In this article, we will discuss the importance of ecommerce accounting and how it can benefit your business in the long run.
Follow along to discover how to choose accounting software for ecommerce business.
Why Ecommerce Accounting is Important?
Ecommerce accounting refers to collecting, organizing, evaluating, and reporting financial data related to your business.
However, it is not limited to mundane tasks such as bookkeeping, inventory management, and tax filing.
It also encompasses more strategic activities like generating and analyzing reports to facilitate your business's growth.
There are several crucial reasons why you should master this skill:
1. Accurate accounting lets you understand which products or services generate the most profit. It helps you focus on what's working and cut back on what's not.
2. Tax laws for ecommerce can be complex, with sales tax, income tax, and international tax considerations. Proper accounting ensures you meet all your tax obligations and can help you minimize your tax liability.
3. When seeking external funding or loans, investors and lenders require well-organized financial statements. Reliable accounting builds trust and increases your chances of securing financing.
4. A clear financial picture of your ecommerce business is vital for strategic planning. It enables you to set realistic goals, allocate resources efficiently, and expand your business.
Features to Look For in Ecommerce Accounting Software
When choosing an ecommerce accounting software, look for features that align with your specific needs of the online business.
1. Ecommerce Integration
For online sellers, it is particularly vital that the software seamlessly integrates with your ecommerce platforms, enabling automatic data synchronization, including sales, refunds, and inventory updates.
Shopify Integration: This integration automatically syncs Shopify sales data, including orders, customers, and inventory levels, with your accounting software. It also supports multiple sales channels.
Amazon Integration: This integration simplifies tracking Amazon sales by pulling order details, fees, and customer info.
WooCommerce Integration: If your ecommerce site is built on WooCommerce (a WordPress plugin), this integration should sync order data, inventory updates, and customer information.
BigCommerce Integration: If you use BigCommerce for your online store, choosing accounting software that integrates natively or offers third-party connectors is important. This integration should automate the transfer of order information and inventory levels.
Multi-Platform Support: If you sell products on multiple ecommerce platforms, it's best to use accounting software that integrates with various platforms. This allows you to consolidate your financial data and maintain accurate records.
2. Payment Gateway Integration
Integration with popular payment gateways is critical for seamless transaction processing and overall customer satisfaction.
This integration should facilitate automatically recording sales, refunds, and payment processing fees.
PayPal Integration: Make reconciliation easier by integrating accounting software with PayPal to automate transaction, fee, and refund recording.
Stripe Integration: Integration with Stripe allows the automatic importing of payment data into your accounting software, including credit card transactions and fees.
Square Integration: If you use Square for in-person and online payments, choose an accounting software that can integrate with your Square account. This will allow you to capture payment details and fees in one place.
Product Variants and Bundles: The software should support these configurations and accurately calculate inventory levels for each option if you sell products with color or size variants or bundles.
Reorder Points and Alerts: Ensure you never run out of stock by setting reorder points for your products. Receive alerts or notifications when inventory levels reach or fall below the specified reorder points.
Cost of Goods Sold (COGS) Calculation: Accurate calculation of COGS is essential for understanding the profitability of your products. The software should automatically calculate COGS based on inventory movements and purchase costs.
Inventory Valuation Methods: Different businesses may use various inventory valuation methods such as FIFO, LIFO, and weighted average. Ensuring that the accounting software supports the preferred valuation method is essential.
Order Tracking Features
Sales Order Management: The software should allow you to create and manage sales orders, which are essential for tracking customer requests, managing backorders, and ensuring timely fulfillment.
Customer Information: When a customer places an order, the software should capture and store their shipping address, contact information, and order history.
Order Fulfillment: It is crucial to track the status of each order from payment processing to delivery to provide visibility into processing times and manage customer expectations.
Returns and Refunds: Ensure accounting software efficiently handles returns and refunds by recording returned products and issuing refunds to customers.
Sales Channels Integration: Your software should centralize orders in one dashboard for easy management if you sell products through multiple channels.
Shipping Integration: Integration with shipping carriers and services (e.g., FedEx, UPS, USPS) can automate shipping label generation and tracking information updates, further simplifying order processing.
Order History and Reports: Access comprehensive order history and generate reports that provide insights into your sales performance, including revenue trends, best-selling products, and customer behavior.
4. Tax Compliance
Ecommerce businesses often face complex tax obligations, including sales tax, VAT, and income tax.
That's why you need to ensure the software has tax automation capabilities.
It will help you accurately calculate and collect taxes and generate tax reports for compliance.
Ecommerce Tax Reporting Features
Sales Tax Automation: Look for accounting software that can automate sales tax calculations based on the location of your customers and the products you sell. The system should also keep up-to-date with changes in tax rates and rules across different jurisdictions.
Multi-Jurisdictional Support: Ecommerce businesses often sell to customers in various states or countries. Ensure that your accounting software can handle multi-jurisdictional tax requirements, including state sales tax, VAT (Value Added Tax), and GST (Goods and Services Tax).
Tax Reporting by Location: The software should generate sales tax reports by location, making filing accurate tax returns in each jurisdiction easier. This feature is crucial for businesses that need to comply with state-level or regional tax regulations.
Filing and Remittance: Some accounting software solutions can file and remit sales tax payments directly to tax authorities. As a result, it streamlines the tax compliance process and reduces the risk of errors.
Tax Compliance Features
Exemption Certificate Management: If you sell to tax-exempt customers, your accounting software should support the management of exemption certificates and ensure you don't inadvertently charge tax to exempt entities.
Audit Trails: Maintain a detailed audit trail of tax-related transactions and calculations, as it provides a clear history of tax-related activities.
Integration with Tax Services: Some accounting software can integrate with third-party tax compliance services, with real-time tax rate updates and compliance with changing tax regulations.
Automatic Tax Rate Updates: Ensure the software automatically updates tax rates and rules to reflect legislative changes. This feature is essential for staying compliant as tax laws evolve.
Tax Reporting for Different Sales Channels: If you sell through various sales channels (e.g., online stores or marketplaces), your software should consolidate tax data into a single report for easy tax filing.
Tax Exemptions and Credits: The software should support the identification and application of tax exemptions, credits, or incentives available in certain jurisdictions, helping you reduce your tax liability legally.
5. Financial Reporting
Comprehensive financial reporting is essential for understanding your ecommerce business's performance.
Look for software that offers customizable reports to analyze key metrics, such as sales trends, profit margins, and inventory turnover.
Expense Tracking: Tracking expenses to control costs and optimize profitability is crucial. Your accounting system should allow you to efficiently categorize and analyze expenses to identify areas where you can reduce costs.
Financial Reporting: Comprehensive financial reporting is essential for decision-making. Look for software that offers customizable reports to assess key performance indicators (KPIs) and analyze trends.
Budgeting and Forecasting: Planning for future growth and setting financial goals is essential. Some accounting software solutions offer budgeting and forecasting features to help you create financial projections.
Cost and Pricing Structures
Lastly, but surely, one of the most important things when looking at how to choose accounting software for ecommerce business is – your budget.
Let's take a closer look at the different pricing models below:
1. Subscription-Based Pricing
In this model, you pay a recurring fee (monthly or annually) for access to the software and its features. The subscription fee can vary based on the software's tier or the number of users.
2. Tiered Pricing
Accounting software often comes in multiple tiers or plans, each offering different features and capabilities. Higher-tier plans typically include more advanced features and may accommodate larger transaction volumes.
The cost increases as you move up to higher tiers.
3. Add-Ons and Modules
Some accounting software allows you to purchase add-ons or additional modules to extend the functionality of the core software.
These may include features like payroll processing, advanced reporting, or inventory management. Be aware of the costs associated with these add-ons.
4. User-Based Pricing
Some accounting software charges per user. If multiple team members need access to the software, user-based pricing can impact your overall cost.
Consider whether the software offers user permissions and roles to control access.
5. Transaction-Based Pricing
Sometimes, especially for smaller businesses or startups, you might find accounting software that charges based on the number of transactions or invoices you process. It can be a cost-effective solution for companies with low transaction volumes.
6. Free Accounting Software
Different free options are available but may have limitations on features or scalability. Evaluate whether a free solution meets your needs before considering paid options.
Subscription vs. One-Time Payment Models
The choice between subscription and one-time payment models depends on your budget, long-term plans, and preferences.
Subscription models offer flexibility and access to ongoing support and updates.
At the same time, one-time payments provide ownership and potential long-term cost savings.
When deciding, consider your budget, scalability requirements, and the features essential for your operations.
Tips On How To Find A Cost-Effective Accounting Software
✔️ Start with Essentials: If you are on a budget, consider starting with an accounting software plan that covers essential features. As your business grows, you can upgrade to a higher-tier plan with more advanced functionality.
✔️ Leverage Free Trials: Use the free trial to test the software's suitability for your business before committing to a subscription.
✔️ Look at Cloud-Based Solutions: Cloud-based accounting software eliminates the need for costly on-premises infrastructure and software updates. You typically pay only for the subscription and any add-ons you need.
✔️ Don’t Overlook Scalability: Choose software that can scale with your business. It prevents the need for frequent software changes or migrations as your transaction volumes increase.
✔️ Consider Total Cost: When evaluating costs, consider not only the subscription or license fees but also any additional costs, such as training, integration, and support.
Before you settle on the desired accounting software, here's a list of questions to go over:
So, how to choose accounting software for an ecommerce business?
It’s not only a matter of convenience but also a strategic decision that can significantly impact the efficiency and profitability of your ecommerce business.
By selecting software that meets your business's specific requirements and objectives, you can position your ecommerce enterprise for long-term success in a fiercely competitive online marketplace.
Likewise, electing to invest in your business's expansion is a strategic move that has the potential to yield substantial returns over time.
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What Is the Best Ecommerce Accounting Software?
Numerous ecommerce accounting software are available, with Xero, Multiview ERP, Wave Accounting, Kashoo, Acumatica Cloud ERP, and Sage Intacct being the most popular.
What Role Does Scalability Play In Choosing Accounting Software?
Scalability is essential as your ecommerce business grows. Ensure the software can accommodate increased data volumes and complexity, adapting to your business's evolving needs.
What Are the Key Features To Look For In Ecommerce Accounting Software?
Essential features include integration with your ecommerce platform, inventory management, real-time tax calculations, and user-friendly interfaces.