Do you know how much you've made in sales in your ecommerce business so far this year? Where would you go to find this information? If your answer would be to check the money received in your bank, then this post is for you.
While some businesses can rely on this method, it's very different for ecommerce businesses. The amount of money you receive is not the same as how much you sold. You might have a jumper for sale for £60, but once the payment provider has taken their fee and you've paid the marketplace commission, the amount you receive in your bank account might be £53. If you were to just go off your bank account, it would be recorded as £53, rather than the actual sale of £60. If the customer used a gift card then you wouldn't have recorded it at all as there'd be no money hitting your bank account.
The actual selling price should be your first port of call. So in the example above this would be £60. If you're selling through a marketplace, such as Etsy, or an online store powered by something like Shopify, then these companies deduct fees before sending the money to you. There may also be fees deducted by the payment provider, such as Stripe or PayPal.
You might not view these deductions as expenses, as they're deducted automatically before you receive any money, but you should think of them in the same way as things like your packaging. They're a cost of making that sale and so should be recorded as an expense.
But why does it matter if your sales are recorded properly? Your profit is your profit, right? Well, kinda. There are a few reasons why it's important to record your sales correctly.
It matters when it comes to checking if you've hit the VAT threshold. The threshold at which you must register for UK VAT is £85,000 of VATable sales. If you're only recording the actual money you receive, then you might not realise you've gone over the threshold. Not registering when you should do may result in you receiving a financial penalty from HMRC.
It's also important in helping you make decisions about your business. How would you decide if it would be more profitable to sell via your own Shopify store rather than Etsy, if you don't know how much you're spending on fees? Together with things like shopping, packaging, cost of making/buying your products, the sale price and associated fees are key to making sure that you've got your pricing correct.
As well as recording the money coming into their bank account as their sales, another common mistake we see with ecommerce businesses is double counting their sales. So they go from not declaring enough sales, to declaring too much! We see this a lot with business owners who are using software such as Xero or FreeAgent to manage their own bookkeeping, and who have also linked their Stripe and PayPal accounts to it. They record all of the payments collected by Stripe and PayPal from customers as their sales, but then once the money is paid to their bank account they record that as sales too, meaning that it looks like they've sold twice as much as they have. From an accounting point of view, the money is received as soon as it goes into Stripe/PayPal, and the payouts to your bank are then just a transfer (think of it like moving money into your tax savings pot, it's still your money it's just sitting somewhere else).
That's because it is! Knowing how everything should be recorded can be difficult, and for a lot of ecommerce businesses the volume of work to do can quickly grow, even if the number of sales you're making is relatively low. If you're selling via your own website and using Stripe to collect payments, then for each sale you make you have to:
You can see how that quickly adds up, and that's one of the easiest scenarios! If you use a payment gateway together with something like Shopify, then the list of things to do for each sale quickly goes into double figures.
If this all sounds like a lot, when all you really want to do is concentrate on selling more products, then book a call to see how we can help. We're experts in making sense of reports from places like Etsy, and we'll make sure that you feel completely in control of your finances.