311 Amazon profit: How do I figure out how much profit I’m making? (Q & A Tuesday)
This is not something where I’m going to give you every single step blow by blow, because that is a bit complicated. But I can say that it sounds more complicated at the front because Amazon is a complicated business and it can be difficult to determine your Amazon profit.
If you would like a more in-depth look from an accountant’s point of view, check out episode 250, when I interviewed my accountant, Penny Lowe, about this. This episode is really to look at look at setting things up, and could very beneficial for new sellers.
Separate Accounting and Bookkeeping Into 3 Blocks For Different Purposes
I recently read a book by Sam Carpenter, Work the System, which is reminiscent of Michael Gerber’s The E Myth and Getting Things Done, by David Allen. It’s an obsession with standard operating procedures.
You need to set the objective first of what your system, process, or person you hire is trying to do.
- Why do you need this thing?
- What outcomes do you need from this?
Then, create systems that fulfill that objective.
Aim 1 – Tax Accounting
I think you should use an accountant for this because the consequences of getting it wrong can be really disproportionate to the money you save by not doing it.
Tools I Recommend to Use:
- A2X Accounting
I would strongly suggest implementing systems that match what your accountant is familiar with, as long as they are familiar with e-commerce.
First year of trading:
- Don’t get obsessed with the tools
- A spreadsheet may suit your needs
- First, clarify the information that the tax authorities really need from you, which will vary based on jurisdiction
- For example, in the UK, corporation tax needs very few details.
- Don’t let your accountant use a system that is geared toward a company doing ￡25 to ￡30 million per year.
Always push for, what is the minimum information I need to provide so that you can provide data on the absolutely critical points.
Bear in mind: corporation tax is a tax on profit, and profit is the difference in the value of the equity of the business at the beginning and end of a period.
Figures you need to determine profit are opening and closing
- Cash balance
Aim 2 – Management Accounting
Management accounting is not externally imposed by the tax authorities or by your accountant. The reason to have management accounting is to be able to make better decisions.
I would separate it out into 2 areas; gross profit by SKU or product line, and overall P&L for business.
Gross Profit by SKU/product line
For this, the tools I recommend are:
They are all quite similar. They plug into the Amazon seller central via an API and it should show you the profit or loss by SKU.
For these tools, you need to input your landed costs (the cost to get the product manufactured, shipped, import duties, storage costs, etc) and when the products sell, it will account for the sales commission and fulfillment costs from Amazon, as well as the PPC, and the tool will provide the P&L information.
Overall P&L for Business – management accounts
Overall profit and loss for a business is tricky because you’re going to need to get the overhead sorted.
There are ways to do this with Xero, A2X, and Quickbooks
- However, you are probably going to have to work with your accountant to set up a chart of accounts.
Overhead off Amazon often get neglected as part of the cost structures.
- Get it all running through one bank account allocated to your business, and download the spreadsheet for that once a month, and add it up once a month.
- Examples of off-Amazon costs:
- Business tools, such as Helium10, Fetcher
- Cost of coach or course
- Accountants fees
Whatever system you choose, make sure you understand it.
Aim 3 – Projected Accounts
This is not just what’s happened in the past as tax and management accounting is, but it’s about the future, particularly related to cash flow and stock.
This is to help with reordering and ad spend decisions.
Again, the tools I recommend for this are:
I would also consider working with a coach or a mastermind if you are not very familiar.
You also need to read the market. For that I would recommend these market research tools:
You need to do this before the cash flow projection. If you realize, for example, you’re going to have a heavy demand on stock in December, and you will need to order stock in August or September, you’re going to need a lot of cash in August.
Do this after the stock projection
If you can, use an accountant and talk to experienced sellers in the form of a coach or mastermind sellers to get insight from multiple perspectives.
Spreadsheets will work ok for this.
I recommend to project over 1 year, if possible, but 3 years is ideal.
- Normally when you start off, you tend to have a time frame of 3 months, but I think you really should project over 6 months at a minimum.
- 3 years is ambitious and is only really valid for the big businesses that have stability and have been around for a while
- The bigger your business, the more important it is to do this
If you can, add in a scenario for projected growth, as well as better-than-projected growth.
- That way, if you’re going to sell more stock, you’re going to have a bigger need for cash flow in September or possibly earlier.
- It’s important to project the cash flow needs of when your big sales are going to be and make sure you “scenario plan” for that.
- Then if you need an extra cash injection, you may need to go to a bank to get a loan, and you can show them that you’ve created these projections, and they will take you more seriously
Working with Accountant
Their understanding of small business
Talk to them frequently and make sure they understand e-commerce
Understanding of e-commerce
Explain it to them or you may need to find a new accountant
One thing that is critical for an accountant is the ability to explain things in lamens terms what things mean.
Equally, you need to set clear goals for measuring what outcomes you need.
- Clarify the outcomes you want
- Then ask the accountant how they can be part of the picture to contribute to those outcomes
What do you do with the measurements?
This share/growth matrix is your overall lens through which to evaluate
Don’t be driven by your profit and loss, use it as a very important metric by which you drive.
The most important thing is the positioning of your business.
- If your business has cash cows, you should use those to fund the star products, the things that will grow your business.
- If you discover your products are dogs, it’s probably time to divest.
- The ultimate job of your business is to find and grow star products, and your accounting needs to help with that.
Whatever your profit and loss tells you is part of your strategic approach.
Overall, do not forget to integrate your accounting into your overall business strategy. There is no great accounting system that will save your business from lousy positioning.
Everything in your business needs to be driven by objectives. The objectives of any department need to be driven by the objectives of the business as a whole.