With the holiday season behind us and a brand new year in front of us, it’s a great time for e-commerce founders to shift focus to 2020 planning. A big burning question we are hearing a lot right now is: “what’s the best way to tackle my e-commerce accounting?”
The knowledge gained from your college Accounting 101 course and those youtube videos you watched definitely won’t hurt—but they also won’t set you up for success for the year ahead. When thinking about e-commerce accounting, it’s important to keep in mind that it is not the same as traditional accounting.
When tackling your ‘ebooks’, e-commerce businesses have many nuances that must be considered: they are multi-channel, they have unique operational costs, and they incur different fees, to name a few.
With the holiday madness in the rear view mirror, now is as good a time as any to find a good e-commerce accountant and get the conversation started to be sure you know where your business stands financially.
The world of e-commerce accounting can be confusing, even at the best of times. Lucky for you we have access to a wealth of experts at companies leading the charge in understanding how to do e-commerce accounting effectively. We picked their brains so you can be in-the-know when it comes to keeping your financials healthy.
Meet the experts
- Brittany Brown, LedgerGurus. Brittany is the Founder and CEO of LedgerGurus. She founded LedgerGurus after seeing the impact of good accounting for small businesses and having a desire to create a flexible work environment for others like her.
- Paul Bianco, Graphite Financial. Paul is the Founder & CEO of Graphite, an NYC based firm that provides early-stage startups full-service outsourced accounting and financial strategy. Born out of a VC fund, they fully understand the strategic and financial needs of high growth startups.
- Steven Muller, Bookkeeper360. Steven is the VP of Sales at Bookkeeper360, on a mission to empower small business owners with real-time financial data to make growing their business easier.
- Chad Davis, LiveCA LLP. Chad is Co-Founder of LiveCA LLP, a virtual CPA firm that works with clients all across Canada driven by principles of education and knowledge-sharing.
- Waseem Daher, Pilot. Waseem is Founder and CEO at Pilot, a bay area based accounting firm that gives online businesses the freedom to focus on their business, knowing their own bookkeeping expert will take care of the books.
Your e-commerce accounting questions, answered
Here are the highlights! You can find their full answers below.
[Infographic courtesy of the Venngage Infographic Maker]
Q1. What are the main advantages of working with an experienced e-commerce accountant?
Brittany: With e-commerce, more so than most other businesses, there is a strong cross-over between operations and accounting.
A good e-commerce accountant can help you identify where you need to mature operationally, based on where accounting is having a hard time getting good numbers. Inventory, for example, is an area where getting good numbers begins in operations with forecasting, planning, shipping, and quantity tracking. But ultimately the inventory numbers land in accounting with margins, value, and good asset control.
The problems are often most obvious to an accountant before they are obvious to someone in operations. A good e-commerce accountant can guide maturity of the organization in key ways.
Someone who does not understand e-commerce accounting isn’t even aware of the problems to look for, let alone how to provide guidance on maturing.
Paul : E-commerce businesses live or die based on their unit economics. If a company is spending more money to acquire a customer (CAC) than they make back in cumulative gross profit over a reasonably short time period from the customer (LTV), it’s a ride straight to zero. A good firm will be able to guide you on, not only your numbers being stated in accordance with GAAP, but what the numbers actually mean as you drill deeper into the detail.
Steven: An e-commerce accountant must have an understanding of how to recognize revenue and related expenses from e-commerce platforms to give you an accurate financial picture of your company.
Chad: Simply put: The main advantage to working with an e-commerce accountant is your numbers will be right. So many accountants are unsure of how to navigate Shopify, Magento, Etsy, inventory systems, refunds, shrinkage, and issues with payment processors that most companies don’t end up really trusting their financials.
Waseem: The main advantage is that you get to take advantage of deep expertise in the specific requirements of e-commerce companies, and the specific systems they use. Yes, we’re working on the books, but we’re also helping guide you on best practices.
Q2. What qualities should e-commerce founders look for when searching for an accountant?
Brittany: A good e-commerce accountant will be cloud-based (that’s where e-commerce companies live so their accountants should too), tech savvy, adaptable, and always learning. They should have deep knowledge of the platforms you are selling on, an understanding of inventory, and solutions for sales tax.
Paul: Having a real understanding of the business and industry is incredibly important. There are just so many nuances, especially with subscription based models, that can lead companies into a bad situation if they’re not paying close enough attention.
Steven: There are three key areas that an e-commerce founder should look to when searching for a good e-commerce accountant.
- The accountants experience with their e-commerce platform.
- The expectations and timeliness of delivery—the accountant should be punctual with their due dates.
- A strong e-commerce accountant will care about giving an accurate financial picture of your business, and will be invested in your companies success.
Chad: It depends on the stage of the company, the impact of having sub-optimal financial data, and how much a founder (or their internal team) wants to be involved in the accounting work.
At a bare minimum, speak to a CPA as soon as possible to arrange a year-end agreement so you don’t avoid a rushed year-end process.
If you have sophisticated needs like revenue recognition, multiple sales systems, multiple revenue streams (wholesale, retail), cross-border sales, accounts receivable, etc) then you should specifically find an accountant who can clearly articulate how they’ll handle each one of those situations. If the impact of having bad information is high, don’t be an accountant’s guinea pig into their exploration into e-commerce.
Waseem: Do you due diligence and learn how familiar they are with industry-standard e-commerce systems, and whether they seem like they’ll be responsive and accessible.
Q3. What are the differentiating factors of an e-commerce accountant?
Brittany: Non e-commerce accounting deals primarily with activity that passes through the bank accounts and the credit cards. Basic transactions coding will capture most of the important activity of the business.
E-commerce accounting requires you to know how to dig deep into sales channels because the only thing passing through the bank accounts are summary deposits of the activity on the channel.
If you use the same standard cash accounting approach with e-commerce businesses, you will miss most of the important information and misstate the financial activity. Financial recording should capture the activity of the channel and then reconcile that with what actually amount deposited into the bank account.
E-commerce is a completely different game than SaaS, marketplaces, and service businesses.
There are a lot of moving pieces between multiple systems (Quickbooks, Shopify, Sales Tax Software, Inventory Management Systems, Warehousing & Logistics providers, etc.) and the firm needs to have experience with integrating those specific tools in order to make the right recommendations.
Steven: E-commerce accounting takes an understanding of multi-channel sales and platforms while non e-com accounting is simply focused on one sale channel or platform.
Chad: E-commerce is a different industry, and comes with a completely different set of systems that require expertise in understanding the ins and outs. Many accountants aren’t able to navigate through the different platforms that an e-commerce business works with, and thus wouldn’t know how the fees are calculated or the reason behind them. If the accountant doesn’t know how to structure the costs of your business, then you can’t confidently understand where your business stands.
Waseem: For starters, inventory tracking is a big one! But the second is simply knowing your way around the various e-commerce-specific systems.
Q4. Tell us about a time you were able to make a big impact on an e-commerce business!
Brittany: We had a client who had grown rapidly, had sales tax obligations in over 30 states, and had no visibility into how their business was doing. They were expensing all inventory purchases immediately, so their profitability was completely skewed and they couldn’t get the loans they needed because their books didn’t reflect the asset value they had in the inventory stored in their warehouse.
We got them completely compliant with sales tax and fixed their books so they could see exactly how the business was performing. They were able to secure the loan they needed to bulk up for holiday sales. And finally their CFO was able to analyze numbers and help the business make better decisions because their numbers were accurate and clear.
Paul: We started out as the accounting arm of a venture fund which made investments in several e-commerce companies such as Plated, Owlet, and WithClarity, before spinning out into Graphite. We worked closely with each company from a really early stage and in the process learned what works and what doesn’t. These early learnings led to us to building an incredible client portfolio of DTC/e-commerce brands.
Steven: A client’s accounting software and Shopify integration were bringing in tens of thousands of individual order details which were not necessary. We were able to efficiently summarize the activity on a weekly basis to provide accurate financials without unnecessary details.
It takes a lot of time to grow a business—there’s no need for unnecessary details or wasted time.
Chad: We’re currently working with a company in the medical device space that sells across 34 different channels, including Amazon, Walmart, Google, Jet, Linio (Latin America), Macy’s, and Newegg. It involves a number of payment processors including Paypal, Stripe, Shopify, and Payoneer using more than 5 different currencies.
Our procedure document is over 40 pages long (single spaced) in order to make sure consistency month over month amongst all the different services. I’m so proud of our team who came together to take this company from a place of chaos and disorganization, to a place where there is almost 100% confidence in the accrual based figures.
Not only have we given them that trust, but our tax team has been able to navigate all of the issues with multiple governments to keep them compliant. While this is one of our largest and most complex e-commerce customers, there are hundreds of others who benefit from our experience working with so many e-commerce tools.
We discovered that one customer was not getting the payments they were supposed to be from one of their payment processors — to the tune of $40k!
Ready, set, go find yourself an e-commerce accountant!
As you can see, the benefits to having a specialized e-commerce accountant are many. As your business scales, it’s important to have a firm grasp on your cash flow and how to better manage it.