Accounting is a vital part of running an eCommerce business. It lets you understand your performance, learn from past mistakes, and help you to boost profitability. It also enables you to convince investors and lenders that you know what you’re doing in running your online store. 

In this post, we’ll walk you through the most common accounting mistakes to avoid so that you can plan measures to prevent this from happening. Ultimately, this helps you boost the performance of your eCommerce business.

The Importance of Accounting for eCommerce Businesses

Whether you’re selling via Amazon FBA or through your own store on Shopify or WooCommerce, you need to know your numbers to run a successful and profitable business. 

Although most eCommerce entrepreneurs or start-ups can keep track of their top-line revenue numbers, you also need to monitor other financial KPIs to know the health of your business. Take a look at the following KPIs that accounting can help measure –

• Profit- What’s left after revenue and operating expenses
• Incoming cash flow- How much cash your business gets monthly
• Ongoing cash flow- How much cash exits your business monthly
• Operating expenses- Costs of running your business, including staff salaries
• Assets- Things your business owns
• Liabilities- Debts or loans of your business
• COGS- the cost of goods sold
• Customer Acquisition Cost

However, accounting for eCommerce needs different initiatives. The lack of proper guidelines can drive you to do mistakes. That’s where you need to be careful.

Read: Best eCommerce Solutions to Start Your Business

Accounting Mistakes to Avoid in eCommerce

As a business owner, you need to wear a lot of hats. Accounting is something that could make (or break!) your eCommerce business. 

So, whether you are a well-established eCommerce business or you are planning to make an eCommerce website, here are some of the cost accounting mistakes to avoid: 

1. Managing your inventory manually

43% of small businesses in the US don’t track their inventory. However, doing your accounting manually can be complicated, even tedious. The room for human error is also significantly higher. This means your financial reports aren’t accurately representing your business’ position. Fortunately, there are several ways to automate and digitize the accounting process in your eCommerce business. 

That’s why you need to set up suitable, cloud-based accounting software. Opting for the cloud means that you can access your data anywhere and give others access. From there, you could set up bank feeds that automatically import transactions from your bank. Moreover, you can digitally store all your receipts and other documentation. 

WP ERP accounting module inventory extension is a highly intuitive system that lets you manage your store inventories and create reports such as inventory reports and product sales automatically.  

2. Not monitoring your cash flow

You might be tracking down how much money your eCommerce business generates, but are you keeping track of how much you’re spending? Account reconciliation will compare your internal financial records with your monthly statements from external sources such as banks, credit cards, and other financial institutions, ensuring they match up. 

Knowing how you can reconcile your accounts is critical to the financial health of your eCommerce business. You have to reconcile your accounts to clearly show how much cash you need to reinvest or pay yourself. If not, then committing this accounting mistake could cause you to miss out on new investment opportunities, and even worse, you realize that you need more cash to run your business. 

3. Use of the wrong accounting tool

There are different accounting tools for an eCommerce business, and you need to pick one that best fits your business size and can help you run your eCommerce store. 

Cloud-based software works well if you want multiple users to log in from various locations or if you wish to access accounting from your mobile device. Desktop software is recommended for businesses with more advanced features and higher security. 

Meanwhile, the most popular accounting software for Shopify stores includes FreshBooks, Netsuite, QuickBooks, Wave, and Zero. Also, a handy tool like the WPERP accounting module is a free and open-source tool that’s highly customizable depending on your ideas and needs. 

4. Disorganized bookkeeping records

Messy books result from too many people having access to business finances, giving less experienced employees financial authority, or moving to a new accounting system. 

There are also some instances where untrustworthy employees intentionally muddle books to conceal fraudulent activities. So, if your business experiences general ledger errors, inconsistencies in invoices, missing earnings, and other accounting record issues, then working with a third-party accountant helps you clean these issues so that you can get your books back in order. 

5. Incorrect eCommerce inventory levels

Another area that pains most eCommerce businesses is inventory management. The more your business scales, the more difficult it is to keep your inventory levels accurate. It would help if you tackled this area later on. There are plenty of inventory apps and tools that help you with streamlining. 

Another important role is how your inventory management software incorporates your accounting software. Let’s say you’re sourcing products from a third-party manufacturer or supplier. You want your data to automatically update in your accounting software when you make a purchase order and when your inventory arrives. 

Inventory valuation is vital in knowing your balance sheet, cash flow forecasting, and profit and loss statement. If there’s a mistake early on, it will ultimately affect your own or your accountant’s ability to create insights about your business. 

With WPERP accounting’s graphical dashboard, you can quickly review important information such as incorrect eCommerce inventory levels.  Accurate inventory levels help you understand your financial position better. 

6. Not charging enough for shipping

Shipping costs are rising, and it can be challenging to make profits if you don’t track costs. To further complicate things, most carriers are adding shipping surcharges to boost your shipping costs even more. 

To create a consistent profit, create a system for tracking shipping surcharges and then set your pricing accordingly. If you manually enter all shipping surcharges, you will retain precious time, but you’ll also have errors in your bookkeeping. Marking your shipping appropriately can be challenging if you provide different shipping solutions. 

7. Forgetting to make bank reconciliations

Bank reconciliation is balancing accounts in an accounting ledger, specifically your bank and cash accounts with your bank. This helps you reconcile your bank accounts. At the same time, it lets you know how much money you have in your bank accounts compared to your accounting records. 

Not keeping track of bank reconciliations could affect your financial reports since your bank data and financial records won’t likely match up. You could get inaccurate reports which will eventually affect your business decisions. 

8. Not tracking payments and refunds

One of the essential aspects of accounting is tracking payments and refunds, and tracking both help, you create accurate records of what came in and went out. Your finances could quickly become clearer and easier to manage if you track this. 

Furthermore, not tracking payments and refunds can eventually lead to tax issues. The IRS may come after you if you have unpaid taxes that they find you need to report your expenses and income accurately. 

WP ERP accounting module’s payment gateway allows one to make seamless purchase transactions. It gives you an actual scenario of any outstanding and paid amounts, overdue, and more with actual diagrams.

9. Not using a chart of accounts

Even the best accounting software needs an informed operator who will pull the right levers and push the right buttons. 

Now, your software’s reporting capabilities will be limited if all your expenses and revenues are lumped together. Smart business owners utilize a chart of accounts to create a foundation for enhanced financial recordkeeping and more informed budgeting. 

Building a logical chart of accounts also enhances practical functionality and gives a better organization. As a result, there’s improved efficiency, especially when the number of users increases. 

WP ERP accounting module’s reporting makes it easy for beginners to understand better and work smoothly with balance sheets, ledger reports, income statements, trial balances, and more without understanding debit and credits.

10. Putting off your accounting until tax season

You commonly see business owners across several industries only pay attention to the upkeep of their books once it’s too late. While this doesn’t specifically apply to eCommerce, this practice is so common that we have to mention it. By spending even half an hour on accounting processes each month, you’ll save yourself many headaches at the end of the financial year. 

Regularly keeping your books in check is vital for business owners, whether you’re doing the accounting on your own or working with an accounting firm. It’s beneficial to block a chunk of your time regularly to review your accounting. 

Let’s say you’re creating a monthly checklist of accounting to-dos. This may include uploading your documentation and receipts to your accounting software and regularly checking your inventory levels and bank statements.

Bonus: Tips to Improve your eCommerce accounting

As a bonus, here are some tips on how you can enhance your eCommerce accounting: 

1. Keep track of your transactions- Good accounting starts with excellent attention to detail. By understanding your cash flow, you can make business projections one month or one year from now. Ensure you keep detailed notes, as this works to your advantage during tax time. 

2. Decide how to track your inventory- Usually, wholesale suppliers sell more products to other companies than average businesses sell to individual customers. Therefore, you need to develop a plan that everyone in your company can follow to track your inventory and make a spreadsheet outlining the details. 

3. Invest in excellent accounting software- This allows you to quickly monitor accounts, develop detailed financial reports, and make business decisions backed by data. 

4. Closely follow your cash flows- Your expenses and revenue must be accounted for all the time. Keeping a close eye on your incoming and outgoing cash gives you a more extensive understanding of your financial situation. 

5. Update your books regularly: Putting off bookkeeping duties until the end of the month will let you make reckless financial decisions. An updated balance sheet gives you a clear idea of your business’s assets, liabilities, and equity situation. 

Over to You

As a new business owner, there are a lot of things that you need to do when managing your eCommerce site. Thus, ensuring customers can easily find what they need and creating an easy way to purchase goods may save time tidying up your accounting process. 

However, these mistakes could eventually lead to significant issues that could cause your business profits and customers. So, to ensure that your business runs efficiently from top to button, make sure that you avoid these eCommerce accounting mistakes from the get-go.