If you’ve ever tried to do your own accounting, you know that it can get complicated fast – and e-commerce accounting has its own special breed of challenges.
We’ve talked before about how important it is to hire an accounting firm that specializes in e-commerce. But what is it about this type of accounting that makes it so complicated? In this series of posts, we’ll discuss what you can expect to pay for your business’s accounting, and what specifically affects pricing.
The Big Picture
It is crucial that you’re able to get a clear picture of your books with accrual accounting (as opposed to cash based accounting – more on that here). E-commerce has an especially long cash flow cycle compared to most industries because the flow of inventory and cash is indirect to both the customer and the seller.
Because of its complex nature, e-commerce data makes creating clean accrual-based books difficult. In addition to the standard data involved with inventory, cash, and overhead, there are several extra categories that e-commerce requires you to take into account.
Amazon deposits come through approximately every two weeks, but due to the aforementioned extra long cash cycle, each deposit reflects many weeks of transactions, returns, refunds, and fees.
In order to accurately balance your books month over month, it is pivotal that these deposits are split in a way that allows you to categorize each transaction into the month it occurred – which is not necessarily the month in which you received the deposit.
There are several software options that solve this problem (check out our review of A2X), but it still takes time and the keen eye of a specialized accountant to parse these deposits out correctly.
Brick-and-mortar stores generally have a pretty straightforward way of accounting for inventory: they can look around at what’s in stock, add anything stored in a back room or possibly a secondary warehouse, and combine that purchase price with the cost of materials it took to make or source the items.
In addition to these costs, e-commerce sellers also have to include the spending that goes into shipping, storing, taxes, tariffs, and any other miscellaneous costs associated with selling a product. These costs are referred to as COGS, or Cost of Goods Sold, and they make e-commerce accounting more complicated than it would be for a traditional seller.
On top of sorting out which expenses to consider COGS on your P&L statement, your e-commerce accountant will be able to keep track of your inventory holding account – a line item that accounts for inventory which has been purchased but not yet sold to a customer.
Every business deals with advertising, but e-commerce businesses generally advertise on multiple channels. Amazon advertising can eat up a significant portion of a seller’s budget, and additionally, many sellers also invest in PPC (pay-per-click) ads, SEO (search engine optimization) tools, and marketing via email, social media, and affiliates in order to make their ads more effective.
Usually on an e-commerce P&L, advertising is its own section. You can choose to calculate your monthly profits relative to your advertising expenses by creating a post-advertising gross (PAG) formula, which gives a clearer picture of how much money you’ll actually take home month over month.
Overhead encompasses everything related to your business that isn’t directly related to your products. This includes things like salaries, space rental costs, office supplies, software and service subscriptions, and insurance costs.
An e-commerce company’s overhead includes all of these expenses plus some extras: website hosting, shipping costs, inventory management software, storage fees, transactional fees from payment platforms, and cybersecurity and VPN subscriptions.
Miscellaneous E-Commerce Expenses
In addition to the above issues, e-commerce sellers also deal with a few miscellaneous categories that create data complexity.
- E-commerce sales tax is a huge source of confusion for sellers and accountants alike. Where brick-and-mortar stores only deal with sales tax in the state where they’re selling, e-commerce businesses deal with a more complicated tax situation that sometimes changes depending on the state where the customer lives. You can read more about sales tax for e-commerce sellers here.
- E-commerce sellers regularly deal with inventory financing loans, both through Amazon and private lenders. These loans create a revolving line of credit that further complicates accounting with…
- Complex AP. Accounts Payable tracks short term debt obligations, and e-commerce sellers generally have multiple loans in repayment at the same time. This creates more complexity for the accountant, as money moving into and out of this account can dramatically affect whether or not a business appears profitable in any given term.
Why An E-Commerce Accountant
By now, you’ve probably realized that e-commerce businesses have their own set of challenges when it comes to finances.
A regular accounting firm will have no problem with regular transactions and reconciliations, but as shown by the points above, e-commerce accounting requires expertise in a whole host of other areas.
Check out the other posts in this series:
What drives the price of an outsourced service?
How should you optimize your business for outsourcing?
How much should you expect to pay for an outsourced accounting service?
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