How To Do Accounting For Dropshipping Business

The dropshipping e-commerce model has exploded in popularity due to its ability to allow entrepreneurs to run an online retail business without major upfront investment into inventory or overhead.

However, to scale a successful long-term business, proper accounting practices are essential for any e-commerce merchant, regardless of size and product focus.

This guide will help you understand thoroughly How To Do Accounting For Dropshipping Business.

While inventory management and logistics are handled by the suppliers in a dropshipping arrangement, the store owner still needs to have clear visibility into sales volumes, revenue, expenses, profit margins, and other key financial metrics that inform strategic decisions.

Additionally,

• managing income and sales tax liabilities,
• processing high volumes of orders and supplier invoices,
• maintaining positive cash flow, and
• producing financial statements are critical accounting responsibility for those running these e-commerce operations.

Without proper financial planning and number crunching, even promising dropshipping stores can quickly encounter issues with profitability and long-term viability.

This guide aims to help dropshipping entrepreneurs establish accounting processes and infrastructure that not only meet compliance requirements. But, also provide the financial insights needed to drive growth.

We will explore critical accounting topics like choosing software platforms, tracking inventory/COGS, analyzing reports, optimizing taxes, and more.

By investing time into accounting now, dropshippers can gain peace of mind by understanding the exact financial standing of their business while also identifying opportunities for improvement.

How To Do Accounting For Dropshipping Business

Managing Invoices and Payments

Now for the unglamorous must-dos of accounting – invoices and payments. As a dropshipper, you’re the cool agent in the middle linking badass suppliers with eager customers.

But that also means you have to wrangle all the billing and cash flow on both ends.

On one side, you’ll get a flurry of supplier invoices for every product order you submit. Keeping track of what you owe and making sure they ship the goods is crucial.

There’s nothing worse than angry customers barking about late packages that you already paid for.

Some tips for taming the invoice chaos:

  • Use accounting software to automatically match invoices to orders
  • Set payment reminders and schedule recurring payments
  • Confirm shipping before paying suppliers

Then there’s getting paid by your customers i.e., sales. Don’t count until the money is in the bank. Make paying you a piece of cake with:

  • Multiple payment options like cards, Paypal
  • Accounting software to generate customer invoices
  • Easy refund process in case of returns

Getting this inflow/outflow equation right means maximizing profits while keeping vendors and buyers happy.

But don’t sweat the details—lean on software and some organization to keep cash flowing smoothly. The less you micromanage payments, the more time for growth.

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Accounting Software for Dropshipping

So keeping up with a blizzard of paperwork and money movement BY HAND sounds like a straight-up nightmare for your dropshipping hustle. Sure you could use old-school spreadsheets and stapled receipts, but better leave that to lemonade stands.

If you want to keep your sanity while scaling, it’s time to loop in some software sidekicks.

Cloud-based accounting platforms are like a best friend for online sellers. They help organize the financial chaos of your business with just a few clicks. Like:

  • Automate supplier invoices and customer payments
  • Track inventory from multiple suppliers
  • Built-in reports on revenue, COGS, profits
  • Sync sales/expense data from Shopify & other e-commerce platforms

And the ability to tag suppliers is a clutch for understanding what products make you bank. Some top recommendations are:

  • Quickbooks Online: user-friendly for e-commerce beginners
  • Xero: handles multi-location inventory well
  • NetSuite: robust for forecasting at the enterprise level

Setting up the integrations and digging into the data feels tedious. But playing around in the platform now will reward you with years of smoother operations and better decisions.

Sales Tax Considerations

You didn’t think you’d get away tax-free just because you don’t physically touch the merch, right?

As an e-commerce retailer, sales tax is just another delightful line item you need your accounting software to handle.

The specific rates and rules vary state by state, but if you have an online dropshipping business:

  • You may need to charge sales tax if selling within your state
  • You’ll likely need to REGISTER and REMIT sales tax in any states you pass the revenue thresholds
  • Special tax exemptions MAY apply in certain states

Automation is key for computing tax rates accurately at checkout and reporting figures regularly. Or enlist an accountant to make sure you’re compliant.

Just be sure to account for sales tax costs within your margins so they don’t eat up your profits. 

Inventory and Cost of Goods Sold Tracking

Unlike traditional retailers, you don’t have boxes of inventory sitting around. But keeping careful track of COGS (Cost Of Goods Sold) is just as crucial for running an efficient dropshipping operation.

Your accounting platform should seamlessly log inventory data with each supplier in order to give you perpetual visibility including:

  • Units ordered, pending shipment, and completed sales
  • The exact cost you paid for each product
  • Which supplier and product COGS is the highest

Monitoring COGS rates will uncover which items are generating the most profit and where to negotiate better wholesale pricing.

Because small savings per order add up BIG time at high volumes. Understanding your precise inventory position also prevents overselling products that aren’t available.

The last thing you want is to apologize to shoppers for selling goods you can’t deliver. 

Financial Reporting and Analysis

Numbers tell the story of your business. You just have to translate all those rows and figures into actionable insights.

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The right accounting software equips you to keep a pulse on the profitability vitals and make data-driven moves. 

You’ll gain ultimate visibility by having these essential financial reports auto-generated from sales and other data:

  • Income statements: How much did we actually bring in?
  • Cash flow: What’s our wiggle room week to week?
  • Balance sheets: How strong are our financials long term?
  • COGS analysis: Where are our highest product margins?

Don’t let your eyes glaze over. Just start digging into the numbers regularly rather than just during tax season. Progress from Wondering to Understanding when you,

  • Track performance metrics month-over-month
  • Compare reality to your business plans/projections
  • Spot patterns in seasonal or segment trends
  • Identify new growth opportunities based on insights

Soon, you’ll feel confident basing expansion plans, partnership deals, and other big calls on the financial fundamentals – not just your gut. 

Tax Filing and Compliance

Properly documenting taxes makes accounting look fun. Unfortunately, Uncle Sam still expects his cut of e-commerce revenues.

Leverage software to automate compiling all the paperwork:

  • Income tax documentation
  • Sales tax forms and remittances
  • Taxable transaction details and classifications

Double-check that platform calculations jive with your direct bank deposits so you don’t accidentally commit fraud.

Consider designating an in-house financial expert or specialized accountant to oversee compliance. The business expense is worth avoiding Tax Man headaches, penalties for errors, or other legal woes that could tank your profit margins.

Then focus on the $$$-making while they handle deductions, quarterly filings, and year-end closings.

Cash Flow and Financial Planning

Avoid the stress by planning and monitoring expenses:

  • Build financial models mapping your projected earnings and major costs over the next year(s).
  • Use accounting software to track exact profits and create budgets for optimizing spend in areas like ads and payroll.
  • Maintain an emergency financial cushion to withstand dips from seasonal slumps or random business disasters.

The key is translating all those abstract numbers into a visible timeline of the actual cash you expect to have on hand, week by week.

Refresh the data as you scale orders of magnitude to prevent unhealthy debt reliance or other unsafe “bootstrapping” corner-cutting. 

Then you can confidently hire help, rent a warehouse, or upgrade to premium suppliers knowing that the investment will pay for itself in profitability gains and business longevity.

Operations and Order Management

Streamlining back-end systems is just as vital as a slick storefront for delighting customers.

Poor communication with suppliers or shipping hiccups leave buyers frustrated with YOU and not warehousing partners. Avoid fulfillment blindspots by tracking:

  • Automated order processing from purchase to shipment
  • Real-time inventory adjustments with each order
  • Shipping status updates from suppliers
  • Return/refund policies and procedures

Avoid getting too involved in every single transaction. However, periodically check account and order histories to identify any processing delays or products stuck in the “pending shipment” stage.

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Proactively addressing these delays allows you to stay ahead of potential complaints and ensures a customer-centric experience. Taking ownership of orders behind the scenes also helps maintain sales momentum.

Analytics and Reporting Best Practices

Here’s the fun part—turning all those chronicled transactions into insight on optimizing your enterprise.

Get your analytics game on point by:

  • Building customized dashboard views and alerts
  • Digging into sales, customer, and inventory reports
  • Comparing period-over-period performance
  • Filtering data in different ways to spot trends

The goal isn’t information overload. Start with high-level monthly reporting to understand growth, busy seasons, profit leaders, etc.

Then strategically drill down into metrics around lagging products, campaign ROI, and buyer demographics.

Let the numbers guide your operational decisions from forecasting demand to personalizing promotions. Before you know it, you’ll have the data whip cracked maximizing profits.

Conclusion on How To Do Accounting For Dropshipping Business

Approaching financial management right from the start pays dividends for years by setting you up with:

  • Systems for organized, scalable order and cash flow operations
  • Visibility into the true health and performance of your e-commerce venture
  • The power to make strategic decisions backed by hard data analytics

While you’ll still deal with the operational hassles and supply chain hiccups inherent to dropshipping, sound accounting lifts a layer of cost uncertainty and financial anxiety off your shoulders.

That stability lets you double down on customer experience, marketing wins, or whatever fires you up rather than putting out money fires.

FAQs on How To Do Accounting For Dropshipping Business

What accounting method should dropshipping businesses use?

Most dropshipping companies should use the accrual accounting method. This matches revenue to when the sale occurred versus when payment is received. Work with an accountant to determine what’s best.

Do I need an accountant/bookkeeper for my dropshipping business?

In the beginning, you can manage basic accounting yourself with software. But consider hiring professional services once you reach mid-5-figures in sales for expert support staying tax compliant as you scale.

How often should I be generating and reviewing financial reports?

Review core financial reports at least monthly to understand sales volumes, profits, and losses, and identify issues early. Analyze customer segments, inventory costs, promo campaign ROI, etc. more granularly each quarter.

What metrics are most important for dropshipping financial analysis?

Focus on sales volumes, revenue growth, COGS, profit margins, customer acquisition costs, lifetime value per customer, cash flow, and working capital. Connect insights to make strategic decisions.

What common accounting mistakes trip up new dropshipping businesses? Not tracking COGS accurately, failing to collect proper sales tax, not budgeting for tax liabilities, insufficient cash flow planning, and not understanding true profitability.

Wrapping up the article How To Do Accounting For Dropshipping Business. I hope it was to your liking. Thanks for spending time with us.

Hello, I’m Samuel, and I’ve been in the dropshipping business for the past 9 years. Over the years, I’ve had the privilege of helping many novice dropshippers grow their businesses. Based on my experience, I’ve launched this blog to share my insights and knowledge with the dropshipper community.

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