Guide on Overcoming Ecommerce Accounting Challenges

Ecommerce Growth and the Rise of Online Retailers

Whether you’re new to the game or an online retail veteran, there’s never been a more exciting time to run an ecommerce business.

Fueled by global turbulence paired with a nearly insatiable demand by consumers to make purchases how, when, and where they want, the ecommerce industry is witnessing growth the likes of which we’ve never seen.

What’s more, consumers are voting with their wallets, and supporting smaller, independent brands.
A recent study found that 50% of consumers are looking for ways to support independent businesses, and 65% of them report they prefer to shop small businesses.

The result? Buyers are not the only ones rushing online. Ecommerce — now seen as an “economic sweet spot” for both entrepreneurs and established retailers — has witnessed an influx of new operators hurrying to gain a foothold in an extremely crowded marketplace. Data shows that 70% of SMBs expanded their digital capabilities during the early days of the COVID-19 pandemic, and more than half of them expect even higher online sales post outbreak.

Ah, the days of wine and roses. Running a small online business has never been easier, right?

Not so fast.

56%

The growth of online purchases as a percentage of all retail sales in just 5 years. ¹

95%

The percentage of purchases experts believe ecommerce will facilitate by 2040. ²

150 million

The number of people who shopped online for the first time during the COVID-19 pandemic. ³

The Challenges of Running a Small Ecommerce Business

But despite the recent record sales growth and access to an influx of new online shoppers, running a small ecommerce business is far from easy. Entrepreneurs drawn to the industry are often charmed by the low barrier to entry and the perceived ease of running their own stores. Unfortunately, they often overlook the resources required — in terms of both time and money — to keep up with constantly changing consumer demands, technological innovation, supply-chain logistics, and a wildly competitive market.

Less talked about is the onus of properly running your small ecommerce business from an accounting perspective. The truth is, if you’re an online retailer, every transaction can lead to a web of potential accounting headaches. The busywork piles up as you pull data from different sales channels, struggle to accurately reconcile your books, sweat complicated sales tax regulations, and manage inventory issues. These manual tasks can steal hours from every day — time that you’d rather spend scaling your business.

Small business owners, who often wear many hats and have a considerably smaller financial reserve than their larger online retail counterparts, face particular challenges when it comes to successfully managing their accounting operations. Our research shows that these struggles can be categorized into three specific pain points:

Accounting busywork consumes valuable resources
Bookkeeping errors and inefficiencies leave sellers open to risk
Lack of financial control and visibility stymies growth

Read on as we explore each of these challenge areas, call out key considerations and solutions, and explore how collaborative relationships with both the latest technology and accounting professionals can help.

P.S. We’ll work hard to paint a picture in layman’s terms and steer clear of financial jargon. See a term you’re not familiar with? Head over to our Glossary.

CHALLENGE #1

Accounting Busywork Consumes Valuable Resources

Small ecommerce businesses know the drill well: Time is money. As online retailers start up and scale their businesses, owners are often playing multiple roles: Director of Marketing, Head of Supply Chain Logistics, and Chief Financial Officer, to name a few.

And while many enjoy the excitement of sourcing new products and marketing their stores, dealing with the constantly shifting nuts and bolts of the ecommerce bookkeeping process is not a regular fan favorite. Small sellers experiencing sales growth — but still burdened by manual accounting processes — can become overwhelmed by the subsequent data entry headaches required to stay on top of their accounting.

But like it or not, the state of your books might very well determine whether your online store thrives or dies. So let’s dig in to the main culprit when it comes to ecommerce accounting busywork, and talk about what you can do to alleviate the burn.

PAIN POINT: Manual data entry

For every sale, online retailers must track a host of line items, including seller fees, sales tax, inventory quantity, shipping costs, and more. Manually exporting this data from a variety of ecommerce platforms and weaving it together (via spreadsheets or into your accounting system) is a tedious, frustrating, and error-prone process that never ends and is expensive to outsource. Not only does it take valuable time away from growing your business, it can also leave you with a potentially inaccurate picture of your businesses’ financial health.

SOLUTION: Put busywork on autopilot

First of all, if you’re still doing your books on spreadsheets, consider moving over to an accounting platform built for small ecommerce businesses. Then research the value of pairing your accounting system with an ecommerce accounting automation platform that will put your administrative tasks on autopilot. Doing so allows you to instantly record all of your online transactions and fees to your accounting platform by customer, sales channel, and payment method. You’ll be able to sync your data between your sales channels in real time, so your books are always fresh and your accounts always match your bank deposits or payouts.

CHALLENGE #2

Bookkeeping Errors & Inefficiencies Slow Sales, Boost Risk

More likely than not, you didn’t start up your small online retail business because you enjoyed the intricacies of ecommerce accounting. In fact:

According to TaxJar, 88% of ecommerce businesses faced challenges with tax compliance.
In a survey by TD Bank, 58% of small business owners working 60 hours or more a week said bookkeeping was particularly draining.
Another report found that 60% of small business owners felt like they were not very knowledgeable about accounting and finance.

Adding insult to injury, ecommerce accounting is particularly complicated due to confusing sales tax liability laws, complex inventory management and returns issues, high transaction volume, and more. Smaller online retailers rarely have a dedicated accounting team to tackle the books, and tout less financial padding to cushion lean times, sales tax fines, or supply chain logistics snafus. In short, a small seller’s accounting books are the perfect breeding ground for errors and inefficiencies if proactive measures aren’t taken. Let’s explore a couple of key areas where ecommerce accounting inaccuracy can cause dire business results, and what you can do about it.

PAIN POINT: Sales tax snares

With more than 12,000 taxing jurisdictions in the U.S. and varying rates throughout the year depending on the product or service sold, sales tax rules have never been more complex. Managing state and local sales taxes is challenging for even the most savvy companies, especially with the new “economic nexus” policies adopted by 40+ states in the last few years. The 2018 Wayfair, Inc. v South Dakota Supreme Court ruling declared that ecommerce sellers must remit sales taxes in every state where they reach a sales volume or revenue threshold, or face steep fines for not complying in some jurisdictions.

PAIN POINT: Inventory headaches

Managing inventory can be tough for any business, but particularly cumbersome for smaller online sellers. But the health of your business depends on staying abreast of what you have, how much it’s worth, and where it’s located. And if you have multiple products in your catalogue selling across different channels, you just increased your opportunity for error exponentially. It’s critical to sync inventory data across both your accounting system and ecommerce sales channels, closely managing sales volume and returns. Unfortunately, according to the Small Business Administration (SBA), inventory problems rank in as one of the top reasons new businesses die on the vine. It’s pretty simple: Inventory shortages and overages are “silent cash flow killers,” and inaccuracy is the predator.

SOLUTION: Leverage tech & accounting pros

Technology can be a huge help when it comes to staying on top of your sales tax tracking and filing. Tax-focused software solutions like Avalara can help streamline the tracking process. A good ecommerce accounting automation platform will help you record sales tax collected from all of your sales channels, then neatly organize it by jurisdiction into your accounting platform for easier filing. The ideal situation? Combine the best of both worlds, pairing the latest technology with solid advice from an accounting professional that specializes in ecommerce sales tax issues.

SOLUTION: Automated inventory management

Savvy sellers avoid inventory nightmares by adding automated ecommerce inventory management solutions to their tech stacks. The best tools integrate with your accounting system and ecommerce channels, ensure that pricing and inventory are always updated in real time so you never oversell, and allow you to forecast demand so you can avoid overstocking as well.

CHALLENGE #3

Lack of Control & Visibility Stymies Your Business Growth

Today’s world is one of record-setting ecommerce sales. It’s an industry that rewards sellers who drive with data and can quickly pivot in response to marketplace changes. Unfortunately, smaller online retailers often struggle to gain visibility across their various ecommerce platforms. They spend too much time pulling their financials piecemeal — and lose out on embracing the control that comes with unique financial insights.

PAIN POINT: No single source of accounting truth

Could you pull revenue, expense, and performance reports from each of your ecommerce sales channels and cobble them into some form of business intelligence? Sure, but when you’re busy trying to grow a business, who has time for that? And yet understanding the “big picture” of how your store is performing, including insights into cash flow, Cost of Goods Sold (COGS), performance, and profitability — in real time — is paramount to small online retailers staying nimble during both difficult and high-growth periods.

PAIN POINT: Inability to visualize expenses & fees

While the majority of ecommerce platforms charge sellers a flat monthly fee, there are others that are harder to nail down. Take Amazon’s fee structure, for instance. The marketplace assesses fees for listing, advertising, transactions, and fulfillment (to name a few), then lumps them together at the end of the month as “Amazon fees,” giving online retailers limited granular insights into what a product’s really costing them. Payment processors, shipping solutions, stores, and marketplaces each have unique fee structures that can be difficult to understand, and even trickier to glean insights from.

SOLUTION: Tech can help you take control

If you’re a small online seller without a business intelligence team (anyone? anyone?) consider taking advantage of software that seamlessly tracks your tangled web of ecommerce data, digests it, then serves it back up as a single source of business truth. Leading ecommerce accounting automation solutions cull data from all of your sales channels, payment processors, and shipping systems, then display it on one easy-to-use dashboard to keep you organized and in control. Fees are detailed so you can easily understand them and identify ways to save. Income and expenses are tracked with every payout to give you better visibility into your cash flow by sales channel. The result? You’ll be able to better scale your business when you get a true picture of your performance and profitability at an order and item level.

You want to get clearer visibility into your profitability.

If you lack insight from financial reports and tend to base your business decisions on how much money you have in the bank, you’re going down the wrong path.

You need help managing and tracking your sales tax liabilities.

This one’s pretty self explanatory. Dread tax season? Do economic nexus laws keep you up at night? It’s time to reduce your risk by seeking professional help.

You could use a hand integrating technology into your accounting process.

While ecommerce accounting automation tools and other applications are extremely beneficial to sellers, some folks need assistance with the set-up. A well-rounded accounting professional should be able to help you source and integrate the best accounting technology for your business.

Your financials are an utter mess.

If you’ve got a huge pile of finance-related paperwork on your desk, it could be a silent cry for help. Reach out to an accounting professional to help get your business accounting in order.

You’re struggling to track inventory/cost of goods sold.

Do you have a surplus of unsold stock? Are stockouts constantly hampering your business profitability? It might be time to call in an accounting pro to take a deep dive into your inventory management process.

An accounting platform you can trust for speed, accuracy, and insights

Without dedicated ecommerce accounting software, keeping your books straight can be an extremely frustrating and inefficient process. Solutions like QuickBooks have a variety of different options (including cloud-based and desktop versions) that can help you speed up your bookkeeping while still maintaining accuracy. Wondering which solution is best for you? Check out this helpful guide, which explains what to look for in a platform and ranks some of the leading systems.

An online store or marketplace that fits your target audience

In today’s digital world, both online stores and marketplace platforms tout powerful ecommerce business models. Which one is the right fit for your business? That depends on your niche market, operational maturity, and marketing strategy. Here’s a quick rundown; check out this article for more in-depth advice.

Online ecommerce stores are well-suited to sellers who want to sell their products exclusively to their own target audiences. These sellers are on the line to handle their own product sourcing, inventory, marketing, and distribution, but in most cases receive the full purchase price. Stores can be built with plug-and-play solutions like Shopify, BigCommerce, or Magento, or created via open source platforms.
Online marketplaces — such as Amazon, eBay, and Etsy — are good for pairing multiple buyers and sellers of goods and services.These platforms facilitate the interactions between buyers and sellers for a cost. It’s easy to get started selling on a marketplace, you’ve got a built-in audience, and they offer a wide variety of payment methods. But the fees and competition are a turnoff to some sellers.

An ecommerce accounting automation solution that syncs your accounting platform and ecommerce channels, saving you time, boosting accuracy, and fueling data-driven insights

If you’re a small ecommerce business looking to do less accounting work so you can get back to scaling your business, then an ecommerce accounting automation solution is right up your alley. The best platforms are easy to use, flexible, and powerful, allowing you to sync data seamlessly and securely between your accounting system and ecommerce sales channels. The result? You’ve got a single source of ecommerce accounting truth that makes it simple to file taxes, puts cash flow and profitability reports at your fingertips, and helps you move faster and focus on growth.

Glossary

Cash flow: The net amount of cash and cash-equivalents that a business receives and disburses during a set period of time.

Cost of Goods (COGS): The direct expenses involved in producing the goods sold by a company. While COGS includes the labor and materials directly leveraged to create the product, it does not take into account indirect costs (such as marketing and distribution).

Ecommerce accounting automation platforms: Technology that seamlessly syncs data between your accounting software and your ecommerce platforms, marketplaces, payment processors, and shipping solutions. These platforms put manual data entry on autopilot and deliver better visibility into an ecommerce business’ cash flow and profitability.

Ecommerce accounting software: Accounting software designed to help ecommerce businesses easily track and report on taxes, inventory, revenue, and fees.

Economic nexus: A connection between a business and a taxing jurisdiction that creates a legal requirement for the business to register and remit taxes within the jurisdiction.

Inventory management: The process by which a business orders, stores, and uses its inventory. It includes the oversight of both raw materials and finished products, as well as the warehousing and processing of these goods.

Marketplace: A website on which multiple sellers offer their products under a single web address (example: Amazon, eBay, Etsy). The primary advantage of using marketplaces is that the store setup is very easy and they have a large, built-in customer base.

Online store: A website through which consumers can place orders for goods and services. It is different from a marketplace in that it only features products or services listed by the company running the store.

Reconciliation: An accounting process that compares two sets of records to check that the financials match and are correct.

2018 Wayfair, Inc. v South Dakota: A Supreme Court ruling declaring that ecommerce sellers must remit sales taxes in every state where they reach a sales volume or revenue threshold, or face steep fines for not complying in some jurisdictions.

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Overcoming Ecommerce Accounting Challenges

A comprehensive guide for retailers

Ecommerce Growth and the Rise of Online Retailers