Getting your first few sales on Shopify is exciting. It’s rewarding to know that there are people who want to buy your products, and that you can earn revenue from e commerce. Whether selling on Shopify is your full-time business or a side-hustle, each stage of your business has unique challenges as you develop your sales and marketing funnel. Perhaps you are considering developing a new product line, testing new marketing initiatives, or hiring an assistant.
One of the areas that many small businesses neglect is accounting. It feels cumbersome (and perhaps even scary) to look at your accounting. How much money is your business really making? Which products are selling well?
While it’s possible to “get by” for a little while when you pay little attention to your accounting, you are limiting the growth of your ecommerce business in the long run.
When you neglect accounting, you cannot make financially informed decisions for your Shopify store. Without knowing the financials of your business, you cannot decide:
- How much inventory can you afford?
- Whether you can hire someone?
- How much you can budget for marketing?
- Whether your business is profitable?
Even if your business manages to survive with poor accounting, your business will not be able to grow consistently and reach its full potential in terms of revenue and number of customers.
In other words, being aware of your ecommerce cash flow is essential for sustainable business growth.
In this article we will cover the 8 most common accounting mistakes that lead to Shopify stores losing money, and potentially even going out of business.
Mistake #1: Commingling Your Business and Personal Finance
Keeping track of multiple bank accounts can feel overwhelming, not to mention all the paper-work that’s involved in setting up a business bank account. Isn’t it easier to have just one account for both your personal and your business finances? Although it may seem easier to have just one bank account, this naive mistake can lead to severe consequences. Here are the two most important ones:
- As a business owner, you need to remain objective and make data-driven decisions. This is impossible to do when your business and personal finances are mixed together.
- Mixing personal and business finances can also lead to legal trouble, especially if you use your business credit card for personal expenses. When you file your taxes, you will need to provide your accountant with a list of business expenses, which is impossible to do if you don’t separate out expenses specific to your business.
Fortunately, there is a step-by-step process to separate your personal and business finances and start your business off on the right foot.
Mistake #2: Waiting until tax time to get your finances in order
As the time comes to file taxes, small businesses struggle to reconcile their sales from several weeks, or possibly months prior. While having to catch up on your sales occasionally is manageable, always waiting until tax time to get your books in order can lead to many complications for your Shopify store:
- Without knowing your daily (or at least weekly) cashflow you cannot makes financially informed business decisions about your business operations
- You cannot allocate your resources appropriately for your inventory
- Your business will become cash-strapped, and you may not be able to pay your staff, your vendors or yourself.
Keeping your accounting solution up-to-date may not be your favorite part of your job as a business owner, but it is essential for yearly growth and to have a thriving Shopify store.
Mistake #3: Committing to an accounting tool without examining your business needs
There are several accounting tools for an ecommerce business, and it’s important to choose the one that’s the best fit based on the size of your business and how you run your Shopify store. Cloud-based software is especially well-suited if you want multiple users to be able to log in from different locations, or if you want to access your accounting from a mobile device.
Desktop software is recommended for businesses that are looking for more advanced features and higher security.
The most popular accounting softwares for Shopify stores include QuickBooks, Netsuite, FreshBooks, Wave, and Xero. Although they are all used by Shopify business owners, there are significant differences among them:
- QuickBooks, which is well-suited for small-to-medium size businesses, has both an online and a desktop version, and users can switch from one to the other if their business needs change.
- Netsuite, on the other hand, is an enterprise resource planning (ERP) system that is suited for large businesses with millions of dollars in annual sales.
- FreshBooks is popular for international ecommerce businesses because it supports 170 currencies, but it has limited functionalities, and each plan includes only one user.
- Wave is a free tool that can be used to manage your sales and expenses, but it lacks a comprehensive mobile app and advanced reporting.
- Xero supports hundreds of integrations and is suitable for small to large businesses, and they also include advanced reporting tools to run your Shopify store profitably.
As an example of a comparison between cloud-based and desktop tools, please see the table below that contacts QuickBooks Online and Desktop.
After evaluating different solutions, you need to decide what is a higher priority for your business: low cost, advanced functionalities, or the convenience of being able to access your accounting from a mobile app?
Comparison between QuickBooks Desktop and QuickBooks Online to illustrate differences between desktop and cloud-based accounting software.
Mistake #4: Calculating Sales Tax Manually
It’s challenging to calculate sales tax when you are selling internationally. In the United States, sales tax varies not only by state, but also within states. California, for example, levies tax by state, city, and county.
If you sell globally, the variations in tax laws among countries complicates sales tax calculations even further. As a business owner, there is no way you could manually calculate correct sales tax for individual purchases. If you try to do this on your own, it can lead to decreases in your sales in multiple ways: 1) it takes away time from other activities that can generate more sales, and 2) you might get audited if you calculate incorrect sales tax.
Fortunately, there is no need to manually calculate sales tax. Online tools such as Avalara and TaxJar, were developed specifically for ecommerce businesses to automate the process of sales tax collection, improve compliance, and avoid getting audited.
Mistake #5: Not matching bank deposits from online sales
Payment processors levy fees and the payout from your Shopify store will not equal what you made in sales. When you don’t match the deposits from your bank with online orders from Shopify, the income is recorded twice. In addition, your account merchant fees will be missing, and you will be taxed on an expense. This leads to confusion when you’re making business decisions based on your cash flow, and it can potentially increase your taxes. If you want to know exactly how much money your Shopify store is making, you need to have a system to match deposits from your bank with your orders.
As you develop more products and your sales volume grows, it is even more important to match deposits to make sure your QuickBooks accounts are reconciled.
An automated deposit matching tool such as Connex can help you to match deposits from Paypal, Shopify, Stripe, Square and Amazon.
Mistake #6: Miscalculating of COGS
The Cost of Goods Sold (COGS) is an essential for determining whether your store is making a profit. Although most Shopify store owners agree on the importance of knowing this number, few of them know the right way of calculating it. COGS is comprised of many factors, that are both directly and indirectly tied to bringing a product to a customer:
- Cost of materials (e.g. raw materials)
- Labor costs (e.g. workforce, shipping)
- Operations (e.g. overhead, office expenses)
It is important to get professional help from an accountant to calculate your COGS on a regular basis. COGS changes over time, thus keeping track of it, and seeing how it ties into your profitability is essential for growing your Shopify store.
Mistake #7: Managing your inventory manually
If you don’t have an automated system for keeping your inventory up-to-date on all your selling channels, as well as your QuickBooks accounts, there are several traps that you can fall into:
Overstocking: Overstocking your products ties up your cash and leads to higher than necessary fees for renting space. It can also lead to your inventory spoiling if it has a limited shelf-life.
Overselling: This is common if you have low inventory or a high-demand item. Given that customers can order from your store 24/7, it’s impossible to keep up with inventory changes manually. If your inventory is not updated regularly, you may oversell, leading to refunds and unhappy customers.
Inability to scale your business: If you don’t have a system for managing your inventory, problems with cash flow, overselling, and overstocking will limit your business’s growth.
Poor business decisions: It is impossible to make good business decisions if your inventory is not up-to-date because you don’t have data on how much of each of your products you are selling, and you cannot allocate your cash to manage your inventory accordingly.
An inventory and shipment management tool such as Ordoro can help you to automate the tedious process of tracking your inventory. This is especially important if you are just starting with low inventory and want to make sure that your inventory is up-to-date on all your sites.
Mistake #8: Not charging enough for shipping
Shipping costs are rising, and it can be a challenge to make a profit if you don’t track costs. To complicate this further, many carriers add shipping surcharges that increase your shipping costs even more.
In order to make a consistent profit, it’s essential that you have a system for tracking shipping surcharges. Then you can set your own pricing accordingly. This will help you to reconcile your QuickBooks accounts.
If you are entering all the shipping surcharges manually, you will not only lose precious time, but also have errors in your bookkeeping.
Marking up shipping appropriately, can be even more challenging when you offer multiple shipping solutions. A shipping platform such as ShipStation, can help you to consolidate shipping from multiple channels.
As a Shopify seller, it is important to consider your business’ growth and future, not just making ends meet in the short-run. A positive cash flow is your business’ lifeline, and it will sustain your most important business functions such as marketing, sales, order fulfillment, and product development.
In order to have accurate cash flow estimations, it’s essential to be up-to-date in your accounting. Rather than quarterly (or yearly) bookkeeping, consider automations that help your Shopify store stay-up-to-date in your financial daily. This practice will help you make financially informed business decisions to allocate your resources properly for maximal growth and profit.