Why Your eCommerce Accounting Should Include Account Hierarchy
Why Your eCommerce Accounting Should Include Account Hierarchy
Despite a positive financial forecast for the industry, ecommerce business owners must not be complacent and instead leverage the growth in sales and shoppers by managing their finances properly. One way to do so is by implementing an account hierarchy for more organized financial reporting and analysis.

By Rachel James, Freelance Writer and Entrepreneur

As digital transformation takes over industries and online shopping becomes increasingly common, ecommerce has become one of the fastest-growing industries in recent years. A previous post entitled ‘Global eCommerce Industry to Gross $3.64T This Year’ illustrates this impressive financial growth, as the market value of ecommerce has grown by 108% in just five years, from $1.52 trillion in 2018 to $3.15 trillion in 2023. 

In 2024, the global ecommerce industry is projected to gross $3.64 trillion, representing a 15.6% increase from last year. Additionally, this revenue growth is combined with an expected 300 million increase in online users of web shops and shopping apps, demonstrating an overall optimistic outlook for ecommerce.

Despite a positive financial forecast for the industry, ecommerce business owners must not be complacent and instead leverage the growth in sales and shoppers by managing their finances properly. One way to do so is by implementing an account hierarchy for more organized financial reporting and analysis. 

Below, we look at how account hierarchy works in the context of ecommerce and how business owners can benefit from this system. We also outline strategic ways to maintain the structure of account hierarchies and ensure they feed into overall ecommerce growth and success. 

How Account Hierarchy Works For Ecommerce

In accounting, the term ‘account hierarchy’ refers to the way a business or organization structures, organizes, and categorizes its accounts to better track and report its financial transactions across all levels or departments. Softrax’s guide to account hierarchy explains that the structures may vary based on the exact industry and accounting needs, but they share common characteristics. These include the chart of accounts, which serves as a foundation of the hierarchy as it contains the list of all the financial transaction records with unique identification numbers for each account.

While large corporations may organize their hierarchy based on cost centers, departments, and business functions, ecommerce businesses commonly employ account hierarchies to categorize the product lines or services they offer, which respectively come with sales, advertising expenses, and fulfillment costs. These structures can be similar to parent-child relationships, in which the higher-level account represents a broader category of related accounts while the sub-account reflects a more detailed view of financial performance and resources.

Overall, having an accessible and organized account hierarchy can help businesses of any size and scale better understand their financial status and sustain revenue growth. In the following section, we highlight the key benefits of account hierarchy for ecommerce success beyond being a routine administrative function.

Why Account Hierarchy Is Beneficial For Ecommerce Success

Streamlining financial management

While ecommerce platforms have undeniably expanded the sales and audience reach of businesses, research by the accounting platform Bookkeep reveals that they have created additional accounting tasks, which include reconciling ecommerce transaction data into their standard accounts. About three-quarters (75%) of the businesses interviewed struggle with the extra hours required for manual bookkeeping, urging them to outsource accountants from offshore firms and thus incur up to $10,000 monthly for accounting costs. 

However, creating and maintaining an account hierarchy can help distribute the labor across various levels or departments through respective user accounts, roles, and permissions. Seeing the interconnections between related accounts clearly also improves the accuracy of financial reporting and compliance with auditing and regulatory requirements.

Minimizing revenue losses or leakages

Meanwhile, having a comprehensive understanding of how your ecommerce business acquires sales, incurs expenses, and makes a profit can also be essential to revenue management. Maintaining the hierarchy’s data consistency and standardization in the long term can also help reduce data errors and discrepancies, which otherwise play a role in revenue losses or leakages. 

Overall, simplifying financial reporting and management across categories enables you to view revenue streams at once and pinpoint how your cash flow can be improved or maintained.

Capturing crucial business insights

Lastly, streamlined financial data through account hierarchies equips business owners with the ability to make more informed decisions, whether it’s about budget allocation or revenue strategy adjustments. For example, implementing categories based on products can help ecommerce businesses identify how each item performs, thus influencing the targets of future marketing and promotional campaigns in an effort to boost sales.

For small and medium-size enterprises, in particular, this wealth of information about ongoing and fulfilled transactions can even pave the way for financial health and literacy, enabling them to last long in an otherwise increasingly saturated industry.

In light of these benefits across productivity, revenue, and decision-making aspects, we offer tips for ecommerce businesses to better manage their account hierarchies in the next section.

How Ecommerce Businesses Can Manage Account Hierarchies

Implement monitoring and evaluation phases

Managing account hierarchies does not begin and end with classifying parent-child relationships between accounts and delegating accounting tasks among teams or employees. It’s best to conduct regular audits of user accounts and permissions and ensure they align not only with financial performance goals within your business but also with regulatory requirements for ecommerce. 

By making monitoring and evaluation phases a norm, you can identify and minimize discrepancies, such as data entry errors or outdated accounts, before they affect your business operations and cash flows.

Pay attention to cybersecurity

The success of account hierarchies depends on how well-organized your user accounts and access permissions are. However, since ecommerce operations largely depend on digital workflows, there’s an increased risk of user access being compromised by third-party actors or cyber criminals. 

A Cyber Security News ecommerce threats article reports that the common cybersecurity threats in ecommerce include malware attacks on digital systems, such as your dedicated accounting software, and social engineering techniques that attempt to manipulate employees to gain unauthorized access to essential business information. So, it helps to implement cybersecurity awareness and training across all levels of your account hierarchy.

In summary, account hierarchy is a valuable accounting system for ecommerce businesses, as it allows them to streamline financial reporting for improved workflows, increased revenues, and more informed decision-making. By incorporating regular audits and cybersecurity training into account hierarchy management, ecommerce shops of all sizes can better meet their financial goals and ensure success in the broader industry.

About the author

Rachel James is a freelance writer and entrepreneur. She spends most of her time studying and writing articles about e-commerce trends to help out small-time business owners. When she’s not busy talking shop, you can bet she’s picking up a new hobby to learn, whether that be pottery throwing or reverse running.

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