From figuring out your own salary to managing inventory and investing in growth opportunities, being financially savvy helps you understand and make smart, timely, informed decisions that impact your businesses financial future.
Working with hundreds of eCommerce businesses just like yours, we’ve noticed some common accounting mistakes business owners make. Learning what these are and how to avoid them can be a real game-changer.
In this post, we’re digging into the most common accounting errors and how you can avoid them. So, you can save not just money, but also time and stress.
Article Contents
- Mistake 1: Using cash basis accounting instead of accrual accounting
- Mistake 2: Using spreadsheets instead of software
- Mistake 3: Relying on the default chart of accounts in Xero or QuickBooks
- Mistake 4: Misunderstanding Amazon fees and net sales
- Mistake 5: No proper inventory accounting process
- Mistake 6: Incorrect landed cost calculation
- Mistake 7: No bookkeeping process
- Mistake 8: Commingling business and personal finances
Mistake 1: Using cash basis accounting instead of accrual accounting
Cash based accounting is the method most new eCommerce businesses use. It’s simple to maintain, and there is no need to track accounts receivables (AR “money owed to you”) or accounts payable (AP, “money you owe others”). With this system, you recognize the timing of transactions as soon as the cash leaves your account. And, you recognize revenue as soon as the cash is deposited into your account.
This sounds like a simple system, and it is until you have inventory. For eCommerce businesses that are growing quickly, if you are still using cash based accounting, you have a distorted financial picture.
For example, a business might record revenue only when cash is received, not accounting for expenses incurred earlier, like inventory purchased but not yet sold. Accrual accounting matches this inventory cost with the revenue when the product is actually sold, offering a more accurate view of profitability.
Additionally, recognizing income based on net deposits rather than true sales figures can be misleading, as these funds often include net amounts after fees and expenses. It’s crucial to download sales reports from sales channel partners to adjust for true sales and fees applied. For example, as anyone selling on Amazon knows, costs for storage, shipping, and fulfillment add up quickly and left without oversight can eat away at your profits
That’s why all eCommerce businesses should be using accrual accounting. With accrual accounting, revenues and expenses are recorded in your books when they are earned — not when the cash hits or leaves your account. This gives a more accurate, long-term picture and spreads out lumpy purchases, like inventory, over the course of the year.
Mistake 2: Using spreadsheets instead of software
Spreadsheets are useful for forecasting and analysis. However, they are not a full replacement for either modern accounting software or inventory management software.
Spreadsheets introduce more room for human error and simply cannot match the accuracy of cloud accounting software, like Xero or QuickBooks, for eCommerce bookkeeping. For example, manually tracking sales and expenses in a spreadsheet can lead to entry errors and unintentional mistakes whereas cloud accounting software automates and consolidates financial data for more reliable reporting.
As your eCommerce business starts doing multi-millions in annual revenue, you may want to look into Cloud ERP alternatives, like CIN7 Core, or a legacy ERP, like NetSuite.
Mistake 3: Relying on the default chart of accounts in Xero or QuickBooks
Using the generic or (worse an inaccurate) chart of accounts in Xero or QuickBooks can lead to incorrect financial reports.
For instance, an eCommerce business might lump all sales into one account, losing visibility into how different channels perform individually. Customizing the chart of accounts provides insights into each channel’s profitability, which in turn leads to better business decision-making.
In addition, grouping costs into categories such as cost of delivery, customer acquisition, staff and operating expenses will give you visibility into areas of inefficient or underperforming spend in your business.
Your financial reports are the story in numbers of the decisions you’re making in your business. Once the story has been appropriately told (through clear organization of your chart of accounts and reporting), you can determine if the story being told is one that you like or one that requires a change.
Mistake 4: Misunderstanding Amazon fees and net sales
Many eCommerce businesses fail to fully account for Amazon’s fees. For instance, a business might see a deposit from Amazon and consider it pure revenue, not accounting for Amazon’s deduction of fees.
This oversight can significantly inflate perceived profits, as the actual revenue is lower after subtracting these platform-specific costs. Not adjusting items sold to reflect correct inventory levels and cost of goods can also lead to errors in inventory and cash flow forecasting.
Mistake 5: No proper inventory accounting process
In order to have a proper inventory accounting process, you need to be using accrual accounting (See mistake #1.).
In addition, conducting physical stock takes and using an inventory management app can further streamline this process as you scale.
This ensures you have an accurate inventory valuation and reflection in your financial reports. Without it, you could be inflating how much profit you are making on particular products and SKUs.
Mistake 6: Incorrect landed cost calculation
Another mistake that we see eCommerce businesses make is miscalculating landed costs. For instance, overlooking customs fees or shipping costs when calculating the cost of goods sold may undervalue inventory and overstate profits. This leads to skewed pricing strategies and financial analysis.
Additionally, focusing solely on inventory costs without tracking overhead expenses like marketing, administration, and staffing can lead to a narrow understanding of your overall business expenses.
Related Reading: How to calculate cost of sales
Mistake 7: No bookkeeping process
Failing to set aside time to review your financial statements, including your Profit and Loss, Balance Sheet, and Cash Flow Statement, each month is one of the most common mistakes that we see eCommerce business owners make, and it can snowball quickly. This usually happens because the business either has either an insufficient or no consistent process in place for bookkeeping. Without this process, you don’t have accurate accounting records.
Working with an eCommerce accounting firm, like Bean Ninjas, to do regular bookkeeping are crucial for maintaining accurate and up-to-date financial records. This helps you see critical trends or issues, such as rising costs or declining sales, in near-real-time, so you can adjust as needed.
It also makes tax season less stressful since you already have your revenue and actual expenses categorized.
Mistake 8: Commingling business and personal finances
Commingling business and personal accounts and expenses can lead to a lot of problems down the line, especially as you scale. For starters, it is harder to track operating expenses properly. This can lead to financial discrepancies, penalties, and even compromise your business’s long-term financial health.
For instance, an eCommerce owner using a personal credit card for inventory purchases may struggle to differentiate personal and business expenses, complicating tax filings and financial analysis.
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These are some of the most common accounting and bookkeeping mistakes that we see eCommerce entrepreneurs make.
If you are looking for more details on how to avoid these business accounting mistakes along with advice for setting up proper accounting systems, watch this webinar recording we did with A2X.
