The essential guide to optimising your business with eCommerce accounting

The eCommerce market generates over £100 billion in sales annually and is forecast to reach over £260 billion by 2025.

This explosive growth presents an opportunity for ambitious online retailers like you. But it also comes with some unique challenges, especially when it comes to managing your finances. 

From tracking cashflow across multiple sales channels to staying on top of ever-changing tax rules, eCommerce accounting can be a complex beast.

But here’s the thing: mastering your numbers isn’t just about staying compliant and avoiding penalties (although that’s certainly important). It’s about unlocking valuable insights that can help you make smarter decisions, optimise your operations, and turbocharge your growth. 

This guide will tackle the most common accounting challenges eCommerce businesses face head-on. 

No fluff, no jargon – just actionable advice you can start implementing today.

The foundation: Cloud accounting software 

A robust, cloud-based accounting system should be at the heart of your eCommerce accounting tech stack. 

Cloud accounting software allows you to access your financial data from anywhere, at any time, and ensures that your data is always backed up and secure. 

It also enables you to collaborate with your team and advisors in real-time, and easily integrate with other tools in your tech stack.

One of the most popular cloud accounting solutions for eCommerce businesses is Xero, although QuickBooks and Sage are also excellent. These platforms offer a range of features specifically designed for online sellers, including:

• Seamless integration with popular eCommerce platforms like Shopify, WooCommerce, and Magento.
• Automatic import of sales data from multiple channels, including online marketplaces like Amazon and eBay.
• Comprehensive inventory management tools to help you track stock levels, costs, and margins.
• Multi-currency support for international sales and expenses.
• Customisable reporting and dashboards to give you real-time visibility into your financial performance.

Connecting your sales channels 

To get the most out of your accounting software, you’ll need to connect it with your sales channels. 

This allows you to automatically import sales data, eliminate manual data entry, and ensure that your financial data is always accurate and up-to-date.

Most cloud accounting systems offer direct integrations with popular eCommerce platforms, making it easy to connect your online store. 

If you sell on multiple channels or marketplaces, you may need to use a third-party integration tool to connect them all to your accounting system. 

Some popular options include:

• A2X: Automatically imports and categorises your Amazon sales data into Xero or QuickBooks.
• Link My Books: Connects multiple sales channels, including Shopify, Amazon, and eBay, to your accounting software.

Common eCommerce accounting challenges (and how to solve them) 

Neglecting your finances will slow your growth or even lead to catastrophic issues for your business. You need a laser-sharp focus on your numbers.

That means understanding your true costs, tracking your profitability across different channels and products, forecasting your cashflow, and always staying one step ahead of the HMRC.

Let’s take a closer look at some of the biggest accounting challenges eCommerce businesses tend to face – and how to overcome them.

Challenge #1: Managing cashflow 

In eCommerce, you need cash to buy inventory, cover operating expenses, invest in marketing and seize new opportunities as they arise. It can be tricky for a few reasons:

• Sales channels like Amazon and Shopify often hold onto your funds for weeks before paying out.
• You have to pay for inventory and other expenses upfront, long before you make a sale.
• Seasonal fluctuations can leave you flush with cash one month and strapped the next.

The solutions:

• Create a cashflow forecast: A cashflow forecast helps you predict how much cash will be coming in and going out of your business over a given period (usually 12 months). By mapping out your expected sales, costs and investments, you can anticipate cash shortages and take steps to bridge them before they become a problem.
• Optimise your inventory: Holding too much inventory ties up valuable cash, while too little leads to lost sales and unhappy customers. Home in on your best sellers and determine whether there are any patterns in selling your items (e.g., by season).
• Build a cash reserve: Aim to build up a cash cushion of at least three to six months’ worth of operating expenses. This is best practice for keeping your business afloat in downturns, or it could enable you to strategically double down on top-selling stock or otherwise reinvest in your business. 

Challenge #2: Understanding international taxation

Selling internationally is often mandatory for growth. However, it also brings a wide variety of VAT and tax challenges that have only become more complicated due to Brexit. 

Here are some key issues to navigate:

• VAT registration thresholds: When you sell to customers in other EU countries, you may be required to register for VAT in those countries once you surpass certain sales thresholds. These thresholds vary by country and can be as low as €10,000 per year.
• VAT rates and rules: VAT rates and rules vary widely across countries, making it challenging to ensure you’re charging the correct amount of tax on each sale. 
• Customs duties and import taxes: When you sell products across borders, your customers may be liable for customs duties and import taxes. If not properly communicated, these fees can add costs to the order and lead to delayed or abandoned shipments.

The solutions:

• Understand your VAT obligations: Before you start selling to EU countries, research each country’s VAT registration thresholds and requirements. You’ll generally need to register for VAT in each EU country you sell to, especially if you exceed the distance selling threshold of €10,000 across the EU.
• Simplify goods VAT compliance with IOSS: If you sell goods to EU customers, consider using the Import One-Stop Shop (IOSS) scheme for consignments valued at €150 or less. The IOSS allows you to collect VAT at the point of sale and remit it through a single EU VAT return, avoiding additional VAT charges at the point of importation for your customers.
• Select a good logistics provider: Working with a global logistics provider like DHL Express or UPS can help simplify your cross-border shipping and customs compliance. They offer useful services like duty and tax calculation, customs clearance, and delivery duty paid (DDP) shipping.

Challenge #3: Keeping up with demand

As your business grows, keeping track of your inventory, product performance, and profitability often becomes tougher.

With hundreds or even thousands of SKUs across multiple sales channels, it’s easy to lose sight of which products are driving your growth and which ones are dragging you down. Key challenges include:

• Tracking inventory levels and costs: Accurately tracking inventory levels and costs across multiple sales channels can be arduous work, especially as your product catalogue grows.
• Identifying best-selling and profitable products: If you don’t know which products generate the most sales and profits, making informed decisions about inventory management and product development is nearly impossible.
• Determining optimal pricing and margins: Setting the right prices and margins for each product is fundamental for maximising profitability, but finding the sweet spot between competitiveness and profitability can be challenging.

The solutions:

• Streamline SKU management with naming conventions: Establish a clear and consistent naming convention for your SKUs that includes essential product attributes such as brand, category, size, and colour. Zoho is a very popular tool for this and worth checking out. 
• Optimise pricing and margins with data: Regularly review and adjust your pricing strategy based on your own margin data and your competitors’ pricing strategies. 
• Consider dropshipping: If you don’t already, consider dropshipping to transfer customer orders to a third-party supplier who ships the items directly to the customer. This can help you expand your product offerings and test new products. Just be sure to choose reliable dropshipping partners who can provide fast, accurate fulfilment and good customer service.

eCommerce accounting best practices: 5 Tips for success 

Now that we’ve tackled some of the most common eCommerce accounting challenges, let’s zoom out and look at some best practices for building a strong financial foundation for your business. 

These are the strategies and habits that successful online retailers swear by – and that we at Almar BSL have seen work time and again with our clients.

Stay on top of your bookkeeping 

Accurate, up-to-date books are the foundation of accounting success. Make sure you’re:

• Recording every sale and expense in a timely manner.
• Reconciling your bank and credit card statements at least once a month.
• Maintaining proper documentation for all financial transactions.
• Keeping personal and business expenses separate.
• Regularly reviewing your financial statements to spot errors or discrepancies.

If bookkeeping isn’t your strong suit, consider hiring a part-time bookkeeper or outsourcing to a specialised eCommerce accounting firm like us at Almar BSL. It’s an investment that will pay off in spades come tax time – and will give you valuable insights into your business’s financial health.

Monitor your key financial metrics

To make smart, data-driven decisions about your eCommerce business, you’ll need to get into the habit of closely monitoring your key financial metrics. 

These metrics provide insights into your business’s financial health and operational efficiency, guiding your strategy and helping you spot potential issues early. 

Here are the top five important metrics to track:

Gross profit margin

Gross profit margin measures your profit on each sale after accounting for the cost of goods sold (COGS). 

This metric helps you understand how effectively you’re managing your production and purchasing costs relative to your sales prices. 

A healthy gross profit margin depends on your industry and business model but generally falls between 50% and 70%. For example, if you sell a product for £100 and your COGS is £50, your gross profit margin is 50%. 

Customer Acquisition Cost (CAC)

Customer Acquisition Cost is the average amount you spend to acquire a new customer, including marketing and advertising expenses. 

For instance, if you spend £5,000 on marketing in a month and acquire 100 new customers, your CAC is £50. Keeping an eye on your CAC relative to your customer lifetime value (LTV) is crucial – ideally, your LTV should be at least 3x your CAC. 

If your CAC is too high, you might need to refine your marketing strategies or focus on more cost-effective customer acquisition channels.

Inventory turnover ratio

The inventory turnover ratio measures how quickly you’re selling through your inventory. A high turnover ratio (e.g., 4-6) is generally a good sign – it means you’re not tying up too much cash in slow-moving stock. 

For example, if you have an inventory worth £10,000 and your COGS over a period is £50,000, your inventory turnover ratio is 5. However, if it’s too high (e.g., 10+), it could mean you’re at risk of stockouts. 

Managing this balance helps ensure you have enough stock to meet demand without over-investing in inventory.

Return on Investment (ROI)

Getting into the habit of tracking ROI across various campaigns and activities helps you understand the financial impact of your decisions. 

For instance, if you invest £10,000 in a new marketing campaign and it generates £30,000 in revenue, your ROI is 200%. 

There are dozens of other financial metrics you could track – the key is to focus on the ones most relevant to your specific business goals and growth stage. 

A good eCommerce accountant can help you identify and interpret your key metrics.

Tax compliance and best practices for eCommerce companies

Now, let’s take a look at tax. Staying on top of your tax obligations will give you peace of mind. If you let it slip away from you, it’ll only mount up and increase your risk of getting in trouble. It can be costly. 

Corporation tax rates and structure

First off, corporation tax:

• Small profits rate: As of 2024/2025, for companies with profits below £50,000, the Corporation Tax rate is 19%.
• Marginal relief: A marginal relief rate applies for companies with profits between £50,000 and £250,000. This gradually increases the effective tax rate up to 25%.
• Main rate: For companies with profits over £250,000, the Corporation Tax rate is 25%.

• Annual reporting: Companies must file a Company Tax Return and pay their Corporation Tax within nine months and one day after the end of their accounting period.
• Records: Companies must maintain accurate accounting records to support their tax returns and comply with HMRC requirements. This is a legal requirement.

VAT for eCommerce 

If your business is VAT-registered in the UK, you’ll need to charge VAT on your sales and file regular VAT returns with HMRC. Here’s what you need to know:

• Registration threshold: Businesses must register for VAT if their 12-month taxable turnover exceeds £90,000 (as of April 2024).
• Deregistration threshold: Businesses can deregister for VAT if their taxable turnover falls below £88,000.

VAT rates:

• Standard rate: 20% on most goods and services.
• Reduced rate: 5% on certain goods and services, such as children’s car seats and home energy.
• Zero rate: 0% on essential items like most food and children’s clothes.

Making Tax Digital:

Businesses must use HMRC-approved software to maintain digital records and submit VAT returns. Xero, Sage, QuickBooks, and other big-name accounting software are HMRC-approved. 

Wrapping it up 

Phew – we’ve covered a lot of ground in this guide! Here are a few key takeaways:

• Accounting is complex, but critical for long-term business success.
• Common challenges include managing cashflow, navigating taxes, and keeping up with demand as you grow.
• Solutions involve a mix of the right tools, processes, and expert support.
• Best practices include choosing the right accounting software, staying on top of bookkeeping, monitoring key metrics, planning for taxes year-round, and investing in your own financial education.

If there’s one thing we hope you’ll remember, it’s this: you don’t have to go it alone. At Almar BSL, we specialise in helping eCommerce businesses like yours streamline your finances, maximise your profits, and achieve your wildest growth dreams.

Whether you need help with bookkeeping, tax planning, financial forecasting, or anything in between, we’re here to be your trusted partner. 

So, if you’re ready to take control of your accounting and unleash your business’s full potential, we’d love to chat.

In the meantime, we hope you’ve found this guide helpful – and we wish you all the best on your business journey! If you have any questions or want to geek out about online retail, please drop us a line anytime. 

Happy selling!