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.
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.
Then, create systems that fulfill that objective.
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:
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:
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
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.
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 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
Overhead off Amazon often get neglected as part of the cost structures.
Whatever system you choose, make sure you understand it.
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.
If you can, add in a scenario for projected growth, as well as better-than-projected growth.
Talk to them frequently and make sure they understand 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.
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.
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.