eCommerce Accounting: How Sales Tax, COGS and Inventory Management Effect Your Business

We talk to a lot of eCommerce business owners, and they all have similar challenges with financial reporting. The primary issue revolves around establishing a scalable solution that will function as they grow. Too often, what worked when they just started is now falling apart and way more painful as they near or begin to exceed $1M in annual revenue. On top of that, they know the data is wrong.

If you are running into some of the issues noted below, you’re not alone.

• You are manually reconciling Amazon or Shopify settlement reports against deposits you see in Xero or Quickbooks Online, which is confusing and takes forever.

• You have no idea how to handle sales tax filings.

• Inventory asset on the Balance Sheet is missing or is incorrect.

• Cost of Goods Sold isn’t accurate. 

• Inability to see product-level profitability across all of your sales channels. 

• No confidence in how your business is performing; cash flow and your Income Statement don’t tell the same story.

The common trend among all of those items is the lack of a properly configured, integrated app stack where everything talks to each other.

eCommerce Accounting System

Think of your eCommerce accounting system as the platform or base of your app stack. This system will report your financial performance at the business level. You won’t live and breathe in here (this is where we live as our customer’s accounting team).

We see some customers try to throw everything into their eCommerce accounting application, which bogs down the system and creates more opportunities for issues. As an example, you don’t need individual sales and customer contacts in your accounting system; that data should live elsewhere in the app stack.

Think high-level reporting for your business. Let the rest of the app stack do the heavy data lifting.

Inventory Management and Data Integrators

Inventory Management

Inventory management programs are the lifeblood of an eCommerce business. This is where operations live and breathe, not in the accounting system. These systems can be expensive and will become necessary as your business starts to exceed $1M in revenue or if you start selling on a variety of sales channels.

Think of this application as a big funnel. All of your sales channels are connected to this system. Products, quantities, and costs are maintained in this central application, which feeds your sales channels.

Detailed sales activity from your sales channels be recorded here and will push that data in a batch summary into your accounting system.

You and your team will use this system to generate POs, receive inventory, pick, pack, ship, and even generate B2B sales invoices if your business isn’t B2C-only. Our favorite, go-to Inventory Management application is Dear Inventory.

As critical as an application like this sounds, they are not cheap for newer businesses; that may be OK, though. We recommend keeping things simple and low cost until you know have something that will sell. We would recommend you putting these systems in place sooner than later as they will help you manage your growth.

Make sure the solution supports the sales channels you sell on. Don’t just take their website at its word. Many will include logos on their integration pages for apps you use or sales channels you sell on. You will need to test them as it may not work as you would expect.

Shipping

Another common application type we see connected to the Inventory Management application is shipping-related. ShipStation is the most common. There are other methods of shipping, but keep this step in mind if you are thinking through your full app stack.

Data Integrators

This type of system pushes data back and forth without having any functionality on its own. The best example of this is A2X. If you are selling on Amazon or Shopify, you need this application. This will automate your settlement reconciliations. In a way, your new best friend. Others like Webgility do the same type of thing, but we’ve found that application unreliable and a bit outdated.

As you’re starting out, start with something like A2X. You can continue to use A2X when you are ready to implement a full Inventory Management application.

Sales Channels

Amazon and Shopify are by far the most common sales channels we see. Consider focusing on a fewer number of sales channels instead of trying to sell everywhere. The most successful customers are experts in the platforms they sell on. It’s probably both an art and a science. 

From an operational and accounting perspective, the more sales channels you sell on, the more complex your systems need to be and more reconciliations that need to happen. Use the less is more approach as you go to market.

Sales Tax

Although a complex topic on its own, sales tax is an integral part of the eCommerce workflow. Some of your sales channels may be filing sales taxes for you, and others will not. Wayfair has generated a wave of changes that is difficult to stay on top of. Consider an application like TaxJar to help automate that process.

Conclusion

Your foray into building your eCommerce app stack will be an evolving process.

When you’re just starting out, I’d keep your accounting and inventory management systems separate, treating purchases as Cost of Goods Sold and deposits as Sales. Don’t worry about Inventory on the Balance Sheet. Focus on getting some sales traction first. As soon as you can afford it, implement A2X if you sell on Shopify or Amazon. As you continue to grow, roll out an inventory management application that works for you. There are a lot out there, and nobody really loves everything about their system. Take time to test, but don’t throw in the towel and quit. You’ll need the integrated systems discussed above to get to $5M and beyond.