Structuring your e-commerce chart of accounts


Develop an understanding of structuring a chart of accounts for your e-commerce business.

Have you considered how to set up your chart of accounts? Do you know how to plan and map it? Do you know how it can actually give you far greater insight to your business performance?

Chart of accounts (CoA) is important to get right early on. It’s the starting point for any business. You may not see the value initially, but you’ll most definitely reap the rewards as your business grows if you start the right way. Having a well-planned and structured CoA can provide easy insight into the performance of your business.

What is a chart of accounts?

A CoA is the index of all the financial accounts in your general ledger. This makes the foundation of your finance application (Xero, QuickBooks, Sage etc.) and is the building blocks to your financial records, how transactions are recorded, accounted, and reconciled. Each financial account has a unique number and description assigned. Collectively, all the financial accounts together are your CoA.

You don’t need to understand the technical side (leave that to your accountant) but what you do need to understand is that the CoA is the building blocks to insightful reporting. You can take your CoA and make sure it’s presented in a format that’s digestible. By adding groupings you can get immediate insight into your business. flinder CFO Fatima Salhab advises,

"Every business is different so it’s important to spend time thinking about what data you have and how you want to group that into something more meaningful. Remember your accounting software only needs to give you headline information and a high-level overview of what’s happening in your business. Keep that in mind when you’re planning the right structure."

What do you need to consider when designing a chart of accounts for an e-commerce business?

When starting on your CoA, your first consideration is what you want to see in your profit and loss account (P&L):

  • Revenue - Think about your e-commerce revenue channels when considering the design. Whether that is wholesale vs. DTC or store vs. online, for example. Or, you may want to split by revenue type alone. Some businesses find it useful to view by revenue channel and region. It’s also beneficial to show discounts and returns separately as opposed to revenue that is a net figure. Why? Well, these are controllable components of revenue, so it’s good to have an understanding of what they are and see how they’re impacting net revenue.
  • Cost of sales (CoS) – After you’ve determined how to show your revenue split, you would typically mirror for this for your CoS, to make sure they’re aligned. If you split store sales and online sales, you would repeat that in your CoS, showing store CoS and online CoS. This gives you the ability to segment your margin and more easily see the metrics that are important to you.
  • Grouping – It’s good practice to group your overheads by relevant categories too. For example, you may have a number of accounts which relate to staff costs, but it may be more relevant for you to understand your cost by various functions e.g. marketing, sales, PR, finance and customer service.

Ultimately, you design your CoA with your end reporting in mind. Using revenue as an example you may then wish to show reporting where all accounts in the 4000 range are grouped and the total of these accounts are shown in aggregate. For another report you may wish to show the individual accounts that make up the overall revenue number – by designing your CoA in this way you have the flexibility to do both.

Next, you’ll need to develop your balance sheet. There isn’t much concern for the design of it as its function is not to provide the daily insight of the business like the P&L. Give yourself space to let it develop and evolve as the business grows. You’re likely to need control accounts for any payment gateways you have such as Shopify or PayPal but the depth of it depends on how complex your business is.

Common mistakes to avoid in chart of accounts

Approaching the design of your CoA with experience from an accountant who has developed them for an e-commerce business before is critical. Bringing experience of understanding e-commerce data and how to process it can make your CoA much more effective and relevant for your business and the types of decisions you need to make.

As previously mentioned, there’s no need to show every aspect of the business in your P&L, its purpose is to show consolidated, top-line data to get visibility of the business quickly. Itemising every product SKU for example wouldn’t give you the overview needed. However, grouping the products by category is more useful. If you’re looking for the finer details, that will come from your e-commerce platform and/or inventory system instead. If you’re creating a new CoA or thinking about updating your existing one, consider the impact this could have on any integrations you already have as part of your app stack as this could prove challenging. If you decide that you want to change your CoA, you need to remap any configuration settings you already set up with third party apps you’re currently using.

An additional layer can be added to your reporting dimensions using analysis or tracking codes. Most systems (Xero uses tracking categories) allow for some additional analysis, which means your CoA doesn’t need to grow and become too complex, but allows you to tag transactions with an additional level of analysis i.e. it becomes wider, not longer.

A CoA can be amended and updated at any time, so don’t be afraid of change but do make sure the foundations are right from the start because, while it’s fine to add another account for a new type of revenue e.g. “pop-up store” when things change, it’s very difficult to retrospectively change in it’s entirety if you want to swap and show by region rather than type of revenue.

Another common mistake is not allowing space for growth. Leave gaps in the current numbering system used so you can add and insert additional accounts if you wish.

How performance management can be affected by your chart of accounts

Your key metrics are pulled from the data which demonstrates how you’re performing as a business. The data is generated from your accounts. Fatima says, “If you can’t slice and dice information from your accounts the data that you need to see, then the format isn’t working. A set of accounts that has too much information means you can’t account in that way. Information overload isn’t going to get your anywhere. You just can’t trust the information. A more refined set of accounts gives you greater insight.  The detail on the face of the P&L is worthless. The purpose of the output is to help you make better business decision and you can only do that with data grouped into meaningful information that translates into real insight.”

What kind of data insights chart of accounts can offer and how your contribution margin metric fits into it

Contribution margin is a metric like no other. “Rather than looking at gross profit, being revenue less direct costs, contribution margins allow you to understand in much more detail as to why you have variances in your gross profit margin. Margins are broken up into multiple stages which allow easy identification as to whether the product margin, selling and distribution margin or customer acquisition costs are to blame for any swings or movement. This helps to focus in on what’s happening in the business and make the right changes off the back of it,” Fatima explains.

Equally, data is so important to have in real-time which needs to be accurate and readily available. Getting your CoA right allows data to be pulled out in multiple ways to show snapshots of key metrics you’ll come to rely on as you grow. Having reliable dashboards and the kinds of metrics such as CPA, CAC, ROAS and AOV that you would pull from a well-structured set of accounts is essential.

Finally, recommendations for a useful chart of accounts

Fatima recommends, “Find an accountant or finance team that truly understands the e-commerce world you live in. Your CoA is needed for compliance but adds a huge amount of value for performance management and decision-making.. You need your finance team to understand the data they’re working with and how to get the best from it. Keep your CoA relatively simple and don’t go too granular. If you need more slicing and dicing, you can go wider with tracking categories or dimensions. The more complicated you make it, the less accurate it will be.”

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