8 Ecommerce Accounting Basics To Grow Your Shopify Store

March 24, 2019 in Shopify Accounting



8 Ecommerce Accounting Basics To Grow Your Shopify Store

What if I told you the secret to growing your Shopify business was… accounting?

I know. It might not fun, sexy, or flashy — but it’s the one thing you can do right now to transform your store from the inside out and graduate to the big leagues.

Cozy up with these 8 Shopify ecommerce accounting basics. We’ve structured them into easy-to-follow steps so you know exactly what to do. It’s time to make the shift from being just another Shopify store owner to an accounting pro who’s destined for huge growth and exponential success. Or hey, at the very least you’ll be compliant and stay out of jail. 😉

Which Business Type is Best for a Shopify Ecommerce Company?

It’s so easy to set up an e-commerce store on Shopify that many people jump in feet-first without having started a business the traditional way.

Traditionally, US businesses start at the owner’s local State Capitol, where you’d fill out tons of paperwork and receive a business license in return. Nowadays you can do it all online, from the comfort of your home.

But wait… you first need to know what type of business entity you’d like to form.

If you’ve already begun selling on Shopify without first getting your license and forming an entity, you could consider yourself a ‘sole proprietorship’ and get your business license after the fact (but don’t wait too long).

Most small US-based businesses do start as a sole proprietorship, where just one person is associated with the business.

Later, after becoming more established, Shopify businesses tend to change their entity type to a Limited Liability Corporation or Corporation. This would give your business name the LLC or Corp abbreviation that you see everywhere.

However, if you plan on seeking investors, or fundraising (raising outside capital), the C-Corp designation is your best bet.

If this feels overwhelming, don’t let this step hold you back. You can set up your Shopify store at any time and address the business formation concerns later.

What I do recommend is that you find a great CPA and attorney today, which is quite easy to do. A simple Google search will uncover many cost-effective service providers who are well-versed in Shopify. Always seek advice from a professional who knows your unique situation.

Are Your Shopify Store and Accounting Settings Up to Par?

One of the first things you’ll see when setting up your Shopify store is that they require you to input sales tax amounts. There’s really no way to get around this, and you’ll want to be sure that your inputs are accurate.

As an ecommerce store owner, no one expects you to know the sales tax rates in every state off the top of your head, but it’s law that you assign the required tax rates if you’re selling physical goods.

When customers make a purchase from your Shopify store, they’re assigned the tax rate that applies to them where they live. This can’t be applied to their orders retroactively, so it’s imperative that you set it up correctly and keep it up to date.

I recommend using a program to set this up, rather than trying to become an overnight sales tax star. Great programs like Avalera exist (read more about it here) that will help you to automate so you always stay on Uncle Sam’s good side.

At the end of every quarter, you’re likely going to owe taxes to the Federal and State governments. The business entity option you chose in Step One will greatly influence how you will approach paying those taxes. Again, a CPA is your secret weapon: they will ensure that you make the proper quarterly tax payments and stay ahead of the tax game.

Step Three: Set Up Your Accounting Software

Is Your Shopify Store Linked With a Reliable Ecommerce Accounting Software?

It’s likely that your accountant has a specific accounting software they prefer, but they won’t be able to assist with the all-important Shopify integration step.

Your accountant may not even bring this up, and instead just ask you for your books at regular intervals. So, you must be proactive here. Don’t get caught trying to backfill data at the eleventh hour, rushing around trying to fill in the blanks or hiring a bookkeeper to do this manually for you after the fact.

It pays to be informed about your accounting software integration options for Shopify, and have them set up so everything flows.

This gets tricky though, as Quickbooks promotes only one (poorly rated) accounting integration software on their website, when there are much better options to choose from.

For instance, Flowify is a nifty Shopify-Quickbooks integration software available in the Shopify app store. It works seamlessly to get you connected fast. Rather than spin your wheels with Quickbooks’ clunky and buggy default option, give us a shot with a free 7-day trial. You won’t be disappointed.

Step Four: Master Your Handle on Cost of Goods Sold

Do You Know this Key to Quick Growth for Your Shopify Store?

The cost of goods sold (COGS) tends to be the largest expense line item in your Shopify business, and when you learn to deal with it strategically it can create tremendous leverage for your Shopify-based company.

Your COGS include all costs associated with purchasing raw materials, turning them into the saleable items, handling and moving inventory, and more. Costs of goods will also include labor and overhead.

It’s important to understand what contributes to that COGS line item, how to control it, and how to drive the costs down so that your margin increases.

Yes, buying in volume helps bring down the price with many vendors. But try to think even bigger: although volume-ordering may grow your business to a point, multiple vendors likely want your business and are willing to place bids, so be sure to use this to your advantage.

Is Your Shopify’s Ecommerce Bookkeeping IRS-Proof?

Bookkeeping is the process of taking daily records of the financial transactions of your business.

You may think that Shopify does this for you, but Shopify’s built-in order tracking system alone doesn’t include the level of detail necessary for official bookkeeping that will satisfy an accountant, or the IRS if you are ever audited.

So what’s your plan of action? You’re going to need an in-house system, or you’ll need to hire a bookkeeper.

Going the DIY route? Let a good, basic bookkeeping system be your guide. You can think of it as just a schedule of activities that are performed on a daily or weekly basis. These accounting activities will include updating the company’s banking records, tracking and accounting for receipts, entering invoice data, cutting checks and paying employees and contractors.

The challenge is to keep to the schedule, even as the demands of running your business pile on and compete for your limited bandwidth. That’s a lot of pressure.

I typically recommend hiring a bookkeeper as your Shopify business grows.

Step Six: Pay Your Employees and Contractors with Ease and Confidence

Are You Sure You’re Running Payroll Correctly?

Cutting your first check for an employee is an exciting feeling for a business owner, but this is where your Shopify business takes a BIG turn. You’ll absolutely need to ensure you are professional and polished with your financials, because there are many pitfalls you will want to avoid in the process.

For example, do you know what the labor laws in your state are, and what portion of the employee’s pay must be allocated to things like workers compensation? This is no time to play the “I’m just a small entrepreneur” card. Paying employees means that the State takes notice, and your accounting must be compliant.

We have mentioned Gusto before as a great payroll solution. Gusto does most of the work for you, helping you stay compliant while ensuring timely payment for your employees and contractors.

Gusto even processes quarterly employment-related taxes for you so that you’re not overloading your accountant or falling behind.

Are You 100% Sure You Haven’t Missed Any Accounting Steps?

Don’t miss any of the important end-of-month accounting steps for your Shopify store. If you’re not careful, the many tasks associated with accounting for your Shopify store can quickly get out of hand. So take a little time right now to print out your own accounting checklist.

I really like this comprehensive checklist, created by yours truly (OK I’m a bit biased). It’s available in a free excel spreadsheet format and it’s easy to customize for any Shopify store owner.

Pro tip: Set a recurring calendar reminder so you never forget to close the books.

Also, if you’ve hired a bookkeeper and accountant, this checklist makes a great agenda for your monthly meetings.

BONUS: Manage and Expand Your Working Capital

As you begin automating your busy-work, it frees up your mind to think more strategically with the money on hand (your working capital) so you can begin leapfrogging your Shopify business forward.

The point I’m about to make is more about small business cash flow, but it’s related to accounting and incredibly important, so listen closely.

When you bill your wholesale customers, or when you negotiate payment terms with your vendors, what do you select for your due date?

Most small business owners keep this pretty simple, giving themselves a 10-day window to expect payment. But here’s where it pays to understand the difference between a regular payment due date and a net payment due date.

Saying “Due upon receipt” on an invoice means just that: the payment is due whenever is most convenient (aka not urgent!).

But, if you were to write “Net 30” on the bill, you are using a credit term, meaning that the payment is due 30 days (including weekends and holidays) after the goods or services are received.

For small businesses, the longer the terms the better. Because remember, cash flow is king. Negotiate Net 30 terms with your vendors. This allows you to buy product and sell it off in your Shopify store before ever giving the vendor a dime. It’s just smart business.

Also, there are often incentives for customers who pay early, to the tune of 1%-2%, so be sure to negotiate that too.

Managing your shop’s working capital is both art and science.

Your New Life as an Accounting-Savvy Shopify Store Owner

How does it feel to be in-the-know? At every step of managing the business end of your Shopify store, there are opportunities to save time, money, and headaches. Begin by setting up your Shopify business with the right official legal designation, get serious about your tax liability and handling your money and human resources.

A good CEO would never cut corners or mismanage the accounting side of their business, because they know this is where some of the best opportunities for a business are found.

Want to know the future of your Shopify business? Will it succeed or fail? The oracle is in the wisdom of your financials. And here, Flowify is your constant, trustworthy companion.

We are Shopify experts. Let us help you streamline the Shopify accounting process with our Shopify-Quickbooks integration and help you write your own success story.

With Flowify, Shopify store owners can completely automate their accounting integration with Quickbooks. It couldn’t be easier to track Shopify sales, inventory, refunds, processing fees, bank deposits, and more.

Get started today and see how a support team of accountants and bookkeepers can help you to better manage your Shopify store accounting. Think of us as your QuickBooks-Shopify connection.

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