The keys to running a successful ecommerce company in the United States are more than just a good online shopfront, high-quality goods and effective marketing. Accounting is one sector that many business proprietors ignore in the pursuit of making sales. But the reality is that even a simple accounting mistake can silently bleed the company, pose compliance threats and inhibit long-term growth.
It is now easier than ever to arrange an online shop with the help of such companies as Shopify, but the financial aspect of this business also needs care and professionalism. Absence of good accounting practices, ecommerce sellers may find themselves in traps that adversely and perhaps unknowingly affect long-term profitability. Here is when specialised Shopify accounting solutions and specialised Ecommerce accountants become invaluable.
In this blog, we will touch on five of the most common accounting errors that gnaw away at the ecommerce profits silently and how you can overcome them by outsourcing professionals.
Mistake #1: Mixing Business and Personal Finances
Combining personal and business funds is one of the most widespread mistakes that new ecommerce sellers make. Keeping both in the same bank account or on the same credit card can create long-term headaches at tax time and will skew your perception of how profitable you are.
Take the example of you purchasing groceries and paying for Shopify app subscriptions using the same card; in such cases the business cost can hardly be determined. This makes bookkeeping more complicated and even exposes it to the risk of non-compliance with the IRS.
Why it matters:
❖ Poor expense monitoring leads to inaccurate profit margins.
❖ Possibilities of missing tax deductions or, worse still, claiming them in the wrong areas.
❖ Possible IRS audit of mixed funds.
Solution:
❖ Get special business bank accounts and credit cards.
❖ Sort transactions with the help of Shopify Accounting tools that connect to your financial software and automatically separate transactions.
❖ Trust in Ecommerce accountants who can keep clear records and ensure you remain compliant.
Mistake #2: Ignoring Inventory Management in Accounting – The Silent Killer
Any ecommerce company lives and breathes inventory. Nonetheless, inventory purchased by many sellers is regarded as expenses which are in hand and not as assets. This slip-up can lead to misstatements of the financial reporting, distortion of the decision-making processes, and taxation problems.
The scenario here is one where a Shopify seller will stock up in preparation for the holiday season. Writing off all that inventory as an expense immediately makes the resulting profits seem lower than they should be, and the company is no longer relatively realistic in terms of its assets. Conversely, a lack of effective supply chain management can cause overstocking, stock obsolescence or stockouts that can ruin customer satisfaction.
Why it matters:
❖ Inefficient management of stock binds up money.
❖ ‘Out of stock’ means losses of sales and a frustrated customer.
❖ Poor valuation may affect the gross profit margins and the taxes.
Solution:
❖ Install inventory management systems coupled with Shopify.
❖ Have ecommerce accountants who comprehend the cost of goods sold (COGS) and who are capable of valuing inventory.
❖ First, reconcile the accounting records with physical counts using regular reconciliation.
Mistake #3: Misclassifying Expenses and Revenue
Misclassification is the other silent killer of profits. Ecommerce involves refunds, bank charges and risks, owner platform fees, advertising expenses, shipment and discounting. Without proper categorisation into these, a financial report will become misleading.
For example, a Shopify merchant that classifies chargebacks as sales might think there is more revenue than there actually is. In the same case, when you categorise ad spend as part of the general expenses line, rather than in the marketing line, you conceal the actual cost of acquiring customers.
Why it matters:
❖ By misclassification, there is an overstatement or understatement of profits.
❖ Scaling ads is an example of strategic decisions that are made based on wrong figures.
❖ A risk of compliance may arise as a result of misapplied tax deductions.
Solution:
❖ Auto-categorise transactions using Shopify Accounting integrations.
❖ Review the accounts with Ecommerce accountants on a monthly basis.
❖ Establish a standardised chart of accounts to suit ecommerce business operations.
Mistake #4: Poor Sales Tax Management
Sales tax is one of the most problematic elements of conducting a commerce business in the United States. The rules vary by state, and the laws state you are required to pay tax as an economic nexus once sales exceed certain levels no matter where a seller is located.
A lot of Shopify sellers believe that the internal tax settings are sufficient to address all the aspects. This is a dangerous assumption, unfortunately. Shopify assists in collection but the final responsibility of the filing and remittance remains with the seller. Failing to register in these states that you are having nexus in or failing to pay taxes on time may lead to fines and penalties.
Why it matters:
❖ Lack of compliance may incentivise an audit and result in penalties.
❖ Imprecise reporting of sales tax hurts credentials with the regulators.
❖ The unexpected liabilities lower the profits
Solution:
❖ Realise regular sales tax nexus analysis to understand where you are required to collect.
❖ Use trustworthy tax software with Shopify.
❖ Work with Ecommerce accountants who are knowledgeable in compliance with state-by-state sales tax in the US.
Mistake #5: Lack of Regular Financial Reconciliation
Many ecommerce owners just look at the top-line revenue, totally forgetting to perform the vital process of reconciliation. Reconciling involves the process of reconciling Shopify sales records with payment processor reports and bank statements as well as accounting records. In its absence, such discrepancies as unreported refunds, chargebacks or secret fees would not be detected.
For example, payment processors such as PayPal and Stripe would take some sort of transaction fee out of the transfer. When these are not monitored, your costly profit margin is decreased silently.
Why it matters:
❖ Concealed charges and losses are not noticed.
❖ The cash flow planning isn’t reliable
❖ Accounting records lack investor and lending credibility.
Solution:
❖ Plan reconciliations to be done once a month on all financial platforms
❖ Automate reconciliation by integrating Shopify Accounting.
❖ Put expert Ecommerce accounting in place to ensure accuracy and have useful reports.
How E2E Accounting Can Help
These mistakes can hardly be avoided, but what they need is professional guidance. This is where E2E Accounting comes into the picture. E2E Accounting specialises in US ecommerce accounting and understands the issues that are faced by a Shopify seller.
Here’s how E2E Accounting supports ecommerce businesses:
❖ Setting up and optimising Shopify Accounting to ensure smooth monitoring of transactions.
❖ Inventory and cash flow management to ensure that reporting is accurate and decisions are made smarter.
❖ Keeping you at the forefront of changing regulations in sales tax compliance across multiple states.
❖ Financial reporting and reconciliation on a monthly basis that gives an actual indicator of profitability.
❖ Experienced Ecommerce accountants who look beyond compliance to help you grow.
Working with E2E Accounting will allow Shopify sellers to put concerns relating to accounting pitfalls out of their minds and concentrate on growing their business with confidence.
Wrapping Up
Accounting errors do not always create an uproar; instead, they stay in the nooks and corners, sipping on the profits of ecommerce enterprises. Mingling personal and business funds as well as overlooking reconciliations are just a few of the mistakes that can not only derail growth but also invite undesirable compliance concerns.
The positive news is, with the right systems, tools, and expert guidance, they are entirely avoidable. Using Shopify Accounting integrations and working with an Ecommerce specialist accountant like E2E Accounting ensures your Ecommerce account is accurate, compliant, and profitable.
In a busy US ecommerce environment, deadly profit killers are profit offenders that you want to avoid. Stop letting accounting errors slow down your progress – increase every penny with E2E Accounting in your corner.
