Xero Best Practices for eCommerce Businesses

Accounting software, like Xero, helps small businesses simplify and automate many everyday bookkeeping and accounting tasks to save them time. 

Xero allows businesses to automate invoicing, generate necessary reports, monitor their business’s profit and cash flow, facilitate tax preparations, and more.   

However, you need to ensure your accounting software is set up and customized to your business’s needs to get the most out of it. In this post, we’re sharing six best practices for eCommerce businesses to get the most out of Xero.

Separate your business and personal banking and transactions

Keeping track of your business and personal expenses, spending, and deposits in a spreadsheet may not be sufficient when running an eCommerce business. Additionally, as your business grows, using the same bank account for personal and business transactions can cost you more time and energy. It also can potentially lead to mistakes when you need to provide separate accounts of the information. 

Monitoring and understanding the flow of your business’s cash and transactions is critical to evaluating your business’s success and ensuring you can pay all bills and expenses on time. Keeping your business’s banking separate will make that process easier for you. 

Additional reasons to keep your business’s banking and transactions separate from your personal banking include: 

• Accurately monitoring your business’s spending, money flow, and deposits 

• Providing you with a clean record of your business transactions to give your accountant or use yourself when preparing your business’s taxes

• If you engage an external bookkeeper it will be clear that all transactions are business related

• Making it easier to provide the necessary information if the tax authority audits your business 

Configure your chart of accounts in Xero

You use Xero’s chart of accounts to categorize and record your company’s transactions. This system allows you to monitor your transactions so you can see where your company is making and spending money. It also helps when generating reports and for financial reporting. 

Xero has a default chart of accounts when you set up your accounting for your company. However, you also can import a chart of accounts from a previous accounting system or set up your own custom chart. 

Having a customized chart of accounts specific to your business is important. A customized chart of accounts ensures a consistent coding system with clear guides and detailed descriptions tailored to your company’s needs. As a result, your data will be entered correctly, even if different people are responsible for adding transactions. 

The customized descriptions also help ensure that transactions are coded correctly to each category over time. Having consistent data from year to year allows you to make accurate comparisons to help you make informed decisions as your business grows. 

The most important consideration an eCommerce business needs to make is to determine whether each expense is variable or fixed in nature.  Variable expenses will increase or decrease as sales increase or decrease.  Examples of variable expenses in eCommerce businesses are cost of sales, merchant fees, and pay per click advertising.  Fixed expenses will remain the same regardless of the level of sales.  Examples of fixed expenses would be rent and office supplies.  

When you set up your Chart of Accounts, Xero requires you to allocate each expense to an account type.  Please ensure that you allocate variable expenses to ‘direct costs’ and fixed expenses to ‘expense’.

Once you have made these allocations, you may wish to design a custom Profit and Loss in Xero to show the gross margin of the business.  The gross margin is the residual profit, after subtracting variable expenses from revenue, and is shown as a percentage of revenue.  

Gross Margin is one of the most important indicators of a healthy eCommerce business, and drives strategic focus and what if analysis.

Set up a monthly bookkeeping system

Ecommerce Bookkeeping is essential for having an accurate picture of your company’s finances, so you can make informed business decisions and plan for the future. 

Accounting software, like Xero, makes the process of bookkeeping easier through automation. The software helps you record transactions, send invoices, make payments, prepare financial statements, and more. By establishing a monthly bookkeeping system for keeping your chart of accounts up to date, you’ll be able to assess and learn from the data that was entered.

Setting up a monthly bookkeeping system helps you stay compliant with taxes and be better informed about your business by:

• Maintaining accurate and up to date records that reflect real-time business operations 

• Ensuring your business is compliant with all local, state, and federal laws

• Handling accounts payable

• Preparing invoices

• Generating inventory reports

• Analyzing revenues and expenses 

Reconcile transactions in Xero 

When you connect your bank account to Xero, bank transactions automatically import to Xero each day.  These transactions are called unreconciled transactions.  It is the responsibility of the bookkeeper to allocate (or code) each of these transactions in Xero by assigning the correct account code, or matching the transaction to an unpaid accounts receivable or payable invoices.  Once this allocation is performed the transaction is considered reconciled.

The accuracy of your financial reports will depend on ensuring all unreconciled transactions are reconciled.  Therefore it is important to ensure you are reconciling your transactions as frequently as possible.

Managing Foreign Currency receivable and payables

Most eCommerce businesses must deal with foreign currency.  It is very common to be importing goods from overseas, and often the payment to these suppliers is in a different currency than the source currency of the business.

When paying international suppliers, the amount invoiced, amount paid and amount that lands in your suppliers is often different. This is due to the hidden international payment, FX and bank fees. Not only does this result in surprise expenses, but this also strains your supplier relationships. There are many international payment providers that help eliminate surprise fees and make faster payments - such as Airwallex. Airwallex allows businesses to open foreign currency accounts in as many currencies as you wish.  You can collect, hold, convert and transfer in multiple currencies with 90% better rates than major Australian banks. This could add up to 5% of cost savings by paying suppliers by eliminating unnecessary conversions.

Airwallex also provides multi-currency corporate debit cards that your team can use to simplify manual reimbursements and chasing receipts.

Airwallex also integrates with Xero to make reconciliation a breeze. Your global bank transfers and corporate card expenses will sync automatically into Xero in the right currency. 

Inventory

If your business is holding inventory, it is advisable to consider implementing an inventory solution that can integrate with both your shopping cart and with Xero.  Many small eCommerce businesses expense inventory as it is purchased instead of allocating to the balance sheet, and moving over the correct proportion of inventory when goods are sold.  This creates lumpy profit that is not matched to sales.  An inventory system will allow the business to match cost of goods sold with sales.  It will also keep track of quantities on hand and assist with month end stock valuations and allocation of costs of landing goods to inventory.

There are many inventory systems to consider, and it really depends on the requirements of the business to select the best fit for your business.  

Other considerations 

eCommerce businesses have many additional complications to manage when preparing financial reports for the business.  In addition to managing foreign currency and inventory, businesses in this industry must manage accounting concepts such as deposits paid to suppliers, and unearned income (when a customer pays for the goods prior to delivery).  To ensure your business has accurate financial reports, it is advisable to work with a bookkeeper or accountant that specializes in this industry niche.

Tracey Newman is the founder of CloudCounting, which merged with Bean Ninjas Australia in early 2021. Tracey is a Registered Tax Agent, Chartered Accountant, and a Certified Xero Consultant. She is a self confessed technology nerd, and is at her happiest in front of a computer or trying out new gadgets.

Tracey has worked in Big 4 accounting firms, and now specializes in putting time back in the day for small to medium business. She has over twenty years of experience working with clients implementing and advising on accounting systems.

Related article: How to Improve Cashflow Management for your Business