Accounting/bookkeeping is the recording and classifying of business transactions according to defined assertions (rules) that establish the timing of occurrence, valuation, and accuracy of each transaction recorded. A business’s taxes, profit, loss, retained earnings, and entire financial health are governed by these assertions (rules). Regardless of size, having the right accounting/bookkeeping service is critical to your business’s success.
Accounting/bookkeeping is essential to a business’s viability – whether large or small. Tracking income and expenses is the minimum requirement for owners to efficiently manage costs, allocate resources, and make optimal decisions to achieve their objectives and ensure their business’s financial health.
Although often minimized, accounting/bookkeeping is even more important for entrepreneurs, international startups, and remote businesses in a multi-currency global marketplace with differing generally accepted accounting practices (GAAP), tax rates, and filing requirements. Entrepreneurs, startups, and international SMEs will find it difficult to operate and be compliant without the help of professional accounting and bookkeeping services with subject matter expertise in the local markets.
Accounting Standards: How They Affect Your Business
The two prevailing global accounting standard promulgators are the United States Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) to which non-US entities have converged their accounting and financial reporting over the years. Below the IASB are each country’s individual Generally Acceptable Accounting Practices (GAAP).
While large companies have adopted International Accounting Standards (IFRS) for their financial reporting, small and medium-sized businesses are normally subjected to individual countries’ local GAAP.
If you operate an e-commerce entrepreneur, a startup, or an SME operating in the European Union, you will be subjected to the local GAAP of each country in which you operate. In many cases, even the average in-house accountants and bookkeepers may lack the skills required in the local markets. By outsourcing these transactional services, owners are able to save time and money and focus on the core activity of running and developing their businesses.
Here are some of the things that you need to know to secure your finances and ensure a healthy business.
Role of Accountants/Bookkeepers
Depending on the size of the business, the bookkeeper and the accountant may be the same person. But as volume increases and transactions become more complex, the bookkeeper/staff accountant focuses on the recording of transactions while more sophisticated finance personnel transforms data into decision-making intelligence with analyses, management reports, and financial statements. They also prepare the business’s tax returns, file statutory disclosures, ensure compliance, and mitigate risks.
Regardless of the size of the business, accounting/bookkeeping is essential to planning and allocating resources and managing costs, revenues, cash flows, performance measurement, and profitability. Additionally, there is the compliance obligation with local statutory reporting requirements – preparing and filing required local government declarations/disclosures (including VAT filings, corporate tax returns, confirmation statement filings, and annual financial statements).
In other words, accounting/bookkeeping is critical to optimal decision-making and ensuring a business’s overall financial health. Below is a small sample of some of the requirements – even for a small business in Europe.
- Cashflow Management
- Merchant Fees, Returns, & Refunds
- Inventory Tracking
- Treasury Management & Foreign Exchange
- Corporate Tax & VAT
- Periodic Statutory Disclosures
- Year End Annual Financial Statements
Down the line, should you wish to attract investment to grow and develop your business, having established accounting processes and practices in place will provide a basis for your valuation and increase your attractiveness to the investor community.
Additional Accounting Issues For Global Startups and Remote Businesses
Traditionally multinationals with the resources to staff teams of local accountants and finance personnel to manage the complexities of local fiscal and regulatory requirements were the only ones operating globally. With the transformation brought about by software as service (SAAS) solutions, e-Commerce, single-person or small to mid-size e-commerce operators, and other startups with an international customer base are chipping away at the legacy business model.
As small businesses and startups often do not have the resource to take the legacy approach and add massive overhead in the various national markets, a new approach to accounting and bookkeeping is required because the same regulatory challenges and complexities of being local in the global marketplace remain.
Let us delve a little deeper into some of the main accounting/booking challenges that global SMEs, e-Commerce, or international startups may face.
Cash Flow Management
It’s important to manage cash flows in any business. But for small businesses, it means life or death. Timing differences in multi-country customer remittances, current expenses (including employee and vendor costs) and future payables (tax liabilities), and the unexpected – customer churns (in the case of recurring revenue customers), unexpected fines & penalties, returns & refunds, etc., can make cash flow a complicated process to forecast and manage.
The key to cash flow is managing your sources (inflow) and uses (outflow) of funds and understanding the timing of each. Any type of unforeseen risk with a financial impact (fines & penalties) is your biggest enemy.
For example, your cash flow position might change dramatically (negatively impacted) by a large and unexpected tax payment or settlement of a fiscal sanction/penalty for non-compliance. Because of this, it’s imperative to have the right accounting/ bookkeeper services that understand your business and can effectively forecast and manage its global inflows and outflows while mitigating risks that might impact either
Managing VAT, Corporate Tax
All countries in the European Union charge Value Added Tax (VAT). If you trade in only one country, you will generally know the threshold for your VAT obligations, which ensures easy compliance. But the EU has a regional VAT system whereby rates vary by countries (including within regions) with their own VAT thresholds, VAT rates, VAT-exempted products and services, and rules governing VAT registration, the timing of filings, and penalties for late filings and payments, etc.
Your risks of penalties, fines, and sanctions for inaccuracies, incompletion, late filings, and late payments are, therefore, magnified.
If you are starting out, you might think it’s safe to operate for a while before worrying about VAT because you are below the VAT threshold. The issue is that VAT thresholds often don’t apply to foreign businesses selling into a country (UK VAT, as an example), yet a seller is still obligated to pay the VAT it collects from its customers back to the government. So you may be obligated to register for VAT in certain countries the moment you plan to sell to their citizens and residents.
Various other VAT complexities may also arise. Some countries even have different tiers and rates for digital goods and services such as educational, online courses, software, ebooks, etc.
Your business will generally need to be registered for VAT in each country. Periodic filings and payments (or reimbursement claims) will need to be made to the tax authorities. In the EU, you are obligated to file your VAT returns even if you owe no VAT for a particular period.
Your accountant or bookkeeper must be able to manage these various burdensome VAT and corporate tax requirements in all countries where your customers are based.
Optimizing your corporate taxation (tax on profits) is also a tricky business in countries like France and elsewhere in the European Union where the loopholes are fewer than in the United States. Still, there are means of doing this with the right accounting planning, but this often requires technical skill sets
Europe Incorporations removes your burden by offering both accounting/bookkeeping solutions and VAT services in France that enable you to sleep comfortably at night.
Inventory Tracking
If you run an e-commerce store, or if you sell goods through online marketplaces such as Amazon or eBay, tracking and managing inventory is paramount for financial accuracy, fulfillment, and customer satisfaction.
As your points of distribution and sales increase, so do the complications. Tracking and managing inventory become a critical success factor with significant financial, tax, and brand implications. Your accountant/bookkeeper needs to manage robust processes to ensure the right levels of inventory are located in the right countries in order to strike the optimum balance between fulfillment and taxation (export) burdens.
For example, in a post-Brexit UK, British-based businesses selling into the EU (outside the Northern Ireland Protocol) and vice versa must pay tax and import duties for customs clearance for items exceeding £135 in value.
Many marketplaces will have inventory tracking functionality built into their platforms, but there are still inherent restrictions and conditions that many accountants/ bookkeepers may not have the skills to use or exploit these platform functionalities because they are not inventory management professionals.
Accounting services with the right expertise can advise on the right solution to integrate your accounting and inventory processes to the relevant e-commerce platforms as well as handle your export/customs requirements in many countries.
While reducing costs and ensuring fulfillment and financial accuracy, this ensures that you – the business owner – are not overburdened with the demands of inventory export, compliance, taxation, and accounting.
Merchant Fees, Return Tacking, and Refunds
Another complication that e-Commerce sellers face is keeping track of various fees and refunds. e-Commerce platforms add their own fees to your sales and these need to be accounted for. When refunds inevitably occur, this complicates the accounting process because you’ll need to account for the refunded sale price the merchant fee, and the applicable taxes.
As with inventory management and tracking, a lack of knowledge might increase the risks to your business.
It’s, therefore, less costly and highly recommendable to engage a knowledgeable accountant/bookkeeper service that can access the e-Commerce platforms and seamlessly track and tabulate the transactions.
Foreign Currency Exchange Risks
If you sell goods and services globally, your sale price and payment will be denominated in the local foreign currency of your customers (mandated by law in all OECD countries).
This will often be handled seamlessly by the relevant banks, payment gateways, credit card companies, and online marketplaces. A startup or SME may have limited leeway in terms of the fees and exchange rate for processing foreign currency. This needs to be tracked and accounted for (converted) in your functional currency for home country reporting purposes.
Fluctuations in national interest rates and market forces that drive variations in exchange rates can erode or increase the value of the selling price relative to the payment when received, which may require recognizing a gain or loss on foreign exchange in your books.
As your business matures, there are tools (APIs) such as Veem, Plooto, Bill, XE, and others that update foreign currency exchange rates in real-time to help you hedge against losses by price adjustments or other means.
Having the right accounting/bookkeeping services with those tools already built into its platform could mitigate foreign exchange risks for your business and save you a lot of money.
Be prepared for complexities – gains or losses that arise from selling in multiple currencies and are accounted for differently under different local accounting practices. Admittedly, if your business activity is concentrated in the unified Eurozone, it isn’t as bad as in the past. You are dealing with the Euro and a handful of currencies, including the Swiss Franc, the British Pound, and the Swedish Krona, among the main ones. I worked for multinationals across Europe before the introduction of the Euro and before the technological ecosystem of today.
