Last time on Amazing FBA, we talked about startup businesses. Today, in part two of my discussion with Penny Lowe, owner of Wellington Consulting, we’re focusing on accounting for companies that would qualify for the 10k collective. In a nutshell, today we’re going to be talking about scaling from an accounting perspective.
Please note that the information is discussed in a very general sense and you should consult a professional for information based on your needs.
The Biggest Problem for Amazon Sellers Growing to $10k-100k per Month in Turnover
One of the most substantial difficulties for Amazon sellers looking to scale up their business is undoubtedly inventory management. Where is my product? How many items are there? Is quality control being kept up? Are my items in storage or transit? These are all questions that become more and more difficult to answer without excellent record-keeping as businesses move from the startup sphere to the established.
Another stumbling block for scaling Amazon retailers is excess stock. Developing a system for identifying stagnant product lines and determining what to do with those dead items can be tough. Offering a discount in the Amazon Marketplace would be foolish; that would drive up demand for the product. Knowing when to throw in the towel and how to offload excess stock can mean the difference between staying in the black and falling into the red for sellers new to high turnover Amazon merchandising. Remember, storage space is valuable. That means it’s expensive.
The U.K. Value Added Tax
If you find yourself approaching £85k in turnover, you need to keep an eye on VAT. Even if you’re selling abroad, you may be able to claim back some VAT for items shipped outside of the UK. On the other hand, if you’ve crept over that £85k, the taxman can come and claim that you owe VAT on items for which you haven’t included it in your pricing; this could be an absolute disaster for the margins of a growing business.
If the competition is selling more than £85k and you want to check if they’ve registered for VAT, check out: HMRC.
The EU Value Added Tax
Each country in Europe has a different turnover limit before they require VAT registration. It’s imperative that Amazon sellers keep an eye on their sales turnover in each country to make sure they’re not in violation of VAT regulations. If you’re selling £50k in Germany, you need to register for VAT in Germany.
The figures for VAT sales thresholds are typically calculated using each country’s distance sales rules. The rules for digital delivery products are different. Mini One Stop Shop (or MOSS) is the resource digital-only sellers should use to avoid registering in all countries where they do business.
EU Distance Selling VAT Thresholds
Germany – €100,000
Spain – €35,000
Italy – €35,000
France – €35,000
U.K. – £85,000
Keep in mind, VAT return and payment processing can take months. If you’ve been overcharged or erroneously charged for VAT get your paperwork filed immediately. These kinds of things can wreak havoc on a growing business’ cash flow. Don’t wait until the last minute to make tax payments. The taxpayer is responsible for knowing business hours of banks and collection centres. The best practice is always to submit tax filings and payments as early as possible.
VAT and Import/Export
For VAT registered sellers, all goods brought in through customs in the U.K. are subject immediately to VAT. If you’re exporting a shipment of items, that shipment will be subject to VAT return. Keep a record of all shipments outside of the country; you’ll need detailed information if you want to receive VAT returns.
If you’re exporting to other countries, make sure to pay attention to their list of restricted products. The last thing any Amazon seller wants is to be slapped with a penalty for importing controlled goods.
Entrepreneurs new to private label selling on Amazon often underestimate the delay between the time when they order a product to be manufactured, and the time they’ll start receiving payment for items sold. If Chinese manufacturers are involved, this process can sometimes take upwards of six months. If you’re going to use debt to help span this gap between order payment and sales receipts, make sure you’ve got plenty of time to pay back the loan and make sure any interest incurred is built into the selling price.
Matt Ward, one of my upcoming guests on the show, has developed debt solution based on taking a percentage of revenue. I’ll have much more on this in the coming weeks.
Bank loans can be difficult to obtain for e-commerce businesses. They are often the best debt solution for solving cash flow issues inherent to Amazon selling, but they do come with substantial risk. Even though the e-commerce sector is rapidly growing as brick-and-mortar retail dies a slow and painful death, banks frequently ask businesses that sell products exclusively online to put up a guarantee for money borrowed.
Shareholders vs. Directors
A director is the registered controller of a company; this person makes all of the day-to-day decisions for the business and is generally the majority or full owner of the company. Shareholders are investors that put up financial capital and in return receive a percentage of profits.
If you, as a director, are going to offer shares of your company, it is a good idea to write up a shareholders agreement. These agreements help companies to define how shares in the business can be purchased and whether a buy-back must be offered should investors decide they no longer want to be involved the company. Even in the case of a 50/50 partnership, writing a shareholder (or partnership) agreement is wise. Make sure to include clauses regarding the procedure should a shareholder or partner fall ill or pass away.
Getting Paid: Salary vs. Dividends
The director of a profitable company should take a salary. Not only should they be recognized for their hard work, but salaried wages are tax deductible; they reduce your business’ taxable income at the end of the year. Collecting a salary also means the director of a company is paying into the various entitlement programs offered by the state.
If the profits of a company are substantial, it’s time to look into taking a percentage of the income after corporation tax by way of dividends. The first £2k are tax-free. After that, dividends are added to the rest of your income. Finding a good accountant to help with these decisions is crucial.
If you want to contact penny for financial advice, you can find her at Wellington Consulting.
Watch Scaling your Business Accounting with Penny Lowe Part 2
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