Common Accounting Mistakes to Avoid as an eCommerce Owner on Amazon
Introduction
eCommerce provides huge opportunities to make money online but navigating the financial side of running can be daunting. The accounting challenges for ecommerce sellers are unique, and even small mistakes can have significant consequences. In this blog post, we will walk you through some common accounting mistakes that ecommerce sellers should avoid to maintain a healthy and sustainable business.
Understanding COGS and Accrual Accounting
First, let’s talk about COGS – Cost of Goods Sold. This is essentially the cost of producing the goods you sell. It includes material costs, labor, shipping from the manufacturer, and other direct costs associated with making your products.
Accrual Accounting is an accounting method that records revenues and expenses when they are incurred, regardless of when cash is exchanged. This method provides a more accurate picture of a company’s financial health than merely recording COGS when cash is exchanged: when you purchase an order right away.
New sellers might not understand Cash vs Accrual accounting, and would expense their entire inventory right when they purchase it. Imagine they bought 120 units January 1st for $1,200 they might expense that right away. In this situation imagine they sold 10 units per month over the year, and the accrual seller would accurately expense 10 units * $10 cost per month for a total of $1,200 per year. The end amount is the same for the year, but looking at a snapshot of cash accounting is likely to be incorrect
Re-adding Refunds to COGS
Amazon has a customer-friendly return policy, and as a seller, you need to account for refunds. The amount shows up in your settlement reports and you can readjust the financials from that.
However, you need to manually handle your COGS as you might have already used accrual to expense items that you thought had sold. You should find Amazon’s return report, download it for the timeframe you want, and pivot those that are sellable. If they are damaged or unsellable you can keep them written off as they will be returned or disposed, but sellable you should add back.
The main potential mistakes are: not tracking refunds at all, double counting them by using the settlement amount and refund amount, or most commonly correctly handling the refund finances but not the cost of goods sold for the product.
IV. The Perils of Neglecting Cash Flow
To a new seller, revenue is the most exciting part about business. However, when the rush of a new sale fades, an intermediate seller will begin to look at net profit and how much they actually get paid as their key metric. However, the seasoned seller will be most concerned with the cash flowing in and out of the bank as cash is the lifeblood of any business. It is the net amount of cash moving in and out of your business.
For ecommerce sellers, keeping a close eye on cash flow is vital due to the fast-paced nature of the business.
The most common pitfall for an ecommerce seller is to not plan enough cash for seasonal inventory. Q4 often brings 1.5-3x normal daily sales, and sellers need to have cash ready to order by August maybe earlier. If the spring or summer is a slow season this can be a sudden surprise as you need to pay suppliers for a massive amount of inventory, and neglecting to forecast cash flow can cause this.
Having an ongoing cash flow plan for at least 12 months is a great way to mitigate it, and update at least once a month. It should incorporate estimated sales for proper inventory forecasting, as well as recurring and estimated expenses based on sales estimates.
The Importance of Good Recordkeeping
There is nothing that annoys an accountant more than having terribly organized documentation and books unkept. Good documentation and bookkeeping only takes a few minutes a month and can save weeks of frustration as you rush to prepare for tax time.
You should save all receipts and documents in at least 2 separate locations: local computer and 1 cloud location, 2 cloud locations, or a combination including in paper. In case something happens you should keep business records for up to 7 years and have at least 1 redundant backup.
Additionally, less a concern for brand new sellers, but anyone doing over $10,000 per year should never commingle personal and business finances. You can almost always find a new checking or savings account for free, and the simplicity it will provide makes it worth getting. Not only does it help avoid confusion on which expenses were which, but it can help avoid potential legal issues.
Conclusion
We’ve covered some common accounting mistakes, such as mishandling COGS, neglecting cash flow, and poor recordkeeping. Understanding and avoiding these mistakes is crucial for the success and sustainability of your ecommerce business on Amazon.
As a final note, consider investing in accounting software designed for ecommerce sellers or seeking professional help to ensure your finances are in order. QuickBooks or Xero are common for eCommerce sellers, but they aren’t designed for eCommerce sellers well. That’s why we made SellAnalytix to automate a majority of accounting and provide better financial insights.