When business owners hear the word “bookkeeping” (or any variation thereof), they automatically think balance sheets and profit and loss statements. They wouldn’t necessarily be wrong, as bookkeeping is inextricably tied to those important reports. But more and more today, there is another meaning attached to the term — a meaning with roots in something that has become a new norm in business and society — e-commerce.
Assume that you’ve started an e-commerce business on your website, Amazon, Shopify, or another selling platform. You already have a brick-and-mortar store, so you have some confidence that you know all about what needs to be done with financials. How hard can it be, right? You order inventory, get a sale, ship out the product, order more, then run the reports, just like you do in your physical location. No problem … well, until there is.
While you may feel as if you (or even the bookkeeper you’ve used in the past) have it all covered, assuming you can model an e-commerce business on a traditional business model is flawed … at best. Before you know it, you run out of inventory and/or your financials are months behind. That’s because many business owners and bookkeepers understand the traditional notions of bookkeeping, but not those nuances that come along with an online store.
Certain aspects of bookkeeping will, of course, remain the same whether your store is on the ground or in the cloud. Bookkeeping is the process of tracking the money that comes into and goes out of the business—no difference there. The issue is that e-commerce presents its own unique challenges and has its own particular needs, including choosing the right platform, software, website domain, and host, complying with various sales tax laws, managing inventory, and determining drop ship options, to name a few. All these issues create a new set of bookkeeping challenges that differ from those of a physical store. And with different needs comes different conversations … and solutions.
Proper e-commerce bookkeeping starts with ensuring you have the correct workflow for an e-commerce store setup. This includes how you track inventory and costs, which accounting software you choose, and what integrations you need in order to make the entire process as seamless as possible. It also includes creating templates for orders and receipts, and, as usual, setting up balance sheets, income statements, and cash flow statements right from the start. But it doesn’t stop there.
E-Commerce Bookkeeping Issues and Challenges
Payment Gateways and Integrations
There are endless options for payment gateways. You can choose from PayPal, Authorize.Net, Stripe, or many others. You want to make sure that the one you choose has what you need for your business and works well in your industry. Additionally, you want to confirm that it can properly integrate into your accounting software. In that way, you can log information once from anywhere and know it will be populated where you need it most.
Varying Transaction Types, Data, and Issues with Timing
E-commerce typically involves many smaller sales. And more sales means more transactions, which means more data points. It’s important to ensure the accounting system you’re using can handle this type of volume. You also want to take a careful look at your gross margin to determine if there is enough to cover any related software costs and fees for all these transactions.
Another issue has to do with where to find the data you need. In a physical location, business transactions are fairly easy to locate on bank and credit card statements. But with e-commerce, specifically when a third-party, like Amazon or Shopify is involved, things may be different. For example, a transaction in a certain amount is recorded on a certain date, but neither may be accurate. First, the amount hitting the account is not necessarily the correct amount of income to be reported because it is the “net deposit” from the selling third-party. “Net deposit” means that there were other transactions (returns, sales tax, chargebacks, shipping, fees) that impacted the amount being deposited. Further, you may get a bulk deposit in one month that captures sales from the previous month (especially troublesome for December/January transactions for a calendar-year taxpayer). The solution to these issues is to go into the backend of every sales channel to get all the numbers that led to the net deposit and determine when exactly the sale took place.
Returns and Exchanges
Returns and exchanges can always present some issues, but they become particularly complicated when they are handled through a third-party seller, like Amazon. It’s important to understand when to write off inventory and make sure it is only written off once. Despite any challenges, returns and exchanges are a necessary evil of e-commerce. When a person cannot see and feel the item before purchasing it, the likelihood of returns increases. Without implementing the right system, the numbers in your books will not reflect actual amounts due to these transactions.
Inventory Management
Questions abound with inventory management in e-commerce. How much product do you have on hand? How much do you need and when? What is it worth? How long will it take to replenish? What is the inventory turnover? Is it stored in one or multiple locations? How is fulfillment handled?
E-commerce retailers must have a solid understanding of inventory and Cost of Goods Sold (COGS). Increased knowledge and tools will help with the inventory management process overall, bookkeeping principles, and calculating COGS for each SKU. This is an area plagued with mistakes (even from experienced bookkeepers if they don’t particularly understand e-commerce).
Sales Tax
Sales tax laws for online sales are constantly changing. The primary concern is maintaining compliance when the sale is not taking place in your state with a consumer standing in front of you. How do you set up a system to ensure you are reporting and paying taxes to those jurisdictions in which you may be subject? While this can get extremely complicated, it is one of the most important issues for e-commerce retailers to have settled.
A discussion of these challenges is not intended to be a deterrent to e-commerce. Rather, it is intended to remind business owners to be proactive and understand that there are inherent differences in bookkeeping as it relates to e-commerce.
E-commerce presents a unique opportunity for businesses of any size. Businesses can offer their products to a broader range of consumers, without the overhead costs of a brick-and-mortar store. You can be open 24 hours a day, 7 days a week, 365 days a year, without the corresponding payroll to accompany those hours. Essentially, you can maintain a small physical footprint while reaching a large audience. But as with all opportunities, there are risks and challenges associated with it. Fortunately, business owners do not need to (nor should they) go about it alone.
It’s important to get someone who understands these specific challenges and has the knowledge, skills, resources, and tools to help guide you on this cumbersome, but fruitful path. Someone who will start with an in-depth analysis to better understand your e-commerce workflow, determine which software best suits your needs, ensure the proper integrations between channels is set up, and provide technical support. You need someone who can identify problems long before they become problems. Simply, you need a partner you can trust.
At Agile Planners, we take care of the numbers, so you can sleep at night. We provide strategic guidance and outsourced CFO services to companies of all sizes. We can help provide the strategy your organization needs for the growth you want. We understand that no two organizations are the same. And with our experience and financial knowledge, we can help develop the right strategic plan for your business to grow and reach its goals. Simply, we’re your trusted partner, so you can focus on running your organization. Contact us today to learn more about how we can help.
