E-Commerce businesses are easy to get started, but accounting is a different story. Before you dive into eCommerce, you should have a plan for accounting and bookkeeping. However, E-Commerce accounting has some unique wrinkles that you should consider before you get started.
This E-Commerce accounting blueprint will help you optimize your accounting system for your business model, so you can hit the ground running with your new business.
The Most Common eCommerce Accounting Challenges
Successful E-Commerce starts with a solid plan. Pay attention to these common obstacles when you’re hashing out your business.
Sales tax is a major issue for E-Commerce businesses, and compliance can quickly become extremely complicated.
Your business may incur taxes in several states depending on its operations. It’s your job to pay these taxes according to local regulations, or you will face penalties.
Sales tax is way too complicated of a subject to cover here, but you can find our exhaustive small business sales tax guide here.
To avoid doing everything manually, E-Commerce businesses should check with third-party marketplaces such as Amazon to see how they handle sales tax. Many marketplaces have their own systems for calculating and collecting sales tax, which can simplify the process for businesses that sell on their platforms.
Furthermore, E-Commerce businesses should invest in shopping cart and accounting software that automatically calculates and applies sales tax for them. There are several software providers, such as Avalara and TaxJar, that can automate the sales tax process and help ensure compliance with tax laws.
Finally, E-Commerce businesses should pay sales taxes to the relevant authorities regularly. This will help you avoid penalties and interest charges and to stay in good standing with tax authorities.
Determining eCommerce Costs
Understanding costs is key to running a successful business. You should carefully track your expenses, so you can maximize your deductions.
Costs of Good Sold
Many E-Commerce businesses spend a considerable chunk of change on acquiring the goods they sell. Cost of goods sold, or COGS, typically includes the cost of acquiring or manufacturing the products you sell, plus any storage or inventory management expenses.
Shipping & Distribution
Shipping costs can also add up quickly. This category also includes the cost of packaging materials, shipping labels, and any other costs associated with getting products to your customers.
Many E-Commerce businesses also operate on merchant networks such as Shopify. Third-party marketplaces typically take a percentage of all sales occurring on their network. Marketplace fees can vary significantly depending on the platform and business model.
Import and Export
Businesses that import products may also incur costs such as import and customs fees, taxes, and other tariffs that they may be required to pay when items are shipped into the country. This is a critical part of international E-Commerce business operations.
E-Commerce businesses also need to factor in the cost of customer service support. This may include hiring a customer service team, providing support through email or chat, or even having a call center in place.
E-Commerce businesses must cover the cost of rent, utilities, and general overhead associated with running a business. For online businesses, renting a warehouse and office space is still a requirement, and those costs need to be factored in.
Advertising & Promotion
Another cost eCommerce businesses should consider is advertising and marketing expenses. These costs may include creating ad campaigns, hiring marketing agencies, and developing content.
Software and SaaS
E-Commerce businesses will also have to consider software and administrative costs. These may include the cost of running and maintaining the eCommerce platform, customer relationship management (CRM) software, and other business-related software. Administrative costs may include the cost of hiring a bookkeeper, accountant or other administrative staff.
After you have developed a reliable system for tracking costs, you should plug your data into a profit and loss statement or P&L. A P&L statement provides a reliable record of a business’s financial performance over a given time, and they’re an invaluable resource for managers and decision-makers at the company.
Inventory management is also a critical aspect of the eCommerce businesses. , and it can present significant challenges, even without considering the accounting implications. Inventory management is the process of tracking and managing the products that a business has in stock, including when products are sold, restocked, and shipped. This is particularly crucial for eCommerce businesses because inventory is the backbone of the cash flow.
Tracking levels in real time is especially challenging. It requires constant monitoring of sales, stock levels, and shipping. It’s extremely difficult to maintain this type of system manually, but automated solutions can make the process much more practical.
Most successful eCommerce businesses tackle these challenges with automated inventory management systems. Automated systems can save businesses time, reduce errors, and improve cash flow.
However, some eCommerce companies don’t have inventory at all, such as dropshipping companies. In this case, you might be able to disregard inventory accounting entirely, since your business doesn’t stock or sell its own goods.
Managing Marketplace Relationships
Most eCommerce companies have at least some sales channels on marketplaces like Amazon, Ebay, and Shopify. These companies charge fees for their marketplace services, and you business should track them closely.
Don’t forget to read each seller agreement and fee schedule closely so you fully understand all platform costs. In some cases, the marketplace may even factor their fees into your selling prices.
You should also double-check your marketplace costs, so you don’t overpay. Mistakes happen, but no one wants to pay for them. Track costs carefully to ensure they line up with the marketplace agreement.
Should You Bring in a Pro?
E-Commerce accounting require lots of juggling. You have to deal with of sales tax, inventory, shipping, and much more. You might think it’s manageable in the beginning, but ecommerce businesses can grow very quickly.
A dedicated bookkeeper or accountant can take a lot off your plate, so you have a lot more time to focus on growing your business.
If you decide to go for a professional, make sure you choose a specialized eCommerce accountant. These experienced pros understand the challenges associated with eCommerce accounting better than anyone, and they’re a tremendous asset for young businesses.
Don’t settle for a storefront tax firm that doesn’t understand your business. If you’re going to spring for an accounting pro, you should get one that will provide maximum value for your business.
Final Thoughts on eCommerce Accounting
A well-planned accounting system can make managing your eCommerce business much easier. It’s also a tremendous asset a tax time.
Managing your own books is always an option, but it can quickly get out of hand if your business succeeds. If you’re falling behind on accounting tasks, it’s time to consider bringing in a pro.
Tax Hack Accounting is fully equipped to assist with all of your eCommerce tax and accounting needs. Our veteran tax pros specialize in high-tech business models like eCommerce, so we understand the challenges your business faces better than anyone else.
Connect with us now for a one-on-one strategy session, and let’s talk about how we can help your business succeed.
Looking for more? Join 100's of entrepreneurs getting better tax strategy with Tax Hack.
Get the latest news and updates from our team.