Selling online is a great way to start a business. Low set-up costs, the business can be run from home and the potential customer base is huge. Marketplaces like Amazon and eBay provide instant access to millions of customers in an instant. Selling via your own website is usually more costly to start with (due to website development costs, online marketing etc), but it is essential for building a brand and reducing selling costs in the long-term, as it avoids Amazon and eBay fees.
Other costs to consider are payment processing fees- whether you accept PayPal payments or take card payments on Stripe, fees will always eat into your profit margin, so ecommerce sellers need to factor this into their pricing to help ensure the business is profitable.
One of the most difficult areas of accounting in eCommerce is stock. Most start-ups think of stock purchases as an expense that would affect profits, but purchases only affect profit when goods are sold.
To give a simple example: you buy 100 widgets for £1 each (£100 total) and you sell them for £2 each. If you sell 25 in month 1 (for £50), the simplistic view would be that you’ve spent £100 and received £50, so you’ve made a loss of £50. However, your accounting profit is actually £25 [(£2-£1)x25], as you still have £75 stock left as an asset to sell in future months. All product-based businesses need to get to grips with this concept to understand how their business is performing. Most e-commerce systems track stock movements. This helps understand profitability, but there is often a need for manual checks to account for discrepancies, such as returns, stock in transit etc.
Having an online accounting system such as Xero integrated with your ecommerce platform is a great way to stay on top of the figures, but care needs to be taken to get it set up correctly and regular reconciliations are advisable.
At CX Accountants, we have experience helping ecommerce clients rapidly grow and scale their businesses. We can guide you through the minefields of VAT, corporation tax, payroll and accounting systems to help your business stay streamlined, tax-efficient, compliant and profitable.
Get in touch if you’d like to see how we can help – contact us