A good business knows its finances. This statement is true as true in the case of Amazon FBA as it is anywhere else.
What is different about Amazon is the number of different and variable costs that you may face, especially as you scale your business.
To be a successful seller in the long term, you have to have a tight grasp on these costs, as well as to fully document them, because when it comes time for taxes, you’ll either thank yourself for being organized earlier on or absolutely hate yourself.
Control Your Finances
Even if you are not a professional accountant, you need to perform key financial tasks or at least understand how it all works so you can supervise when you hire someone to do this for you.
Either way, it’s essential for you to stay on top of your finances.
Cash Flow Projections
Forecasting your Cash Flow can help you stay in control of your income and manage expenditures so you don’t run out of cash.
A lack of cash needed to support your flow of operations is more common than it should be in the case of Amazon sellers, especially in active growth stages.
A lack of cash can mos definitely stunt your growth, but it can even jeopardize your whole Amazon business operation.
Cash Flow projections are a must if you want to be a successful Amazon seller.
Cost of Good Sold (CoGS)
Trust us when we say this: You need to calculate your Costs of Goods Sold on a regular basis!
CoGS is one of the most important financial metrics for Amazon sellers as the nature of the business is in accumulated profits coming from sales of all the different product lines.
CoGS analysis will help you evaluate which products are bringing you the most profit and positively affect your bottom line.
Once you know that, you can focus on selling your “Stars” (aka your best performing selling units) and even adding more products like these to your list.
CoGS will also let you determine which products are “Dogs” (aka poor-performers) and those products can then be dropped and replaced by something that will bring in more value.
Calculating true CoGS takes time and requires organization skills (ex: tracking all costs), but it’s something that must NOT be neglected just because it isn’t an easy task - your longterm success depends on it!
Profit and Loss Statement
Many financial experts consider a Profit and Loss account the most important document for Small and Medium size businesses. Unfortunately, too many Amazon business owners often fail to put together a Profit and Loss Statements (P/L).
A P/L helps businessmen, banks, and potential investors measure how well your company is performing. But mostly it helps you, the owner, understand your own business performance.
Looking through a properly performed P/L summary, you can set expectations for future performance, and make data-focused business decisions, for example, determining which unnecessary costs could be removed from operations to save you money.
The look of your PL statement can be particularly important when you are seeking a bank loan, investment, or looking to sell your business.
Every seller should look to make their profit margins as wide as possible. Doing so is good for obvious reasons ($$$), but it also makes your books more attractive to potential buyers.
There are two general directions for improving your profit margins
Amazon marketplace has millions of sellers worldwide competing against each other, so setting up a high price often isn’t an option if you want to make a competitive offering to the market. Therefore, in many cases, Amazon/E-commerce businesses have to focus on bringing their costs down.
Interesting: The Financial Intelligence Pyramid
The main costs of an Amazon business are:
Other Financial Considerations
The nature of Amazon/e-commerce business tends to suck the cash-out, especially when the business is growing rapidly.
There might be a time when you need to borrow cash to support your operations, and if that comes, make sure to do it wisely and with a trusted loan-issuer.
Of course, make sure that you review your financial projections and make sure that you plan payments in accordance with your actual numbers and projected inflows of cash.
As a general rule, keeping your accounting and financial information in order is a big plus for any business. It’s great for tax purposes, potential selling opportunities, as well as for yourself as a business owner.
Depending on your scale of business, personal accounting skills and your willingness (or the lack of it) to spend time on putting together reports by yourself, consider hiring an accountant, using an accounting software, or outsourcing to a trusted third-party.
But if all this information has got you feeling overwhelmed, do not worry!
We at SellerPlex have a passion for finance and actually thrive on making businesses as successful as they can be.
If you’re looking to get a handle on your finances, find out in what state they are in, as well as to learn how you can optimize them and stop wasting money, then get the SellerPlex Business Report and solve all your financial issues once and for all!
[…] fourth reason for eCommerce failure is running out of cash. Effective financial management is crucial to the success of any business. Your balance sheet and income statement paint a clear […]