The number of eCommerce businesses launching in the UK is increasing for various reasons. Putting a business online allows it to reach an even bigger market as there are plenty of choices for eCommerce platforms. Starting as a private limited company in the UK comes at a low price too.
However, without the financial lifeblood in place, a proper accounting system, the business risks itself getting everything messed up. New entrepreneurs tend to take charge of their business’s financial and accounting aspects by themselves, overlooking the potential repercussions.
The worst that can happen is financial downfall which could have been avoided with the help of a reliable accounting team and software. Here are 7 reasons why accounting for eCommerce companies is challenging and a few other challenges they encounter upon launching:
Possibly Confusing Sales Tax and Other Legal Issues
There are a handful of legal matters to take care of when running an eCommerce business. The most hassling of them all is the sales tax. It is the tax added to the total price of a product or service that the customers pay. Online merchants are then responsible for collecting and handing the tax to the liable authorities.
Sales taxes vary as they are based on the location, economic nexus, and the specific threshold to which they are subject to paying sales tax, among others. Economic nexus refers to the business’s presence in a certain location, particularly where its inventory and customers are.
“Ecommerce merchants must familiarize themselves with the legal requirements of their businesses, especially sales tax. ”
Unlike brick-and-mortar stores that only pay taxes where they are physically established, eCommerce businesses pay taxes on almost all locations where they generate sales and may have to manage a lot of monthly or quarterly filings.
Having to juggle plenty of filings for various locations and tracking where the business owes tax can get very complicated. Not to mention the legal consequence of collecting sales tax from customers without proper tax filing.
Aside from conscientiously complying with sales tax, there are several other eCommerce laws in the UK that businesses must at least be familiar with. Tax and business professionals can significantly help with these aspects so that online companies can run their trade through legal means at all times.
Huge Volume of Transactions
A myriad of transactions means plenty of data, especially when the company uses Amazon as a point of sale. Merchants using this platform know well that it doesn’t allow them to save their customers’ contact information easily and there are varying fees.
But some of the best accounting software programs can greatly help manage a massive volume of transactions, although they have their own limits. Take, for instance, Xero, which slows down when the monthly transactions reach up to 10,000.
A good accounting software program can only handle such a number of detailed transactions each month, but this can be managed by putting them in a batch—daily, weekly, or monthly—in a certain period.
With the help of an accountant, businesses can batch their transactions better to conveniently store a considerable volume of data in their accounting system.
Fees on Amazon and Logistics
There are a lot of eCommerce platforms to choose from in the UK that best fit small and medium-sized enterprises (SMEs), such as Amazon, eBay, Alibaba, Etsy, Folksy, Wish, and more. Amongst these, it is Amazon that a vast percentage of eCommerce businesses rely on, particularly 86% of the UK’s population.
However, Amazon’s fees can be challenging to determine in one go since it asks varying prices for each of its services. Generally, it has three services to pay to: sales commission, Fulfilment by Amazon (FBA) fees, and advertising cost of sales (ACOS). Additional fees include gross profits and the cost of the goods sold.
The fees depend on various factors. Sales commission can range from 6% to 20%; FBA fees are based on the item size, weight, category, length of time in the distribution centre, etc. Separate fees are imposed on ACOS and other miscellaneous services.
“Read the sellers’ fee agreement carefully before using a sales platform. ”
These varying and separate fees for each transaction level can be difficult to track. If not taken carefully, the fees could put extra pressure on the business’ profit margins. This applies to other eCommerce platforms as well.
When handled manually, meticulous attention is required. Merchants must first read the platform’s seller agreement and fee schedule, double-check the listing fees, and record them into their accounting system. Take note of the third-party logistics (3PL) fees too.
But automation through accounting software provides more accuracy. Keeping track of the fees by hand could lead to a lot of errors. The best software can help the business determine the right selling prices considering the sales platform’s extra fees, calculate the total fees, and be keener about their promotions or bulk listings.
Complex Inventory Management
Even smaller eCommerce businesses may find inventory management difficult. Every sale or return can easily affect inventory tracking. It can get tougher for online sellers who use multiple channels or obtain new products.
As online businesses grow, tracking the inventory becomes even more complicated with the increasing volume of transactions, marketplaces, countries, warehouses or fulfilment centres, and SKUs. It gets harder to pinpoint where the inventory is or even keep track of whether the products are still sellable or not.
Moreover, the UK imposes the Generally Accepted Accounting Practice (GAAP), which means merchants have to match their expenses with their respective revenues. Tracking the value of one’s inventory from production through sale is a requirement.
This is how important an automated, scalable, and integrated inventory management tool is, which is one of the essential functions in an accounting software program. A good software program’s inventory function can scale up and integrate any updates, enabling businesses to keep everything under control.
Product Return Management
Amazon allows a return of a product when it is damaged by the seller or carrier or downright defective. When it’s the sellers’ fault, they pay the consequence, whilst if it is Amazon’s, they just submit a reimbursement ticket.
A customer-friendly return system and policy can indeed improve the brand of the eCommerce store and reconvert customers, but returns can easily complicate the business’ inventory. Without effective return inventory management, bookkeeping can get messed up. The inventory might get expensed twice.
“Efficient accommodation of product return results in good inventory flow.”
Businesses have to carefully track any return, decide to write off or re-add it to the inventory, and issue a refund to the customer. For more precise accommodation of the returns, they can update their accounting software manually, which is essential in this case.
Manual Data Entry
Manual data entry may be suitable for smaller online businesses with fewer customers. If it proves sufficient for their needs, they can have the best control over their data and have the peace of mind that they’re safe from software mishaps and potential hacking.
However, businesses that turn to manual data entry instead of automation to save on overhead expenses wind up shouldering more costs. Human errors lurk around the corner, which means these companies pay not just their employees but also the potential cost of straightening up any error.
Many data input errors in eCommerce businesses come from manual data entry, which can be lethal to the business’ finances. Even the most minor errors can cost companies a huge deal. It’s easy for the human eye to overlook mistakes, especially with an enormous set of data.
Moreover, the manual process can be very time-consuming. Large volumes of data and complex information that require deeper understanding can greatly slow the turn-around time. Companies may have to employ good data entry staff to accomplish the task as quickly and accurately as possible. But even with the best staff, the risk of committing errors remains.
Limited Access to Data Analytics
An eCommerce software program can make or break the business, which is why it’s vital to choose a program that suits their accounting and financial needs best. Two of the essential functions are data analytics and reporting.
“Data-backed analyses help businesses make an effective next move.”
When choosing the best accounting software for one’s eCommerce business, a transparent performance tracker that provides real-time updates is necessary. Online entrepreneurs need to be proactive about making their accounting flow more visible. This way, they can easily spot the movement of the inventory, performance history (e.g., which channels sell the most), and other fundamental data to analyze.
Overcome eCommerce Challenges with the Help of an Accountant
Launching and running an eCommerce business is no small feat. There are a lot of challenges that need to be dealt with immediately and strategically. One thing to take note of is to never do the accounting tasks manually. This is one of the huge reasons why accounting for eCommerce companies is challenging.
Ecommerce accounting software abounds as well as experienced accountants. Let the experts handle what they’re good at. Accountants at Legend Financial understand eCommerce in many ways as they encounter it daily and already have several years of experience in this specific industry. We have the most reliable solutions for your business’ accounting needs. Please feel free to reach us anytime!
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