuracy, allowing you to navigate your financial landscape with confidence.