6 mistakes every ecommerce founder needs to watch out for
Why is ecommerce bookkeeping so different than other industries? Every online seller should be aware of the complexities and why it matters for your business.
As an ecommerce owner, whether you're selling on Shopify or on Amazon, it's important to really understand the nuances and complexities of your ecommerce booking—what makes it different from any other bookkeeping process?
The short answer is: a lot.
Understanding the differences and how to account for them will help you get the most value and insights from your financials and prevent major issues down the line. More importantly, it will give you the tools to review the quality and relevance of your current books to make sure you aren't paying a lot for bookkeeping that is essentially irrelevant for your business.
In this blog, we'll cover the top 6 reasons ecommerce accounting is different than accounting for other businesses and what to look out for with your current bookkeeping.
Let's dive in.
What is ecommerce bookkeeping?
86% of ecommerce owners polled by Finaloop list the lack of ecommerce-specific accounting knowledge as one of the main reasons they are looking to replace their current bookkeeping service.
This begs us to ask the question - is ecommerce bookkeeping really that different?
The answer is this: The basic structure of all bookkeeping is generally the same - you’ve got your assets, liabilities, equity, income, and expenses. But, the breakdown of each category, the specific issues important for you to understand for your business, and the technology needed to properly record all transaction details are dramatically different from your brick & mortar or service business counterparts.
Many DTC owners and bookkeepers alike take the standard Quickbooks bookkeeping process, add an Intuit ecommerce service or third-party integration to integrate with their store platforms, point-of-sale systems, fulfillment, and other ecommerce platforms, and consider this ecommerce bookkeeping.
Adding ecommerce integrations is only one piece of the puzzle in making your books ecommerce-friendly. There are many real differences between regular bookkeeping and ecommerce bookkeeping that also need to be taken into account (yup, pun intended).
How is ecommerce accounting different than traditional accounting?
Here we'll share the top 6 bookkeeping differences between ecommerce businesses and physical stores that should be considered by you or any bookkeeping service you choose so you can maintain your books accurately. These are the 6 most common accounting mistakes we see done by non-ecommerce bookkeepers.
- No big picture view of your real income
- Gross margin is calculated differently
- Inventory management is multi-faceted
- Ecommerce financing has different rules
- Sales tax is exponentially more complicated
- Chart of accounts (CoA) is not 'one size fits all'
1. No big picture view of your real income
For non-ecommerce businesses, you see a deposit in your bank of $220, you record income of $220. It's not rocket science.
For ecommerce, it's not quite so simple.
A deposit of $220 from Shopify, Amazon, or Walmart, is not $220 of income. It could mean, $300 of income, $60 of returns, and $20 of merchant fees. It could also mean that of the $220, $15 is actually sales tax you owe to the tax authorities.
In other words, just like your relationship status, it's complicated.
Using technology such as AI accounting and AI bookkeeping to integrate with your online stores (like Shopify), marketplaces (like Amazon), payment processors (like Paypal, Afterpay, or Stripe), or your other apps, can significantly reduce your errors, give you a full big picture view into your revenue and save you time on bookkeeping. Harnessing the power of automation here allows you to pull the data directly from your platforms into your books on a real-time basis.
You can automate the full bookkeeping process start-to-finish using an automated bookkeeping service like Finaloop, which uses its own proprietary integrations to ecommerce platforms like Shopify, Amazon, Walmart, Etsy, Paypal, Stripe, AfterPay, etc. to pull your data and complete your bookkeeping process on a real-time basis.
Using an integration also allows you to track your undeposited funds, i.e., the remaining balances in your Shopify, Amazon, Paypal, or any other store or payment gateway, that has not yet been deposited into your bank account. This is important to track for both accounting and tax purposes and to give you a better view of your expected cash flow.
2. Gross margin is calculated differently
Everyone will agree that for a retail business, online or not, understanding your gross profit is a key metric in measuring the health of your business, determining your breakeven point, and forecasting your future profit. But, not everyone knows that the components of this calculation are different for ecommerce businesses.
MIND BLOWN, right?
Gross margin is meant to be a calculation of the profit you are left with after a sale. For brick & mortar businesses, the gross margin is essentially revenue minus cost of goods sold, better known as COGS.
For ecommerce stores, variable costs directly associated with making a sale should also be taken into account - specifically, merchant fees and costs for shipping to customers - because without these costs, the sale wouldn't be able to happen.
- Merchant fees or transaction processing fees are fees charged by a merchant service for processing transactions and payment gateway services (such as Paypal, Stripe, AmazonPay, ShopPay, etc.). For ecommerce businesses, it's best practice to treat these expenses as part of COGS in determining the gross margin, rather than an operating expense since they are directly related to the cost of sales.
- Shipping out/ freight-out expenses are the costs related to shipping a product to a customer. For the businesses of yesteryear (i.e., brick & mortar stores), shipping out was not considered a key selling expense and was often recognized as an operating expense. For ecommerce businesses, this expense is a necessary cost of sales that increases with each additional sale. Accordingly, this too should be treated as part of COGS.
To get a better understanding of your gross profit (and to determine if you are pricing your products correctly as an ecommerce business), check out our free ecommerce profit margin calculator.
3. Inventory management is multifaceted
Let's say you own a shoe store and have 50 pairs of shoes in your backroom. If you sell 10 pairs, you know you have 40 left to sell. It's easy to plan when to order more.
If, instead, you sell shoes online through multiple sales channels, such as your Shopify store and on Amazon, it becomes increasingly more difficult to track how many shoes you have left in stock and when it's time to order more.
Correctly accounting for your inventory costs and balances is something any good ecommerce accountant must understand. Based on our findings, it's one of the major pains of all ecommerce brands and an area that tends to be very prone to human error when using a traditional bookkeeper to track inventory and COGS. For more details about accounting for inventory costs correctly for ecommerce, check out Fundamentals of Inventory Management: How to Track Your Ecommerce Inventory.
4. Ecommerce financing has different rules
There are MANY ecommerce financing options out there - Shopify Capital, Stripe Capital, ClearCo, Ondeck, Ampla, Wayflyer, and the list goes on. The way these financing instruments work are different than standard loans and can often impact the accounting and tax treatment.
For example, a merchant cash advance received from Shopify Capital should be treated differently than a traditional loan. It's important to find a bookkeeping solution that understands these nuances or you will likely lose out on potential tax deductions.
To learn more about ecommerce financing options and understand the real costs for your business, check out our free ecommerce loan calculator.
5. Sales tax is exponentially more complicated
One of the most complex issues ecommerce sellers need to deal with is sales tax. Sales tax can arise from physical presence in a state - an office, warehouse, employees, or from 'economic nexus' - selling a certain amount in a specific state.
For ecommerce businesses selling all over the U.S., sales tax can be a real headache.
Make sure your bookkeeper or accountant understands the complexities of sales tax nexus and how to manage the compliance requirements. We recommend using an automated service like Taxjar to help you with the compliance requirements and make sure your sales tax is set up correctly in Shopify to ensure you are collecting required amounts from customers.
6. Chart of Accounts (CoA) is not 'one size fits all'
A chart of accounts is essentially the breakdown and structure of your financials. It shapes how you view and think about your finances.
A well-defined CoA improves your ability to monitor and analyze the financial performance of your business through meaningful reports and can directly impact your decision-making process.
As ecommerce accountants, we strongly believe that best practice CoAs vary significantly across different industries. The CoA for a doctor’s office, for example, should look different from the CoA for a CPG & DTC brands.
Here are some examples of how to optimize your CoA for ecommerce:
Marketing and advertising expenses
A standard CoA may have some general marketing accounts but generally does not have sufficient breakdown necessary for you to manage the marketing spend for an ecommerce brand.
A CoA for ecommerce should breaks down marketing & advertising expenses into more granular details to give you better insights into your expenses, such as:
- Advertising & marketing contractors
- Marketing- Software & subscriptions
- Influencer expenses
- Trade shows & events
- Content creation & design
- Facebook - Advertising
- Amazon - Advertising
- Google- Advertising
Cost of goods sold
While each CoA is a bit different, for ecommerce-specific CoAs, both merchant fees and shipping-out should be part of COGS and taken into account in determining your gross profit.
An ecommerce CoA should track both merchant fees (per payment gateway), shipping-out expenses, Warehouse costs, and fulfillment fees as separate sub-accounts of COGS. This enables you to analyze these costs on a standalone basis and provides a more accurate gross profit for purposes of understanding your business’s financial health.
How to best manage your ecommerce bookkeeping
If you have read until here, you should have a pretty clear understanding of why using an ecommerce bookkeeping specialist is important in maintaining accuracy of your books.
Many people attempt to accomplish this themselves by using a DIY accounting software such as Quickbooks or using a traditional bookkeeper. Unless you have significant experience in BOTH bookkeeping or accounting and ecommerce, a lot of the important nuances of ecommerce bookkeeping may be lost in your books. It's important to make sure any bookkeeping solution you choose, has the ecommerce knowledge you need to get the most from your financials.
To simplify the process and save you time and money on bookkeeping, you can use an automated bookkeeping service like Finaloop which covers your accounting software, app integrations, and full-service bookkeeping so you can get the most accurate ecommerce books with only about 15 minutes of input a month.
Don’t underestimate the importance of setting up your books based on ecommerce best practices. Ecommerce businesses don’t work like brick & mortar stores and the accounting treatment and CoA breakdown should not be the same.
The best option is to find a cost-effective automated solution that integrates with Shopify, Amazon, Paypal, and other apps and pushes the data into your bookkeeping software in real-time.
We are a technology company providing automated end-to-end accounting service to ecommerce businesses. Our system connects to your apps, syncs all your data and reconciles your books in real-time, replacing your bookkeeper. We offer reconciled books available 24/7, tax-saving insights, and a single place for all your financial data.
*The information provided on this website does not, and is not intended to, constitute legal advice. All information, content, and materials available on this site are for general informational purposes only. Readers are advised to consult with their attorney or accountant with any questions or concerns.*
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