In Pursuit of Profit
Experts sharing tips about business, money, taxes...
to support your mission and improve profits.
In Pursuit of Profit
to support your mission and improve profits.
If you are making any of these common e-commerce bookkeeping errors, resolve to fix them immediately with the help of an experienced financial professional:
1. Using the Wrong Accounting Software
Some business owners who are entering the world of e-commerce after having run a traditional retail business for many years may be used to managing their books manually. Not using an accounting software to streamline and automate functions is a colossal mistake. Running a successful e-commerce business requires leaning on an accounting system that can keep pace. There is simply no way that a business owner, bookkeeper, or accountant can manually keep the books for an e-commerce store doing business nationally or internationally effectively.
Choosing an accounting software is a critical decision. Utilizing the right software for your business type, financial acumen, and business life stage is a hugely important first step. Businesses that just use whatever is free or quick to set up or trending right now can find their day-to-day operations and future growth hampered by their rash choice. Making a smart decision about which accounting system to use when starting the business will pay dividends in the future, by eliminating the hassle and cost associated with needing to migrate to a new platform.
If an e-commerce business is more established and discovers that the accounting software it is using does not fit its needs, it is always a shrewd decision to switch sooner rather than later.
2. Mishandling Sales Tax
Handling sales tax correctly is the most difficult part of running an online business. Sales tax must be calculated at the state and local level to add the appropriate charge to a customer’s transaction. Once sales tax is collected, it must be recorded as a liability, reported to the state, and remitted on a strict payment schedule. Using the right accounting software makes all the difference here because more sophisticated systems like QuickBooks Online will automatically calculate and account for your sales tax liability.
3. Not using a Chart of Accounts
Even the best accounting software still requires an informed operator to pull the right levers and push the right buttons. If all your expenses and revenue are just lumped together, your software’s reporting capabilities will be limited. However, shrewd business owners that use a chart of accounts lay the foundation for improved financial recordkeeping and more informed budgeting. Creating a logical chart of accounts also improves practical functionality and provides better organization. The result is improved efficiency, especially as the number of users increases.
4. Throwing Out Receipts for Small Dollar Amounts
The IRS does not require that you keep receipts that are less than $75. However, these small receipts can serve as proof of claimed tax deductions, which means that it is still a good idea to keep them just in case you get audited. There are plenty of mobile apps that let business owners take a picture of their receipts to automatically upload, categorize, and store them in the cloud. This eliminates the clutter of piling them up somewhere in your office for a rainy day, which is what people are typically trying to avoid when they throw their receipts away.
5. Disorganized Record Keeping
Messy books are usually the result of too many people having access to business finances, giving financial authority to less experienced employees, or migrating to a new accounting system. In other instances, deceitful employees may intentionally muddle the books to conceal fraudulent activity. If your business is experiencing general ledger errors, cash discrepancies, missing retained earnings, invoice inconsistencies, or other common signs of accounting record issues, consider hiring a third-party accountant to clean up these issues to get your books back in order.
6. Doing Bank and Credit Reconciliations Too Infrequently
Bank and credit reconciliations should be performed regularly. Failing to maintain consistency with reconciliations (or skipping them altogether) can allow discrepancies to linger through multiple reporting periods, affecting cash flow management, forecasting, and even tax calculations. The resulting implications can range from cash shortages to IRS penalties, as well as open the door for fraud.
7. Recognizing Revenue Incorrectly
Many e-commerce businesses recognize revenue incorrectly because they keep records based on when they were paid, instead of when the sale was made. However, if an online sale is made at the end of a month, even if the money from the transaction does not get deposited into your account until the following month, the revenue from that sale should still be recorded in the month when the sale was made. Recording revenue in this way is compliant with GAAP (Generally Accepted Accounting Principles). This is especially important when the time periods being spanned are years rather than months because e-commerce businesses that offer big year-end promotions can see their data skewed significantly when recognizing revenue incorrectly.
Recording deposits as revenue poses another problem as well. The deposited amount from a customer’s transaction is the sum of all incurred charges – the value of the sale as well as sales tax and shipping costs. Fees added to the top of the sale for tax and shipping should not be recorded as revenue.
8. Incorrect COGS Calculation
COGS is a tricky concept for e-commerce businesses because they have additional considerations that traditional retailers do not have to worry about. E-commerce COGS includes both the direct and indirect costs associated with selling products. While some costs like raw materials and packaging are easy to figure out, things like indirect facilities costs are incredibly difficult to break down and spread out across all units produced, which is why they typically require the expertise of a professional accountant to calculate correctly.
9. Incorrect Inventory Levels
For e-commerce companies that sell across multiple platforms, staying on top of inventory is always a challenge. Most e-commerce software providers do not provide multi-channel inventory tracking, requiring the integration of an inventory software to maintain accurate real-time data.
10. Misclassifying Employees
E-commerce operations are typically more likely to employ consultants and freelancers than brick-and-mortar retail companies, which makes them more likely to have issues with misclassifying employees. Consultants and freelancers must be classified as contract employees for tax purposes, otherwise serious penalties and fines can be imposed on your business.
11. Not Tracking Expenses that are Reimbursable
Always track expenses that are eligible for reimbursement. Failing to keep accurate records around these types of expenses is like throwing money away. Again, using a mobile app to save and categorize expenses is a great way to automate what would otherwise be a tedious task. If you are not sure whether an expense is reimbursable for your specific business, ask your accountant for help.
12. Being Late with Tax Deadlines
State and federal tax deadlines are obvious examples of important dates that e-commerce companies should not miss. However, those are not the only tax deadlines that business owners will need to be aware of throughout the year. Sales tax deadlines vary by state and some even have quirky details related to filing deadlines. Whether you are declaring tax that was collected or not, you should still file. A zero returns filing helps to keep your business in good standing even when you do not have anything to declare, potentially granting more leeway if you ever do file late.
13. Not Backing Up Data
Data backups are critical for e-commerce operations. Financial data should be backed up regularly and saved in a secure location to prevent against corrupted files, data loss, or other catastrophic failure. A data backup can also help restore good records if a widescale mistake occurs during regular operations that would be time-consuming to reverse.
14. Doing It Yourself
Entrepreneurs as a group tend to be more inclined to handle things themselves. Whether the motivation is cost savings or increased control, doing your own accounting is not feasible indefinitely. As your business grows, more sophisticated financial needs will require an experienced accountant to manage ongoing needs and plan effectively for strategic growth.
If you need help determining which accounting services to outsource to an accounting company, feel free to reach out to us. We would be happy to discuss your unique needs and make a recommendation.