Entrepreneurs are drawn to ecommerce because of the low barrier to entry and the perceived ease. It seems easy to sell items that are already popular on sites like Amazon or eBay. The difficulty of running an online store is up for debate. But online sellers and their accountants agree that ecommerce accounting has unique challenges.
For small business owners in the ecommerce space, here are six challenges you’ll face and how to overcome them.
Sales Tax Liability
Ecommerce sales tax has gotten complicated in recent years. The biggest change came with the Supreme Court ruling in the Wayfair vs. South Dakota case in 2018. Now, online retailers have to remit taxes in almost every location where they make sales.
These new “economic nexus” rules established revenue and/or sales volume thresholds. These determine when a business has to remit taxes. Before, you were only responsible for collecting sales tax where your business is physically located. Review what you need to know about an economic nexus in our sales tax walkthrough.
Brick-and-mortar retail might only have one or two tax locations. Online sellers are now juggling dozens of tax locations. On top of that, sellers have to file taxes monthly or quarterly, depending on the business.
There are plenty of tax-focused software solutions on the market. For example, Avalara and TaxJar help make sales tax tracking easier. In some softwares, you can set up tax locations and track using that method. Check out our free sales tax calculator if you’d like to try it yourself.
Be diligent about tax tracking on every sale so there is less confusion when it’s time to file. Technology streamlines the process and is worth investing in. If you want to learn more about calculating sales tax, check out our comprehensive guide.
Managing inventory is a tricky task for sellers no matter how small the business is. New products and sales channels only complicates this further.
You have to track what you have, what it’s worth, and where it’s located if you have more than one warehouse or fulfillment center. Every sale changes the total inventory quantity. Returns arriving back at the warehouse in good condition will also affect inventory.
Inventory management is a challenge even without its tie-in to accounting. It is the backbone of every online retailer’s cash flow, so it’s important to have it under control. Most successful sellers use automated and integrated inventory management systems that can scale. These systems will provide the most accurate data so financials will always be up-to-date. Our walkthrough of inventory management will equip you with all you need to know.
Tracking Seller Fees
Most ecommerce platforms charge you a flat monthly fee to sell on that platform. Other miscellaneous fees are harder to track. Amazon’s fee structure is the perfect example of this. There are fees for listing, for transactions, for advertising, and for fulfilling each order.
The percentage or flat fee depends on the category of the product, plus its size and weight for shipping. At the end of the month, these expenses are recorded together as “Amazon fees” giving sellers zero granularity. The lack of insight makes your budget planning that much more difficult. You can learn more on what goes into a seller fee in our blog post.
Online calculators are available to help determine the seller fees paid to the most popular marketplaces. But what about shopping carts and other ecommerce platforms? Depending on their fee structures, you might be able to track by hand. It’s more sustainable to use automation so when your business scales, you have less busywork to do. This will let you focus on future growth. Bench will take the guesswork out of tracking merchant costs. Start a free trial today to learn how.
Further reading: Bookkeeping for Amazon Sellers
An inconvenience of ecommerce is tracking returns. Most sellers let their customers return items that don’t fit, arrive damaged, or don’t work for any other reason. Studies show that having a favorable returns policy can boost brand loyalty and result in reconversions. It’s in your best interests to accept returns as a reality of running an online store. However, returns throw a wrench into the accounting process. Customers are issued a refund, and the returned product(s) may have to be re-added to the inventory.
The key to handling returns is a careful attention to detail. Sellers have to decide whether to write off inventory so they don’t expense it twice and mess up their books. Returns management is a feature of many inventory management systems. You can also manually update your accounting software to accommodate returns.
Manual Data Entry
There are several items to track with every sale: local sales tax, seller fees, inventory quantity sold, shipping costs, and more. Manual entry of all this data becomes overwhelming as the business grows. Some sellers outsource this process to an accountant, but you might be surprised by the cost. Simply put, manual data entry is a major pain point because it is time-consuming and rife with potential for errors. Getting set up on Bench will take this work off your hands. Get walked through this and more in a free trial.
Automation can help online retailers overcome this challenge by taking over the task. Accounting automation software can connect ecommerce stores to your accounting solution by posting all transactions.
Limited Access to Data Analytics
When it comes to analytics and reporting, some ecommerce platforms offer more than others. This poses a challenge to sellers who have limited access to store performance data. They would get delayed information, constantly reacting to what has already happened. Solid reporting allows you to be proactive based on up-to-date analytics and performance history.
You need greater visibility into your accounting to be proactive. With a real-time store performance tracker, you can see how quickly inventory is moving and which channels are the biggest revenue drivers. There are dozens of solutions on the market, and you can use them to make data-backed decisions about which moves to make next.
No Challenge Is Impossible
Ecommerce accounting is complex and full of unique challenges. But none of them are impossible. You can invest in your tools early on to make navigating this subject a breeze.
Equip yourself with free tools for your business
- Cash Flow Forecast Template
- Estimated Quarterly Tax Calculator
- Small Business Accounting 101: A Guide for New Entrepreneurs
- 2020 U.S. Small Business Tax Checklist
Learn more about overcoming accounting challenges
- The Top 7 QuickBooks/DIY Mistakes (and How to Fix Them) (Read time 5 minutes)
- How to Manage Your Cash Flow and Spending (Read time 4 minutes)
- How an IRS Audit Works—and How to Prevent One (Read time 10 minutes)
- How to Find an Accountant (Read time 7 minutes)
Taylor Gilliam is a Content Specialist at Webgility, the #1 accounting automation solution for online retailers and accountants using QuickBooks. When she’s not photographing concerts, you can find her hiking with her dog, Charlie.