All businesses need advice from a variety of professionals. One of the most important professionals that guides a business owner is their accountant. This relationship determines a lot of the financial success of the business. A good accountant providing solid advice can help an ecommerce business succeed where otherwise they might struggle or fail.
Why do businesses often hire an accountant?
Online services and the growth of the Internet have made it easier for companies just starting out, to approach their finances with a do-it-yourself approach. But eventually, almost everyone in business has a relationship of some sort with a certificate public accountant (CPA) or enrolled agent (EA). Larger companies may have employees or even an entire department devoted to these activities, but the relationship still applies.
I generally think of four general aspects of this relationship. Some retailers may use all of these, while others only a few.
1. Advice When First Starting Out
A brand new company has to get established in a few ways before doing business. First, the decision of whether to run the business as a sole proprietor, to incorporate, or to form as an LLC or partnership is often helped by professional advice, whether it’s a lawyer or a CPA. Additionally, there are often business licenses to obtain, income tax elections to make, and other red tape to deal with.
2. Periodic Tax Filings
Like all businesses, online retailers must file taxes. They often turn to a professional for their yearly income tax preparation. Some may also have their accounting firm prepare and file their quarterly employer tax and other returns. A CPA can also help navigate the murky waters of IRS communications, as well as those from individual states.
3. Managed Bookkeeping and Financials
A company who doesn’t have the benefit of a full-time bookkeeping staff may choose to outsource this effort to bookkeepers employed by their accounting firm. This includes reconciling checking accounts, credit cards, and merchant accounts (the accounts used to charge customers’ credit cards). It may also include inventory tracking and reports, invoicing and managing accounts payable, and handling payroll.
4. Ongoing Advice
As a business grows, it often needs new or different advice than it did when it was first started. Here again, this might be provided by a lawyer, but is often part of the accountant/client relationship. For example, if you are looking to expand your offerings or buy out a competitor, you may want sound financial-based advice before making a final decision. Other times, advice is required due to external changes, such as new laws or regulations that may affect the business.
What Advice Do Retailers Want from their Accountants?
So what do online retailers wish their CPAs understood better? We interviewed several, and I’ve also injected some items based on my years of experience working with retailers of all sizes and in multiple product markets.
How to best structure your business
Someone just starting a business has to determine what their business structure should be: sole proprietorship, LLC, partnership, or corporation. To make the decision, the founders generally want to know two things:
- How can I minimize what I pay in taxes?
- How can I protect my personal assets?
Fortunately, the answers to both questions are usually common knowledge for CPAs, because the structure affects taxation to such a high degree.
Ecommerce retailers have to deal with many different kinds of software, from accounting packages to order management, warehouse packages to the software that runs their website. Although the accounting software obviously has the strongest relationaship to their CPA, sometimes other software ties in as well.
Additionally, business owners, even those who operate in the realm of the Internet, have varying levels of tech savvy. When it comes to software, they may operate from two different ends of the spectrum.
- The retailer who knows what software they plan to use: This person/company already has package(s) they are familiar with. It might be an online service like Freshbooks, an industry standard like Quickbooks, or more enterprise-level software such as Microsoft Dynamics or other ERP packages.
- The retailer who wants guidance on what software to use: This person/company really doesn’t know what they need or the benefits/drawbacks of different software. They just want solid advice on what they need and how they can learn to use it.
No one (or no reasonable person!) expects their accountant to teach them to use Quickbooks. But when they have a question, they want help answering it. And if they need training, it’s great if the accountant can recommend a class or online course that meets the retailers need.
Merchant Accounts / Chargebacks
Almost all retailers need a merchant account, which allows them to collect payment from customers who pay with a credit card. There are hundreds of options (if not more) when it comes to payment processing, but in the end, they all eventually boil down to a merchant account.
An initiation into the world of merchant accounts can be extremely daunting. Selecting a provider is often difficult due to the way that different fees are calculated, and the odd wording used to describe such. (A "discount" sounds like a good thing – but it’s really the rate charged to the merchant.) Then, learning to read and reconcile a monthly merchant account statement can be difficult; it’s not as simple as reconciling a checking account. And who ever found checking accounts simple anyway?
Then there are chargebacks. A chargeback is when a customer complains to their credit card company that they shouldn’t have been charged. The credit card company then reverses the charge, taking it out of your bank account and giving it back to the customer.
There are a number of reasons a customer will issue a chargeback:
- Merchandise never received
- Merchandise faulty, damaged, or not as described
- Fraud on behalf of the customer
This post isn’t the best place to go into chargebacks, but they are certainly an area where retailers are often surprised and may seek advice from their accountant on how to resolve one or avoid them in the future. A good accountant will understand what these are, as well as the basics of fighting one and protecting the business against them in the first place.
Understanding Sales Tax
Sales tax is extremely complicated for many online retailers. A local business may only need to deal with sales tax in one state and at the local rate where their store is located. But an online business has a few other hurdles to leap:
- What rate needs to be charged on an order? If it’s a destination based state, the rate depends on where the customer lives, not where the retailer is located.
- Does the business need to deal with sales tax in multiple states? If they have certain business activities, especially using drop-shippers or storing inventory in a warehouse in another state, it’s very likely they may.
An accountant will do well to understand how to point a retailer in the right direction for answers, even if they don’t know the often intricate specifics of sales tax in multiple states.
What to Sell and How Much to Stock
Someone starting an ecommerce business probably knows what they plan to sell, at least in general. But they may not have the knowledge to ascertain what specific products to sell – and when to keep a product and when to dump it.
Being able to help retailers understand profit margins, carrying costs, inventory management, supply and demand – these are all concepts where retailers can typically benefit from an accountant with a much larger financial background than they likely have.
Glynn Gallagher of LockPickShop.com has a CPA who came highly recommended, but it turned out he didn’t have a lot of experience with retail businesses. One of the mistakes she made early on was keeping too much inventory.
"I wish he’d have warned me against carrying so much inventory. I thought if I kept investing money in inventory that it would be a good thing for my business. I figured if I had a lot of inventory that I wouldn’t have to worry during months that were lean. What I didn’t realize that since my business is a (1 person) LLC that all of the inventory is considered personal assets/income. I ended up with a $40,000 tax bill because I didn’t realize that stockpiling inventory was a big mistake."
Always having to make ends meet can be difficult for any business, especially those whose revenue fluctuates during the year. An accountant that can help a business keep its head above water during lean times is worth his or her weight in gold.
One unique example comes from Lee Rosenthal at Hotel Restaurant Supply. Certain restaurant equipment manufacturers and vendors provide value to their distributors and dealers by way of rebates. That is, the vendor may sell the item at a wholesale price to the dealer and then pay an annual or quarterly rebate on each invoice. This means they get back a percentage of their purchases from the manufacturer, and that percentage is based on how much they’ve purchased. Sometimes it is a flat percentage and more frequently based on tiers and volume thresholds.
For example, they might pay $5000 for a refrigerator. However, at the end of the period the dealer will get back, for example, a 10% rebate, or $500.00, the numbers add up.
This uncommon scenario is profitable, but presents some hard cash flow issues, as it takes the full 12-month timeframe to receive most of their profits.
My father has always said it’s almost impossible for a business to stay the same size. It has to either grow or shrink. It might be sometimes one or sometimes the other, but understanding company growth is just as important for online retailers as it is for any other business.
Company growth is a tough thing to manage. "Often the prosperity of the business can outpace the ability of the business to maintain that success," says Matthew Swyers in an article published by Inc. Company needs change depending on the size of staff, infrastructure, and more. And external factors like the number of competitors and market demand determine a company’s ability to grow.
Solid advice on managing growth so as not to grow too fast, or to manage a decline when it happens, is invaluable.
These are just a few ideas of the advice retailers would like to be able to receive from their accountants. A solid understanding of retail and ecommerce can help solidify an accountant’s business, as it allows for consulting business on top of simple tax preparation. (We use the word "simple" quite tongue-in-cheek!)