If you’ve newly started your eCommerce business and wondering whether you can handle the accounts on your own or not, then today’s article is for you. Ecommerce accounting can be challenging, and there could be no exception for experienced people running their eCommerce business for a while and find handling sales more complex than their expectations.
The result of all these situations is complicated accounting. We’re going to discuss the challenges faced by people dealing with eCommerce accounting and how it is more challenging than other industries.
In terms of financial management and performance, each industry has its pros and cons. There is no need to worry about accounts receivable or direct labor expenses in an eCommerce or Amazon FBA business. Still, there is probably sales tax liability and a ton of cash sitting in the inventory in multiple states. Let’s get to those four challenges that are particularly relevant for e-commerce sellers.
1. Sales Tax Liability might Be Confusing
For e-commerce sellers, especially Amazon (FBA) seller keeping up with where you owe sales tax is really a nightmare. In more than 25 states the Amazon has more than 90 fulfillment centers. The reason for mentioning it here is that sometimes Amazon can transfer some of your inventory into a particular state, causing a legal nexus to your business which means now you are responsible for collecting and remitting sales tax for sales made to residents of that state.
Amazon is getting sued by the States for accessing and using seller lists to send for back sales tax out collection letters. You have to make sure you know where your inventory is and protect yourself by developing a risk-management strategy.
If you are collecting sales tax from the residents of a state without properly filing. In that case, you will get prosecute criminally by those states, so this is a huge deal and can create some significant eCommerce accounting headaches for you.
2. Inventory Management Is somehow Complex
Questions like How much inventory do I have and what it is worth are not easy to answer for Amazon sellers like 3rd party merchants and those who also sell through multiple channels.
For eCommerce sellers, sometimes it could be very challenging to determine how much product is in production in China, in FBA, in a shopping cart, in customs, en route, in your 3PL, or a returns pile. Proper eCommerce accounting requires the business owner to match expenses with the associated revenues, and all this is because of the matching principle espoused by GAAP. According to GAAP, it is the seller’s responsibility to track inventory value from production through sale.
To get accurate data from your financials for decision-making you need to have a scalable, integrated, and largely automated inventory management system with you so that everything goes well.
Sellers are forced to carry extra inventory, creating significant cash flow challenges, if a seller can’t manage inventory closely.
3. Amazon Fee is a Big Part of Profit & Loss
A specific fee is charged on at least three parts of your FBA transactions by Amazon. Let’s have a look at the fee charged by Amazon.
Amazon charged fees:
1. Sales Commission
The sales commission is almost 6-20%. It mainly depends on the category you are working in.
2. FBA Fees
FBA fee is dependent on few factors like item size, category, duration of inventory sitting at a distribution center, and others.
3. ACOS (Advertising Cost of Sales)
This is the cost for Sponsored Products and Banner Ads, Etc.
Each eCommerce seller needs to produce SKU-level profitability targets. It is recommended that after fees of at least 20%, each SKU should have a gross margin.
Your work here is to know where you are and make changes accordingly to improve financial performance. Still, without perfect eCommerce accounting, it would be very challenging to manage your suite of products.
4. Transaction Volume Can Blow Up the Accounting System
In eCommerce, success sometimes means lots of small transactions with lots of data points, which is also a challenge with Retail. SKU-level sales data is automatically categorized in a traditional brick-and-mortar store, and CRM data is captured for making an email list, and this all is an excellent point-of-sale system.
But in the case of amazon, the scenario is totally different as amazon doesn’t allow you to capture customers’ contact info, and a bunch of multiple kinds of fees is charged by Amazon that needs to be appropriately categorized.
Find an intelligent way to batch your transactions. You can batch your transactions daily, weekly, or every other week, or monthly. You need to have financial visibility without having so much data that you blow up your eCommerce accounting system.
The above are four factors that make e-commerce accounting challenging for many Amazon sellers.
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Accounting is Challenging