Online merchants face unique challenges, and these challenges demand some unique accounting considerations. This guide will explore 6 accounting issues that affect the eCommerce industry, and help you stay on top of your inventory, cash flow, and more.
1. Choosing an Accounting Method
First, you’ll need to choose the right accounting method for your eCommerce business. Cash basis accounting is the simplest. Using this method, you’ll simply record transactions every time you spend or receive money.
Accrual basis accounting is more complex. Using this method, you’ll record each transaction as it happens, regardless of when money changes hands. For example, if you order new inventory, you’ll record this order under your “pending transactions” and then record the actual payment once the shipment arrives.
Smaller online merchants can get by with the simplicity of cash basis accounting. But as your business grows, accrual basis accounting can provide a more detailed, accurate record of your income and expenses.
Technically, either method will work, but the accrual method can be more helpful when orders, shipments, and payments don’t necessarily occur at the same time.
2. Budgeting for Merchant Fees
Every retailer will have to contend with merchant fees of some variety. Credit card processing fees, for example, can take a bite out of your overall profits. But eCommerce businesses will need to pay special attention to these fees, as some online processing platforms can charge an additional percentage to accept online payments.
When you’re first getting started, it helps to compare rates across multiple providers. But don’t forget to look at what you get in exchange. You may discover that it’s worth paying slightly higher fees if you gain access to technical support or other important services.
This choice also means you’ll need to account for these fees in your sales budget. These fees are largely unavoidable, so if they impact your revenue too dramatically, you may want to find other ways to cut costs or increase prices.
3. Planning for Sales Taxes
Sales tax can become complicated for online businesses. If you sell products to those within your state, you simply charge your local sales tax on those items. But states can also charge sales tax even if your business doesn’t have a physical presence in that state.
This setup involves something known as a sales “nexus.” The requirements differ by state, but most commonly, this means that if you sell more than $100,000 worth of inventory or conduct over 200 transactions in another state, you’re considered to have a “nexus” in that state and must pay the applicable taxes.
It’s important to keep track of this, as it can impact your bottom line and can even land you in hot water if you fail to comply with these laws. Check with your eCommerce platform provider to see how their software handles these calculations to ensure you remain in compliance.
4. Tracking Inventory Across Multiple Platforms
It’s not uncommon for online merchants to make sales across multiple platforms. For that matter, it’s not uncommon for brick-and-mortar retailers to also operate an eCommerce platform as part of their business. All of these factors can make it challenging for merchants to keep track of their inventory.
Staying on top of your inventory will naturally aid you in budgeting. It can also help you spot seasonal sales trends and adjust your procurement procedures accordingly. Online retailers will therefore need a system that gives them up-to-the-minute access to data to monitor their inventory and track sales across multiple sales channels.
5. Refunds and Chargebacks
Successful eCommerce companies will need to have a clear refund policy. This policy can actually be a selling tool, as many American consumers may feel more comfortable making a purchase if they know they can make a return.
Refunds are generally easy to budget for, and you’ll only have to worry about covering things like shipping costs and the hassle of restocking the merchandise.
Chargebacks are a bit different. A “chargeback” takes place when a customer disputes a charge on their credit card statement. The issuing bank can reverse the charges and even assess a small fee.
Publicizing your return policy and contact information can minimize your risk of chargebacks, but you may still need to account for these fees in your financial records.
6. Shipping and Reverse Logistics
Finally, you’ll need to ensure that you have a clear plan for covering the cost of shipping. This plan should include the cost of transportation itself, as well as any supplies and packing materials required.
Reverse logistics refers to the process of reclaiming your inventory in the event of a refund. In other words, you need to account for how a product leaves your customer’s hands and returns to your warehouse. Both shipping and reverse logistics costs will cut into your budget and will have to be part of your larger financial plan.
The Changing Face of eCommerce
As eCommerce businesses continue to flourish, proper accounting methods will become critical. If you’re an online merchant, it’s important to stay on top of industry changes so you can adapt and thrive in the years ahead.
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