This platform is one of the most popular for online sales in recent years. It is not a surprise considering how easy you can start a business by simply opening a Shopify account. However, it is common that people are struggling with accounting. Missing some important details in this part can lead to problems.
You must learn more about all the essential details that must be included in accounting. However, a lot of people lack skills and experience in this area, which often leads to various issues like spending too much time, making mistakes, and more. The great thing is that you can avoid manual shopify accounting by using a software, and if you are interested in this feature, there are more details that you can find here.
There are many reasons why this is so important. First of all, it will be much easier to prepare data related to taxes, but also to provide higher transparency for external financial institutions if you are looking for a loan. Here are some tips that will help you improve the bookkeeping for your business.
1. Understand the Difference Between Profit And Cash Flow
Profit and cash flow are often confused, but they are two distinct concepts. Profit refers to the money your business makes after deducting all expenses. On the other hand, cash flow is the movement of money in and out of your business.
Therefore, monitoring both profit and cash flow is essential to get a complete picture of your business’s financial health. For example, you might be making a profit on paper, but if you have a negative cash flow, you might still struggle to pay your bills on time.
2. Keep Accurate and Detailed Records
Accurate and detailed record-keeping is crucial for any business and becomes even more important as your business grows. Keep track of all your income and expenses, including sales, purchases, payroll, and taxes. Keeping accurate records will help you stay organized and make it easier for you to prepare your tax returns and respond to audits.
This approach will help you with other areas of your business, like planning and analyzing. If there is a way to reduce certain expenses, or increase the profit by making some changes, you will be able to determine it only by keeping all your records accurate.
3. Use a Bookkeeping System
Using a bookkeeping system can help you keep track of your finances more efficiently. Several options are available, including manual ledger books, spreadsheets, and bookkeeping software. Choose the system that best suits your needs, and make sure to update it to keep your records accurate regularly. For example, if you’re using a spreadsheet, enter your transactions and reconcile your accounts regularly.
4. Use the Right Accounting Method
There are two primary accounting methods: cash basis and accrual basis. The cash basis accounting method records income when you receive payment and expenses when you pay them. On the other hand, the accrual basis method records income when it’s earned and expenses when they’re incurred, regardless of when the payment is made or received.
It is essential to choose the right accounting method for your business as it can affect your tax liability and financial statements. For example, if you’re using the cash basis method, you might not be able to claim certain expenses until you have paid them, even if they were incurred earlier.
5. Understand the Difference Between Fixed And Variable Costs
Fixed costs are expenses that remain constant regardless of the level of business activity. Examples include rent, salaries, and insurance. Variable costs, on the other hand, change based on the level of business activity. Examples include raw materials and shipping.
Understanding the difference between fixed and variable costs can help you make informed decisions about your business and allocate resources effectively. For example, if you’re trying to reduce your expenses, consider negotiating lower rates for your fixed costs or finding ways to reduce your variable costs.
6. Use Financial Statements to Track Your Business’s Performance
Financial statements provide a snapshot of your business’s financial health and performance. The three primary financial statements are the balance sheet, income statement, and cash flow statement. The balance sheet shows your business’s assets, liabilities, and equity at a specific time. The income statement shows your business’s revenues and expenses over a particular period.
Furthermore, the cash flow statement shows the movement of cash in and out of your business over a particular period. Understanding and analyzing these financial statements can help you make informed decisions about your business. For example, suppose you’re trying to determine the profitability of a new product line. In that case, you can use the income statement to see how much revenue the product generates and how much it costs you in expenses.
7. Seek Professional Help When Needed
Bookkeeping can be a complex and time-consuming process, especially as your business grows. If you are uncomfortable handling it alone, consider seeking professional help. A bookkeeper or an accountant can help you keep track of your finances and provide valuable insights and advice. They can also help you understand and comply with any legal requirements, such as tax laws and accounting standards.
Proper bookkeeping is crucial for the success of any business, and it becomes even more important as your business grows. By understanding and implementing these bookkeeping basics, you can keep track of your finances, identify areas of improvement, and make informed decisions about your business. Whether you decide to handle your bookkeeping on your own or seek professional help, it is essential to prioritize it and allocate the necessary resources to ensure the success of your Shopify business.
It might seem too complicated for people who lack experience and skills. In that case, the implementation of automation is the best choice. Besides that, hiring the right assistance is the only solution for beginners. Dealing with various financial details related to your business can be complicated, and you won’t be able to learn that overnight.