Every online business needs to have accounting software set up to keep track of progress. Usually, aspiring entrepreneurs go for the simple automation features of Xero, Shopify, A2x and various other inventory solutions. But after some computations on your own, you may find that the gross margin on your Xero P&L is inaccurate.
While the automation could be working just fine, there may be some missteps along the way that need manual adjustments. This could range from bookkeeping errors to changing things without understanding their impact. Here are some common examples:
Manual Adjustments You Can Use to Get Higher Accuracy
1. Bookkeeping Cost of Goods Sold vs. Supplier Deposits
If your eCommerce business gets goods from China in USD, you would usually have to pay a supplier deposit of 30 per cent of the goods manufactured. Before it gets shipped out, you have to pay the remaining 70 per cent.
You or your bookkeeper may be inputting these numbers in Xero into Cost of Goods Sold (CoGS), when it really should be in your balance sheet assets as Goods Ordered Not Received, or Supplier Deposits. They should be counted as assets and should not be counted as sold until they are sold to the customer.
2. Customer Prepayment Problem
When one of your items is out of stock, some customers add it to their wishlist to purchase once it comes back. They may input a prepayment, which can show up on Xero in profit and loss. Pre-orders do not reach the customer yet while they’re out of stock, which means they don’t count as a sale. Without manual intervention, you may pay income tax on a customer deposit a year early.
3. Dispatching Inventory Delays
Some eCommerce shipments may become delayed due to a high volume of orders or growth in demand. They may fall behind a week in picking and packing. If the sale is made this month and is to be delivered next month, it should show up in the Unearned/Deferred Sales figure balance sheet.
4. Mislabelling landing date for Inventory and Invoice date for Xero
eCommerce businesses may end up saying they will “land” inventory in their systems to make them available in Shopify. This can cause discrepancies in your final numbers, most especially if the actual landing date is days later. You may end up doubling Ordered, not Received, and Stock on Hand.
Your gross margin will be heavily impacted by write-offs in your inventory system. If it is too large, you may find some errors. Isolate these write-offs as extraordinary events and simply categorise them as your cost of goods sold. This can make your monthly margin consistent.
Your Xero-Shopify-A2x automation may seem right, but this is not set in stone. The margins always require constant analysis every month. If the numbers don’t make sense, go through these possibilities to troubleshoot the problem. Or, if you truly need assistance, contact a professional.
Do you need help with the Shopify-Xero setup for your monitoring system? You can always ask for help from the accountants and advisors from The ECommerce Accountant. We are a team of professional business advisors for online shops, influencers, and any up-and-coming brands that want accounting solutions. Contact us today!