Accounting for Dropshippers

As an accounting firm in the USA that specializes in tax accounting for dropshippers we know that business oriented people never try to get a job. They like being their own boss, which is why they believe in struggling and starting their own business. Most teenagers take initiative for starting businesses with friends. They come up with an idea which seems most appropriate to them and is easier to start on an initial level.

Generally, one of the problems that all business owners face is the delivery and shipment of products. This is where dropshipping comes into the picture. It is not a new term. It has been around for quite some time. There are several misconceptions about this concept as to what it really is. Dropshipping business also has several tax accounting issues. In this blog we describe several accounting solutions for your dropshipping business.

We offer customized accounting solutions for dropshippers, and e-commerce business models. For more information about our tax accounting services call us at 407–344–1012, or email us at info@freedomtaxfl.com .

What is Dropshipping?

As mentioned previously, people have a lot of misconceptions about the dropshipping business and also regarding the accounting for dropshippers. So, prior to understanding the details regarding accounting for dropshippers, you must first understand the concept of dropshipping. Basically, dropshipping is a service which is offered by some wholesalers for stocking or shipping products to the ultimate customers of the retailers. With a wholesaler, a retailer or you don’t need worry about the shipment of your products. You just need to directly contact your wholesaler as soon as you receive an order from your customers.

With a dropshipper, you can sell a variety of products without having to stock inventory. This is indeed a very appealing feature for small, new, and especially home based online businesses. Instead of purchasing a large amount of inventory, you can just hire a partner or a wholesaler who can act as a dropshipping supplier and list them the merchandise for sale. On receiving an order, you can forward it to the supplier for its fulfillment.

Then, the dropshipper will deliver the products to the customer from their warehouse and will charge you for the shipped item. The entire process and accounting for dropshippers is handled by the wholesaler. But you need to be really careful while hiring a credible and professional wholesaler for effective accounting for dropshippers. There are several perks of dropshipping as well as accounting for dropshippers. You can find them in the further sections and also about accounting for dropshippers.

Are You Wondering About Accounting for Dropshippers? Have a Look at the Objectives of Dropshippers First!

If you are pondering about accounting for dropshippers, you must first understand about the objectives of the dropshippers. Let’s have a look at them.

  • They are accountable to receive goods when you hire them.
  • They are responsible to move the goods to quality review area.
  • Dropshippers examine goods on the basis of receiving criteria.
  • They make sure that the goods are moved into the warehouse safely.
  • They pick goods and combine them with other items for its shipping.
  • They are responsible to ship the merchandise to the ultimate customer when retailer orders to do so.

Some Concerns Regarding Dropshipping

One of the best perks for sellers or retailers is that they do not need to invest in upholding and maintaining any of inventory since the supplier is responsible to maintain it. So people who are concerned about the accounting for dropshippers, they must remember that inventory is managed by wholesalers. With the benefit of easy accounting for retailers, accounting for dropshippers becomes complicated as they have to manage all the merchandise and goods.

But you must keep in mind that this approach is only helpful when the goods that are required for reselling are in bulk and they can eliminated for a large amount of storage space from the warehouse. Due to these factors, dropshipping for retailers is considered as one of the best options for delivery of goods to the ultimate customers.

Regardless of the countless benefits and that dropshipping can be used as an alternative for a reseller, there are some problems that you must know about. Let’s have a look at those issues.

  • It is not necessary that every supplier will agree to your dropshipping agreement, as it involves a large number of small unit count deliveries which are quite expensive and time consuming.
  • The seller needs to institute new processes and procedures in order to control the issue of shipping notification to suppliers and ensure that the shipments are made accordingly. Also, there should be a proper and organized system for billing the department when shipments are made in order to issue the invoices. All this can be very problematic for the dropshipper.
  • The customer will get to know about the supplier and they may order the product directly from the supplier. As a result, a retailers business can be at stake.
  • Accounting for dropshippers will become time consuming and difficult due to large of goods.
  • Retailer has lesser control on the products or goods.
  • A retailer will have lesser visibility in regards to what so ever happens to the dropshipped products you are selling.
  • Dropshippers will consume most of the profits which is actually quite unfair.

Dropshipping can be very helpful where it can be applied but it only provides limited solutions. In order to know the core of accounting for dropshippers, keep reading.

Perks a Retailer Can Enjoy by Hiring a Dropshipper

Along with some drawbacks, you can never ignore the benefits that dropshippers offer. Indeed, it has made the lives of retailers quite easier especially because of its accounting. It saves time of retailers and helps them in focusing on their core business activities. Let’s have a look to some of the benefits a retailer can enjoy with dropshippers.

1. Dropshippers Require Lesser Capital

This is one of the biggest advantages for starting a business. Less capital is always helpful for business owners. Even if a business owner has a small budget, they can start their business. Dropshipping is basically helpful for e-commerce businesses. The electronically operated business structures do not require investing thousands of dollars for the inventory upfront.

With the online platforms, it has become easier for business owners to start a business with only a small investment(depending on the business nature) while previously, business owners or retailers required huge amounts of capital to purchase an inventory.

Additionally, those who are concerned about accounting for dropshippers and dropshipping model of business must remember that they cannot purchase the product unless they have already made investments for the sale and are paid by the customers.

2. Ease in Establishing and Getting Started

Despite of the complicated accounting for dropshippers, dropshipping business owners should not forget that running an electronic commerce business is much easier than establishing and running a conventional business and deal with physical products at hand. With dropshipping, you do not need to worry about the following aspects.

  • You do not have to pay and manage for the warehouse.
  • You do not require packing and shipping your customers’ orders.
  • You do not have to track inventory for accounting reasons.
  • Retailers do not have to handle returns and inbound shipments.
  • Being a dropshipper, you do not have to continually order products and manage you stock.

3. Low Overhead Cost

In the dropshipping business, you do not have to deal with purchasing inventory or managing a warehouse. As a result, your expenses are quite low. Additionally, most of the successful dropshipping businesses are operated from a home office using a laptop. Once your business starts to grow, the expenses also increase but still they are comparatively less than the traditional conventional businesses because they save rent of office place, costs of furniture, and many other expenses that are required in a conventional business requiring a physical office.

4. Flexible Location

One of the best benefits you can enjoy as a retailer is you can operate your business from anywhere. Similarly, you don’t have to worry about a dropshipping business. It can be operated from anywhere but just requires a fast and reliable internet connection. You just need to communicate with the suppliers and customers properly in order to run your dropshipping business apart from accounting for dropshippers. As a result, it is a flexible business and can be used at several different locations.

Along with these benefits, there are several other benefits too that make dropshipping business a very attractive model for both novice and seasoned business owners or professionals. But dropshipping business is not all roses and rainbows because of the specified benefits and concerns along with accounting for dropshippers.

The business of dropshipping is completely changing the inventory and merchandising game for retailers. It has made processes easier as the accounting for dropshippers is the responsibility of the suppliers. Accounting is a broader term, which is why it involves several aspects depending upon the type of business. Similarly, here we have highlighted some of the accounting aspects with respect to dropshippers. If you want to know the core of accounting for dropshippers, you must read this section very carefully.

We offer customized accounting solutions for dropshippers, and e-commerce business models. For more information about our tax accounting services call us at 407–344–1012, or email us at info@freedomtaxfl.com .

1. Tax Challenges

As they say, tax and death is inevitable. Similarly, tax challenges are everywhere. Dropshipping can lead to tax consequences for all the parties that are involved. Taxes are one of the major parts of accounting for dropshippers. From tax perspective, if a retailer has nexus with a specific state or has willingly registered in the state, then the retailer is required to collect sales tax. In this type of situation, the customer will be required to pay off the taxes even if the purchase was exempted. However, establishing a connection in such situations is quite simple, things get a bit more interesting when the retailer does not have a link with the taxing state, but the shipper has it.

2. Managing Invoices

Drop shipping has three main data integrations between the supplier and retailer including the product catalog, orders and inventory. The last and final step is the supplier invoices the retailer for the products that they sold and provided to the retailer’s customer. Invoices are one of the major parts of accounting for dropshippers. They are almost similar as the manufacturers’ and distributors’ traditional inventory purchases but they have only one difference. The supplier’s system generates an invoice on per order basis. The financial and accounting information including the payments terms round out of the rest.

We have formed a list of important data that should be coordinated among suppliers and retailers for effective accounting for dropshippers.

  • invoice_id: It is the unique identifier that is generated by the supplier’s account system.
  • po_number: This is the identifier that is generated by the retailer’s ordering system.
  • invoice_sub_total_excluding_line_items: The total charges on the invoice should be shown and not related to the line items, SKUs
  • invoice_amount: The amount of the invoice that is to be paid.
  • invoice_due_date: The date of the invoice to when it is due.
  • invoice_date: The date of the invoice.
  • invoice_terms: The terms and conditions of the invoice such as “net 20”
  • invoice_handling_cost: The cost of handling for the invoice, if it is different from the handling costs of line items SKUs.
  • invoice_discount_due_date: The date due on when the invoice is set to be received at discount.
  • invoice_buyer_id: The unique identifier of the retailer in the supplier’s accounting system.
  • invoice_sales_tax_amount: The sales tax amount of the invoice should be shown if it is different than the first item.
  • ship_to_company: The name of the company of the customer who will receive the invoiced order.
  • ship_to_address_1: Address 1 is the main address of the customer who will receive the invoiced order.
  • ship_to_address_2: Address 2 is the alternate address of the customer who will receive the invoiced order.
  • ship_to_city: Name of the city of the customer who will receive the invoiced order.
  • ship_to_region: The name of the region of the customer who will receive the invoiced order.
  • ship_to_postal: The postal code of the customer’s region who will receive the invoiced order.
  • ship_to_country: The country of the customer who will receive the invoiced order along with the two character ISO code for the country.
  • invoice_batch_id: It is the batch identifier also known as unique identifier that invoice.
  • invoice_batch_total: The complete amount of all the invoices given in one single batch.
  • invoice_status: It is the declaration status of the invoice such as “paid” or “outstanding”.

All these determinants regarding the invoices must be settled at the first place between both the parties i.e. the retailer and the supplier. These determinants need to be clearly identified, coordinated, and discussed initially as they are an important part for the accounting for dropshippers. Here are a few more things that you need to consider for invoices:

  • Shipping costs
  • Invoicing frequency
  • Single item orders
  • Returns
  • Accuracy and delay
  • Handling and drop shipment fees

3. Inventory Management

One of the most important aspects of dropshipping is its efficient inventory management. Retailers often pair down offers which reduce the risk on their part. Also, products can really stand out in dropshipping and can identify new opportunities for the retailer.

If there is a certain product which is over performing on dropship, it will be an opportunity to bring that item into the store and test out if that product is good enough to physically carry out or not. There are some individuals who are unable to manage the inventory which is ultimately, badly affecting the accounting for dropshippers. So, below we have provided some tips to efficiently manage the inventory.

  • Retailers must understand that all dropshippers are not the same.
  • They need to avoid overselling.
  • Retailers must know that successful drop shipping depends on details.
  • They need to organize, centralize and integrate the order management, accounting for dropshippers and inventory management.
  • They must pick the products wisely or take advice from some seasoned people of the similar industry.
  • You need to use multiple suppliers to manage inventory.
  • Retailers need to use generics for their advantage.
  • They must ensure about the item’s availability.
  • They should deal with the out of stock orders.

4. Varying Profit Margins

Like all other businesses, profitability and revenue stream depends on a number of variables. But once it is done correctly, no one can stop you from creating a highly profitable online business, or a dropshipping business in this context. When we talk about dropshipping business, it is not a magic formula, and the real success requires constant effort and a lot of time, but it is a very feasible online business model associated with very low risk. Once you commit to a long term endeavor, your dropshipping business can go up and grow exponentially.

Additionally, profit margins will vary greatly on the basis of the products you will sell. Those who are operating in expensive electronics, the margins will be thin and be in between 5% and 10% range. But if you operate in low priced accessories, the margins are greater, they are 100% instead. Not only the nature of the products matter, it is also the value you offer to your customers. It allows you to charge a premium over your competitors.

5. Cost Benefit Analysis

When we refer to accounting for dropshippers, one of the important aspects is cost benefit analysis. According to Justin Drage, the cost benefit analysis plays out in the favor of the retailer with the desire to serve what is in the best of the interest of their customer. According to the researchers, the discussion of the cost benefit analysis for the dropshipping business has been quite interesting.

They found that the profit margins of the retailers were balance out by saving logistics costs by avoiding the tying up capital, saving the sale and carrying the stale stock and where the retailer has had an discontent customer. The costs benefit analysis is really in favor of dropshippers.

6. Positive Cash Flow Cycle

Among all the specified benefits of the dropshipping business and accounting for dropshippers, two of prominent benefits are upfront inventory and a positive cash flow cycle. A positive cash flow occurs in the dropshipping when the seller is paid on the making the purchase. Generally, the seller pays the wholesaler with the help of a credit card or credit terms. For this reason, there is a period of time where the seller has the customer’s money but they have not paid them to the wholesaler.

Moreover, it can be an advantage for retailers when there is no middle man in between the direct communication of a wholesaler and a retailer; hence, saving costs and delay in physically sending the goods to the ultimate customers.

Tips for Choosing a Credible Dropshipper

If you want to enjoy the benefits of accounting for dropshippers and drop shipping business without facing mishaps and hassles, you need to find a reliable and a credible dropshipper. But how will you do that? We have come up with a few tips that can help you in choosing a credible dropshipper.

· Tip # 1: You Need to Become Expert Researchers

It is not very easy to always call up your manufacturer and ask them to drop ship for you. What if they reply in negative, what will you do then? You need to be ready with some extensive research and contingency plans, right? Drop shippers are often not really good at internet marketing and usually have poor online presences. So, you have to dig into the depths of Google to find other options.

· Tip # 2: You Have to Focus on Communication Skills

One of the most important qualities a dropshipper must have is good communication skills. Your dropshipper need to be responsive and quite transparent, or else you will be constantly stressed out about what is to be done and how to fulfill the orders on time.

· Tip # 3: Check Out Reviews and Ask for Referrals

You need to ask for referrals and check out reviews for a credible dropshipper. Also, you need to ensure that the dropshipper you are selecting is seasoned and have reasonable experience in the relevant industry as they will be able to guide you about the industry. When seeing reviews, you must make sure that they are true as they are one of the great sources to find a credible dropshipper for your business.

By coordinating with an experienced, seasoned, efficient, accurate, well versed, transparent and good at communicating dropshipper, they can help you in understanding the customer’s requirements more clearly and you will not have to face the headaches that may come along with the dropshipping. Also, they will ensure about a positive cash flow of your business by keeping a track of your accounting.

We offer customized accounting solutions for dropshippers, and e-commerce business models. For more information about our tax accounting services call us at 407–344–1012, or email us at info@freedomtaxfl.com .


Originally published at freedomtaxaccounting.com on April 13, 2016.

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