Congratulations on launching your online store or preparing to do so! It requires exceptional passion and perseverance to reach this point, and you should be proud of your achievement.
However, as you know, small business owners often have a constant flood of satisfying milestones coupled with expanding to-do lists. With your launch, you’ll need to get on top of the accounting tasks of owning a store.
This list of accounting steps will give you the confidence to know you’ve covered your bases and are ready to move on to the next item on your small business finance to-do list.
Bookkeeping 101
When running a business, you must either learn bookkeeping or outsource it. Fortunately, learning how to manage your own books is possible, and doing it yourself has several notable benefits.
After legally registering your business, you’ll need somewhere to stash your business income. A separate bank account keeps records distinct and will make life easier come tax time.
It also protects your personal assets in the unfortunate case of bankruptcy, lawsuits, or audits. If you want funding down the line from creditors or investors, vital business financial records can increase the likelihood of approvals.
Note that LLCs, partnerships, and corporations must legally have a separate bank account for business. Sole proprietors don’t legally need an individual account, but it’s recommended.
Start by opening up a business checking account, followed by any savings accounts that will help you organize funds and plan for taxes. For instance, set up a savings account and squirrel away a percentage of each payment as your self-employed tax withholding. A good rule of thumb is to put 25% of your income aside, though more conservative estimates for high earners might be closer to one third.
Next, you’ll want to consider a business credit card to start building credit. Credit is important for securing funding in the future. Corporations and LLCs are required to use a separate credit card to avoid commingling personal and business assets.
Before you talk to a bank about opening an account, do your homework. Shop around for business accounts and compare fee structures. Most business checking accounts have higher fees than personal banking, so pay close attention to what you’ll owe.
To open a business bank account, you’ll need a business name, and you might have to be registered with your state or province. Check with the individual bank for which documents to bring to the appointment.
The foundation of solid business bookkeeping is effective and accurate expense tracking. It’s a crucial step that lets you monitor the growth of your business, build financial statements, keep track of deductible expenses, prepare tax returns, and legitimize your filings.
From the start, establish an accounting system for organizing receipts and other important records. This process can be simple and old school (bring on the Filofax), or you can use a service like Shoeboxed. For US store owners, the IRS doesn’t require you to keep receipts for expenses under $75, but it’s a good habit nonetheless.
There are five types of receipts to pay special attention to:
Starting your business at home is a great way to keep overhead low, plus you’ll qualify for some unique tax breaks. You can deduct the portion of your home that’s used for business, as well as your home internet, cellphone, and transportation to and from work sites and for business errands.
Any expense that’s used partly for personal use and partly for business must reflect that mixed use. For instance, if you have one cellphone, you can deduct the percentage you use the device for business. Gas mileage costs are 100% deductible, just be sure to hold on to all records and keep a log of your business miles (where you’re going and the purpose of the trip).
Before we jump into establishing a bookkeeping system, it’s helpful to understand exactly what bookkeeping is and how it differs from accounting. Bookkeeping is the day-to-day accounting process of recording business transactions, categorizing them, and reconciling bank statements.
Accounting is a high-level process that looks at business progress and makes sense of the data compiled by the bookkeeper by building financial statements. As a new entrepreneur, you’ll need to determine how you want to manage your books:
With so many options out there, you’re sure to find a bookkeeping solution that will suit your business needs.
Canadian and US business owners need to determine whether they’ll use the cash or accrual accounting methods. Let’s take a look at the difference between the two.
Technically, Canadians are required to use the accrual method. To simplify things, you can use the cash method throughout the year and then make a single adjusting entry at year end to account for outstanding receivables and payables for tax purposes.
US business owners can use cash-based accounting if revenues are less than $5 million, otherwise they must use the accrual method.
Bookkeeping 101
Bookkeeping is something that you either have to learn or outsource when you’re running a business. Luckily, it’s possible to learn how to manage your own books and there are a few notable benefits to tackling it yourself.
Many online stores start out as a one-person show. When you’ve reached the point where it makes sense to hire outside help, you need to establish whether that individual is an employee or an independent contractor.
For employees, you’ll have to set up a payroll schedule and ensure you’re withholding the correct taxes. There are lots of services that can help with this, and many accounting software options offer payroll as a feature.
For independent contractors, be sure to track how much you’re paying each person. American business owners may be required to file 1099s for each contractor at year end (you’ll also need to keep their name and address on file for this).
Depending on your business model, you may be planning to purchase and import goods from other countries to sell in your store. When importing products, you’ll likely be subject to taxes and duties, which is worth noting if you run a dropshipping business. These are the fees your country imposes on incoming goods. Learn about importing goods into the US and Canada, and the associated taxes, so you know the rules from the get-go.
Also, if you’re importing goods, a duty calculator can help you estimate the fees in your own business and plan for costs.
When sales start rolling in, you’ll need a way to accept payments. If you’re a North American store owner on Shopify, you can use Shopify Payments to accept debit or credit card orders. This saves you the hassle of setting up a merchant account or third-party payment gateway.
If you want to accept credit card payments without using Shopify Payments, you’ll need a merchant account or you can use a third-party payment processor, like PayPal, Stripe, or Square. A merchant account is a type of bank account that allows your business to accept credit card payments from customers.
If you use a third-party payment processor, fees vary. Some processors charge an interchange plus rate, typically around 2.9% + $0.30 per transaction. Others charge flat fees for each transaction, while some have a monthly membership model for unlimited transactions. You can consult this list to help you find a payment gateway that will work for your location.
The world of ecommerce has made it easier than ever to sell to customers outside of your state and even country. While this is a great opportunity for brands with growth goals, it introduces confusing sales tax regulations.
When a customer walks into a brick-and-mortar retail store, they pay the sales tax of whatever state or province they make the purchase in, no matter if they live in that city or they’re visiting from somewhere around the world. However, when you sell online, customers may be located in different cities, states, provinces, and even countries.
Canadian store owners only need to start collecting GST/HST when they have revenues of $30,000 or more in a 12-month period. You can submit the GST/HST you collect in installments. If you want, you can collect GST/HST even if you don’t earn this much in revenue, and put it toward input tax credits.
Selling to international customers can be easier than domestic sales. Canadian store owners don’t need to charge GST/HST to customers who are outside of Canada.
For US store owners, sales tax gets a bit trickier. You’ll need to determine if you operate your business in an origin-based state or a destination-based state. In the former, you must charge sales tax based on the state where you run your business. The latter requires sales tax to be applied based on the purchaser’s location.
International purchases are tax exempt for US-based businesses. This can all get a bit complicated, so check in with your accountant for detailed information about your specific state’s regulations regarding international sales tax.
Tax obligations vary depending on the legal structure of the business. If you’re self-employed (sole proprietorship, LLC, partnership), you’ll claim business income on your personal tax return. Corporations, on the other hand, are separate tax entities and are taxed independently from owners. Your income from the corporation is taxed as an employee.
Self-employed people need to withhold taxes from their income and remit them to the government in lieu of the withholding that an employer would normally conduct. For American store owners, you’ll need to pay estimated quarterly taxes if you’ll owe more than $1,000 in taxes this year. Canadians have it a little easier; if your net tax owing is more than $3,000, you’ll be required to pay your income tax in installments.
Improving your store’s gross margin ratio is the first step toward earning more income overall. In order to calculate gross margin, you need to know the costs incurred to produce your product. To understand this better, let’s quickly define both cost of goods sold (COGS) and gross margin.
Here’s how you can go about calculating gross margin:
Gross margin (%) = (revenue – COGS) / revenue
You can also use our free profit margin calculator to plug in your numbers for a quick calculation.
The difference between how much you sell a product for and how much the business actually takes home at the end of the day is what truly determines your ability to keep the doors open.
There are many scenarios where a growing ecommerce business might need to secure external business financing, be it through a line of credit, investors, a small business loan, or even a business partner.
For instance, you might have an unexpected downturn in sales due to uncontrollable external circumstances, or maybe you need a financial boost during slow periods in a seasonal business. Brands with big growth goals often need to secure funding to make investments in new product developments, inventory, retail stores, hiring, and more.
Remember, to get a small business loan, you’ll likely have to provide financial statements—a balance sheet and income statement at the very least, possibly a cash flow statement as well.
But before you sign off on the debt, it’s important to make sure the numbers make sense. In other words, it’s a good idea to calculate the ROI of the loan. Add up all the expenses you need the loan to cover, the expected new revenue you’ll get from the loan, and the total cost of interest. You can use our business loan calculator to find out the total cost.
As a business owner, you’ll want to have an understanding of generally accepted accounting principles (GAAP). It’s not a rule, but it helps you measure and understand your company’s finances.
When you first start out you may opt to use a simple spreadsheet to manage your books, but as you grow you’ll want to consider more advanced methods like QuickBooks or Bench. As you keep growing, continually reassess the amount of time you’re spending on your books and how much that time is costing your business.
Every business owner needs good accounting software to remove manual data entry and save time. Accounting software is something you use to access financial information quickly and easily. It lets you check bank balances, understand revenue and costs, predict profitability, predict tax liabilities, and more.
Once you connect your business bank accounts and credit cards to a software, transactions show up in a queue and are grouped into categories. You can find all this information on your chart of accounts. Once you approve of the categories, transactions automatically settle in your financial statements.
Some features to look for in your account software include:
There are many user-friendly accounting software options for small businesses, ranging from free to paid models. You can also browse the Shopify App store for an accounting software that will seamlessly integrate with your ecommerce store.
Check out the following accounting software you could use to manage your books.
Xero is a cloud-based accounting system designed for small and growing businesses. You can connect with a trusted adviser and gain visibility into your financial health. It can be accessed from any device. Plus, with Xero’s advanced accounting features, you can view cash flows, transactions, and other financial information from anywhere.
Benefits:
QuickBooks Online is a small business accounting software run by Intuit. You can use it to snap and store receipts for expenses, track your income and expenses, and more.
QuickBooks shows all your costs, such as inventory and maintenance costs, and every sale your business makes over a period of time. It also offers inventory automation using perpetual inventory tracking, so your sales and inventory cost are updated every time you make a sale. You can also integrate QuickBooks with Shopify to stay organized and up to date.
Benefits:
Wave is a web-based accounting solution built for small businesses. With its bank reconciliation feature, you can link your bank accounts, PayPal accounts, and other data sources to see real-time business transactions. You can also generate reports such as accounts receivable, balance sheets, sales tax reports, and accounts payable.
Benefits:
FreshBooks is a cloud-based accounting and invoice management software for small businesses. It offers expense management, core accounting, and everything you need to take care of basic bookkeeping.
Benefits:
Starting a business can be an overwhelming process, but if you follow this list, you’ll have your new store’s finances in order from the beginning. From opening the right type of bank account to determining how much you’ll bring in per product, these tasks will all contribute to your business’ success, now and as it grows.
You can set up basic small business accounting records in a spreadsheet, though this is more tedious, prone to manual errors, and time consuming than a comprehensive small business accounting software. At the very least, you’ll want to track expenses and income in a secure cloud-based platform.
Small business accountants range in price, depending on a number of factors. If you’re hiring in-house, the US Bureau of Labor Statistics estimates accountants make an average annual salary of $70,000. Bookkeepers come in at $17.26 per hour, according to PayScale. If you’re outsourcing to an external contractor or one of many accounting firms, costs vary from a few hundred dollars per month to thousands per month—depending on the level of services provided and complexity of your small business accounting needs, among other factors.
A small business accountant does many things, including the following:
Bookkeepers handle ongoing, administrative duties for small business accounting, including:
