Between filing sales tax, updating your chart of accounts, and calculating the cost of goods sold, it can be easier to celebrate new revenue than properly settle your books.
But how do you know if you’re turning orders from your Shopify store into profit?
Without adequate Shopify accounting processes, it can be nearly impossible to gauge the correct cash flow and financial standing of your eCommerce business. Certain Shopify accounting mistakes not only sabotage your business profitability but also leave you totally in the dark.
In this post, we’re sharing 6 of the most common Shopify accounting mistakes that we see and what you can do to fix them.
- Mistake 1: No accounting or bookkeeping system at all
- Mistake 2: Using spreadsheets to keep track of all finances
- Mistake 3: Mixing personal and business income and expenses
- Mistake 4: Waiting until tax time to catch up on your bookkeeping
- Mistake 5: Not calculating cost of goods sold (COGS) or calculating it incorrectly
- Mistake 6: Not registering or filing sales tax properly
- How Bean Ninjas can help keep your Shopify accounting in order
Mistake 1: No accounting or bookkeeping system at all
It’s common for a brand-new eCommerce business to wing it with Shopify’s built-in dashboard, a simple spreadsheet, or even worse the balance reflected in their bank account!)
Unfortunately, while the Shopify platform can provide metrics like your sales and orders, it does little to display the full picture of your finances.
Without a finger on the pulse of your finances, it’s easy to lose track of essential data, like how much money you owe or when an upcoming payment will be debited from your account. This can create massive cash flow problems, particularly for Shopify stores that scale quickly.
For instance, imagine if you just placed a $2,000 wholesale inventory order through your business bank account. You assumed you had $3,000 in it. But without an accounting or bookkeeping system, you’ve forgotten that a $3,000 loan payment was scheduled to be debited from your account the same day.
Now, it’s likely the loan payment will bounce, which can place your business in poor standing with the bank or financial institution. On the other hand, if the payment processes before the wholesale purchase, your inventory order will be canceled. Either places a Shopify store in big trouble.
The most straightforward solution to a lack of an accounting or bookkeeping system is to invest in cloud-based accounting software, like Xero or QuickBooks. Both platforms integrate with Shopify. No matter which accounting software you choose, set at least a monthly cadence to complete bookkeeping tasks.
Mistake 2: Using spreadsheets to keep track of all finances
Aside from a total lack of financial management, another common Shopify accounting mistake is using spreadsheets to track finances. Whether it’s Google Sheets or Microsoft Excel, some business owners turn to spreadsheets to monitor sales, sales tax, expenses, employee payroll, and more.
The only problem is spreadsheets cannot automatically sync with a Shopify store for a real-time look at financial metrics. The manual data entry necessary to maintain a spreadsheet is also highly mistake-prone, especially if the sheet is shared by multiple users.
One example of why using spreadsheets to keep track of all finances is a major accounting mistake is when multiple users input business expenses. If Employee A inputs the cost of inventory as an expense, but then Employee B inputs the same data, the business cash flow is no longer accurate.
Rather than manually input all financial data, keep your accounting current with a software system like Xero or QuickBooks. Both bookkeeping solutions come equipped with features to upload print and digital receipts, as well as automatic account reconciliation, to quickly flag duplicate entries.
Mistake 3: Mixing personal and business income and expenses
When small to mid-sized Shopify stores are owned and run by single business owners, it’s easy to commingle personal and business income and expenses. The owner often tracks personal expenses and income generated from outside sources directly within the books for their Shopify store.
Business owners, including Shopify eCommerce store owners, are anticipated to pay taxes on the income the business generates. Mixing personal and business income and expenses skews the legitimate profit and costs taxes are based upon, which can have both legal and tax implications.
If you find yourself using your personal credit card for business expenses and vice versa, get a separate business bank account and business credit card as soon as possible. Likewise, disconnect your personal card from any business auto-pay option immediately.
With your separate accounts created, get in the habit of paying yourself a fair salary. The base pay for a Shopify store owner ranges from $60,000 to $100,000 per year, but use your business’s financial metrics (and your level of effort in the business) to determine an adequate salary.
Separate accounts will enable you to properly track and file correct business tax and personal tax.
Mistake 4: Waiting until tax time to catch up on your bookkeeping
Bookkeeping is far from a seasonal task. In fact, waiting until tax season to finally catch up on your accounting and bookkeeping can do more harm than good — including paying more in business taxes. This is because adequate bookkeeping practices and proper tax planning go hand-in-hand.
Tax planning refers to adopting techniques that can reduce the amount of tax your business owes. Implementing a tax reduction strategy through routine bookkeeping helps to forecast tax liabilities ahead of time, take advantage of available benefits, and account for potential changes in tax law.
For example, imagine your business accrued $20,000 in payable tax, but paid $28,000 in total. The extra $8,000 paid was because you failed to utilize available business benefits, such as credits that bring down the total owed. A proper bookkeeping strategy could have helped save upwards of 33%.
Mistake 5: Not calculating cost of goods sold (COGS) or calculating it incorrectly
As a Shopify store owner, every product you sell will have a cost and sale price. Your cost of goods sold (COGS) refers to the direct costs of acquiring the products that your business sells during a period. Your COGS will include any expenses directly required for you to receive each product, including shipping, customs, and duties fees. However, it will not include indirect costs, such as marketing.
One mistake we see Shopify store owners make is incorrectly calculating the COGS with indirect costs, like paid ads or other marketing expenses used to promote the product. This will significantly skew the store’s gross profit margin and can even reflect an incorrect inventory value, harming profitability.
To avoid incorrect financials, you will need to determine the right COGS for each product SKU and record it at the right time. To calculate COGS correctly, leverage this time-tested formula:
COGS = Beginning Inventory + Purchases – Ending Inventory
In the formula, beginning inventory refers to the total cost of your store’s inventory from the previous period, purchases are the total costs of what your business purchased during the specified period, and ending inventory refers to the cost tied to the remaining product.
Let’s say you want to calculate the COGS in the first quarter of 2023. If your Shopify eCommerce store had a beginning inventory of $20,000, your purchases totaled $10,000 for that quarter, and you have an ending inventory of $6,000, then your total COGS for that quarter will be:
COGS = $20,000 + $10,000 – $6,000 = $24,000
Pro Tip: Explore apps like Dear Inventory, Finale and A2X to help you manage inventory and calculate COGS with precision.
Mistake 6: Not registering or filing sales tax properly
Like business taxes, eCommerce businesses are also expected to collect and pay sales taxes on sold products. As a Shopify business, you’re required to establish your sales tax rate as part of your set-up process, but you must ensure the money you collect goes to state and federal tax collectors.
Failure to collect, remit, and file sales tax can incur a penalty that is 10 to 25% of your total tax amount, depending on the state. Some states charge 5% per month if you didn’t collect, remit, or file, whereas others can charge up to 25% per month for improper taxes.
When you don’t register or file sales tax properly, you open your Shopify eCommerce business up to thousands of dollars in penalties that can effectively shut down operations for months to come.
The best solution to improper tax filing is to register and file sales taxes wherever you have nexus. Sales tax nexus refers to the connection between a taxing jurisdiction — such as a state — and an entity such as an eCommerce business. Generally speaking, you have a sales tax nexus anywhere you have a physical office space or warehouse, paid employee(s), or exceed a certain number of sales.
Once you establish a sales tax nexus in a state, use a third-party app, like Avalara, to help with collecting and remitting the proper sales tax on orders to avoid being penalized for noncompliance.
Pro Tip: DIY sales tax solutions are riddled with errors when not setup correctly. Use a Sales Tax Specialist like TaxValet or TheSalesTaxSisters when your sales tax demands get complex.
How Bean Ninjas can help keep your Shopify accounting in order
Whether you are looking for help fixing a Shopify accounting mistake, want help getting Xero or Quickbooks set up, or need regular eCommerce bookkeeping support, our team at Bean Ninjas is here to help. Schedule a free call here.