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Strong accounting and finances will significantly increase the success of your ecommerce business. Understanding what customers want, finding the right products and getting them to customers are all a huge part of growing your online store — but that’s only half of the story. There are lots of accounting challenges for ecommerce small business owners: A combination of financial rules and taxes, hidden fees, currency exchange, inventories and profit margins all put pressure on your financial management.
COVID-19 is magnifying these challenges further. Whether you’re dealing with supply chain difficulties or increasing demand from customers, strong financial principles will make you much more resilient. That’s why ecommerce accounting is so vital. Get it right, and you’ll make much better decisions to help your business grow and thrive.
We’ll cover some of the main accounting concerns for ecommerce businesses and how you can solve them, both during the pandemic and beyond.
Common Accounting Foundations for All Businesses
Before we get into ecommerce-specific accounting difficulties, it’s worth looking at the foundations of good accounting that apply to all businesses, both traditional and online. Good accounting practices include:
- Get a bookkeeping system in place that records how money is coming into and going out of your business.
- Use a business bank account and reconcile all of the transactions against your bookkeeping system.
- Understand your revenue, expenses and profits, including how much money you have available to pay staff, buy inventory and meet essential business needs.
- Calculate and pay taxes, both on an estimated, quarterly basis and at the end of the year.
Once you have the basics in place, it’s time to focus on the accounting challenges that are unique to ecommerce.
Ecommerce Accounting Challenge 1: Understanding, Charging and Paying Sales Taxes
Sales taxes are the additional taxes added to the costs of products when you sell them to customers. You’ll add these costs to the amount customers pay, then pay those taxes to the relevant authorities. The problem is that sales tax rules and rates vary tremendously depending on where you and the customer are located, whether you have something called a “sales tax nexus” and various other factors.
This can get very complicated, very quickly. Doing everything manually is a huge accounting overhead for an ecommerce business. You can solve this problem by:
- Understanding when you’ll need to pay sales tax and who you need to pay it to
- Checking with Amazon or other third-party marketplaces to see how they handle sales tax
- Investing in shopping cart and accounting software that calculates and applies sales tax for you — good examples are Avalara and TaxJar
- Paying sales taxes to the relevant authorities
Challenge 2: Figuring Out Your Ecommerce Costs and Overheads
Ecommerce businesses have to deal with a huge variety of costs. These include:
This all adds up very quickly, and you have to pay all of these costs out of your margin on every product you sell. You need to understand all of your costs so you can build in a reasonable profit margin and price your product correctly.
You can do that by:
- Carefully tracking every cost relating to selling products
- Categorizing these costs as part of your bookkeeping
- Using the “Profit and Loss” report in your accounting software
- Regularly checking the total costs of every item
Once you know what your costs are, you can adjust your profit margins and pricing to cover all of your overheads and give you a little extra to grow your business.
Challenge 3: Paying Third-Party Marketplace Fees
Many ecommerce sellers take advantage of third-party marketplaces like Amazon, Etsy or eBay. If you sell through these websites, you’ll know that they charge fees for you to sell your products. Both eBay and Etsy charge listing fees and may charge a percentage of the final selling price. Amazon has a variety of fee structures, including a complete “Fulfillment by Amazon” service that does a lot of the heavy lifting but creates a hefty expense!
All of these fees put additional pressure on your profit margins, so it’s important to understand and manage them where you can.
- Read through the small print of the seller agreement and fee schedule of any third-party marketplace.
- Take account of these extra fees when you’re calculating selling prices.
- Use specialist software to list items and to calculate the total fees you will need to pay.
- Double-check your listing fees against what you’re charged by the marketplace.
- Take advantage of bulk listings and other promotions to reduce your listing fees.
- Include all of the listing fees as part of your expenses in your accounting software.
Challenge 4: Dealing with Ecommerce Payments in Different Currencies
As your ecommerce business grows, it could be the perfect time to expand internationally. When you do, you’ll want to take payments in the buyer’s currency, then convert it to your own currency for depositing into your bank account. Unfortunately, there can be a lot of hidden fees when it comes to foreign currency exchange rates.
- Look for shopping cart software that gives you plenty of options for the currency you charge and how the customer pays.
- Investigate your credit card payment processors to see what their exchange rates are and how that compares to the baseline, midmarket rate.
- Use bookkeeping and accounting software that can handle multiple currencies and bank accounts.
Challenge 5: Having Enough Products in Stock to Meet Forecast and Demand
Problems caused by the pandemic mean that the supply chain is front-page news. These issues mean ecommerce businesses have to be better than ever at having enough products to meet customer demand.
- Analyze the demand for each ecommerce product line and talk to suppliers and manufacturers about how soon you will get products.
- Get good forecasting and predictions in place so you can manage increasing customer demands, especially during peak seasons.
- Carefully track exactly when you’re spending money with suppliers so you’re not locking up too much money in inventory.
You can even get alternative suppliers and manufacturers in place to make your supply chain that much more resilient.
Putting the Effort into Ecommerce Accounting
The right type of accounting for ecommerce businesses can help you identify and deal with challenges early. That will often mean finding the right software or reading through the small print of your agreements.
Although this can seem like a lot of effort, it will set you up for success. Specialized ecommerce shopping cart, sales tax or listing software that integrates with your bookkeeping will make your accounting so much easier. Understanding agreements with marketplaces and suppliers lets you stay on top of your fees and services.
Fortunately, when it comes to preparing your books and filing your accounts, Bizee will do the heavy lifting. Our complete tax and bookkeeping services are perfect for your ecommerce business, so trust us to help you meet these challenges.
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