Top 4 Accounting Challenges Faced by E-commerce Businesses and Ways to Overcome Them

Top 4 Accounting Challenges Faced by E-commerce Businesses and Ways to Overcome Them

by Sue OLeary
April 20, 2023

Managing the accounting for your e-commerce business is no walk in the park. You need to record customer sale transactions, pay vendors, manage credit card receipts and payments and keep up with sales, use, franchise, excise and income taxes. But ultimately the truth is in the numbers. When you can rely on accurate accounting data, you can use that insight to make informed decisions that can take your business to the next level.

Below we explore the four top accounting challenges that e-commerce businesses face and ways to overcome them, so that you can begin to develop effective accounting strategies that drive growth and support compliance.

1. Understanding, Recording and Reconciling Your Sales

Whether you sell on Amazon, Shopify or other online marketplaces, each website has its own reporting platform. Your customer transactions process through that system and then the platform provides you with information on each transaction. At the end of a predetermined timeframe (some daily, weekly or monthly), the marketplace credits your bank account with your share of the sale proceeds. With varying reporting and seller fee structures from the platforms, using manual journal entries to record these transactions can lead to inaccurate financial statements.

What you can do: The best solution to help you maintain accurate accounting records and sales reconciliations is integrating an enterprise resource planning (ERP) software with your e-commerce platforms. Doing this allows both systems to exchange data and eliminates the need for manual entries, improving your overall business efficiency and data accuracy.

For example, your integrated system can show you all the components within your settlement, not just the cash deposit. This is important because the deposit amount does not represent your sales. It represents a combination of factors — your sales and sales taxes collected, minus the ecommerce platform applicable fees and returns, minus platform reported and collected sales taxes on your behalf.

There are a variety of ERP options for e-commerce businesses. Finding the right one for you will depend on the size of your operation and the number of transactions you must account for. If you’re a small business that’s just getting started, an entry-level software such as QuickBooks may be the right choice. For growing or larger organizations, a more comprehensive software solution such as Microsoft Dynamics 365 Business Central can handle the complexities of your growing e-commerce business.

Without platform integration, manual journal entries can become time-consuming as you sell on multiple platforms with multiple stores. An integration solution will save you major headaches by providing you with an easier and more reliable way to reconcile your sales and applicable marketplace fees.

2. Calculating Your Inventory Value and Understanding Your COGS

Like many e-commerce businesses, you’re likely aware that the value of your inventory includes all the direct costs associated with each item. If you manufacture your own items, you include all costs associated with procurement, storage and management of inventory. If you purchase from a supplier, you would include the direct item cost paid to your supplier plus any additional freight-in costs and/or any applicable tariffs.

When purchasing products directly from a supplier, you should agree upfront on the item cost and, in most cases, issue a purchase order (PO). The PO contains the details of your order including quantity, cost, ship to location and any other fees incurred by the business. Ensuring your PO agrees with the bill received from the supplier will help you accurately track the value of your inventory and cost of goods sold (COGS). Once you have properly accounted for your inventory, you are on your way to an accurate item value for your COGS.

What you can do: ERP software can also be a big help for calculating your inventory and COGS. Most systems automate your three-way matching — a process that helps maintain adequate records of costs and aligns them with accounts payables. Three-way matching entails:

  • Using a PO system to acknowledge agreed-upon purchase terms and quantities
  • Matching quantities ordered to quantities received
  • Comparing the supplier invoice to the items received and the PO before submitting payment

This process allows you to keep accurate and up-to-date records of your item cost. It’s best to use an ERP system for three-way matching because using spreadsheet software like Excel is prone to formula and human errors.

3. Evaluating Your Profitability

The measure of gross profit is straightforward: gross profit = sales revenue - COGS

But in this complex industry, you need to monitor more than just gross profit to evaluate profitability. You should also consider significant selling expenses such as marketplace fees (commissions, advertising, inventory storage fees), credit card fees, delivery costs and warehousing operational expenses including warehouse labor and shipping supplies.

With so many ways to leak profit, e-commerce is highly price-sensitive. And when every dollar counts, it’s important to be aware of how operational issues impact your bottom line.

For example, one place you can lose precious margin dollars is if you overlook your warehouse operations and the number of manual processes it takes for a customer’s order to be picked, packed, and then shipped. Each step adds incremental costs that reduce your overall level of profitability.

What you can do: Warehouse operation teams try to be as accurate as possible, but inefficiencies and errors can occur over time. To keep operational costs from eating away at your profit, you can:

  • Understand the cost drivers in your operations with current state process flow mapping
  • Identify ideal state processes to eliminate non-valued added activities
  • Adopt an integrated ERP solution platform to automate key components of your pick, pack, and ship process and provide real time reporting on key efficiency metrics to improve labor expense management
  • Standardize shipping supplies and processes to minimize opportunity for packing error
  • Review your shipping invoices regularly for any discrepancies between the agreed-upon shipping rate and the actual charges

Your shipper’s invoice can be hundreds or thousands of pages long, depending on how many orders you have. Although it may be too time-consuming for you to go through this documentation on your own, there are providers that can do it for you. Regardless of the number of items you sell each week, you want to make sure that warehouse inefficiencies and errors aren’t adding up to major losses. Taking control of your operations can be the difference between making and losing money.

4. Understanding Your Sales Tax Liability

When you sell on one of the online marketplace platforms, their system handles the tax calculation, collection and remittance for you — if you set it up for your company store correctly. The sales and taxes they collect on your behalf need to be reflected on your business’s sales tax return.

However, if you’re selling on your own website, you need a reliable method to track your sales tax liability and file in all the necessary states.

What you can do: To help ensure your state and local tax compliance, you can:

  • Conduct a nexus study to identify the states where your company does business and determine where you may have a tax liability.
  • Implement a sales tax software that links to your ERP and e-commerce platforms so that you can calculate, collect and report accurate applicable sales tax based on items sold across the country.
  • If you already have a sales tax software, conduct a sales tax system health check to ensure all items are properly identified as taxable or tax-exempt and that you calculate the tax amounts correctly.

Sales tax software can make the management of your e-commerce business easier while improving the accuracy of your calculations. No matter what products you sell or which states you ship to, you can leverage technology to connect with your accounting systems and keep your business compliant with the changing regulations.

The Bottom Line

When it comes to e-commerce accounting, a proactive approach is key to addressing common challenges and positioning your business for success. The guidelines provided can help you streamline your financial statements, improve compliance and ultimately drive growth. With the proper accounting tools and best practices, the truth will shine through your numbers, and you’ll be empowered to make informed decisions and achieve your business goals.

Contact our outsourcing experts to learn how to improve your day to day accounting processes, streamline your operations, put the right tech stack in place, avoid costly profit leaks and minimize liabilities.

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