Drop shipping has become increasingly popular for reasons that include the seller not needing to have inventory on hand like other e-commerce services to get started. In fact, as a drop shipper, you don’t even have to pay for the products upfront.
What Is Drop Shipping?
Dropshipping is an order fulfillment business model in which businesses act as middle-man between consumers and manufacturers, to fulfill orders.
A customer visits your e-commerce store, purchases a product, and a third-party supplier ships it to them.
The customer pays the retail price that appears on your e-commerce store, you pay the wholesale price, and the difference ends up in your pocket. You make money, but you never have to worry about investing in products or inventory.
While drop-shipping may sound simple, this kind of business model will present a few challenges along the way.
This article will go through how to get started, what you need to make your drop-shipping business a success, and how to handle accounting for your drop-shipping business.
We will go through what you need to make your business a success, such as a good drop shipping accountant, time, and commitment.
Getting Started With Drop Shipping
With the drop shipping business model, it is your responsibility to build a website, design your company’s brand, get a good drop shipping accountant and choose the products that you want to sell. It is up to you to set shipping costs and set prices so that you can earn a decent profit margin.
To start, you need to register an account with a supplier. With this, you have two options.
- Using a supplier database. These include businesses like Dropship Direct, Alibaba, and AliExpress.
- Using an integrated supplier directory connected to the back end of your store. An example would be Oberlo.
If you are just starting out and using Shopify or Oberlo may be your best bet. With Oberlo, you are able to access millions of products and have them shipped directly to your customers with the click of a button.
Just a few words about Oberlo. Oberlo offers the easiest plug-in for drop shipping use, with its basic plan starting at a cost of $29 a month.
With Oberlo, if your customers buy something, the order is fulfilled automatically. However, you are responsible to make sure that all the details are correct. AliExpress dropshipping will be shipped to the customer regardless of where they are in the world.
What Are the Benefits of Drop Shipping?
If you are an aspiring entrepreneur, dropshipping is a great way to get started. It gives you the freedom to experiment with novel business ideas at a low cost. You can learn about the market, identify products that are in demand, and make adjustments with minor risks. A drop shipping accountant can also help guide you along these processes. Here are some of the other benefits of drop shipping.
1. It Only Requires a Small Amount of Capital
It is easy to launch an e-commerce store without spending thousands of dollars upfront. If you use traditional retailers, you have to invest large amounts of capital when purchasing inventory.
With drop shipping, you only purchase a product after you have made the sale and have already been paid by the customer. This means that you are able to start offering and sourcing products with little money upfront and with little risk.
2. Easy to Get Started
Since you are not stocking a physical inventory, you don’t have to worry about having a warehouse, employees, and security. Thus, you are not responsible for packing or shipping your orders. Nor are you dealing with returns or inbound shipments. You don’t have to worry about maintaining inventory levels. The fulfillment center does all of this.
3. Low Overhead and Flexible Location
Since you don’t have a warehouse or inventory, your overhead is low. Many drop shipping stores are home-based businesses that rely on a laptop and a few recurring expenses, like Internet and fees for keeping their website up and running.
4. Easy to Test and Easy to Scale
Drop shipping makes it easy for you to launch a new store, take it for a spin, and see if customers want to purchase your products. The great part about drop shipping is that you sell the product before you buy it.
Scaling your business is easy because, unlike traditional retail businesses, if your number of drop shipping orders increase, you don’t have to do much more work. All the processing, shipping, and packing tasks are done by the drop shipping supplier. This means that you can grow your business without growing pains.
Making Money with Drop Shipping
It all sounds good on paper, but the real question is, what is needed in order for you to make money from drop shipping?
Drop shipping is a business, so you need to be committed to its success and see it as a long-term proposition. With drop shipping, you will either need to invest a lot of time or money.
Most new drop shipping entrepreneurs opt to invest time. This means learning how to operate the business inside and out. The better you understand the business when it is small-scale, the easier it is going to be for you to manage it as it grows.
Commitment includes learning about your customers and the market. This helps you make better decisions in the long run.
2. Finding Your Niche
To open a successful drop shipping business, you need to go through the same process you would if you were opening a retail store. This means understanding the market, understanding trends, and getting to know your competition. You need to identify the niche you are interested in and then make decisions that drive profit.
3. Understand Drop Shipping Accounting
Everything from deciding your business structure to getting your finances in order will impact your ability to make money with drop shipping. It is important to consult with a specialized drop shipping accountant.
Drop shipping accounting requires you to keep your business and personal finances separate as much as possible. This means opening up accounts for credit cards and checking accounts in the business name.
Understanding tax laws and whether or not multistate taxes apply to your business is important when learning how to make money with drop shipping. You need to know when to collect sales tax and how much sales tax you need to collect. If you under-collect, you could pay out-of-pocket to cover those expenses.
Drop shipping is a fulfillment model. It is used by retailers around the globe. Like every other business, the only way that you can make money is if you satisfy your customers’ expectations and create a brand that leads to brand loyalty.
At Fusion CPA, our accountants understand the unique bookkeeping, general taxation, and accounting needs of entrepreneurs running drop shipping businesses. We can help you make decisions now that will increase profitability and allow you to build a thriving and profitable drop shipping business that complies with IRS tax regulations.
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