Because of the complex technology stack required to sell online, eCommerce accounting can be complicated. Many technologies are used in eCommerce for a variety of financial reasons; however, before delving into specific eCommerce solutions, it is critical to understand the fundamental elements of the eCommerce technology stack. This knowledge gives you a solid foundation for success in this expanding industry. In part one of this series, we'll explore the technology used to manage eCommerce-specific functionality.
What sales channels are typically used for eCommerce?
The first technologies you must understand with eCommerce are the sales channels. This comes in a variety of forms, but there are a few major channels to know about first. People selling their own brands, also known as direct-to-consumer (DTC), will often host their own website via an eCommerce platform, like Shopify, Big commerce, or Magento, just to name a few. Shopify is the most popular of these many platforms.
There are also third-party marketplaces where sellers can sell their own or sourced products. Amazon is the biggest marketplace by far, but there are a few major second-tier marketplaces like eBay, Etsy, and Walmart.com. There is also a long list of niche and smaller marketplaces that usually serve specific industry verticals. For example, you can find marketplaces just for camping gear or pick your product category of choice.
The marketplace or sales platform is where all things eCommerce start, but it is not the only technology you’ll need. These sales channels will contain order information and often other information, such as inventory, which must be accounted for.
Payment Processors handle the money paid for eCommerce orders
Payment processors work with your sales channels to facilitate credit card purchases. The most common ones you’ll see in eCommerce include Shopify payments, Amazon Pay, Stripe, Square, and PayPal. There are many other payment processors that you may encounter as well. The list is long and varied.
Payment processors come in different shapes and sizes in terms of their quality of technology, reporting capabilities, and general administration. Some are very easy to work with, and some are not. Understanding the data and reconciling it to the proper time frame is a key part of eCommerce accounting.
Accounting for inventory in eCommerce
Inventory tracking is a challenge with eCommerce. There are several tools but no clear dominant platforms. Part of the challenge with eCommerce is multi-channel inventory, where a business is selling on multiple sales channels but managing inventory centrally. For example, a business may have an order on Amazon and an order on Shopify and need to track its inventory quantities across those two channels.
Inventory may also be physically located in various locations, such as Amazon's warehouses, a third-party logistics company (3PL), or a business's own warehouse for fulfillment. Businesses frequently use a single fulfillment method, but they may also use multiple fulfillment methods. Inventory accounting is critical for calculating the correct cost of goods sold and determining when and how much to order throughout the year.
How to handle the challenge of sales tax
Product businesses usually pay sales tax, but eCommerce has the unique challenge of multi-state sales tax. With the Supreme Court’s Wayfair decision in 2018, the floodgates of online sales tax were opened, creating a nightmare for anybody doing eCommerce. There are a variety of rules in terms of economic thresholds, physical presence thresholds, as well as taxability rules. Online sellers must navigate this pit of misery as they grow to maintain proper compliance.
Good eCommerce accounting includes good sales tax accounting. This starts by understanding when a business has nexus or when they are required to collect and remit sales tax. Properly tracking sales tax collection, especially in a multi-channel scenario, is the next step. Finally, remitting sales tax appropriately is the final step. The good news is that technology exists to help businesses manage the complex scope of sales tax.
Considerations when tracking and executing shipping and fulfillment solutions
Tools to expedite the shipping process will be used by eCommerce enterprises that perform their own fulfillment. ShipStation is the main solution for managing shipping across many shipping providers, including major shippers like FedEx, UPS, USPS, and DHL.
For those using a 3PL, there are very complex pricing agreements. Costs of storage, receiving products from a manufacturer, picking products for an order, and packing and shipping are a few examples of these pricing intricacies. Such invoices could be a cornucopia of complexity and could contain insights a company might want to track.
In this article, we discussed eCommerce-specific technologies that are used by the vast majority of businesses in this space. Keep an eye out for part two of this series, which will cover back-office solutions that address common technology used to manage internal processes in an eCommerce business.