Buyers are insanely switching to ecommerce, in fact, as per Statista, Retail e-commerce sales are projected to exceed 4.1 trillion U.S. dollars worldwide by 2024. This is a great progress and a lot of businesses are taking advantage of it but there are a list of businesses that are struggling to manage financials.
If you want to remain in the industry with great margins, you need to know about ecommerce bookkeeping or ways to handle your finances. For you, I have written the essential guide to ecommerce bookkeeping for small businesses. It will walk you through all the major challenges along with the proven solutions.
Let’s dive deep without wasting a second.
Why Handling Ecommerce Finance is Different?
First of all, you need to understand that ecommerce bookkeeping has unique challenges and complexities as compared to rest of the businesses. Unlike traditional brick-and-mortar businesses, ecommerce deals with constant online transactions, inventory spread across multiple locations, and sales occurring through various platforms like Amazon, Shopify, and eBay.
So, you might find yourself overburden due to the impressive volume of daily sales, fluctuating inventory levels or inconsistent cash flow. But don’t worry, with the right strategies, you can turn these challenges into manageable tasks.
Tracking Income and Expenses Accurately
One of the biggest hurdles for ecommerce businesses is tracking income and expenses. With sales happening across multiple channels, it can become a nightmare to keep accurate records. Perhaps you’ve been diligently entering sales into a spreadsheet just to make sure that you do not skip an important transaction from one of your smaller sales platforms. Otherwise, you forgot to record returns and refunds, which are the most critical part of accurate bookkeeping.
Now you might be thinking the way to overcome this challenge. Well, all you need to do is to ensure that every sales transaction—whether through Amazon, Shopify, or your website—gets captured and recorded. Simple and most effective approach!
One way to do this is by integrating your sales platforms with accounting software that can automatically track income across channels. It’ll save you time and ensure that no transaction gets lost in the shuffle. For example, tools like QuickBooks and Xero can be linked with your ecommerce platforms, so every transaction flows into one central hub.
A common error ecommerce businesses make is failing to distinguish between revenue and cash flow. Revenue looks great on paper, but if returns, shipping costs, and other operational expenses are not accounted for, you might think your business is doing better than it actually is. Let’s understand this with a real-life example:
An online boutique specializing in handmade jewellry initially struggled with recording expenses. They were selling through Etsy, Shopify, and their website, but the owner was only tracking income from Shopify sales. Returns through Etsy were overlooked, leading to confusion at tax time. After integrating all platforms with QuickBooks, the boutique owner had a much clearer picture of their actual income and was able to plan for the future accordingly.
Managing Inventory and Cost of Goods Sold (COGS)
Another complex area for ecommerce businesses is tracking inventory and calculating the cost of goods sold (COGS). Inventory is the lifeblood of your business, and if you’re not careful about tracking how much inventory you have and what it costs, you could end up either overstocked or with insufficient stock to meet demand.
COGS represents the direct costs involved in producing your products, including materials, labour, and manufacturing overhead. Without accurate COGS, you won’t know your profit margins, which makes it impossible to make informed decisions about pricing and promotions.
Let’s look at the most proven method to overcome this challenge. That is to use inventory management software that syncs with your accounting software. This will help you:
- Track stock levels
- Monitor the value of your inventory
- Know exactly when to reorder.
- Ensure that you’re regularly reconciling your inventory counts with your sales data to avoid discrepancies.
Let’s understand it with an example. A growing skincare brand had difficulty calculating COGS because they sourced ingredients from multiple suppliers with varying prices. By implementing an integrated inventory management system, the owner was able to streamline the process of tracking material costs and monitor inventory in real time. This gave them accurate COGS and enabled them to set better pricing strategies.
Dealing with Sales Tax Compliance
Sales tax is another area where ecommerce businesses often trip up. The domain of sales tax compliance has become increasingly complicated, especially for businesses selling across state lines. Different states have different sales tax rates and requirements, and failing to comply can result in hefty fines and penalties.
For small businesses that sell in multiple jurisdictions, trying to manually calculate and file sales taxes can be incredibly confusing. It’s easy to make mistakes, especially when the tax rates change or you’re unsure about the rules for tax exemptions. To overcome this issue, you need to automate your sales tax calculations by using tools like TaxJar or Avalara.
These services can help you calculate the right sales tax for each transaction and file returns in every state where you have tax obligations. You’ll save time, avoid mistakes, and ensure compliance with the ever-changing sales tax laws.
For example:
An ecommerce business selling custom sneakers across the U.S. was overwhelmed by sales tax rules. Before outsourcing their sales tax filings to a platform like Avalara, the owner struggled with calculating the correct tax amounts for each state. After implementing automation, the business easily complied with different state tax laws without missing deadlines.
Cash Flow Management
Maintaining healthy cash flow is one of the most critical aspects of managing an ecommerce business. Cash flow refers to the amount of money coming into and going out of your business. If your expenses are outpacing your income, you could find yourself unable to pay suppliers, staff, or yourself, even if your business is technically profitable.
Ecommerce businesses often experience fluctuating cash flow due to seasonal sales spikes, unpredictable returns, or delayed payments from online marketplaces. These irregularities can lead to cash shortages, which can be disastrous if you’re not prepared.
The solution is to:
- Create a cash flow forecast to plan for upcoming expenses and identify potential shortfalls.
- Automate invoicing and implement timely follow-ups on late payments.
- Setting aside a cash reserve during high sales periods to cover any lean months.
For better clarity let’s take an example.
A home decor ecommerce store had impressive seasonal sales during the holiday season but struggled to maintain cash flow in the slower months of January and February. By implementing a cash flow forecast and setting aside reserves from the holiday season, the business owner managed to navigate the lean months without needing to take out loans or cut back on operations.
Accounting for Fees from Marketplaces and Payment Processors
If you sell products on platforms like Amazon, eBay, or Etsy, you’re likely familiar with the fees these marketplaces charge for each sale. Additionally, payment processors like PayPal and Stripe also deduct fees from every transaction. While these fees might seem small, they can add up over time, eating into your profit margins.
It’s important to keep track of these fees and deduct them as business expenses. Ignoring these costs could make your business look more profitable than it actually is, leading to poor financial decisions.
How to overcome this challenge:
Ensure your accounting software is set up to record these fees automatically when transactions are processed. This way, you can accurately track your net income and avoid any surprises at the end of the month.
Real-life example:
A craft supplies store on Etsy initially struggled to factor in Etsy’s transaction fees and PayPal’s processing fees. These small deductions added up to hundreds of dollars in lost profit each month. After adjusting their bookkeeping process to account for these fees automatically, they were able to better understand their true profit margins and adjust pricing accordingly.
Understanding Shipping and Fulfillment Costs
Shipping costs are another essential part of managing an ecommerce business’s financials. From packaging materials to carrier fees, shipping expenses can quickly eat into your profits. Additionally, the rise of free shipping as a customer expectation means that many ecommerce businesses absorb the cost of shipping, further shrinking their margins.
Fulfillment costs can also add complexity, especially if you use third-party logistics (3PL) providers. These companies charge for storage, picking, packing, and shipping your products, and those fees need to be accounted for properly.
How to overcome this challenge:
Track shipping and fulfillment costs as separate expense categories in your accounting system. This will help you assess the true cost of each sale and determine whether offering free shipping is sustainable for your business. Additionally, regularly review your shipping options to ensure you’re getting the best rates.
Real-life example:
A clothing retailer offering free shipping noticed their profit margins were decreasing. Upon closer inspection, they realized they hadn’t been tracking shipping costs as part of their expense management. By breaking down shipping and fulfillment costs separately, they discovered they could offer discounted shipping for larger orders while still maintaining profitability.
Handling Returns and Refunds
Returns are an unavoidable part of ecommerce, but they can complicate your financial management. Processing returns involves not only refunding the customer but also adjusting your inventory and accounting for any loss in value if the returned item cannot be resold.
If not tracked properly, returns can skew your financial records, making your income look higher than it actually is. Without proper systems in place, you might also lose track of returned inventory, leading to stock discrepancies.
How to overcome this challenge:
Use your accounting software to track returns and refunds in real time, ensuring that they are properly accounted for in your financial records. Implement clear return policies to minimize the financial impact of returns, and integrate your inventory management system with your accounting software to keep track of returned items.
Real-life example:
A luxury handbag ecommerce store faced issues with refunding customers but not accounting for the inventory returns properly. By integrating their accounting and inventory management systems, they were able to streamline the return process and ensure that all returns were recorded accurately, preventing revenue overstatement.
Ensuring Accurate Reporting and Tax Compliance
Staying on top of your finances also means generating accurate reports and complying with tax laws. Regularly reviewing financial reports like profit and loss statements, balance sheets, and cash flow reports will give you valuable insights into your business’s health. However, tax season can bring its own set of challenges, especially if you haven’t been diligent about tracking expenses and sales tax throughout the year.
How to overcome this challenge:
Regularly reconcile your accounts and generate financial reports to stay informed about your business’s financial status. When tax season approaches, consider working with a professional who understands the complexities of ecommerce taxes to ensure that you file correctly and maximize deductions.
Real-life example:
A small pet supplies store ran into issues during tax season because they hadn’t accurately tracked expenses for packaging and shipping. After working with an accountant to generate detailed reports and identify missed deductions, the store was able to reduce its tax liability and improve record-keeping for the following year.
Time to Take Action with the Experts
Managing the financial side of your ecommerce business might seem like an uphill battle, but with the right tools and processes in place, it becomes much more manageable. Whether it’s tracking inventory, calculating sales tax, or managing cash flow, staying on top of these key elements will set your business up for success.
But if all this sounds daunting, you don’t have to go it alone. The Pro Accountants specialize in helping ecommerce businesses like yours streamline their financial processes. Our team of experts can help you set up systems that will save you time, reduce errors, and ensure compliance with tax laws. Ready to take the next step? Schedule a meeting with The Pro Accountants today and let us help you implement a tailored financial management solution for your business.
Frequently Asked Questions
1. What is the difference between profit and cash flow?
Profit is the amount of money your business makes after deducting all expenses, while cash flow refers to the movement of money in and out of your business. A business can be profitable on paper but still experience cash flow issues if payments are delayed or expenses aren’t managed well.
2. Why is inventory tracking important for ecommerce businesses?
Inventory tracking helps you understand how much stock you have on hand, when to reorder, and whether your inventory costs are in line with your sales. Without proper tracking, you risk running out of stock or holding onto excess inventory, both of which can hurt your cash flow.
3. How can I handle sales tax for multiple states?
Automating your sales tax calculation and filing through tools like TaxJar or Avalara can help ensure that you stay compliant with different state sales tax laws. These tools will automatically calculate the correct sales tax for each transaction and file the necessary returns on your behalf.
4. How do I calculate the cost of goods sold (COGS)?
COGS includes all the direct costs associated with producing and selling your products, such as materials, labor, and manufacturing costs. To calculate it, you’ll need to track your production costs and ensure they are properly categorized in your accounting system.
5. What is the best accounting software for ecommerce businesses?
Some popular accounting software options for ecommerce businesses include QuickBooks, Xero, and Wave. These platforms offer integrations with major ecommerce platforms like Shopify, Amazon, and Etsy, allowing you to automate income and expense tracking.
6. What are the benefits of outsourcing my financial management?
Outsourcing can save you time, reduce errors, and provide you with expert financial advice. It allows you to focus on growing your business while professionals handle the day-to-day tasks of managing your financials.
7. How can I avoid cash flow problems in my ecommerce business?
Regularly reviewing your cash flow, setting aside reserves during high sales periods, and automating invoicing and payment collections can help you avoid cash flow issues. Creating a cash flow forecast can also help you plan for future expenses and income.
8. What should I do if my ecommerce business is growing too fast?
Rapid growth can lead to challenges like inventory shortages, cash flow issues, and increased complexity in managing your financials. Hiring a financial expert or outsourcing your bookkeeping can help you manage this growth effectively and ensure that your business stays on track.
9. How do I handle returns and refunds?
Use your accounting software to track returns and refunds in real time, ensuring that they are properly accounted for in your financial records. Additionally, implementing clear return policies can minimize the financial impact of returns.
10. What’s the best way to track shipping costs?
Keep shipping and fulfillment costs as separate expense categories in your accounting system. This will help you assess the true cost of each sale and determine whether offering free or discounted shipping is feasible for your business.
