If you asked ecommerce entrepreneurs what part of running an online business they enjoy the most, it’s fair to say that accounting probably wouldn’t be top of the list. 

As it can be a complicated and time-consuming task that many struggle to get to grips with. This leads to a host of common accounting mistakes that cost online business owners valuable time and money.

Never-the-less, taking care of your accounts and business finances is an absolutely essential task that needs to be given proper attention - not to mention a legal obligation!

In the fast-paced world of ecommerce, where online transactions happen at lightning speed, accurate accounting is more critical than ever.

At Crunch we have helped thousands of ecommerce business operators just like you optimise their financial management and boost revenue, with our specialist ecommerce accounting services. 

And in this article we’ll share our key tips to help you avoid the most common and obvious ecommerce accounting mistakes. So stay tuned for expert advice you won’t get anywhere else!

The importance of proper accounting

A well-structured accounting system is the backbone of any successful ecommerce business. It provides invaluable insights into your financial health, enabling you to make informed decisions, optimise operations, and ensure compliance with tax regulations. 

Without accurate accounting, you risk overspending, underestimating your profitability, and even facing legal consequences - HMRC has some pretty severe penalties for tax irregularities that can result due to a lack of proper accounting and bookkeeping.

Managing accounts isn’t fun, it’s monotonous and boring. But it’s vastly preferable to frantically digging through mountains of receipts, invoices and sales data when you come to complete your tax-return.

With that in mind, read through the list of the most common accounting mistakes below to learn what to avoid and how to get your ecommerce business finances in order.

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1. Inventory mismanagement

One of the most frequent accounting mistakes made by ecommerce businesses is inventory mismanagement. This can lead to a variety of financial problems, including:

• Overstated or understated inventory - Inaccurate tracking can result in either overvaluing or undervaluing your inventory, which can skew your financial statements.
• Incorrect cost of goods sold (COGS) - If you don't accurately track the cost of your inventory, you won't be able to calculate your COGS correctly, which can impact your profit margins.
• Inaccurate profit margins - Mismanaged inventory can lead to inaccurate profit margins, making it difficult to assess the profitability of your products.

In order to avoid these resulting problems you need to be diligent about the essential aspects of inventory management such as implementing a robust inventory management system, conducting regular physical counts and using the correct valuation method. 

There are 3 key actions you should take:

1. Use software or spreadsheets to track your inventory levels, purchase orders, and sales.
2. Periodically physically count your inventory to ensure that your records match your actual stock.
3. Choose a valuation method like FIFO (First-In, First-Out), LIFO (Last-In, First-Out), or average cost to determine the value of your inventory.

Following these basic steps will help you to avoid inventory mismanagement and ensure that your financial records are accurate. If you want more tips and tricks to keep on top of ecommerce inventory management -then check out our expert inventory guide.

2. VAT errors

VAT (Value-Added Tax)compliance can be a complex and often overlooked aspect of ecommerce accounting. Failure to properly handle VAT can lead to financial penalties, legal issues, and damaged customer relationships.

To avoid VAT errors, it's essential to:

• Stay informed: Keep up-to-date with VAT laws in all jurisdictions where you operate. This includes understanding any changes to rates, exemptions, or nexus requirements.
• Utilise technology: Consider using VAT compliance software to automate calculations and filings. These tools can help you stay organised, avoid errors, and ensure timely compliance.
• Seek professional guidance: Consult with a VAT professional for expert advice and assistance. They can help you determine your VAT obligations, navigate complex regulations, and address any specific questions you may have.

If you're new to VAT or just looking to understand it more, check out our article which covers VAT registration and reporting to help you identify what rate of VAT applies.

3. Expense tracking issues

Expense tracking is another area where ecommerce businesses often make mistakes. Inaccurate or incomplete expense tracking can lead to overstated expenses, understated profits, and difficulty making informed financial decisions.

You can generally stay free of these problematic issues in this area by categorising expenses accurately and maintaining clear documentation: 

• When you record an expense, make sure to categorise it correctly so that you can track your spending by category. 
• Keep receipts and other documentation for all of your expenses. This will help you verify your expenses if you are ever audited.

4. Ignoring chargebacks and refunds

Chargebacks and refunds can be a significant expense for ecommerce businesses. Failing to properly account for them can lead to overstated revenue, inaccurate profit margins, and potential disputes with payment processors. 

To avoid these issues, it's crucial to record chargebacks and refunds promptly, investigate the reasons for chargebacks, and strive to improve customer service to minimise their occurrence.

Here’s some steps you can take to do this:

1. Immediate recording - As soon as you receive a chargeback notification, record it in your accounting system. This ensures accuracy and timely tracking.
2. Detailed notes - Include specific details about the chargeback, such as the customer's name, order number, and the reason given for the dispute. This information can be helpful for future reference and investigations.
3. Separate account - Consider setting up a separate account to track chargebacks. This can help you easily monitor their frequency and impact on your finances.

Also, if you are experiencing a high number of chargebacks you should investigate the reasons why customers are disputing their charges. Improving your customer service can help to reduce the number of chargebacks.

5. Lack of financial reporting

Financial reporting is an essential tool for ecommerce businesses. Without regular and in-depth financial reports, it's difficult to gain a clear understanding of your business's performance, make informed decisions, and identify potential financial risks.

Key consequences of neglecting financial reporting include: limited visibility into business performance, difficulty making informed decisions, and increased risk of financial problems. So it’s highly important to regularly prepare financial reports, analyse key metrics, and consult with a financial advisor if needed.

All your ecommerce accounting issues sorted with one simple solution!

As you will come to realise, managing accounting for an ecommerce business can easily become a serious amount of work. Recording, reviewing and organising mountains of data and documents can really drag you down and take the fun out of running your business.  

Using a dedicated ecommerce accountancy service like Crunch will allow you to forget about the stress of business finances, whilst our expert accountants handle it all for you. What’s more is they can point out money saving opportunities that you’ll probably miss by doing it yourself, and will even file your Self Assessment for you.

Check out our ecommerce service now to find out why more and more leading online businesses are signing up!

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Take control of your ecommerce finances

Avoiding the common accounting mistakes discussed in this article will protect and improve the financial health of your ecommerce business. Accounting can be a difficult task, but it's a prerequisite for making smart business decisions and complying with tax regulations.

The key to successful ecommerce accounting is proactive management - staying organised, tracking expenses accurately, and seeking professional advice when needed, will help set your business up for long-term financial stability.

Book a free consultation with accounting experts to see how we could support your business with ecommerce accounting.

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