You have set up the perfect tech stack for your eCommerce business – Xero + Shopify + A2x + Dear/ Trade Gecko/ Cin7 (insert inventory solution here). Your sales in Xero match Shopify reports. Your inventory on the balance sheet matches the stock valuation report in your inventory solution. But the gross margin on your Xero P&L is not correct – WHY??!!
We see this every month when we prepare management reports for our eCommerce clients. Unfortunately, your eCommerce business can have all the automation working perfectly but your numbers still don’t make sense.
Here are a few of the top reasons why (please note that your inventory solution will not automate any of the below, these adjustments must be done manually, or with help from your eCommerce accountant):
- Goods ordered not Received. If your eCommerce business, like most, orders your goods from China in USD, chances are you have to pay your supplier a deposit, most commonly 30% before the goods are manufactured. And then, you have to pay the remainder of 70% before the goods are shipped. These payments are most likely being coded by your bookkeeper in Xero to Cost of Goods Sold. But they should be coded to a balance sheet asset called Goods Ordered Not Received, or Supplier Deposits. These amounts are assets to your business, and cannot be counted as cost of goods sold until your goods are sold to consumers.
- Customer prepayments. Often eCommerce businesses will sell a product that is out of stock and consumers will pre purchase these goods and wait for the delivery to be fulfilled. Again, without manual intervention, these sales will show up on the Xero profit and loss. But these customer prepayments are not sales yet, and won’t be until the item is dispatched. So these prepayments must be shown as a liability on your business balance sheet. And you don’t want to pay income tax on a customer deposit a year too early!
- Delay in Dispatching Inventory. Further to point 2 above, some eCommerce businesses become so delayed in shipping goods, due to growth, that they are a week or more behind in picking and packing. If a sales order date is in one month, and the dispatching date is in the next month, an Unearned/Deferred Sales figure must be raised in your balance sheet showing this amount.
- Sales orders syncing straight to Xero, even though dispatch date is much later. We had a client that had a multi million sale sync from their inventory system to Xero, even though they fulfulled that order over a year later. The tax agent missed this and the client was instructed to pay tax on the sale (even though not paid by the customer) in the wrong financial year. Refer point 3 above!!
- Difference in landing date (Inventory) and Invoice date (Xero). Often eCommerce business will “land” inventory in their inventory systems to make goods available in Shopify. But the true landing date may be days, or weeks later. This can cause a double up between Goods Ordered not Received and Stock on Hand.
- Inventory Adjustments / Write offs. If your eCommerce business makes a large write off in your inventory system, this will impact your gross margin. It is important to isolate these write offs as extraordinary events, and categorize them separately to your regular cost of goods sold, so that your monthly margin is consistent and meaningful.
- Consistency of dates between Xero and the Inventory Solution. If the date of a customer and supplier invoice differ between Xero and your inventory solution, you can have timing issues that have an impact on your gross margin. Always ensure your dates between these two systems are aligned.
- Coding packaging and freight costs directly to Cost of Goods sold instead of amortizing these landing costs to inventory. Often with eCommerce business the costs of landing (freight) and packaging can be material. These costs should be allocated, on a pro rata basis based on cost or weight to your eCommerce inventory. If this is not done, the costs will often land in the P&L when incurred, and can cause the margin to be inconsistent from one financial period to the next.
As you can see, these automated syncs between Xero + Shopify + A2x and Inventory are not set and forget. The margins must be analyzed on a monthly basis and if they do not make sense, all of the above issues must be considered.
It is so important for all eCommerce business to use a tax agent that truly understands the your industry specific issues. You can contact us by calling 04266 25683 (04266 CLOUD). We look forward to working with you!