Do you know what the challenges that E-Commerce accountants and business owners face?

The process of bookkeeping and accounting of e-commerce transactions is more complex in comparison to the service-based business and even to the traditional retail business. Let’s review and analyze the major challenges that are faced by the management and accountants of the E-Commerce business. 

1. Complicated Inventory Management Process – The market or the customer base is extensive in E-Commerce business. The E-Commerce business must be flexible to accommodate and adapt itself and its product with a change in consumer demand. As a result, the business and the accountants are under continuous pressure to forecast and manage these changes in the inventory.
2. The Complex structure of the Fees and Commissions of the Selling Channels – The selling channels like Amazon, Shopify, etc. charge different types of fees and commissions for different services it offers to the business. The accounts of E-Commerce businesses experience continuous pressure to account for and check the accuracy of such costs.
3. Continuous Forecasting and Projections – The accountants and the management are required to continuously forecast the change in demand, change in consumer preference, etc. This is possible only if the financial information is readily available on a real-time basis.
4. Larger Sales Volume – There is a large volume of data that is to be handled. The accounts for E-Commerce businesses need to account for the sales, returns, shipping, inventory, selling costs, damages, etc. 
5. Tax Compliance is Complex – The high sales volume that is generated by sales not only limited to a particular geographical area along with different kinds of costs, creates complexity and confusion concerning tax treatments and compliance with multiple States and on a federal level with IRS.
6. Other Issues – There are many issues such as recognition of revenue, reconciliation, accounting for discounts and schemes, etc.

Therefore, in order to tackle these unique challenges, your E-Commerce business needs an E-Commerce CPA Specialist who knows all the ins and outs of the industry, its challenges and solutions.

Do you know why keeping track of your cash flow is necessary for your E-Commerce business?

It is common knowledge that many E-Commerce businesses fail to achieve their maximum potential because of their apparent inability to adequately understand and manage their cash flows. Cash remains the most important component of the business. If the business fails to generate cash regularly, it will collapse. It is evident from the fact that only 25% of the E-Commerce businesses sustain beyond two years of its incorporation. Cash flow is the life-blood of a business. The inflow of cash takes place as a result of sales and outflow happens when the cash is spent on inventories, payroll, or supplies. The major concern for any business is to ensure positive cash flow in the business by executing proper control over cash outflows and take pro-active actions to increase its cash inflows. 

Cash Flow Issues faced by an E-Commerce businesses

The owner and the accountant of the E-Commerce business must keep track of the following factors to ensure adequate cash flow management – 

1. Proper forecast and projection enables appropriate decision making, thereby allowing increased cash inflows and controlled cash outflows.
2. The business must not tie-up most of its capital in inventories. It makes it less flexible.
3. Accounts receivable management ensures billing and collection on timely basis. it is of prime importance for an E-Commerce business.
4. Management must monitor the efficiency and productivity of the employees on periodic basis. It must abstain from the temptation of over hiring.

Do you know what your E-Commerce business operating cycle is?

The operating cycle refers to the average time a business takes to re-generate the cash invested in the day to day transaction. This cycle determines the ability of the business to pay off its debts and other current liabilities on time. The business must keep track of its operating cycle in order to determine its working capital needs. One can achieve following benefits by keeping track of the operating cycle – 

1. Reduction of working capital requirement
2. Proper management of margin requirement
3. It can assist to negotiate better terms of payment with the vendor
4. It enables comparison with benchmark operating cycle to gauge its financial performance

A business that insists on having a proper accounting system will always have a competitive edge as it will be equipped with all relevant financial information to accurately determine the operating cycle.

Do you know how much capital you will need for the continuous growth of your E-Commerce business?

It is a reality that very few numbers of E-Commerce businesses survive beyond their initial years. The failure rate exceeds the success rate in this regard. The key reason for this failure is intense competition and mismanagement of working capital. Prudent management of capital constitutes an essential part of strategic decision making. There are two types of capital namely fixed capital and working capital. Fixed capital refers to the amount of investment one needs to establish the infrastructure of the business. For example – purchase of office space, computers & peripherals, furniture, etc. The other form of capital is working capital. As the name suggests, working capital is applied to fulfilling the routine obligation. Simply speaking, working capital is the excess of current assets over the current liability of the business. One must not confuse it with cash flow.  

The most common error E-Commerce Businesses Make 

The key to an effective working capital management is based upon two main factors –

1. Inventory Management
2. Vendor Management/Terms of Payment

The success of any E-Commerce business is incumbent upon its ability to strike a balance between the time it requires to liquidate its inventories and pay the vendors for product. For instance, if business generally requires 50 days to sell one product, it must negotiate a credit period exceeding 50 days with the vendor. This ensures that the business does not face any short-term financial crunch owing to the working capital shortage. 

Steps to improve Capital Management

1. Applying proper and data-driven inventory management processes allows the business to reduce the strain on working capital. Maintaining a large amount of inventory is not prudent and can result in huge losses. Proper accounting and adequate control ensure that the business is not under immense pressure to sell.
2. The business must have all relevant financial information available on a real-time basis which will help it to forecast its future needs. This will ensure that the business can order inventories in a more orderly manner.
3. Negotiate proper terms of payment with the vendor.

Do you know why Bookkeeping and Accounting is a prerequisite for your E-Commerce business?

A properly managed accounting system is the key to a successful business. It helps you to understand the health of your business, the viability of your decisions, and ensure regulatory compliance like filing of tax returns on a timely basis. Bookkeeping refers to the activity of recording your routine transaction on the other hand accounting involves the bigger stuff like drawing of financial statements, preparation of forecasts, and management information reports. When you start an E-Commerce business, generally you choose a selling channel like Amazon, Shopify, E-bay, BigCommerce, Etsy, etc. The major challenge lies in keeping track of the inventories, confusing tax compliance, complex structure relating to selling channel’s commission & fees, cash flows, and returns. It is where an E-Commerce CPA specialist comes in handy. Benefits of maintaining a proper accounting system are – 

1. It allows you to better forecast your business performance
2. It puts you in the driver’s seat by empowering you with accurate financial information 
3. It facilitates your adaption with ever-changing Sales Tax laws
4. It assists you in understanding your inventories and related costs
5. It allows better management of shipping & handling of returns
6. Better payroll management