Category Archives: Your Money

Choose How to Get Paid

Choose How to Get Paid

After you’ve decided on a shopping cart, you’ll need to choose a payment gateway (sometimes called a payment provider) that securely authorizes and charges customers’ payment cards, temporarily holds the funds in a merchant account that’s part of the service, and sends you the payments less transaction fees.

Examples of payment gateways include PayPal, Authorize.net, Chase Paymentech, and Sage Pay.

Choosing a Payment Gateway

Your choice of payment gateway is critical to your business because:

  • Different services charge very different transaction fees (bases on percentages of funds collected and sometimes the payment cards used), plus possibly recurring fees that could be charged each month, regardless of how much you sell. These differences can amount to a great deal of money once your business starts to grow.
  • It’s important to choose a payment gateway service that resolves your issues promptly, consistently, and fairly. We call our payment provider about customer issues and technical support at most around once per month, but since many of those calls are urgent as far as customers are concerned, we depend on prompt and reliable phone support.
  • Your payment gateway must communicate securely with your shopping cart to protect both customer data and your money. Just as importantly, the service should have processes to resolve (hopefully rare) cases of customer fraud as painlessly as possible, along with controls to prevent criminals from accessing your account online. We’ll discuss the controls used by our payment provider in the next article.

Choose Your Payment Gateway with Care

As with the other key parts of your online store, you should compare and choose your payment gateway carefully since the choice will have a big impact on your business and could be difficult to change as you grow.

Beware of the add-on fees charged by some services that advertise low transaction costs. These fees can include surcharges on some types of payment cards, monthly reporting surcharges, and even termination fees.

As always, treat online review sites with suspicion, as many of the comparisons I’ve read on these sites don’t seem to give an accurate picture.

I’ve personally tested only the PayPal Standard* service that our store used for the first few years, the PayPal Payments Pro gateway that we use now, and the (now defunct) Google Checkout service. Therefore I can’t give first-hand advice about other services.

Our experiences with PayPal have been very positive, but we’ve learned some secrets in dealing with PayPal that were important for our business.

Next: PayPal Secrets

 


* This is not a paid endorsement.

PayPal Secrets

PayPal SecretsIf you search online for the phrase “PayPal sucks” you’ll find discussion board comments and even entire websites with bad things to say about PayPal.

Many of the complaints seem to suggest that PayPal freezes funds and even shuts down the accounts of honest merchants for completely unfair and arbitrary reasons.

Reading between the lines, I suspect that a lot of these complaints come from individuals whose business practices have problems that PayPal’s aggressive customer service controls have exposed.

To put it another way, I believe that if you deliver an honest product with good customer service you’ll find that PayPal doesn’t suck*. From our perspective, PayPal is one of the most reliable online services that we use.

PayPal Standard Buy Now Button
PayPal Standard
“Buy Now” Button

Why PayPal?

When starting our first online store, I chose PayPal Standard, a combined shopping cart and payment gateway, because of its simplicity. This service allows you to start collecting payments by pasting a few lines of HTML code on your web pages, following instructions on the PayPal website. You’ve probably seen PayPal Standard “Buy Now” buttons like the sample shown here.

Since that time our website has changed a great deal, but PayPal is still collects our payments. Although we’ve moved to a more flexible service called PayPal Payments Pro, many of the core advantages are unchanged, including:

  • Competitive transaction fees, that get smaller as your sales volume grows, and the ability to accept many different customer payment cards
  • A lack of hidden costs such as extra fees on rewards cards, statement fees, and so on
  • Aggressive security controls to prevent hackers and an occasional dishonest customer from taking your money
  • Integrated UPS and USPS shipping that automates your shipping labels and provides proof of fulfillment in case of any disputes
  • A history of good telephone support, by staff that seems to be US-based

But despite these positive points, we had to discover some critical, mostly unwritten rules to keep things running smoothly.

Secrets to Trouble-Free PayPal Service

Many of the most important secrets for working with PayPal didn’t seem very obvious at first. We had to learn some of these through experience.

  • Make the email address for your PayPal account your primary customer service address, since buyers will see the address when PayPal confirms payments and issues refunds. Choose an email address that’s simple and will make sense to customers, like service@Example.com.
  • Document all customer requests that impact fulfillment (for example shipping address changes) and use integrated PayPal shipping to help prove you shipped every order.
  • Avoid accessing your account from a new location without notifying PayPal beforehand, as this could trigger a security lockout.
  • Once you add employees, configure additional PayPal logins to prevent others from viewing balances, transferring funds, and so on.
  • As soon as your account balance is big enough that loss of funds would be a disaster, enable the PayPal Security Key that uses a cell phone or smart card to authenticate any login that’s allowed to withdraw money. Use of your mobile phone as a security key is free to US customers.
  • Most importantly, treat customer satisfaction as your top priority. Answer questions and complaints quickly, and do everything in your power to focus on customer service so that no one ever ever needs to contact PayPal or their payment card issuer to dispute your charges.

PayPal Shortcomings

All online services suffer occasional outages, and PayPal is no exception. In our experience PayPal disruptions have occurred less than once per year, and are usually resolved within a few minutes of calling their support line.

Our biggest frustration with PayPal used to be its transaction reporting. We find these reports difficult to use since so many of the entries are temporary, behind-the-scenes transactions like authorizations, holds and reversals. These related, temporary transactions often span consecutive months so they’re difficult to reconcile, and they’re so numerous that they bogged down our accounting software. We found no reliable way to import the transactions into QuickBooks, and the add-on tools we tried only made things worse.

After years of frustration we finally found a great accountant who taught us how to solve the problem. For details about the simple way that we now get the financial results from PayPal into our accounting software, see our story about QuickBooks Hell.

What’s Next?

Once you’ve configured your website and chosen your shopping cart and payment gateway, if you sell physical goods you’ll need to determine the shipping options you’ll provide customers. We’ll discuss that next.

Next: Shipping Your Products

 


* This is not a paid endorsement.

QuickBooks Hell

QuickBooks HellAs your business grows – and especially once you start to work with outside suppliers – you’ll likely need an accounting software package. For most businesses QuickBooks is the unavoidable choice. If you want to get help from an accountant or eventually hire a bookkeeper QuickBooks is practically mandatory.

QuickBooks has the potential to make seemingly impossible tasks look easy. Once you get QuickBooks configured right, it’s gratifying to see your transaction history loaded into tax software like TurboTax, and to see the correct IRS forms completed almost instantly. And, you’ll sleep better knowing you’ll have precise profit-and-loss data within a few days after the close of each month. You’ll also know exactly how much sales tax to send to your state each quarter (if required), and you’ll be confident that the bills you’re paying are correct.

Unfortunately, QuickBooks can also make many basic, daily record keeping tasks seem impossibly difficult. Even after reading books on double-entry accounting principles used by the software, I found that setting up and maintaining my company’s books with QuickBooks was hugely frustrating, and it seemed to consume limitless amounts of time.

While I’m no Certified Public Accountant (CPA) and can’t offer specific help setting up QuickBooks for your business, I can share a few pointers that I wish I’d known before wasting what seemed like an eternity in QuickBooks Hell.

Keys to QuickBooks

Used correctly, QuickBooks can provide a great deal of value in tracking and reconciling items such as:

  • Bills, payment card charges, and business expenses in general
  • Key business accounts including your checking account, online merchant account, and sales taxes payable to your state
  • Purchase orders, and the payments that you send to suppliers
  • High-level financial results, with the ability to feed this data to TurboTax

However, we find other activities to be impossibly difficult with QuickBooks:

Before finding our really smart CPA, we paid several other accountants to try and make our QuickBooks setup workable. We quickly learned that while many people call themselves ‘experts,’ most were only familiar enough with QuickBooks to make it work for one particular type of business. Nobody seemed to understand the software well enough to help us set up efficient processes for our online store.

Setting Up QuickBooks for an eCommerce Store

Fortunately, after trying to manage inventory for several years with an expensive version of QuickBooks, we eventually found our great CPA. We followed his advice to discard that version of QuickBooks, buy the more basic QuickBooks Pro (often sold for under $200), and start fresh with the features that we found usable. We also switched to planning our inventory with an Excel spreadsheet, and then entering the correct information into QuickBooks at the end of each month.

For our particular business, here are some of the key guidelines we eventually learned with help from our smart CPA.

  • Don’t import individual online transactions into QuickBooks; instead, create QuickBooks entries dated the last day of each month to match the few top-line totals (like Payments received, Payment fees, and Refunds sent) reported for the month by your payment processor.
  • If you sell physical goods, don’t use QuickBooks to manage builds or forecast inventory; instead, enter monthly inventory adjustments in QuickBooks, using the data you track in Excel, so that QuickBooks can calculate your Cost of Goods Sold and the value of inventory on hand.
  • Don’t choose a bad eCommerce platform, payment gateway, or software add-on only because it claims to integrate with QuickBooks. We learned this the hard way, after testing and rejecting many alternatives.

Using these guidelines we’re now able to close our books within a few days after the close of each month, and to easily track the information needed to pay suppliers and tax authorities. And, our sales revenue in QuickBooks exactly matches the 1099K report that PayPal sends to the IRS each year.

If you’ve got questions not answered here, please visit our discussion forum.

The Inventory Trap

Inventory TrapOne of the most bewildering aspects to managing a business that stocks and sells physical goods (as opposed to selling only electronic downloads, or items drop-shipped directly from manufacturers to customers) is understanding the huge importance of inventory that you keep on hand to sell.

It’s entirely possible that at some point your accounting software will tell you that your business is making a healthy profit, yet there’s no cash on hand to pay your bills. How is this possible?

It can happen because the finished products you buy and stock to resell (or the components that you assemble) are likely to tie up more and more of your profits, and perhaps personal savings, as your business grows.

This could put you in a position where you don’t have the cash you need to pay suppliers or even the IRS – because so much money is tied up in physical inventory on your shelves. And the concerns don’t end there.

  • As your business grows you’ll likely need to keep an ever greater value of inventory to maintain a constant number of days’ supply, since running out of products will lose customers and waste advertising dollars.
  • Many local property tax districts require you to file a report – separate from your home appraisal – showing the value of your business inventory at the end of each year so that they can collect additional property tax.
  • Once the inventory you keep on hand grows to a value that you can’t easily replace, you should seriously consider buying business insurance so that fire, theft, and accidents won’t shut you down.

Avoiding the Trap

Many online stores limit their inventory costs by drop shipping products directly from manufacturers to their customers, without ever handling the products themselves. While drop shipping can eliminate inventory costs, there are several disadvantages.

  • You’ll likely pay more for products that manufacturers drop ship to your customers, compared to items that you buy for stock.
  • You’ll lose control over the quality and promptness of the shipments that manufacturers send directly to customers.
  • Your website could have too little differentiation with other retailers who likely publish similar descriptions, and offer the same stock status and delivery times, provided by manufacturers who drop ship.

In the case of our business, we chose to ship our own manufactured goods and stock items, and to make it a priority to proactively manage inventory.

Next we’ll discuss some of those strategies to control inventory costs.

Next: Control Your Inventory

Keep Your Money Safe

Keep Your Money SafeToday there seem to be almost limitless ways for criminals to steal money from an online business. Your bank accounts, online merchant account, credit card accounts, website, and the computers you use for work will be under constant attack.

You’re never 100% safe, but I can suggest some basic guidelines that should greatly reduce the odds of losing your hard-earned income to thieves.

Here are some general recommendations to stay safer online.

  • As soon as you can afford to, get a separate PC just for business. Keep its operating system and antivirus up-to-date, install and test a system to backup files, and avoid visiting unfamiliar websites with this machine.
  • Be sure that two-factor authentication is in place for every account that handles your money. At a minimum you should be required to reply to an automated email any time you login from a browser that isn’t recognized.
  • Use different passwords for all online accounts that handle money or confidential information.

Email has become an big source of risk, and so requires extra precautions.

  • Treat everything in your inbox with suspicion, especially if it has a link or attachment that you did not request from the sender. Potentially harmful phishing emails can appear to be from people and services you know, with believable text, and dangerous links or attachments.
  • Never email sensitive information – including passwords, payment card numbers, or Social Security numbers – since your messages are easily shared and create permanent copies on many computers.
  • Be on guard against 419 scams and other email fraud designed to steal your funds. An especially annoying scam, disguised as a customer service request, is explained in our story about why email is dangerous.

Stay Involved with Bookkeeping

Early-on, one of our biggest challenges was finding an accountant with enough skill to help us set up our accounting software and manage our financial records efficiently.

It wasn’t until we’d paid three other accountants – who all were of little help – that we finally found the right Certified Public Accountant (CPA). In the end, it was a recommendation from a really smart Chief Financial Officer (CFO), who I knew from a past job, that led us to the right CPA.

It’s essential that you’re able to trust anyone who can access your financial records and accounts, and that you stay actively involved in the bookkeeping process. One colleague learned this when he hired a bookkeeper who eventually fled after embezzling a great deal of money.

If your business sells physical goods, a big financial concern is likely to be something I call the inventory trap. We’ll discuss that next.

Next: The Inventory Trap

Manage Your Money

Manage Your MoneyAfter the first full year of running a moonlight business, I found that we’d earned a nice profit. The money wasn’t yet as much as I earned from my day job, but it represented more spare funds than our family had seen in a long time.

Unfortunately, anyone who knows US tax law* will tell you that the extra income you earn as a sole proprietor is taxed at your highest marginal rate, and is subject to additional self-employment taxes.

This means that while the IRS might take, say, 20% of the of the earnings from a typical day job, you’re likely to pay closer to 40% of your additional business earnings in federal tax. Once your business starts to earn a real profit, you could be shocked by your federal tax bill.

Your Secret Weapon

Fortunately, if you can do without spending some of those extra earnings right away, the US tax code currently offers a powerful way to postpone – and almost certainly diminish – the taxes on much of your moonlight earnings. Your secret weapon is the Solo 401(k) .

Similar to the 401(k) savings plans offered by larger employers, a Solo 401(k) allows sole proprietors and their spouses put money from pre-tax earnings into a savings plan. That money and any dividends aren’t taxed until you withdraw the funds at a later date.

This helps you avoid paying federal tax on those earnings right away, and since you’ll likely be in a lower tax bracket when you retire, could help you avoid paying much of the total tax in the long run.

The amount of income that you can shield from immediate federal taxes with a Solo 401(k) changes each year, and depends on your age and net business profit. In general, your maximum contribution can range from $20,000 to over $50,000, plus more for a spouse.

I’d urge you to set up a Solo 401(k) as soon as your business shows a profit. It’s great to know you’re avoiding taxes and contributing to your security. You can search online for Solo 401(k) Providers to help create your account.

More Money Tips

The following suggestions are covered in depth in other articles.

  1. You can avoid bad investments by heeding Steve’s First Rule of Money.
  2. Read our story about how to keep your money safe.
  3. If you sell physical goods, be careful to avoid the inventory trap.
  4. To stay out of QuickBooks Hell, use your accounting software only for the things it does well.

Next, we’ll cover those important guidelines to help keep your money safe.

Next: Keep Your Money Safe

 


* I am not a CPA. This information changes with different circumstances, so please find a good accountant or tax professional to help you.

Control Your Inventory

Control Your InventoryAs discussed in our story about the inventory trap, if you sell physical products (as opposed to electronic downloads or items drop shipped directly from outside manufacturers to your customers) your ability to manage your inventory could be critical to the survival of your business.

Minimizing excess inventory is essential to ensure you’ll have enough cash on hand to pay bills. It’s equally important to avoid running out of items that customers want to buy so you’ll never lose sales or squander your advertising investments.

In our business, we find that inventory control amounts to three main tasks.

  1. Keeping an accurate count of all stock quantities – with the ability to feed that information into our bookkeeping software
  2. Creating a process to warn us in advance of items we need to buy to avoid running out
  3. Taking frequent enough physical counts of our inventory to assure that our reports are correct

We first tried managing inventory using an expensive version QuickBooks, but found this to be hugely frustrating.

After struggling with the problem for a few years, I found our only solution was to track inventory with a spreadsheet. This required me to get a deeper knowledge of Microsoft Excel, a skill became useful for many other tasks.

Managing Inventory with Excel

Today we manage inventory using a single Excel workbook with different sheets where we record the data that determines our inventory.

  • On one sheet we append newly completed (shipped) transactions reported by our shopping cart onto a long list. Each row shows an individual product ID purchased, order number, date of the sale, product cost, sales tax and shipping fees.
  • On a second sheet we enter product refunds, mainly to keep track of refunded sales tax.
  • On a third sheet we list the date, quantity and part number of items we receive from suppliers and any adjustments, say, for free replacements we send, changes in physical inventory counts, and so on.

With these three basic inputs, plus pages that use the Excel SUMIFS and SUMPRODUCT functions to calculate component parts consumed, we’re able to report the quantities of all items in stock on any prior day and time, and for any period the inventory used and the sales taxes collected and refunded. The workbook uses only conventional formulas, and no macros or add-ins.

We’re also able to see historical averages of components used, and alerts so that we know to order more stock when levels fall below thresholds we’ve set in days’ supply, accounting for each supplier’s normal lead times.

For our business, we’ve found that it’s critical to take physical inventory every few months, and to enter any adjustments into our spreadsheet so that we avoid any surprises.

We’ve also learned that it’s a good idea to keep plenty of critical, low-cost items (like labels, packaging materials and fasteners) in stock, while carefully monitoring our inventories of more expensive items.

Next, we’ll talk about bookkeeping processes we’ve found that work – and those that don’t – for running an online business.

Next: QuickBooks Hell

Register with Your Government

Register with Your GovernmentAfter you’ve registered your company name online, registering your new business with the government can seem almost stress-free. I found our county offices to be surprisingly helpful – and no wonder, since over the years we’ve sent them a lot of sales taxes collected from customers in our state.

A first step is to visit your county clerk or tax office, tell them you’re setting up a new business, and ask for the paperwork you’ll need to file in your area.

Typical state and federal paperwork you’ll want to file can include:

  • A “Doing Business As” (DBA) certificate of ownership to register your business name in your county. Your DBA name should closely match your web address; for example, if your website is “FishFoodSupply.com you could register the DBA name “Fish Food Supply.”
  • If you live in a state that collects sales taxes, you’ll need a state tax permit. You permit number is required to send your state tax assessor any sales taxes you’ve collected from customers in your state.
  • If you think your company ever has the slightest chance of being sued by a customer or competitor, create a Limited Liability Company (LLC) in accordance with your state laws to protect personal property from being seized in a lawsuit. If you list yourself as sole proprietor of the LLC, filing your income taxes should remain as straightforward as possible.
  • Apply for an Employee Identification Number (EIN) online with the IRS. You’ll start using your EIN right away with financial institutions, suppliers and others because it allows you to identify yourself for tax purposes without disclosing your Social Security Number. You may also need to file IRS form 8832 to tell the IRS that you can be “disregarded as a separate entity” to continue filing an individual tax return.

What Happens Next?

Next, you’ll need to set up a separate bank account and at least one payment card for your business.

Next: Set Up Your Bank Accounts

Set Up Your Bank Accounts

Set Up Your Bank AccountsYour choice of where to set up the bank and payment card accounts for your new business could have a big impact on daily convenience. You should choose carefully, since it could become difficult to move accounts as your business grows.

It’s often easiest to create separate, linked business accounts at your current bank. But before you do, take a serious look at whether your personal bank is a good choice for your business.

  • Be sure that your bank uses multi-factor authentication to help protect your money from thieves. Multi-factor authentication typically requires you to reply to an automated email any time you try to access your accounts from a computer or browser that the bank doesn’t recognize. Many of the nation’s largest banks still don’t offer this basic protection, and so could put your finances at greater risk.
  • Confirm the checking, savings, and payment card accounts all allow QuickBooks Web Connect (*.qbo) statement downloads (as opposed to only Quicken downloads). This can free you from entering transactions by hand or importing them with less reliable methods.
  • Be sure that the bank provides a free or low-cost business checking account, in addition to a higher-interest savings account where you can move any funds that aren’t needed to pay bills.
  • Ask if your business checking account will have an online bill payer feature to save time when you need to pay supplier invoices by check.

When setting up your new business account, the financial institution will require you to bring the forms you received when you registered with your government, including your business registration, EIN number, and so on.

As you set up your new business accounts you’ll need to transfer in some personal funds to get started. You should also consider getting a checkbook to pay some of your suppliers’ bills.

Paying some supplier invoices by check – as opposed to prepaying by payment card – can be an important way to build a credit history for your company. Even if you never really need to buy items on credit, some future suppliers may ask you to provide references from other vendors whose invoices you’ve paid on time, by check, before they’ll do business with you.

Get a Payment Card Right Away

I personally hate having too many credit cards, and resisted getting a payment card for the new business right away. This was a big mistake: not only does the IRS expect you to consistently charge business expenses to a separate card that’s solely for your business, but use of a business payment card can start saving you money immediately.

That’s because a separate business payment card makes it easier to charge every legitimate expense to your business. This could save a lot of time separating business from personal receipts, and helps ensure that you claim every business expense to save you on taxes.

NoteBe aware that using a personal credit card for business expenses could impact your credit score. A mortgage lender once told me that my credit score fell by around 30 points because a single, personal credit card account that we use to pay monthly advertising expenses often exceeds half its limit, even though we pay the balance in full each month.

Now that your accounts are in place to pay business expenses, it’s time to set up your website.

Next: Set Up Your Website

Get the Right Shopping Cart

Get the Right Shopping CartYour shopping cart is software that allows visitors to select the items they want to purchase, calculates shipping and tax, and communicates the costs to your payment gateway so that customers are charged the correct fees.

The shopping cart also provides reports to help you manage your inventory, keep your financial books, and perform other important tasks.

A shopping cart typically takes one of the following forms.

  1. Probably the easiest way to accept payments on your website is to sign up for a service like PayPal Standard* that combines a basic, hosted cart with a payment gateway. You can quickly turn almost any website into an online store by pasting a few lines of HTML code onto a page, following instructions on the PayPal website.
  2. The PayPal Standard cart doesn’t give you accurate shipping calculated by the carriers, the ability to accept coupons, cart pages that look like part of your website, or a consistent checkout flow so you can track the effectiveness of your online advertising. For these types of features you can combine PayPal (or another payment gateway) with a hosted shopping cart. A hosted cart I’ve tested is Ecwid*, which I think provides good features and a nice customer experience, at reasonable cost.
  3. If your store needs more advanced features you can buy shopping cart software to install and maintain on your website. Our web store uses shopping cart software called Ecommerce Templates* that we installed on the shared Linux host that runs our site. This software gives us the features of other carts, plus unlimited logins with different permissions for our staff, support for drop shippers and affiliates, the option to collect and publish product reviews, more control over the cart appearance, extensive reporting, and so on. The software takes a bit more effort to maintain than a hosted cart, but we like its flexibility.

Note that if you use a hosted eCommerce solution for your website, you’ll also be using the provider’s own shopping cart. More about this approach is discussed in part two of our article about how to set up your website.

Test for Yourself

Just as with any other paid services, you should always set up and thoroughly test your shopping cart options before making a commitment.

It’s also a good idea to treat websites that offer reviews and comparisons of different shopping carts with great suspicion, since I’ve found that they often provide unreliable information.

NoteI’ve tested several shopping carts that claim to make it easy to download every transaction into QuickBooks accounting software. I thought that the QuickBooks-integrated carts I tested were overpriced, difficult to use, and inferior to the alternatives in just about every other way. And, as noted in my article about QuickBooks Hell, you’ll probably want to avoid importing every sales transaction into QuickBooks anyway.

Next: Choose How to Get Paid


* This is not a paid endorsement.