If you’re an online retailer, your biggest focus is probably on maximizing sales. The catch is that even with great sales numbers, your business can still go under if you don’t keep a close watch on liabilities. Liabilities are debts or obligations that pile up in the daily activities of any business large or small, and no successful ecommerce seller is immune from dealing with them!
So which liabilities are most important for an online seller to watch out for? Let’s break down and go over them one by one.
1. Accounts Payable
Accounts payable refers to the money you owe suppliers, inventory managers, warehouses, and basically anyone else who helps you sell your products. We can classify them as short term debt obligations. Payment schedules are usually detailed in an invoice your suppliers send for goods sold, and should be met as soon as possible. After all, if you don’t pay your suppliers, they’ll cut off shipments to your customers. And, a promptly paid supplier is a happy supplier who may give you nice deals in the future! For each product you sell, it’s also important to keep track of your Cost of Goods Sold (COGS). Knowing the true cost of the sales you make is the easiest way to make sure you’re making desirable profits on every sale.
2. Accrued Liabilities
These types of liabilities are confused with accounts payable on a regular basis. They’re basically expenses which haven’t been paid yet. Unlike accounts payable, which should usually be paid immediately or in the near future, these expenses can be put down as either short or long term on company balance sheets.
3. Taxes Payable
Online sellers are as responsible for paying taxes as brick and mortar store owners. Tax compliance for your ecommerce business involves collecting sales tax on the goods you sell and paying income tax on your profits. How much sales tax and whether you have to charge any taxes at all depends mainly on where your business is based, and some states don’t even tax sales made inside their borders. FBA shippers need to keep an eye on merchandise origin – where goods are coming from before it reaches your customers. This may make you liable for charging sales tax for that state, even if your own state charges no taxes. If you have employees, you also need to worry about payroll tax.
4. Wages Payable
Most ecommerce sellers start off as sole proprietors, meaning they’re a one person band. But as your business grows, you may have to hire others to help with tasks ranging from digital marketing and social media management to customer service and sales support. As the title suggests, wages payable is simply the compensation you’ve agreed to pay employees every month, and are part of the overall package that attract talented professionals to your business.
5. Notes Payable
Also confused frequently with accounts payable, notes payable keep track of the promissory notes a company issues. These are written promises that you will meet the financial obligations to a third party. If you take out a loan for your ecommerce business for example, banks will usually require some sort of collateral or commitment of personal responsibility from the business owner(s). In some cases, this will make you personally responsible for repayment of debts accrued by your business, despite the fact that it’s a separate entity. These notes should be listed in your general ledger under liabilities.
Establishing a smooth ecommerce business with healthy growth is tough. Aside from having great merchandising ideas that fill customer wants and needs in the market, it takes financial discipline to make sure you can compete in today’s highly competitive ecommerce space. Arming yourself with a strong knowledge of basic finance and best accounting practices will go a long way towards making sure you stay one step ahead of the competition.