Many clients have come to us for financial guidance AFTER they have started trading online, spending time and money setting up websites and creating online accounts with their chosen sellers from Amazon, EBay, Shopify & Easy, to name a few, only to find they have wasted their time and money!
Every trader must earn money and money comes from profits, there is no point in selling for less than you are buying, right?
When calculating margins and profits you must remember to include 20% of turnover, for vat in your calculation once you have become vat registered and/or hit £85,000 turnover and this turnover figure will come sooner than you think.
If your plan is to undercut your rival by making a little margin on your costs then you will more than likely be put out of business when you hit £85,000.
For example –
M Bloggs buys widgets for £1 (ignore vat on purchases) and decides to sell them through Amazon for £1.50 to undercut their peers.
Profits after Amazon costs and postage etc = 10p
The price is so good, the business hits £15,000 sales in the first month, at this point you must become VAT registered as you knowingly will easily exceed the £85,000 threshold in the first year.
NB Amazon will be asking for a VAT number at this point.
Taking 20% off your margin, you are effectively selling the widget for less than your costs.
VAT has effectively wiped out your whole business plan.
If you choose to ignore VAT and submit your accounts showing a turnover figure greater than £85,000, HMRC will insist you pay the VAT difference.
If you are in the midst of starting up selling online or you have already started trading, feel free to drop us an email to [email protected] and we can review your business plan. The first consultation is free, limited to one hour.