In recent years, more and more people have been pivoting to or starting an online business in the Philippines.
This is a result of a number of factors, including:
- New solutions, payment gateways, cloud platforms and end-to-end fulfilment providers, which together enable a much more efficient and cost-effective path to setting up an online business.
- The COVID-19 pandemic forced many businesses to pivot from traditional bricks and mortar business models to an online model.
- As internet connectivity expands across the country, this opens up more opportunities for business owners to sell online and customers to buy online.
In light of this increased emphasis on the online business model and drawing from our experiences of providing accounting services for such businesses, we have outlined below 5 key finance and compliance-related tips that founders, owners and managers should consider when running any online business in the Philippines.
1. Registration of Online Businesses
Expert Tip No. 1: Online businesses still have to be registered! Consult your lawyer, business adviser or accountant to identify which type of registration is right for your business!
We regularly receive enquiries asking if online businesses must be registered with the BIR or the SEC or any other government agency.
The specific tax obligations of an online business might vary depending on the business model. However, the mandatory obligations associated with registering a business in the Philippines remain the same whether it is an online business or a traditional physical/bricks and mortar business.
In short, if you are running or managing an online business for a commercial purpose here in the Philippines, the business should be registered with the relevant government agencies. Legislation in the Philippines does not differentiate between online businesses or traditional/physical businesses from the perspective of business registration.
The type of business you register should depend on your business plans and future objectives. If you wish to register your online business as a domestic corporation or a One Person Corporation (OPC), it should be registered, at a minimum, with the SEC, the BIR and the Local Government Units (LGUs).
If wish to register your online business as a Sole Proprietorship, the business should be registered with the DTI, the BIR and the various LGUs.
Here are some additional points to consider if you are thinking of starting an online business in the Philippines.
2. Know Your Business Model
Expert Tip No. 2: Understand how your online business model impacts your operations, sales, tax and compliance obligations!
As with any kind of business, it’s important to understand how your online business will make money. In other words – what is the business model?
Your chosen business model will usually determine how you will run the business from an operational perspective. However, it will also determine what type of taxes the online business is mandated to pay, particularly from the perspective of online transactions.
For example, a standard business model for an online retail business is the purchasing of goods directly from suppliers, holding the goods as inventory and then selling the goods directly to the end customer via sales orders received through your company website.
However, many businesses might have numerous sales channels, in addition to their company website. Platforms such as Lazada, Shopee or even Zalora (for clothing/fashion) are often used as supplementary (or even primary) sales channels by online businesses in the Philippines. This makes the business model slightly more complex as the business will have to pay platform fees or commissions, identify who is responsible for fulfilment and ensure that the various sales channels are accurately reconciled (see below).
Another form of online business model is the online marketplace. Under this business model, the business would not be buying or selling goods. It would actually be providing a platform or “marketplace” online which serves the purpose of connecting sellers and buyers. In this business model, the primary fees or “sales” will be generated on a commission or standard fee basis when transactions occur or subscribers join.
Whatever the business model, make sure that you understand, at all times, how your business can generate revenue on a sustainable basis!
3. Sales Reconciliation
Expert Tip No. 3: Implement a robust sales reconciliation process in your business. Make sure you are a) generating sales, b) fulfilling the orders, and c) getting paid for every order!
The reconciliation of sales can be a common pain point for online businesses – particularly when the business has multiple online sales channels.
If your business does not have a robust sales reconciliation process in place, it will be very difficult to match your sales figures with actual payments received.
So, what do we mean by “sales reconciliation”?
Sales reconciliation is a monitoring and matching process that requires an internal review of all business sales/orders against actual cash received in full payment for those sales/orders.
It is an important safeguard and control mechanism to ensure that payments received match sales orders fulfilled.
An example! Suppose you run an online business that currently sells products to B2C customers within the local Philippine market. You might have a number of sales channels through which customers can order, including Shopee, Lazada, Instagram and Facebook, as well as your own company website.
While it can certainly help to have many performing sales channels, at the back-end, it can be difficult to manage. Sales are being received from various channels, all of which might have different reporting mechanisms and different integrations with your online platforms. You might receive an order through a message on Whatsapp. How is that pushed to your fulfilment team? How is it booked in the daily sales figures? How do you identify if the order has been paid for if the buyer does not send you the remittance/payment advice?
Compare this to the traditional bricks and mortar businesses of a retail store or an F&B establishment such as a restaurant or a cafe. These businesses will generally (or hopefully!) use Point of Sales system (POS) which can easily track credit card and cash sales as payments are processed directly on the premises in real time. Much simpler, right?
Here are 3 key reasons why the Sales Reconciliation process is so important for online businesses:
- Your sales orders may be growing month on month. However, if a sales reconciliation is not being performed, how will you know which orders have been paid and which payments remain outstanding?
- Solutions and platforms such as Shopify, Lazada or Shopee will generally provide quite detailed reports on sales and platform fees which can be very helpful from a sales reconciliation perspective. However, sales received through Facebook or Instagram are generally not tracked by any system. Someone needs to manage these orders and perhaps encode them manually in a centralized system (e.g. Shopify). Someone then needs to make sure that payments for sales through these channels are actually received – as this is usually not automated.
- It’s important to understand the actual value of your sales. Remember, sales platforms will generally charge a fee or a commission for using their platform. It’s important to be tracking all of the charges and fees associated with the use of these platforms so you can a) understand how much profit you are actually making per product and b) accurately calculate your cost of goods sold!
4. Issuing Sales Invoices for the Sale of Goods
Expert Tip No. 4: Online businesses that sell goods must issue a sales invoice with each order. Through the implementation of a robust process with clear controls, online businesses can ensure 100% compliance with BIR requirements when it comes to issuing sales invoices!
In the Philippines, a sales invoice must be issued to a customer with the sale of any goods or products.
What’s a Sales Invoice? A sales invoice is a document that must be generated by a seller or supplier in the Philippines which provides documentary evidence that a sale of goods has occurred and that payment is due for those goods.
The sales invoice will also be a key documents when supporting sales recognition and tax computations.
For most companies, the sales invoice must be handwritten, using an official sales invoice that has previously been registered with and authorized by the BIR, and then delivered to the end customer with the goods.
The need to issue a physical sales invoice for online businesses can be an operational burden. Notwithstanding that the business is “online” and founders and managers can benefit from an eco-system of integrated online tools and cloud solutions to grow the company, in the Philippines, in the majority of cases, there still remains the need to issue a physical sales invoice with every sale of goods.
This requirement is often manageable in the early stages when daily transaction volumes are still low. However, as the online business starts doing tens and hundreds of sales transactions a day or a week, the need to write and issue hundreds of sales invoices becomes a real operational consideration that requires robust processes and controls.
Certain businesses can apply to the BIR to register for and use the Computerized Accounting System (CAS) method of Books of Accounts. Registration with CAS enables the business to issue e-invoices. However, CAS registration can be a long detailed process which many startups and SMEs are not yet ready to pursue.
5. Inventory Management
Expert Tip No. 5: Ensure your inventory management system is fully optimized before integration with other business solutions.
For online businesses selling goods at scale, it is crucial to have a high quality inventory management system in place.
Again, to offer a comparison, traditional retail or F&B stores will generally be able to run their inventory management through their POS system which can identify when stocks are running low and in some cases, automatically notify suppliers.
We would always recommend for businesses with significant inventory movements and a large volume of sales transactions to consider implementing an inventory management solution/tool. An example of efficient inventory tools would be Unleashed Systems or Dear Systems, to name just a few. Inventory can also be managed through Quickbooks Online – an online cloud accounting solution used by many startups and SME businesses in the Philippines.
Remember, it is not enough to simply subscribe to an inventory management system. You must ensure that the inventory management system is fully optimized to align with your business model, your operational processes and of course, your purchasing and selling needs!
Finally, your inventory management system can be integrated with other online solutions – for example, your accounting system. However, we would strongly recommend that, prior to implementing an API that enables the automated transfer of inventory data to your accounting system, you need to make sure that your inventory system is 100% accurate and can be relied upon.
Otherwise, you could end up in a situation where not only is your inventory data inaccurate, your asset values, cost of sales data and general inventory levels will be incorrect also! This can create real issues for a business if such inaccuracies arise on an ongoing basis!
CloudCfo supports many online businesses across a wide range of industries within the Philippines.
Our expert team has significant experience advising across various online business models, tax compliance requirements and providing solutions to the various pain points as online business start to scale!
If you are the founder, owners or manager of an online business operating in the the local Philippine market, Speak to our Team of Experts today!