E-commerce is booming! But the digital landscape has undergone rapid changes and consumer behavior has revolutionized the way in which e-commerce stores need to operate to survive a highly competitive environment.
Online furniture stores, much like their e-commerce counterparts, have to stay abreast of the trends to stay relevant to their audience. Or at least if they want to be part of the predicted growth trajectory for this sector. The revenue in the ‘furniture’ segment of the e-commerce market in the United States is predicted to continuously increase between 2023 and 2027 by 28.2 billion U.S. dollars. This means that digital furniture businesses need to stay on top of their game, both operationally and in terms of compliance.
Navigating the accounting maze of furniture e-commerce
From having to be agile in terms of price point to constantly adapting to prioritize seamless user experiences, our CPAs have helped hundreds of e-commerce furniture retailers and have found a number of common issues that may be challenging to navigate. In this article, we’ll look into some of the key accounting challenges that businesses in this sector commonly encounter.
1. Inventory management and valuation
Navigating the intricate world of inventory management and valuation can be extremely challenging for digital furniture retailers. With a diverse array of products, each varying in size, material, and design, maintaining an accurate account of inventory becomes a complex task. The decision on an inventory valuation method, whether it’s FIFO, LIFO, or weighted average, holds paramount importance. Below we look into the common valuation methods these retailers can employ.
- FIFO (First In, First Out): Items purchased or produced first are the first to be sold or used.
- LIFO (Last In, First Out): The latest items added to inventory are the first to be sold or used.
- Weighted Average: The average cost of all items in inventory, weighted by the quantity of each item.
This choice not only influences the reported cost of goods sold but also directly impacts the overall profitability of the business. Navigating this with accuracy often demands an accounting system that integrate with inventory tracking software to automate inventory count and its value into the financial records of your business.
2. High rates for return and exchange of goods
Managing returns and exchanges can be quite the challenge in this sector. This is because furniture is typically more susceptible to customer returns due to space specifications or unmet expectations. In fact, online furniture stores often manage higher return requests. The problem is that it has a ripple effect on revenue reporting. Additionally, managing the returns process requires meticulous attention to detail, issuing timely refunds, and accounting for potential restocking fees or damages. This can be finicky to navigate but is imperative to accurate financial reporting.
3. Variable shipping and handling costs
Given the substantial variance in size and weight of furniture items, calculating and managing fluctuating shipping costs can be inconsistent and complex. Offering promotions like “free shipping” adds an additional layer of intricacy, as the business must absorb or strategically incorporate these costs into pricing strategies. Furthermore, for those venturing into international markets, there is even more to consider. Customs duties and taxes, inherent to cross-border shipments, require meticulous accounting to avoid unexpected fees and hiccups. Our CPAs cannot vouch more for accounting software like NetSuite that comes with built-in multi-state and multi-currency functionality.
4. Depreciation of showroom or demo items
Online furniture showrooms offer customers a tangible and immersive experience to bridge the gap between the digital and physical worlds. It aids in enhancing a purchaser’s confidence when opting to buy a product. This is a great marketing benefit. But, in the virtual space, the depreciation of demo items adds another dimension to the accounting requirements.
Determining the fair value of these items as they age or become outdated requires a rounded understanding of market trends and customer preferences. Moreover, when these demo items are eventually sold at a discounted rate, precise accounting becomes crucial. It is advisable to consult with an expert that understands the intricacies of depreciation in this regard, as this could lead to issues with financial reporting to the IRS if not handled accurately.
5. Sales tax complexities
The online furniture retail arena caters to customers across diverse states or even international borders. This poses multifaceted challenge when it comes to navigating varying sales tax rates and rules of different jurisdictions. These businesses need to keep track of regulations and be precise in calculating the correct remittance of sales taxes. Without accounting software to automate this process, online furniture stores risk non-compliance issues with the IRS.
Accurately managing finances in this sector relies greatly on implementing the right accounting tools and software. It also requires specialized expertise of a seasoned CPA.
We can help your business strike the right balance between customer satisfaction and business profitability, while ensuring you stay compliant and on the right side of the IRS requirements. Contact us for help today!
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This blog article is not intended to be the rendering of legal, accounting, tax advice, or other professional services. We base articles on current or proposed tax rules at the time of writing and do not update older posts for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.
