When starting a new Shopify store (or other e-commerce site), it is easy to spend all your time developing relationships with manufacturers, marketing your products, and fulfilling orders. Unfortunately, there’s this little thing called bookkeeping that often gets set aside for more exciting business activities. While it’s certainly not as sexy as Instagram or as creative as website design, keeping your books clean and up to date is VITAL for the success of your business.
Getting behind on your bookkeeping (or not doing it at all) can lead to inefficient decision making, or worse, cause penalties from the IRS and BIG problems at tax time. E-commerce accounting is particularly tricky because of sales tax rates, inventory, and cost of goods sold (COGS). But not to despair, there are a few easy steps you can take right now (or in the next 30 days) to make sure you’re properly accounting for the money coming in and out of your business.
Get a Business Specific Credit Card
One of the quickest ways to get yourself into trouble is co-mingling your personal and business expenses. If you don’t already have one, get a business credit card. Many cards also offer 0% financing for the first year, which can help you purchase initial inventory without paying lots of interest. Make sure that when you are opening this credit card that you use your federal tax ID (EIN) and not your personal social security number.
Get a Business Specific Bank Account
Making lots of sales? That money needs to be deposited somewhere—and it shouldn’t be your personal bank account. Instead apply for a small business bank account. I have mine thru SmallBusinessBank.com. Just like having a business credit card, a business bank account is vital for keeping your books clean.
The other reason for making sure you keep your business and personal funds separate is legal liability. According to Stephanie Morrow at LegalZoom.com, co-mingling your business and personal expenses removes the protection you have established by forming an LLC or corporation. You don’t want to take that risk.
Get Familiar with your Tax Forms
Before setting up any bookkeeping system, you should become familiar with all the tax forms that you are responsible for filing. These forms should be the basis for your Chart of Accounts, and informs what you need to be tracking to be compliant. Most new Shopify store owners are single-owner LLCs, which for tax purposes is treated like a Sole Proprietor. For this type of business, you are going to want to get real familiar with the Schedule C.
If you are selling physical goods, you also need to deal with paying sales tax. Before you have to do it for the first time, get a hold of the sales tax form for your state (in many places this is an online form). Again, this tax form will give you a good idea for what accounts you need to set up in your bookkeeping system.
Connect your Shopify Store with a Cloud-Based Accounting System
These cloud-based accounting systems save time and money for your company in the long-run. (Read my article on cloud-based accounting). Although it can be painful to spend money for accounting software when you are just starting up, if you are in this for the long haul, just do it. Where there are financial and legal implications, you don’t want to cut corners.
Keep Track of Personal Money You are Investing in Your Business
In the first year of my small business, I invested nearly $3,000 of my own money. Make sure that you are keeping track of this investment and accounting for it in an “Owner’s Capital” account. Later on, once you are in the black you can take money back out of this account as an owner’s draw.
Save Your Receipts
Yes, you could do this in a shoebox. Considering that you have an online business, I’m assuming you’re a little more sophisticated than that though. I really like using HubDoc. It allows you to store all your receipts and bills in one place in the cloud. You can use your smart phone to take pictures of paperwork or forward e-invoices from your email inbox. The IRS requires you to keep receipts for expenses over $75, although I always encourage businesses to match every transaction to a receipt.
Reconcile your books every month
So many small businesses miss this important step. It is critical to reconcile your books each and every month. Set a date for yourself (the 15th is a good one), and make sure you’re caught up on your bookkeeping. When you’re books are clean, you can pull meaningful reports.
At a minimum, you should be looking at your balance sheet and income statement every month. In a blog post on Shopify.com, William English also recommends looking at the following cash flow reports:
- Sales tax report
- Inventory valuation report
- Cash account report
Account for your inventory and COGS
E-commerce can sometimes make for tricky accounting, when compared to a service business, for example. Of critical importance is accounting for your inventory and cost of good sold (COGS). I’ve seen many new Shopify business owners order their first batch of inventory and then simply treat it as an expense. Wrong! When buying product for re-sale (or material that goes into your product), it must be added to an inventory account. Then, when you make a sale that consumes that inventory, you reduce the inventory account and add the expense to COGS. Don’t skip this step, or you will have trouble (a) determining your profit margin, and (b) doing your taxes.
Some Shopify owners simply use dropshipping. In this case, you never hold inventory so the cost goes directly to cost of goods sold.
Know when to get help
In the beginning, when cash is tight and you aren’t making many sales, it might make sense to do your own bookkeeping. As your business grows, however, there becomes a point when your time is better spent focusing on strategic management, and outsourcing tasks (including bookkeeping) makes sense. Additionally, if you’re just not a numbers kind of person, or you don’t have any kind of accounting experience, then it may make sense to get help from a professional from Day 1. One of the biggest reasons small businesses fail is because they don’t take their financial management seriously. If you want to be successful in the long run, make sure you make clean books a priority.
Need bookkeeping help? Contact us for a free consultation.