The 12 Biggest Accounting Errors That Could Sink Your ecommerce Business

By
Julia Tolmachyov
Co-Founder at DayZero

Julia is a co-founder at DayZero. Prior to DayZero, she was an investor in both retail and software companies and has a background in finance and accounting.

The 12 Biggest Accounting Errors That Could Sink Your ecommerce Business
Updated
Reviewed by
Michelle Liao
Co-Founder at DayZero

Michelle is a co-founder at DayZero. Prior to DayZero, Michelle bought, sold and operated e-commerce brands, managing their finances and accounting on a day to day basis.

In this article

Running an ecommerce business is tough—handling accounting on top of that can feel overwhelming.

With so many moving parts like revenue, inventory, and taxes, there's little room for error.

A single mistake could affect your bottom line and cash flow or even lead to compliance issues.

In fact, 82% of ecommerce business failures are tied to poor cash flow management or a lack of understanding of cash flow dynamics.

The good news? Today’s accounting tools and proven techniques make it easier than ever to stay on top of your finances.

In this article, we’ll cover the top 12 common accounting mistakes that ecommerce owners make—so you can avoid them and keep your business running smoothly.

The top 12 ecommerce accounting mistakes that could hurt your bottom line

We’ve had conversations with over 300 brands, and while we’ve seen plenty of successes, we’ve also come across some recurring challenges.

What stood out the most were the common accounting mistakes these businesses tend to make.

Many were struggling with messy financial records, and their accounting teams were barely holding it together when tax season hit.

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It was clear that a lot of them didn’t have a solid grasp on their numbers, and that’s where things went wrong.

To help you avoid these pitfalls, we’ve put together a list of the most common accounting mistakes we’ve seen—along with ways to fix them.

Mistake #1: Neglecting to reconcile accounts regularly

In the busy world of ecommerce, it’s easy to let account reconciliations slide. 

Many business owners view this as a low priority, thinking it can wait until the end of the month or quarter.

However, neglecting regular reconciliations can lead to serious financial issues that harm your business.

Why this matters

Failing to reconcile accounts can result in errors in your financial statements, like unrecorded sales or double entries.

For instance, if you sell 100 items but only record 90, you may overstate your revenue, leading to a misleading view of your business's performance.

Over time, these discrepancies can snowball, making it increasingly difficult to resolve them.

When tax season arrives, inaccuracies can result in overpayment or underpayment of taxes, possibly triggering audits or fines. If you wait too long to reconcile, correcting errors becomes more complicated.

Regular reconciliations keep you informed about cash flow and help spot issues with payments or inventory management.

👉 Auto-reconciling using DayZero allows you to identify early if you’re missing transactions in your statements.

Making it a priority

Establishing a regular reconciliation schedule can save you time and stress later on.

DayZero offers automated features that simplify the reconciliation process, ensuring your financial records remain accurate.

Prioritizing reconciliation helps you avoid potential pitfalls and ensures smooth business operations.

Mistake #2: Ignoring proper inventory valuation methods

Inventory valuation may seem like a behind-the-scenes task, but it can significantly impact your financial statements.

Many ecommerce businesses mistakenly apply a one-size-fits-all approach, overlooking the importance of choosing the right inventory valuation method.

Why this matters

Using an incorrect valuation method can distort your cost of goods sold (COGS) and profit margins.

Let’s say that a company uses the first in, first out (FIFO) method during a period of rising prices—it will show lower profits compared to using last in, first out (LIFO).

This misrepresentation can affect cash flow management and tax liabilities.

Additionally, failing to accurately value inventory can lead to stockouts or excess inventory. 

Choosing the right method

When selecting an inventory valuation method, consider your specific business model and market conditions.

In this case, if you deal with perishable goods, FIFO may be more suitable. 

Consistently applying your chosen method across all periods not only ensures accurate financial records but also enhances your credibility with stakeholders.

Regularly reviewing and adjusting your inventory valuation approach using tools like DayZero can lead to more informed decision-making.

For example, shifting to a weighted average cost method during volatile pricing periods can better reflect actual costs and improve profit analysis.

Mistake #3: Misclassifying expenses

Expense classification may seem minor, but misclassifying expenses can have serious repercussions for your ecommerce business.

Many owners unknowingly categorize their expenditures incorrectly, leading to inaccurate financial reporting.

Why this matters

Incorrect expense classification can distort your financial statements, affecting profit margins and tax obligations.

If a business mistakenly categorizes a large equipment purchase as a routine operational expense, it could significantly lower taxable income for that year. 

Moreover, this misclassification may lead to higher taxes in future years as the asset depreciates.

Misclassifying expenses can also limit your ability to analyze spending trends effectively.

If you categorize marketing expenses as general administrative costs, you might overlook the opportunity to optimize your marketing budget for better results.

Ensuring accurate classification

To avoid misclassifying expenses, establish a clear and consistent chart of accounts and regularly review your financial statements. DayZero makes it easy to spot how transactions are being categorized using our Transaction Summary and Transaction Details views. 

Mistake #4: Failing to keep up with tax obligations

Many ecommerce businesses overlook their tax obligations, assuming they can manage them later.

However, failing to stay updated with tax requirements can lead to severe financial penalties and legal issues.

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Why this matters

Tax laws are complex and vary by jurisdiction. Not staying informed about your tax obligations—whether it’s sales tax, income tax, or payroll tax—can result in fines, interest charges, or audits.

For instance, if you sell products across state lines but fail to account for varying sales tax rates, you could face unexpected liabilities.

Given how ecommerce businesses often operate in multiple regions, each region comes with its own tax regulations.

A business selling in both California and Texas needs to understand that tax rates differ significantly, and neglecting this can lead to costly penalties.

Staying compliant

To mitigate these risks, establish a routine for monitoring tax obligations and deadlines.

Work with a tax professional who understands ecommerce regulations and modern accounting tools that offer built-in tax compliance features to help manage your obligations.

By staying on top of your tax requirements, you can avoid costly penalties and ensure that your business remains compliant.

Mistake #5: Overlooking cash flow management

In ecommerce, it’s common to focus heavily on sales and revenue while neglecting cash flow. Many business owners assume that positive sales figures mean their cash flow is healthy.

Why this matters

Ignoring cash flow can lead to liquidity issues, making it challenging to meet financial obligations like paying suppliers and employees.

For example, a business might have significant sales but could face cash shortages due to delayed customer payments. Insufficient cash flow can result in missed opportunities for growth and increased borrowing costs.

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Tracking cash flow regularly helps you identify trends and potential problems before they escalate. If you notice a consistent lag in receivables, you can adjust your invoicing practices or offer incentives for early payment.

Implementing effective cash flow strategies

Establish a cash flow management system to monitor inflows and outflows. 

⚡Consider using tools like DayZero that offer real-time cash flow insights, helping you make informed decisions.

Setting up cash reserves can also provide a buffer for unexpected expenses.

Regularly reviewing cash flow statements will help maintain liquidity and support business stability.

Mistake #6: Not implementing proper internal controls

Many ecommerce businesses underestimate the importance of internal controls, believing their operations are too small to warrant such measures.

Why this matters

Lack of internal controls can lead to fraud, theft, and errors that compromise financial integrity. This means that without checks and balances, unauthorized transactions may go unnoticed. This may lead to considerable financial setbacks and harm your company's reputation.

Proper internal controls also ensure compliance with regulations and can enhance operational efficiency. Regular audits and reviews help identify weaknesses in your processes, allowing for timely corrective actions.

Establishing strong internal controls

Develop a comprehensive internal control framework tailored to your business size and complexity. This can include segregation of duties, regular reconciliation of accounts, and access controls for sensitive information.

Using accounting software with built-in security features can help manage risks effectively. Ensure your team is trained on these controls to maintain a culture of accountability.

Mistake #7: Delaying financial reporting

Many ecommerce owners postpone financial reporting, believing it can wait until the end of the month or quarter.

Why this matters

Delaying financial reports can lead to missed opportunities for strategic decision-making. Timely access to financial data enables you to identify trends, measure performance, and adjust strategies accordingly. For instance, without regular reports, you may overlook declining sales patterns until they become significant issues.

Moreover, late financial reporting can impact relationships with stakeholders who rely on up-to-date information to make informed decisions about their investments.

Establishing a reporting routine

Create a schedule for regular financial reporting that aligns with your business needs. Tools like DayZero can automate this process, providing real-time insights into your financial health.

Implementing monthly or even weekly reporting cycles allows for better visibility into your operations and empowers you to take corrective action swiftly.

Mistake #8: Failing to utilize financial forecasts

Many ecommerce businesses overlook the importance of financial forecasting, treating it as a tedious task rather than a strategic necessity.

Why this matters

Without accurate financial forecasts, you may struggle to plan for growth and manage resources effectively. A lack of foresight can result in overstocking inventory, unnecessary expenses, or missed investment opportunities. For example, if sales projections are inaccurate, it can lead to insufficient stock during peak seasons, resulting in lost sales.

Financial forecasts provide valuable insights into expected cash flow, profit margins, and future expenses, helping you make informed decisions that align with your business goals.

Creating effective financial forecasts

Develop a forecasting model that takes historical data, market trends, and business goals into account. Frequently reassess your forecasts by considering actual outcomes and changing market conditions.

Using financial software can simplify this process, allowing you to generate and adjust forecasts quickly. This proactive approach enables you to stay ahead of potential challenges and seize growth opportunities.

Mistake #9: Ignoring the importance of accurate sales tax calculations

Many ecommerce businesses underestimate the complexities of sales tax calculations, assuming that it is a straightforward process.

Why this matters

Inaccurate sales tax calculations can lead to compliance issues, resulting in audits, fines, or legal penalties. If a business fails to apply the correct tax rates for different jurisdictions, it may end up under-collecting or over-collecting sales tax, creating liabilities that could impact cash flow.

Additionally, the constant changes in tax laws and rates can complicate the process further. Businesses operating in multiple states must understand the varying regulations to avoid costly mistakes.

Implementing accurate sales tax practices

To ensure compliance, utilize accounting software that integrates sales tax calculations based on the latest regulations. 

Regularly review your sales tax processes and consider working with a tax professional who specializes in ecommerce to ensure accuracy and compliance.

Mistake #10: Disregarding seasonal fluctuations in your strategy

Often, ecommerce businesses tend to overlook the impact of seasonal fluctuations, assuming that their sales will remain consistent year-round.

Why this matters

Seasonal variations can significantly affect cash flow, inventory management, and overall profitability. Failing to plan for these fluctuations can result in overstocking or stockouts, leading to lost sales and increased carrying costs.

Understanding seasonal trends enables you to adjust your strategies, ensuring that you are prepared for peak periods while managing resources effectively.

Creating a seasonal planning strategy

Analyze historical sales data to identify seasonal trends specific to your business.

✔️ Use tools like DayZero to monitor inventory levels and cash flow during peak and off-peak periods.

Develop a flexible financial plan that accommodates these fluctuations, allowing you to maintain operational stability throughout the year.

Mistake #11: Overlooking overhead expenses while concentrating on inventory costs

In ecommerce, it's common to prioritize inventory costs while neglecting overhead expenses. This oversight can lead to a skewed understanding of financial performance.

Why this matters

Overhead costs, including rent, utilities, and employee salaries, significantly affect a business's overall profitability. Ignoring these expenses can result in misleading assessments of financial health.

This means that even if inventory is moving quickly, high overhead can consume profits and lead to financial instability.

Without tracking overhead costs, businesses may miss opportunities for cost reduction.

An incomplete view of expenses makes it difficult to allocate resources effectively and can hinder informed decision-making.

Moreover, not monitoring overhead costs complicates budgeting and forecasting efforts. Businesses may find themselves struggling financially, which could ultimately lead to operational challenges or bankruptcy.

Accurate financial reporting relies on a comprehensive understanding of all costs associated with running the business.

Improving cost management

To address this issue, it's essential to implement a system that tracks both inventory costs and overhead expenses.

Financial management software can simplify this process by providing insights into total expenditures. DayZero can facilitate this by automating tracking and reporting, ensuring a clear view of all costs.

Regular reviews of both inventory and overhead expenses will enhance financial decision-making and improve overall profitability.

A thorough understanding of the complete cost structure enables businesses to identify areas for improvement and optimize operations.

Mistake #12: Counting income from net deposits instead of actual sales revenue

Relying on net deposits for income recognition instead of actual sales figures can lead to significant inaccuracies.

Why this matters

When income is based solely on net deposits, businesses risk overlooking returns, discounts, and unprocessed transactions.

This can inflate revenue figures and create an unrealistic picture of financial health.

Such overestimations may lead to misguided financial planning, poor investment decisions, and potential cash flow problems.

Accurate income recognition is vital for proper financial reporting. It ensures profit margins are correctly calculated, which impacts strategic business decisions.

Inflated revenue figures can erode stakeholder trust, damaging relationships with investors and lenders.

Additionally, tax consequences may arise from miscalculating income. If reported income exceeds actual sales, businesses could overpay taxes, resulting in financial strain. 

Inaccurate income recognition complicates financial forecasting, which can cause missed growth opportunities.

Implementing accurate income tracking

To avoid this issue, businesses should adopt a system that recognizes income based on actual sales rather than net deposits.

Accounting software should be used to track real-time sales, including returns and adjustments.

💡DayZero can assist in this process by ensuring income recognition aligns with true performance. Regular reviews of sales data and financial reports help maintain transparency and accuracy, fostering sound decision-making and stakeholder confidence.

Next steps

Now that we have a clearer understanding of the costly mistakes that ecommerce businesses often encounter, it’s important to keep a few things in mind. Be proactive in tracking your finances. You need transparency, real-time data, and updated books on a daily basis. About 1 in 4 U.S. businesses fail within their first year of operation, so staying on top of your numbers is crucial.

Consider a tool like DayZero, which comes with ecommerce-specific features and updates your data automatically, 24/7.

From simplifying data management to providing real-time insights, we are transforming traditional bookkeeping processes and helping you understand what your numbers truly mean for your business.

Book a demo today to see how we can help your business power through with accounting. 

Frequently Asked Questions (FAQs)

  1. What is the most common accounting error?

The most common accounting error is misclassification of expenses. This occurs when expenses are recorded in the wrong categories, leading to distorted financial reports and potential tax issues.

  1. How to correct errors in ecommerce accounting?

To correct errors in ecommerce accounting, first identify and review the discrepancies in your financial records. Update your entries to reflect accurate information and ensure proper classification.

Using DayZero can simplify this process by automating data management and providing real-time insights, which helps maintain accurate books and reduce errors. Regular audits can also assist in spotting and rectifying mistakes promptly.

  1. What are one-sided errors in accounting?

One-sided errors refer to mistakes that affect only one side of an accounting entry. This can occur when an amount is recorded incorrectly in a single account without a corresponding entry in another account.

For example, if an expense is recorded without an offsetting entry in cash or accounts payable, it can lead to inaccuracies in financial statements. Regularly reconciling accounts helps identify these types of errors.

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