How to Avoid Shopify Accounting Issues with Returns & Exchanges
Returns can cost retailers 20% of the total cost of goods sold (COGS).
Labels, labor, shipping costs, re-stocking fees, inventory that can’t be resold– it all adds up quickly. But one of the largest expenses when it comes to managing returns doesn’t get talked about often: the enormous cost of having inaccurate inventory and unbalanced bookkeeping.
On average, ecommerce merchants spend about 10 hours per week reconciling sales, inventory, and customer data. Depending on your accountant’s hourly rate, that could cost over $15,000 per year and take up over 500 hours per year.
If you’re in customer service or work in a warehouse, you might not have visibility to these accounting challenges. But if you’re a CFO, accountant, or manage the books, you’re probably experiencing accounting pains from returns on a regular basis.
Ironically, some tools that are designed to make returns easier for shoppers lead to the biggest accounting headache for merchants.
Let’s break down why certain exchange workflows cause accountants to pull their hair out.
How Exchange Workflows Can Lead to Shopify Accounting Chaos
When a shopper submits a return, it means the sale didn’t stick. However, merchants can implement creative strategies to retain revenue and soften the blow. These tactics include offering bonus credit to incentivize exchanges or store credit to showcase alternative products and upsell during the returns process. Offering shoppers bonus credit can incentivize an exchange or store credit which helps merchants recuperate potential revenue lost from a refund.
Unfortunately retaining the sale doesn’t save your CFO or bookkeepers from the headache. In fact, it can make it worse. For some returns platforms, instant exchanges offered during the returns process can create double entries, lead to inaccurate returns inventory, and inflate the costs of goods sold.
In layman’s terms, it means the books don’t add up, profit statements are inaccurate, and someone must manually go in and reconcile the problem. Someone is most likely being paid $100+ per hour.
Double-order entries make one sale and one return look like two sales.
Inaccurate returns inventory leads to merchandise stuck on shelves losing value or lost revenue due to shoppers being unable to buy products that are actually in stock.
The inflated cost of goods sold results in the total cost of inventory sold by a company appearing greater than it really is. This means the variable cost of materials, labor, and overhead costs associated with each unit of inventory sold is incorrect.
Why do Exchanges Mess Up Transaction Flows in Shopify?
When a returns management platform processes a return outside of Shopify’s native refund workflow, they introduce a system where the product is marked as “returned” in Shopify without actually refunding the customer’s money.
As a result, merchants receive an unexpected “positive return order adjustment” in Shopify’s reporting. Unfortunately, this workflow doesn’t include the necessary “negative order adjustment” to cancel it out. This applies to both exchanges and returns for store credit.
Why does this integration function this way?
The steps below outline how secondary payment processors, when integrated with returns software, cause problems.
- Duplicate orders and incorrect cost reporting: The returns management platform creates a new order in Shopify for the exchanged product(s) and marks it as paid. However, since no actual payment is collected for these products, the order doesn’t reflect a new payment, and the original transaction remains in the system. This creates duplicate orders and falsifies the cost of goods sold (COGS).
- Underreported taxes: Merchants use this workflow to quickly process and ship new products for exchanges. But when the returns management software marks exchanged products as “refunded” in Shopify, the tax information is removed from the original order. As a result, the Shopify store may underreport taxes, unless the tax is accounted for in the new exchange order.
- Inflated profits and inaccurate revenue reporting: Additionally, any additional payment made during the exchange process is captured by the secondary payment gateway. However, this payment doesn’t go through Shopify’s native payment gateway, so Shopify’s sales report doesn’t reflect it accurately. This requires reconciling the information recorded in the secondary payment processor with what is reported in Shopify.
In summary, when returns management platforms process returns outside of Shopify’s native refund workflow, it can cause problems because it marks products as returned without issuing refunds, resulting in incorrect reporting of orders, costs, taxes, and profits in Shopify.
How Can Shopify Merchants Fix Inaccurate Reporting?
Switch returns platforms! Just kidding, kind of.
Reconciling orders of exchanged products through secondary payment processors is time-consuming and costly. If you want to take on the challenge of manual accounting reconciliation, there is most likely a helpful article out there.
But if you want to avoid this problem entirely, choose a returns management platform that doesn’t rely on secondary payment processors for returns.
One big reason merchants choose ReturnLogic is that all of the accounting issues mentioned previously don’t exist. ReturnLogic relies on the native Shopify payment gateway, which allows merchants to create and manage draft exchange orders.
That way, there’s no accounting reconciliation needed. Books stay up to date, inventory stays accurate, and merchants know the cost of goods sold.
Sure, shoppers might have to check their email, but you won’t need to worry about inaccurate bookkeeping, and you won’t need to deal with fraud.
At the end of the day, merchants want to be profitable, and this starts with making sure finances are accurate and up to date. Without that, Shopify merchants will slowly but surely hit a scaling plateau due to inflated numbers and inaccurate inventory reporting — by that point, hopefully, it’s not too late.
Schedule a free returns management audit with one of our returns specialists to discover how you can break free from accounting chaos.
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