Does Amazon seller metrics matter? Does revenue matter? Yes – but it’s probably not why you think. Listen to what Michael has to say on today’s episode.
“Turnover is vanity; profit is sanity; Cash is king.”
Does Revenue matter? Yes – but it’s probably not why you think…
5 Reasons Why Amazon revenue doesn’t matter
- Revenue is not cashflow
- You can’t live off revenue
- It doesn’t make it a lendable business (ie you won’t get a loan based on revenue)
- It doesn’t add to the value of the business (as a sellable asset)
- It’s not a “true Top Line” (comparing businesses & investments)
Revenue is not cashflow
Cashflow is king. This is doubly true with capital intensive businesses, like property…and e-commerce if buy the products before you sell them on Amazon seller metrics.
It’s triply important if you have to sink a lot of capital into a part of the business and hold it there for a while before you get it back – like Private Labelling.
If your business throws off a lot of cash you can grow organically.
You can’t live off Revenue
You shouldn’t take money out until you’ve grown the business to the point where it can afford to pay you as owner/director of the business.
Assuming you aren’t planning to sell soon, at some point, you need to justify to yourself and your loved ones the time, energy and money invested in your amazon business.
You can only pay dividends out of profit as an owner with Amazon seller metrics.
If you take a salary instead as a director, there has to be enough money left in the business after other expenses to pay that salary.
Either way, you pay yourself out of profits effectively.
It doesn’t make the business lendable
Cashflow is the key here.
With a capital intensive business, there are points – like Christmas/Holiday season/Q4 – where even a modestly sized business might require extra funding.
Institutions, from Amazon Lending to Funding Circle etc. will often be willing to lend good money. – but only if your business is cashflow positive.
That is kind of a function of revenue but only if it is profitable AND you don’t overtrade your Amazon seller metrics.
Revenue doesn’t add to the value of the business
When a privately held (ie not stock market listed) business is bought, it’s generally valued as a multiple of profit.
Specifically, pre-tax profit plus “owner discretionary earnings”.
Revenue has almost nothing to do with the sellable value of the business.
Revenue, not a “true” Topline*
Amazon or e-commerce for most business owners/entrepreneurs/directors does not exist in isolation.
When you’re trying to compare different businesses with different business models or investments, you need to be very careful which “top line” or “revenue” metric you choose.
In e-commerce, a lot of your revenue numbers are really “pass-through costs”*.
For example, Amazon gets paid by you from your revenue for sales commission and fulfilment costs but only when you make a sale.
We do in fact see this clearly in the mechanics of payment: we receive an “Amazon payout” every two weeks which is equal to Amazon revenue net of Amazon costs including sales and fulfilment costs.
The simple version
Greg Crabtree’s* rule of thumb is that if your Gross Profit is under 40%, you should use Gross Profit as a top line, rather than Revenue.
Viewed through this prism, a “$10 million a year” Amazon business – ie a business doing $10 million a year in revenue – at 30% Gross Margin would, in fact, be seen as a “$3 million a year business”. A more Humbling metric – but more helpful!
**I’m indebted to the excellent book Simple Numbers, Straight Talk, Big Profits!
By Greg Crabtree. Crabtree is a CPA (Accountant) who specialises in accounting to really help CEOs/MDs of small and medium businesses (SMEs) for these very helpful distinctions.
I can’t recommend it too strongly for anyone scaling an e-commerce business.
What to do about all this
- Talk to your Accountant!
“None of us generally talk to our accountants as often as we should.” (Jason Miles of winningonshopify.com)
It’s so important not to just use your accountant at tax time – whether corporation tax or personal income tax. Nor just to use bookkeepers to take away a fiddly task.
“Delegate, Don’t Abdicate.”
We’re all guilty of this but financial measures are too important to delegate responsibility for.
Instead, we need to make accountants key advisors.
The setting of financial goals; deciding what to measure in progress towards that; monthly or weekly check-ins on your business’s financial health and goal progress – these are very key parts of running a successful business.
It’s no coincidence that one of the fastest-scaling Mastermind member businesses has a fantastic Finance Director (FD= CFO in American terms) at the centre of their business.
Get some input from a fellow entrepreneur
If you’re confused by all the metrics flying around and want an entrepreneur’s viewpoint of view, you’re best of referring to your mastermind of peers.
If you don’t yet have serious peers ie ones with substantial e-commerce revenue, you may want to consider getting input from a business mentor, Amazon consultant or Amazon coach.
I do offer a specific service where we focus on what to measure, how to get those figures and how to make sense of them.
Marketing and financial figures focus on Amazon-specific metrics.
To find out more go to www.amazingfba.com/measure
Watch discussion about Amazon seller metrics
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