I think it's always good to spend a little time now and then reflecting on your business; keeping in tune with the heartbeat of your operations. Are you managing things well? Understanding your numbers and producing financials that are providing you with an accurate picture of your business' current health?
Many ecommerce sellers have a common concern that I hear about often when talking with those in the industry. According to the Amazon accounting software they are using, they are making money, but somehow they never seem to have enough available cash. They ask themselves, "How can this be right?" My answer? It's not. There may be several reasons for this disconnect, but the three most common seem to be:
- You may not fully understand the various Amazon fees and deductions that are taken out before the payout is sent to you
- You may not completely grasp how the bookkeeping software for Amazon Sellers tracks your Product Costs
- Perhaps your software isn't being maintained adequately enough to ensure the most current product costs
Taking a look at each of these, we may be able to find some answers for you!
You need to understand what happens with your money before Amazon sends your payout to you, and Amazon bookkeeping or Amazon FBA bookkeeping should provide you with the information you need. Simply recording the deposits on the books as income isn't enough. You need to read your settlement report carefully, paying close attention to the activity that ends with the amount of the payout. All of that activity should be recorded as you enter the deposit into your books. Systems like Inventory Lab obtain the information directly from Amazon, so you can easily see see it. As Amazon accountants, we also want to see it in your financial reports. We create a recurring deposit template in both QuickBooks Online and Xero that is pre-populated with the accounts typically found on the Settlement report. Whenever we record a deposit, we simply open the template, add the appropriate numbers and record the deposit. When we review the monthly Profit and Loss Statement, we are able to compare it to previous months and see how each of these activities are tracking. These activities or costs include such items as promotional rebates, shipping, refunds and even gift wrap credits. If there are any significant changes between months, we know we need to dig in and find out why.
Tracking your product costs is a big challenge for Amazon sellers. The first real challenge is knowing exactly what's included in those costs. Typically, product costs include the direct purchase cost of the product, along with any additional labor required to get your end product to market. Activities such as bagging, labeling and other preparation, including the costs of the labels and bags would all be considered part of your product costs. These should be calculated on a per-unit basis, and when all of the costs are added together, this will be your product cost that you then add into your Amazon accounting or inventory management system. Just a note here that because shipping costs vary so much between shipping methods and fuel surcharges, we don't recommend that they be included in your product cost. Our blog on Freight and Shipping Costs can provide you with more details on this. Instead of added the shipping costs into your product cost, it's better to use that as part of your cost of good sold and to true up your inventory account, which we suggest you do at least on a quarterly basis.
Finally, it's really important that you make certain your costs are being updated in your software anytime there is a change. If you simply set it up once and forget it, you'll find yourself in that place of not know where your money has gone. It's also important to keep your software updated, too. It's easy to forget this critical step, so work to make it a habit to review your inventory by cost on a monthly basis to see if you have any zero-cost products. If you do, update it so you'll have numbers that accurately represent your inventory and Cost of Goods Sold. Completing this one important step will help keep you from thinking you are more profitable than you actually are.
Amazon accounting software systems can play an important role in helping you manage your day-to-day business, but they cannot replace a true accounting system such as QuickBooks Online and Xero. The main benefit of true accounting systems is the Balance Sheet capability. The Balance Sheet allows you to monitor the overall health of your business across time, not just the Profit and Loss for the current year. With the Balance Sheet you can track your long-term value of Cash, Inventory Assets and Liabilities, and Equity accounts. These systems are reconciled back to statements provided by outside financial institutions, which is a must to ensure you are receiving accurate information from your financial data.