7 Bookkeeping Mistakes E-Commerce Businesses Must Avoid

Bookkeeping might not be the most exciting part of running an e-commerce business, but getting it wrong can cost you major headaches.

Messy financial records lead to cash flow issues, unexpected tax bills, and bad business decisions. Yet, many e-commerce founders either put bookkeeping on the back burner or assume their numbers are fine until they’re not.

The good news? Most bookkeeping mistakes are avoidable.

In this post, we’ll cover seven of the most common pitfalls e-commerce businesses run into, why they happen, and how to fix them before they turn into expensive problems.

1. Not separating personal and business finances

One of the fundamentals of e-commerce accounting is to separate your personal and business finances. However, failing this practice is less common, and it is easy for funds to get comingled due to:

• Some business owners might think that using a single account simplifies financial management.
• Some entrepreneurs may not even understand why keeping these finances separate is so important.
• Some founders secretly dip into business accounts to fund personal expenses.

But blurring the line between personal and business finances can raise red flags with tax authorities and “pierce the corporate veil” by exposing your private assets to business liabilities. Not to mention, it causes confusion when you are trying to assess your company’s financial health.

It is also entirely preventable if you do the following:

• Open a new business bank account solely for business activities.
• Get a business credit card to build your business’s credit history.
• Set up a payroll system for yourself as the company founder.
• Organize and store all the receipts related to corporate expenses.

2. Ignoring sales tax obligations

Once your business generates six figures in revenue (or 200 transactions, depending on your state), you are technically liable for registering and collecting sales tax anywhere you have “nexus.”

Ignoring your sales tax obligations can rack up a considerable amount of fines. Interestingly, small businesses often make this particular mistake because:

• The laws regarding sales taxation are complex, given that e-commerce businesses operate in multiple states simultaneously.
• The concept of economic nexus (i.e., you’re supposed to collect sales tax in states where you have no physical presence) is lost on many.

Ignoring sales tax obligations, however, can lead to hefty fines (such as 10% of the due amount per bill).

Your business may also face audits, damaging your credibility in a consumer’s eyes. Paying back taxes owed puts a dent in your finances as well. Remember, you don’t want to incur the wrath of the IRS, as it can lead to severe penalties, including fines and interest.

Here’s how you can avoid this mistake:

• You should start by learning about your sales tax obligations and economic nexus.
• Find out whatever you can about marketplace facilitator laws and how they impact your business.
• Get the much-needed sales tax permits in states where you’ve established nexus.
• Use a fully managed sales tax solution, like Zamp, that integrates automated tax calculation tools to make sure you’re collecting/remitting the correct amount.
• Hire a niche e-commerce accounting firm that can help you stay compliant.

3. Mishandling inventory accounting

An eye-opening report published last year claims that almost 6 in 10 accountants working for US-based e-commerce companies make several bookkeeping mistakes per month, such as mishandling inventory accounting.

It happens when bookkeepers:

• You’re working with a generalist bookkeeper who isn’t familiar with the nuances of e-commerce businesses
• Don’t understand inventory valuation methods
• Have no set procedures to track their inventory
• Rely on manual methods or use outdated software
• Can’t decide which inventory method to use (LIFO, FIFO, etc.)
• Miscalculating landed costs by overlooking shipping and custom fees

Making mistakes here can lead to a host of problems, from inaccurate cost of goods sold (COGS) to unnecessary expenses related to storage, insurance, & potential write-offs for obsolete stock as well.

Fortunately, you can avoid these mistakes by:

• Choosing the right valuation method for your inventory items.
• Keeping an eye on your inventory’s turnover rate to identify slow-moving items.
• Adopting an inventory management system (one that can also integrate seamlessly with your e-commerce platform).
• Developing standardized processes for receiving, storing, and tracking your inventory.
• Scheduling periodic physical counts of your inventory to reconcile with your accounting records (i.e., manual counting can verify the results of automated valuation).

4. Forgetting to account for returns and chargebacks

Some e-commerce businesses don’t forecast return rates correctly and overlook the impact of returns/chargebacks on their revenue.

Chargebacks reverse sales and often incur additional fees from payment processors as well. This can strain cash flow, especially if your business is unprepared for these unexpected costs. It will end up misrepresenting the financial health of your business, besides increasing operational costs.

Plus, if you are getting frequent chargebacks, this also shows that customers are not fully satisfied with the quality of your service and/or product.

Some things you can do to reduce returns and chargebacks include:

• Have a very clear-cut return policy.
• Always track returns separately from chargebacks.
• Adjust your chart of accounts right away when a return or chargeback occurs.
• Check out the reasons why chargebacks are happening so you can fix the underlying problem(s).
• Improve your customer service quality, such as offering multiple channels to resolve customer issues before resorting to disputes with their banks.
• Keep an eye on your chargeback ratios (the number of chargebacks compared to total transactions).

5. Not categorizing transactions and expenses correctly

Did you know that 40% of businesses lose money due to poor bookkeeping or misclassifying expenses?

Without clear visibility into where money is being spent, your businesses may struggle to manage cash flow effectively.

For example, misclassifying marketing expenses as administrative costs end up obscuring true marketing performance.

It can also hide trends in spending that could be optimized. For instance, if travel expenses aren’t tracked separately, you may miss opportunities to negotiate better rates with vendors.

But there are many ways to fix these mistakes, including:

• You can start by moving away from the default chart of accounts in Xero or QuickBooks and using one that is specific for e-commerce businesses
• Review your categorized transactions regularly and examine your financial records.
• Use expense management software that lets you split expenses across multiple categories.

6. Not setting aside money for taxes

Whether it is not understanding their income and sales tax obligations, prioritizing immediate business expenses, or preferring reinvesting their hard-earned cash right away over covering future tax liabilities, many e-commerce entrepreneurs aren’t setting aside money to cover their tax liabilities.

In fact, one study shows that over 1 in 5 small businesses owe money to the IRS in back taxes.

Unexpected tax bills can strain your cash flow. Your business may also face penalties and incur interest charges when you’re ill-prepared for the tax season. The pressure of looming tax deadlines without enough funds can also create significant stress.

One simple way to avoid this fate is to set aside 25% of their profits for future taxes.

7. Trying to DIY their bookkeeping

A survey done in 2021 shows that one-third of small business owners prefer handling their company’s bookkeeping personally. As a result, entrepreneurs end up making mistakes in recording transactions and generating inaccurate financial statements. Plus, spending excessive time on bookkeeping tasks can divert attention from core business activities that drive growth.

If you want to free up time, bringing on the right e-commerce bookkeeper or bookkeeping firm, like Bean Ninjas, can be an invaluable asset.

Here are some tips for how to make this transition.

• If you are still using spreadsheets, it is time to transition to cloud-based accounting software like Xero or QuickBooks.
• Find a bookkeeper or firm that specializes in working with e-commerce businesses. That’s because they understand the ins and outs and have likely worked with hundreds of other businesses just like yours. This means more strategic guidance and efficient processes.
• Schedule regular check-ins.

Wrap-up

Small bookkeeping mistakes can snowball into major financial headaches, including cash flow issues, tax trouble, or even poor decisions based on inaccurate data. The good news? Avoiding these pitfalls doesn’t have to be complicated.

Keeping your financial records clean is one of the smartest moves you can make for your business. Want a deeper dive into best practices? Check out this guide to e-commerce accounting for expert insights and practical tips