Creating products, marketing them to your target audience and generating sales are all part of the ecosystem for any eCommerce business. But ask any eCommerce seller and they’ll tell you that their success in staying profitable lies in mastering eCommerce accounting.
Like any industry out there, eCommerce accounting challenges are plenty, and vary depending on the size of the business. What doesn’t show up as a credit in the ledger can come up as a debit elsewhere. Without an eCommerce accounting software, you’ll be taken off guard and will never know if you’re balancing your books correctly.
In this blog we’ll dive into the key accounting challenges in eCommerce that should be preempted before it overtakes your profitability percentage.
Challenges for Accounting for eCommerce Business
Erroneous Cost of Goods Sold Computation
The Cost of Goods Sold is the total cost of selling products. It is an important eCommerce business metric that indicates the impact of inventory decisions, pricing strategies, taxes due and cash flow management. A miscalculation in COGS can cause eCommerce sellers to wrongly compute pricing and taxable income, which can invite fines and penalties. The COGS should ideally be carried out at an SKU level for increased granularity.
COGS = Starting Inventory + Purchases-Ending Inventory.
The purchase costs here factors in costs for labor, materials, supplies and anything under the head of miscellaneous.
EasyEcom’s inventory reports contain a ledger report that records the starting and closing inventory. It displays the numbers after automatically calculating any sales and adjustments made. Next, add purchases and do an inventory count to tally the ending inventory. Be sure to include costs such as packaging, marketing, shipping/carrier costs, operations, materials, labor and operations. Indirect costs include the cost to facility rental costs and utilities, logistics and equipment.
Reseller Commissions & Fee
If you are reselling items on marketplaces like Amazon and eBay, you would already know that there are charges for listings, advertising and promotions and order fulfillment services in addition to the flat monthly fees they charge to use their platform. This is a lot easier to track if you create separate expense accounts. You’ll also have a better idea of the domains that cost you more and which one is more profitable for your products.
The flat fee depends on the product category, dimensions and volume. An accounting software for eCommerce like EasyEcom contains a reporting suite with tax reports, confirmed and pending returns, inventory and margin reports. These financials inform you if extra marketplace deductions have been levied that need further investigation and rectification.
Recognizing Revenue and Purchase
The vendor generates a purchase order when you order from them. This should be recognized by converting it into a purchase invoice the moment it’s received as stock in your warehouse. The date of the stock received will be counted as the purchase invoice date.
Revenue should also be recorded in a similar manner when products are delivered to the customer. You can retrieve revenue details directly from the sales reports available on an automated eCommerce solution.
The transaction that qualifies for recognition of revenue involves transferring ownership of the goods from the seller to the buyer. EasyEcom brings greater transparency into the process by enabling sellers to create purchase orders based on the inventory forecast and warehouse/ purchasing department’s requirements. Furthermore, you can pull up revenue details directly from the sales report and verify costs related to sold products through profit and loss statements . These costs can be further split into categories to do your books with greater accuracy. The idea here is that you can adjust your pricing while covering your overheads to create a reasonable profit margin.
4. Handling Returns
When an order is sent back, it initiates the reversal of the chain of custody. Depending on the returns, exchanges and refunds policies, most eCommerce sellers allow returns for products that differ from the description, or arrive visibly damaged. Accepting these returns entail steps to reconcile them to determine the next logical action.
Return to origin can be initiated for any reason, and what happens to those products are determined in the returns management phase. The product’s conditions need to be rechecked before approving it to go back up on inventory. Only then can you update your sales channels without risking shipping a damaged item again. While small sellers can manually inspect defective items at the warehouse, you’re going to need a dedicated software for handling returns if your order volume grows exponentially.
A vital component of returns management is return reconciliation, which notify eCommerce sellers of the date of return and the quantity and product category of the items being sent back to the warehouse. EasyEcom lets omnichannel eCommerce sellers keep track of these confirmed and pending returns which later adjust your saleable inventory on the outcome of QC checks. Once all orders are back at the warehouse, the staff can assess the action for the products, such as sending it for repair and restoration, or discarding.
Inventory management is the backbone of every online retailer’s financial success because quality, quantity, relevance, innovation and availability all play a crucial role in customers preferring you. Sellers need a proper accounting tool as the number of SKUs, geographies and marketplace transactions increase, because you need to track
- What you already have and their worth.
- Where it’s located if there are multiple warehouses or distribution centers.
- Every sale made and
- Every returned order and whether or not it qualifies to get recorded back on inventory.
The tricky part is to track the inventory value from production to sale and match it with the expenses incurred as it goes through several middlepersons. Imagine the inventory value to be of a certain X amount without knowing if all the items in it are still in a sellable condition!
Managing inventory is crucial to eCommerce business success. An exactness in quality and adequacy prevents shrinkages, excesses and losses by provisioning for stock whose sales performance indicates potential. What makes inventory management challenging are multiple products, warehouses and sales channels- where levels fluctuate constantly based on demand.
An automation-led inventory management solution can help growing sellers scale and make informed decisions. They’ll gain visibility into what should, or should not go out on sales channels and be able to update them with inventory reports on inventory aging, order aging and expiry. While inventory aging indicates the number of days an item is stored at a warehousing facility, order aging lets sellers know how much time has passed without the order being processed. Sellers can set a trigger for expiry-sensitive items so that they are automatically de-listed as their expiry date approaches, thereby preventing outdated items from going up on sales channels.
Integrating all potential selling platforms can enable you to record stock and track inventory. Furthermore, you have a single interface to perform several functions at once, from viewing channel wise sales performance splits to tracking order statuses and shipments. A common platform for recording all the sales and sales returns is a must for eCommerce accounting
6. 3P Marketplace fees
Inventory-based eCommerce fulfillment models employed by marketplaces such as Amazon, Etsy etc stores and sells inventory for several sellers and brands. They charge a fee for listing and the pricing structure varies depending on the extent of control sellers allow. These fees can add to your overhead which is why it is best managed through specialist tools.
Remember to carefully go through seller agreements and fee schedules before committing to any marketplace. A seller should account for fees when applying pricing for their product catalogs and where possible, reduce the listing fee by opting for bulk listings and promotions.
7. Tracking sales tax
Sales taxes are in addition to the product cost and represent the amount you pay as tax to relevant authorities. The tax liability differs depending on the state or country of both you, the seller and the customer. For example, in the United States, the tax rate varies between 2.9-7.25% with some states allowing local counties to impose additional tax percentages as part of revenue collection. Seeing as there’s no one-tax-fits-all. attempting to keep track of sales taxes manually will prove to be a frustrating exercise rife with errors and numerous rounds of back-and forth.
This mental checklist will help you compute sales tax correctly;
- Understand when the sales tax applies and to who it needs to be paid to.
- Invest in an accounting software or eCommerce solution with an accounting module that can calculate the sales tax for you. A cloud-based solution can additionally prevent false charges and allow you to raise disputes against the wrong claims.
Frequently Asked Questions
Why is accounting important for an e-commerce business?
Accounting is important in eCommerce because it
- Stabilizes the business
Bookkeeping and accounting lets eCommerce companies maintain financial health by providing an operational system of record.
- Provides financial forecasts
eCommerce accounting gives you recommendations based on a combination of historic events and current trends which enable you to predict inventory profitability in the future.
- Ensures proper tax compliance
Staying tax-compliant is key to avoiding penalties while paying your dues. Taxation reports disclose the breakdown of charges under different heads such as marketplace commission, carrier and warehousing/storage space fees against your reported gross income.
What are the major challenges of e-commerce?
Some major challenges of eCommerce in India include
- Artificial Intelligence Implementation
Automation is constantly being experimented on, but the divide between its feasibility and actualization is the challenge. Besides personalizing products and sending out marketing collateral according to user preferences, AI can help eCommerce sellers stay relevant and in-demand with newer technologies. For example, 3D try-ons in selfie mode are being used by clothing and eyewear retailers (such as Lenskart). There’s a lot of untapped potential that could help eCommerce businesses stay unique and attractive to their customer base.
- Evolving Customer Expectations
Faster, damage-free and higher accuracy for order fulfillment are what customers expect. The post-purchase experience matters in the buyer journey to determine repeatability.
- Accounting Challenges
While bookkeeping involves categorizing your transactions, invoicing and reconciliation, accounting is a bit more complex and requires eCommerce businesses to prepare and adjust entries, perform financial audits, plan taxes and forecast financial risks. The inaccuracies and disparities multiply if you continue to do your books manually than through an eCommerce accounting software.
- Logistics management
Your store may be online but orders can come in from anywhere worldwide. It would be best to work with a 3PL/4PL carrier that is vetted by an aggregator from the affordability and fulfillment accuracy perspective.
- Inventory Management
Managing the inventory is a major challenge for retail businesses, whether you’re digital or omnichannel. You need to coordinate on-ground efforts and warehousing movements and stock availability to ensure timely fulfillment of orders. Features like order rerouting and reports such as inventory aging and forecasting can keep your inventory pipeline lean.