As an eCommerce business owner, your financial records are the backbone of your success. Accurate bookkeeping is critical for growth, profitability, and compliance. Yet, many eCommerce businesses struggle with financial mismanagement, leading to poor strategic decisions and even financial distress. ERAA Consulting are eCommerce Business Bookkeeping experts in UK.
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ERAA Consulting Limited are the undisputed leaders in eCommerce accounting in Scotland. We specialize in helping online businesses manage their books with precision. Our expertise ensures that your financial records are accurate, compliant, and optimised for growth.
If your bookkeeping isn’t handled correctly, your business is at risk. Here are six critical signs that indicate bookkeeping trouble in your eCommerce business.
1. Inaccurate Inventory Balances | eCommerce Business Bookkeeping
Inventory is often the largest asset for an eCommerce business (except in drop shipping models). Proper inventory accounting ensures you:
- Know exactly how much stock you have.
- Track sales trends and margins accurately.
- Maintain correct valuations on your balance sheet.
Red Flags:
- The inventory balance doesn’t change over time.
- Inventory levels appear inconsistent with sales volume.
- No inventory is recorded on the balance sheet.
Your inventory value should increase when you purchase stock and decrease when products are sold (recorded as Cost of Goods Sold – COGS). If these numbers don’t align, your financial records need urgent attention.
Poor inventory tracking can result in stock shortages, overstocking, and cash flow issues. It can also distort profitability, making it difficult to make informed business decisions. eCommerce businesses must ensure their inventory management system is fully integrated with their accounting software such as Xero.
2. VAT Errors on the Balance Sheet | eCommerce Business Bookkeeping
VAT (Value Added Tax) is a complex issue for eCommerce businesses, especially with multi-jurisdictional operations across the UK and EU. Every business selling goods must comply with VAT regulations, ensuring that the correct VAT rates are applied and reported accurately.
Red Flags:
- No VAT liability appears on the balance sheet.
- Unusual fluctuations in VAT figures.
- VAT returns frequently result in unexpected liabilities or penalties.
Remember, you collect VAT from customers where applicable. A bookkeeping system then records that VAT as a liability. That is payable to HMRC or the relevant tax authority. If your books aren’t reflecting this correctly, your business may be exposed to significant financial risks, including audits, penalties, and reputational damage.
Failure to properly account for VAT can lead to underpayments or overpayments, both of which can have severe cash flow implications. It is essential to use the correct VAT codes for different sales types, such as domestic, EU, and rest-of-world sales, to ensure compliance.
3. Misreporting VAT on Profit & Loss Statement | eCommerce Business Bookkeeping
VAT should never be included in your income or expenses. It is neither revenue nor a business expense; it is a liability owed to tax authorities.
Red Flags:
- VAT appears as an income item.
- VAT payments are recorded as expenses.
- Incorrect tax calculations impacting profit figures.
Incorrect reporting can lead to taxable income misstatements, affecting financial projections and tax obligations. Business owners should ensure that VAT is correctly allocated in their accounting software, avoiding costly errors when filing VAT returns.
4. Incorrect Revenue Recording | eCommerce Business Bookkeeping
Unlike traditional businesses, eCommerce revenue flows through multiple channels. These include (but not limited to) Amazon, Shopify, eBay, and more. Many bookkeepers make the mistake of recording only bank deposits, leading to inaccurate revenue tracking.
Red Flags:
- Revenue recorded solely based on bank deposits.
- Missing breakdowns for merchant fees, shipping fees, VAT, and refunds.
- Monthly sales data doesn’t match platform reports.
Accurate revenue tracking requires pulling detailed sales reports from each platform, accounting for fees, refunds, chargebacks, and VAT, and ensuring everything ties back to the final bank deposit. If your books don’t reflect this, you’re not getting the full picture of your profitability.
Many eCommerce platforms deduct transaction fees, advertising costs, and fulfilment charges before making payouts. If these aren’t recorded separately, businesses may drastically underestimate their operational costs, leading to incorrect profitability calculations.
5. Unstable Gross Profit Margins Due to COGS Mismanagement | eCommerce Business Bookkeeping
COGS directly impacts your profitability. It should be recorded in alignment with sales to provide an accurate picture of margins.
Red Flags:
- Wide swings in gross profit margins.
- Inventory expenses booked at the time of purchase instead of at the time of sale.
- Periodic recording of COGS instead of real-time tracking.
If your margins fluctuate wildly, your bookkeeping process may be misaligned. Proper COGS tracking ensures financial stability and better decision-making.
COGS should be matched to sales, ensuring that the correct amount of product cost is recorded when revenue is recognised. If a business books inventory purchases as expenses immediately, it will experience erratic profit margins and inaccurate financial reporting.
Furthermore, eCommerce businesses that operate internationally must consider currency fluctuations, supplier payment terms, and landed costs (including duties and shipping) to ensure accurate COGS calculations.
6. Poor Cash Flow Management | eCommerce Business Bookkeeping
Even if your business is profitable on paper, poor cash flow management can lead to serious financial struggles. eCommerce businesses often deal with delayed payouts from platforms, high advertising costs, and seasonal sales fluctuations.
Red Flags:
- Struggling to cover operational expenses despite strong sales.
- Frequently relying on short-term loans or credit cards for cash flow.
- Inconsistent payment cycles from different sales channels affecting liquidity.
Managing cash flow effectively means forecasting future expenses and income, setting aside funds for VAT payments, supplier costs, and unexpected expenses. Businesses must also ensure that sales payouts from different platforms are tracked correctly, avoiding unexpected shortfalls in working capital.
Take Control of Your eCommerce Finances with ERAA Consulting Limited
Bookkeeping errors can cripple your business. We do Accurate eCommerce accounting at very competitive fees. ERAA Consulting ensures your books are accurate, your tax obligations are met, and your financial statements are investor-ready.
Why Choose Us?
- Scotland’s leading eCommerce accountants.
- Deep expertise in platforms like Amazon, Shopify, eBay, and TikTok Shop.
- Proven track record of optimising financial reporting for online businesses.
- Expertise in UK and EU VAT compliance.
- Customised accounting solutions tailored to your business needs.
If you recognise any of these warning signs in your financial statements, it’s time to take action.
Contact ERAA eCommerce Accountants today for a consultation. Let us help you master your books and grow your business with confidence!
