Online shopping has become one of the world’s most popular digital activities, and it has continuously seen an upward trend even to date. According to a recent report, eCommerce will account for 20.4% of global retail sales by the end of 2022, which was merely 10.4% in 2017.
In January 2021, the Philippines government launched the e-Commerce Philippines 2022 Roadmap to promote eCommerce as a platform of choice for small and medium-sized enterprises (SMEs).
Due to the impact of the COVID-19 pandemic, the government is looking to increase the country’s gross domestic product (GDP) contribution to 5.5% in 2022 to make up for the global health crisis’s great damage to the industry.
If your brand is only starting in the eCommerce field, you’ll need to be equipped with the right strategies to keep up with fluctuating customer demands. All areas in your operations need to be set in place for the business to run smoothly—especially accounting.
If you have yet to learn about accounting for eCommerce, this article can help. But before discussing accounting and its importance to organizations, let’s first get into the specifics of how eCommerce work for businesses.
What is an eCommerce Business and How Does It Work?
eCommerce is the process of buying and selling goods and services through the internet. Much like brick-and-mortar stores, the size of businesses that utilize this platform can vary. Today, you can see businesses of all sizes use eCommerce in the place of in-person establishments.
Through this model, brands can transact with their customers conveniently, allowing them to acquire an item or service in just a few taps on their chosen device. Consumers can also pay for their purchases through electronic payment systems linked to the business. Then, the merchant delivers the goods or grants the service to their client after receiving their payment.
What is eCommerce Accounting?
eCommerce accounting is how a business gathers, arranges, evaluates, and reports financial data connected to an eCommerce’s list of transactions and assets. Using organized sheets and reports to display how money comes and goes in the company helps eCommerce entrepreneurs make thoughtful business decisions.
Your brand may focus on two types of eCommerce accounting: cash basis accounting and the accrual method.
- Cash basis accounting
In this method, you add a new record whenever you receive money in your bank account or spend cash. This technique ensures that your books reflect every transaction stored in your payment methods and bank accounts, allowing you to record all cash movements.
- Accrual method
Commonly known as the standard accounting technique, the accrual method requires business owners to keep track of all sales and expenses, regardless of money entering or exiting their bank account.
Some may argue that this method is more difficult to manage since you must consider the money you haven’t made yet (account receivables) and deduct charges you haven’t incurred yet (account payables).
Why is Accounting Vital for eCommerce Businesses?
While it’s no secret that launching an eCommerce counterpart to your business will help streamline your operations, it doesn’t come without downsides. Having an automated business process is good, but only if you know how to account for all of your business transactions properly.
Here are some reasons why accounting for businesses in the eCommerce industry is important.
- It helps for better sales management
Thanks to today’s technological advancements, consolidating sales for an eCommerce business has become a fairly manageable process. However, having multiple sales channels can make it challenging.
Setting an accounting process for your eCommerce business helps manage your revenue better. You can monitor where a sale was made, regardless of which avenue a customer checked out a brand item.
- It helps manage inventory better
As current assets, inventory plays a big role in a company’s balance sheet. In fact, it can make up 15-40% of a company’s value, immensely influencing the amount of profit or loss generated by a brand. Without proper accounting, inventory management can spiral out of control and lead to higher costs than earnings.
- It helps ensure tax compliance
The Bureau of Internal Revenue (BIR) requires every business owner, including those who manage an eCommerce store, to issue a physical sales invoice with every sale delivery. This mandate enables the agency to keep records of businesses and guarantee that an organization, company, or individual pays the correct amount of tax they’re due.
Under the Tax Code of the Philippines, sales worth ₱25 or more are required to have supporting sales invoices. However, a vendor could still issue one for purchases less than ₱25 to establish process consistency across all sales operations. If you fail to record commercial transactions in your books of accounts, you might be subject to penalties.
- It helps create a sound business model
A business model is a brand’s core money-making plan, and accounting is the bedrock of any successful business. You can receive clear insights into how your firm is running if you have a system for recording all your transactions and expenses. More importantly, you can avoid any unpleasant surprises when it’s time for payroll or tax payments.
- It helps improve corporate governance
Like any other industry, an eCommerce business needs to comply with government regulations. Tax compliance requirements are expected to be submitted by all companies. Through accounting, eCommerce businesses can note all financial transactions to ensure the smooth sailing of their respective government responsibilities.
5 eCommerce Accounting Basics Your PH Business Needs to Cover
- Focus on sales management
Maintaining your online business requires keeping track of your cash flow. You need to know if you’re generating more money than you’re investing, which is impossible to do if you don’t know how much resources are coming in and going out in your daily operations.
- Monitor inventory cash flow
Another item you should keep track of is your inventory, as it comprises both the product you’re selling and the raw materials you’ll need to make it. Inventory is money, and whatever is sitting in your facility could result in future losses if the value of your product drops suddenly.
Since monitoring inventory is an easy way to track sales, it calls for accurate data. If they aren’t handled effectively, a company may encounter issues like a high carrying cost. Carrying costs are the costs of a company to hold inventory in stock, which can account for 40% or more of the business’ average inventory investment.
- Keep official receipts
Make a system for storing and categorizing your official receipts and sales invoices. These documents should be easily accessible, so develop a strategy that allows you to access them easily.
Furthermore, monitoring official receipts is a crucial duty by the Philippine government to guarantee that businesses properly report all service transactions and pay the correct taxes.
- Subscribe to eCommerce tools
Today, automation in business processes has become a need to ensure seamless client transactions and internal operations. This most definitely applies when you’re running an online business.
As a small business, you want eCommerce solutions that can assist you in making your day-to-day tasks easier and provide you with more precise data to make better business decisions for your brand. This includes paying for an easy-to-tweak domain to host your eCommerce website and using a content management system with plug-ins, among other things.
- Find a good accounting system
You don’t have to stress yourself out by attempting to handle everything with spreadsheets. Automating your accounting work will make it easier to keep track of your finances, especially if you’re new to eCommerce accounting. A solid system can assist you in simplifying each step and streamlining operations to make compliance more manageable.
A Simpler Way to Manage Your Finances
Hopping into the eCommerce industry can be daunting and confusing, even more so if you don’t have the right tools or team to help you get started.
In the Philippines, accounting is one of the most crucial facets when running a business, which means it has to be done properly every time. Partnering with the right people to do the job can make all the difference in your overall operations.
CloudCfo is a cloud accounting firm for startups and SMEs in the Philippines that can help you with your eCommerce accounting needs and more! We offer professional accounting services and other financial functions to ease the process for you. Contact us today to learn more about how we can help scale your business!