we are two recent graduates and are currently working on a financial plan for a new business idea. So everyone's help here is really really appreciated and we would be indebted forever.
Here is the question / issue at hand:
We are thinking to set up an online shop that sells artworks from galleries through our site. To give you an example. We have an artwork that costs 100 £. We receive 30% of the price and the gallery 70%. The artwork will be at the gallery and we agree to put it up on our site for one month. If the artwork is sold, the gallery sends us the artwork and we package it and ship it to the buyer. Within two weeks of shipment we pay the gallery the 70 £.
What exactly is the whole process from an accounting perspective? Since we are the ones basically earning a commission of 30% but are actually receiving the whole 100£ and are paying the gallery the 70£, I am slightly confused.
Are the 30£ a commission revenue for us, hence in the income statement? Or do we state the 100£ as revenue in the income statement and then the 70£ for the gallery as a selling expense?
the gallery is quite cleverly landing you with the insurance and transportion costs out of your 30% so side stepping all risk and costs. For £100 I would imagine that you wouldn't come away with anything but I assume that you are just using thatr figure as an example and the real sales will be much higher than that.
It would seem that the only revenue that you record is the 30% commission on the sale.... But, I'm not privy to the actual agreement!
Is the financial reality that you are in fact purchasing the artwork from the gallery after you have found a buyer? The sale may not be as obvious as you think.
What you need to ask yourself is this.
If the artwork was damaged in transit, where does the risk sit as in who would reimburse the client?
If you then you have purchased the artwork and you record as recenue with the 70% being a cost of sale.
If the gallery then you are working on commisssion and only the 30% is recorded through your books.
Have you done all of your costings? What profit margin over your investment are you anticipating? What are your breakeven figures? Just some things to think about.
The key to any business venture is to think of it in terms of Porters five forces :
1) what is the threat from new entrants to the market? 2) What is the threat of alternatives to you product or service? 3) What is the bargaining power of customers? 4) What is the bargaining power of Suppliers? 5) What other incumbant firms are offering the same service and how can you beat them without entering a price war?
Good luck with the new venture,
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
what would you suggest us to do? Rather negotiate with galleries to not be in charge in case of damage and receive the 30% as commission revenue or to buy the artworks, book the 100 pounds as revenue and pay the galleries 70 pounds. In this case, arent the 70 pounds rather selling expenses instead of cost of sales? They have nothing to do with the inventory if you ask me...What is you suggestion? In any case its always better to be able to report higher revenues.
In this case, arent the 70 pounds rather selling expenses instead of cost of sales? They have nothing to do with the inventory if you ask me...What is you suggestion? In any case its always better to be able to report higher revenues.
Best
I have no doubt Shaun will pick up on the rest but as I'm sitting in the Morrisons coffee shop bored waiting until I pick up my boy from school I thought I'd attack this point.
Given that this cost can be directly related to a particular sale, what makes you think it's an overhead rather than a direct cost of sale? To me it seems very black and white with this particular example, if of course that is the way you choose to go.
Your business model is very much down to yourselves as you know the figures and costs.
What I would suggest is that you sit down with an excel spreadsheet and go through all of the possible what if's and projections.
The £70 is nothing to do with you under one scenario (commission) and is a cost of sales under the other (purchase and resale).
I see no scenario where an item that is being sold could be considered a selling expense.
Its not always better (or legal) to report higher revenues.
Your accounts must reflect the financial reality of the substance of transactions per FRS5 (specifically application note G) under UK GAAP and IAS18 under IFRS. Neither of those have legal standing in their own right but are given such by the companies act divesting authority to accounting standards where such are more detailed than statute.
Yesterday I directed you to porters five forces to have you start thinking about your business strategy and more importantly the threats to it.
Today I would suggest that you look at the steps of your business model in relation to the value chain in order to identify your costs at each step. Once you have these then use GAP analysis techniques to reduce your costs at each step.
Both of those are quite straight forwards and you seem quite clued up so you should be able to understand them both after a quick read around the internet.
Your basic issue though is down to whether or not the paintings belong on your books or the galleries and that is all down to where the risk and reward of ownership lies.
If the responsibility after sale falls to you then the reality is that this is stock. If risk remains with the gallery then you are working on commission.
As I say, only you are privy top the contracts that exist between yourselves and the galleries so only you know the financial reality of the scenario.
I would advise that if you do not already have an accountant working with you that you find a good local one who will be able to help you get your business off the ground.
Ensure that you find some good accountants who come on personal recommendation from other local business people.
kind regards,
Shaun.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
we're in agreement but the nature of the agreement between the gallery and the poster can change the substance of the transactions so I'm adverse to putting my flag in either the commission or cost of sales camps without exact specific knowledge of the wording of the agreement. At the end of the day its all really down to where the risk and reward lie.
... And on that note, I should be off to pick my boy up myself.
Doesn't time fly when your having fun.... Ooh look, I'm over 6k posts!
talk later matey,
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
