Calling 2020 an “unprecedented year” is a cliche at this point, but indeed it’s been unlike anything the ecommerce industry has ever seen before. Nobody could have predicted the global pandemic, the subsequent lockdowns, and the devastating losses many faced both personally and professionally. With fewer brick-and-mortar stores open among escalating health concerns, consumers turned to the web to make their purchases across a range of categories—resulting in an explosion of business for both new and established online retailers. It was a mass behavioral shift that changed the course of ecommerce forever.
What does ecommerce’s rollercoaster of a year mean for ecommerce accounting? The truth is that both ecommerce sellers and accountants will grapple with opportunities and challenges stemming from 2020’s extraordinary ups and downs. Read on for a snapshot, as well as tips for how both sellers and accountants can work together to pave a smooth path forward into 2021.
2020 Ecommerce Sales: Two Very Different Stories
Even before the pandemic, online retail as a whole had been growing rapidly. In the last four years, global ecommerce sales more than doubled from $1.8 billion to $4.2 billion, and current projections show sales totaling $6.5 billion by 2023. The why seemed pretty clear: Consumers appreciated the convenience of shopping online, not to mention the wide selection of products and great deals they could find there. After hitting purchase, their items arrived in between a few hours and a few days—no leaving the house required. “[Ecommerce is] all about instant gratification. We have every movie and TV show at our fingertips,” says Peter Eastvold, Point of Sale Expert and Owner at BlackRock Business. “It’s a little addictive.”
When nationwide lockdowns went into effect in March of this year, the concept of shopping without leaving the house was no longer just a luxury; it was a necessity. While grocery stores and other locations selling essential items remained open, concerns about the unknown kept many consumers turning to the Internet to make purchases. Data from ClearSale shows the number of first-time online shoppers (roughly 150 million) rose by 12% between March and April of 2020, quickly contributing to the most dramatic growth spurt ecommerce has ever seen.
The results were stunning. Shopify found that—at the height of the pandemic —10 years of ecommerce growth happened in just 90 days. During that time frame, ecommerce’s share of global retail sales peaked at 16.4%, after spending three fiscal quarters hovering around 11%. The growth was not only driven by people buying more; it was also fueled by a greater volume of consumers making purchases. In total, 84% of consumers shopped online during the pandemic, compared with 76% before the health crisis.
But it wasn’t all days of wine and roses for ecommerce sales. Though many sectors of the industry saw explosive growth, disaster struck for others. Apparel and accessories sales dropped 52% year over year, and luxury goods fell by 23%. The beauty category’s makeup side also saw a steep sales decline of 64% between 2019 and 2020. Meanwhile, the national unemployment rate spiked to 14.7%, severely lowering consumer confidence and spending on frivolous purchases. Even Amazon stopped delivering everything except food and household/cleaning supplies for a few weeks in March and April.
The bottom line? There are two stories to tell about ecommerce in 2020: One of massive, 129% year-over-year growth and one about overwhelming financial loss. It was a year of ups and downs, but the recent holiday sales cycle indicates plenty of reason for hope.
Avoiding Financial Missteps After the Holiday Season
After a turbulent ecommerce sales cycle earlier in the year, Cyber Week 2020 shone as a bright light boding well for the holiday season. Thanksgiving, Black Friday, and Cyber Monday all broke records for sales and growth. In total, consumers far outpaced experts’ projections and spent $270 billion during Cyber Week, growing the online event by 36% year over year. Traffic growth rates increased dramatically, and both add-to-cart and conversion rates either held steady or increased on desktop and mobile devices. Consumers also spent more time shopping online, likely due to increased personalized marketing efforts and social media buzz.
Unfortunately, a pitfall of running an online store is dealing with the slow seasons, one of which occurs right after the holidays. If your startup or small ecommerce businesses is at risk of seasonal financial whiplash, leverage these ecommerce accounting tips to avoid common financial missteps:
- Understand your cash flow. Savvy sellers mine their data to know when their customers buy the most and when sales are scarce, so they can cut expenses down to the bare minimum until things pick up again. If this is your first year in business, research your industry to get an idea of when to expect the next rush. Then consider an ecommerce accounting automation platform that draws singular business insights from your books.
- Reduce loss. There are three ways to keep your business afloat during the slow months: spend less money, suspend any unnecessary expenses like subscriptions or rentals, and trim down your labor force. You can also diversify your products or services to add revenue during the slow season.
- Plan ahead. The best way to cover your expenses when business is slow is to use savings from your busy seasons. Once you’ve navigated your first slow season successfully, the next one should be easier. BlackRock’s Eastvold advises, “After an excellent rush, [sellers should] stock up their warehouses to make it through the lean portion of the year.”
2020 Highlights Challenges Faced By Online Retailers
While selling online is a lucrative endeavor for millions of entrepreneurs, it’s not without its operational challenges. In 2020, there have been sizable hurdles to overcome due to raw materials shortages, supply chain disruptions, and financial uncertainty. The explosive growth of ecommerce also overextended shipping carriers’ systems and resulted in deliveries taking nearly five times longer than usual.
Even when we’re not amid a pandemic, ecommerce is a competitive industry, and navigating it requires both business savvy and technological expertise. There are several hurdles to overcome on a day-to-day basis, but a few accounting challenges stand out because they’ve been heavily impacted this year:
Ecommerce sales tax issues: Whether ecommerce sellers launched in 2020 or simply grew their customer bases this year, they likely have new sales tax liabilities to consider. The 2018 Wayfair, Inc. v South Dakota Supreme Court ruling declared that ecommerce sellers must remit sales taxes in every state where they reach a sales volume or revenue threshold, or face steep fines for not complying in some jurisdictions.
Inventory management angst: Sellers of all sizes also faced inventory management headaches this year as they experienced unprecedented consumer demand from March onward. Stockouts were far more common, and shipping delays slowed the cash flow tracking process. It’s challenging in normal times for sellers to be in tune with what they have in specific locations, but the lightning-fast pace at which products sold online made inventory management far more stressful in 2020.
Manual accounting nightmares: Small businesses experiencing sales growth—but still burdened by manual accounting processes—became overwhelmed by the subsequent data entry headaches required to stay on top of their accounting. Manual data entry is time-consuming, frustrating, and prone to human error, and outsourcing it is expensive. Sellers that haven’t embraced ecommerce accounting automation are stuck dealing with busywork instead of building their businesses.
2020 Stresses Issues for Ecommerce Accountants
Online retailers tackle unique challenges while operating in the ecommerce industry, and they often make their way into the accounting process. Ecommerce accountants in turn face four significant issues when working with their seller clients during normal times—and the pandemic has only exacerbated them. Here’s a breakdown:
Consistent and accurate reporting: Well-organized financial reporting is a must in every industry, but ecommerce showcases some unique reporting needs. Consider the three key reports accountants use:
- Balance sheets report a company’s assets, liabilities, and shareholders’ equity at a specific point in time. Potential investors and banks use balance sheets (and credit scores) to determine whether to finance a business.
- Profit and loss statements (or P&Ls) show incoming revenues and expenses during a given period. P&Ls are paired with cash flow statements.
- Cash flow statements show a breakdown of the revenues and expenses, indicating whether a business is sustainable.
Ecommerce is more complicated and fast-paced than traditional brick-and-mortar retail, so having access to up-to-date reports is crucial for online retailers to stay nimble during both challenging and prosperous times. However, with so many transactions to include during ecommerce bookkeeping, it’s nearly impossible to account for them all without automated accounting software.
Tracking fees: Ecommerce accountants also must accurately track the fees that sellers incur. For example:
- Sales channel fees: Many online retailers utilize multiple sales channels, and each can tack on monthly membership fees, sale fees, FBA fees, and more.
- Payment processing fees: Sellers also have to pay fees to Square, Stripe, or whichever integration(s) they’re using.
Each fee must be recorded as its own expense, rather than as part of gross expenses, so the P&L statement remains balanced. Like other manual processes, recording each of these fees by hand is time-consuming and redundant.
Selecting the right tech: Ecommerce accountants are faced with a plethora of technology, and cloud accounting software is a key piece of the puzzle. Manual data entry is a frustrating, time-consuming process that’s expensive to outsource, and it is prone to human error. Yet, many small ecommerce sellers are hesitant to pay even small monthly fees to automate the process. “I tell [ecommerce business] owners their time is worth a lot of money,” Eastvold says. I ask them, ‘How many hours a week do you spend doing your accounting to make it work?’ It can come out to thousands of dollars per month [to process their accounting] the long, hard, Excel way. But there’s software that does it for them, for a nominal fee.”
Tackling the returns process: Finally, ecommerce accountants must deal with the returns process, which can prove challenging for two reasons: the impact on inventory and the extra step to the bookkeeping process added by refunds. When a return arrives at the warehouse or fulfillment center, the items must be evaluated in case they can be re-added to the total inventory. Double expenses (when the inventory is written off twice) should be avoided at all costs. In short, returns complicate your inventory and, if you aren’t careful, can throw a wrench in your bookkeeping. And—sigh—online retailers are preparing for more returns than ever this holiday season.
Automation Helps Ecommerce Businesses Thrive
Online retailers are thriving thanks to the unprecedented surge of ecommerce, but they’re also experiencing growing pains. As a business scales, the owner’s workflows have to adapt to accommodate greater order volumes and more team members. It can be intimidating to make changes after seeing success with your existing processes, but setting yourself up for long term sustainability is worth the risk. For 40% of enterprises and 25% of small businesses, that operational change is adding automation.
Experts agree that automation is the key to business success. Syed Balkhi, CEO at OptinMonster and WPBeginner, notes these advantages of automation:
- Automation helps to complete busywork and gather large quantities of data.
- Advanced automation systems analyze the data and can suggest more efficient workflows.
- Business owners who use automation can improve customer service, lead generation, customer relationships, and data collection.
There are many ways to automate your business operations as an online seller, from fulfillment to marketing to accounting. Ecommerce accounting automation in particular saves sellers time, money, and headaches while increasing accuracy and efficiency. (It also helps to maintain business compliance so sellers can avoid audits.) During the biggest year in ecommerce, speed and precision are critical for businesses to stay on pace—so automation is more essential than ever.
Collaboration Between Sellers & Accountants Is Key
During periods of turbulent growth, BlackRock’s Eastvold advises online retailers to collaborate with their accounting partners—especially when investing time into understanding the critical role technology plays. Accounting systems, point of sale systems, and web stores all have their intricacies that sellers should grasp before passing on data to accountants.
“The number one pain I run into with helping [ecommerce] customers is due to either time or laziness on their part: If they don’t take the time to properly figure out how their systems work first, you’ll often find that they’ve been [processing their data] wrong the whole time, Eastvold says. “And then there’s a ton of cleanup.”
Sellers who do not heavily incorporate technology into their workflows can still institute some best practices that help their accounting partners produce better work. Organizing receipts, meeting deadlines, billing efficiently, and updating key reports goes a long way toward more accurate—and insightful results.
Looking Ahead — the Ecommerce Forecast for 2021
The events of this year are already shaping the projections for ecommerce in 2021. After the rapid expansion of online retail in the past nine months, insiders predict uneven growth next year. Experts expect brick-and-mortar stores to welcome shoppers in larger numbers, which will help them recover after their pandemic plunge. Ecommerce sales, meanwhile, are anticipated to decelerate. As hybrid commerce becomes the new normal, industry insiders are advising sellers—when feasible—to adopt an omnichannel strategy to remain relevant.
Looking ahead to next year, online retailers should be preparing for tax season. The biggest year in ecommerce means that online retailers’ accountants have so much more to account for— sales, returns, seller fees, inventory expenses, administrative costs, and more. Accountants are already bracing for late and unprepared clients.
Consumers have grown to expect a seamless experience when switching between online and offline, and they’re comfortable using technology to shop. Savvy online retailers should take advantage of this tech-centered trend and automate their data sync to make multichannel selling easier and more organized.
“Ecommerce will just continue to grow,” Eastvold says. “Each year, more people decide to order online. They may never have [shopped online] before because they were uncomfortable with it previously, or they’re used to going to a local shop. But if it’s a good experience, they’ll continue to do it.”
This was a historic year for online retail, and many small businesses are scaling faster than their processes allow. Harness the power of Webgility’s ecommerce accounting automation platform to kick manual accounting processes to the curb — and use the extra time to focus on growing your business instead! Learn more.