Why Payment reconciliation is critical for your e-commerce business

For most sellers, listing inventory on marketplaces itself is a big task. Whether you’re a trader or manufacturer, inventory keeps changing and you should have done atleast the basic of these following actions:

1. done up the SKU listing really well,
2. added nice photos,
3. got great SEO optimised content and
4. generated enough reviews
5. Added the correct taxes as per the HSN code

Even so, you do have to actively manage its pricing and quantity everyday to ensure you’re selling well and not running out of stock.

Add to this, once the order is made, you dispatch the SKU and then what? Your product is sold but your money is not in!

Most marketplaces have a 1-2 week payment cycle, meaning they release the cash they received for your product after a certain delay from the time the order was made. What this means is

1. You need to have enough working capital to wait for inventory to COGS to happen
2. You ALSO need to have enough working capital for this payment from the marketplace to happen.

That’s actually a double whammy for the cash flow from operations. But it’s not all bad, you have a nice distribution channel online which most buyers flock to (especially if it’s well known such as Amazon or Myntra), and once the listings are set up, it’s minimal effort to sell on a continuous basis. In effect, the marketplaces get you a lot of eyeballs, but you should still have your eyes on this eyeball-to-working capital tradeoff.

Usually, when the marketplace makes a payment, it also gives you a detailed excel sheet mentioning which orders were paid out to you. Then it deducts some commissions and its own taxes and pays out the rest to your bank account. These commissions are shown as revenues for the marketplace and the taxes are the taxes on these revenues, that amazon levies on the seller.

<insert image showing formula of order value - commissions - taxes, Jay can you do this?>

Good marketplaces will always show the deductions in the form of per-order commissions and taxes and then an overall deduction.

Let’s take a look at Amazon’s payment reconciliation excel sheet. Each order has a value equal to the sum of item value, item tax and shipping. And then there are commissions and taxes deducted on them.

As a seller, what should you do to understand your payments?

Well, firstly, you need to add up all the payments received in your bank. If it’s amazon, they make 2 payments a week, once for COD and once for prepaid orders.

Secondly, you need to aggregate all the types of commissions you were charged from the payment excel sheets. These sheets are generated for every payment per week, one for COD and one for prepaid orders. So a total of 8 excel sheets are generated per month.

Thirdly, you need to aggregate all the taxes, similar to how you calculated commissions.

Now for all the commissions and taxes, we create a purchase voucher in Tally. Then we account for all these taxes in GSTR2 and net off against GSTR1.

Finally, the total of order value minus taxes in GSTR1 minus commissions PLUS GSTR2 is your gross profit.

MRP: 299

Fees: -97.92

Net of settlements = 299-97/92 = 202

COGS: - 85

EBITDA: 202-85= 62

Taxes - 30 (GSTR1)

Taxes GSTR2 - XXXX

Gross Profit after taxes: - 62 -

<insert image of calculation>

Now when you subtract the COGS from this figure, you get an idea of how much money you made on the inventory.

Say you spent Rs. 1 lakh buying inventory, and sold all of it within 3 months for Rs. 5 lakh, that’s a profit of Rs. 4 lakh in 3 months. This is YOUR OPPORTUNITY COST of doing business. What this means is that if you could make more than 4 lakh doing something else or selling in a different marketplace in these 3 months, then you need to evaluate your next moves, which would typically be:

1. Increase the initial inventory (say from Rs. 1 lakh to Rs. 3 lakh, and see if it generates the 4x profit in 3 months)
2. Increase inventory AND sell in different marketplaces to compare the profits
3. Add newer high price SKUs that could sell well and remove loss making SKUs
4. Add new lines of business (software, training etc)

So in effect, Payment reconciliation is the cornerstone of understanding how well you’re doing in an e-commerce marketplace.

In the next article, I will talk about different types of amazon and Flipkart fees and average order commissions that are charged in Amazon and Flipkart.