Amazon Seller Profit and FBA Cash Flow: How to Keep Score

First of all, it's really a numbers game.

You need to understand your data and keep an eye on key metrics to ensure the numbers are going in the right direction. If you are uncomfortable with numbers, then it's time to learn a second language; don't let the numbers scare you.

If you're a sports fan watching a sporting event, I bet you understand those numbers. And not just the goals or runs; I imagine you know the stats of key players, the team’s overall record for the season, etc. It's the same thing for your Amazon business.

Business is a game (of sorts) and your financial statements are your scoreboard. If sports aren't your thing, then just look around—many of our hobbies, like baking or sewing or even gardening, require math. You get the idea. Now, let's look at some important business numbers for Amazon sellers, including FBA cash flow.

First—Revenue

You gotta have it! It's great to look at your revenue and see it compared month by month in an increasing trend line. The revenue number is the one most of my clients understand instinctively.

However, right now we are seeing some anomalies with revenue numbers. Many of our clients use an inventory/profitability dashboard for their sales information. Because of the delays in shipping that have occurred with COVID-19, we are seeing a discrepancy between the dashboards and actual sales shown on the settlement reports.

This is because the orders are not counted as sales until the items ship. However, the dashboards are reporting orders as sales. Be mindful and make sure you understand what your software is reporting. Check it against what you see happening in your accounting system.

Why Gross Margin is More Meaningful Than Revenue

The more meaningful number for our clients is gross margin. We recommend that you look at this on a business-wide level. The calculation should be easily made from your Profit and Loss Statement:

Revenue – Cost of Goods Sold = Gross Profit

From there, to get your Gross Margin percentage:

Gross Profit ÷ Revenue x 100 = Gross Margin percentage

Some people get confused about what to include in your Cost of Goods Sold (COGS). We recommend first that you use modified cash or accrual accounting. By doing this, your inventory is held on your balance sheet and is recorded as Cost of Goods Sold when you actually sell the items. This movement from the Balance Sheet to the P&L is done by a journal entry.

If you are recording your revenue by your Amazon settlements, match up the timing of your COGS journal entry with the timing of your revenue. You also want to include shipping, Amazon fees, and any other direct product costs in the COGS section of your P&L in order to get a true gross margin.

When you have multiple products,
it's not easy to tell what is performing well and
what is reducing your gross margin.

Gross margin is also meaningful at the product level. When you have multiple products, it's not easy to tell what is performing well and what is reducing your gross margin. We recommend that our clients look at their portfolio of products and evaluate the margins on the top 20% of sales at least every six months.

It's easy for changes in product costs, by your supplier or fees from Amazon, to turn a high-margin product into one that is not worth your effort. Be diligent with these details because they are what can make or break you. I've seen clients selling a lot of an item and feeling very excited with growing sales only to realize that their top sellers were not benefiting their bottom line.

And if that’s not bad enough, these items are tying up your cash. Any time your cash is invested in inventory that does not contribute to your bottom line, it cannot be used for products that do.

Finally—Cash Flow

Cash flow is the result of maintaining a good gross margin and keeping your operating expenses under control so that your net margins or your "bottom line" are also healthy. Cash is critical to your business, so monitor the trend of your cash balances month over month.

You want to be accumulating cash and reducing debt. If you're not moving these accounts in the right direction, then you may have a margin issue, either with pricing, COGS expenses, or operating expenses. You could also be spending your Amazon seller profit on items that show up in the balance sheet, such as inventory, paying down debt, or owner draws.

Know where your FBA cash flow is going and maintain good gross margins and you'll know the most important numbers for your business. Invest the time to know how to keep the score so you can win the game!

Good Amazon FBA Income Data is Key

This is the step-by-step advice I give to new sellers so that they have good data from the start of their business venture.

First, get your business entity structure set up correctly. There are many considerations, including taxes, liability, and ease of operations. It varies state by state, so check in with your local CPA or someone knowledgeable about your state and your finances.

Next, get three business bank accounts set up. You need two checking accounts: one for inventory and one for operating expenses. You will also need a savings account. You will use the savings account to accumulate profit and it will also serve to hold your cash reserve as it grows. Let's dig into these a bit more.

Inventory Checking Account

As you plan for your first Amazon inventory purchases, consider the minimum order quantity (MOQ) and all the shipping, inspections, packaging, and other costs required to get that product to market.

Now double that number and add that amount to the inventory bank account. That cash is set aside for the sole purpose of managing your inventory. If you are a new business owner, you most likely had some seed money. You will use a portion of your seed money for this account.

The reason I recommend doubling the amount for your first order is that the timing from your sales and when you get your payouts will typically fall short of when you will need to place your second order. Your seed money should cover at least two rounds of inventory purchases.

Once you start selling, you will fund this account from your sales. With each settlement, you will look at the units sold times the unit costs to determine your Cost of Goods Sold. You will move this amount into your inventory account.

Units Sold x Unit Costs = Cost of Goods Sold

These funds will replenish your bank account to fund future inventory orders. If you want to grow your inventory levels, then add an additional percentage to this calculation. If you want to grow at 10%, take the Cost of Goods calculation above and multiply it by 110%. That is the amount of money from your settlement that you will need to move to your inventory bank account. When you place your orders and pay for inventory, you will pay for it from this account.

Profit Savings Account

When the pandemic hit, I had two types of phone calls: those panicking about a drop in sales or not being allowed to ship to Amazon, and those who said thank you so much for getting us set up on Profit First.

The Profit First crowd was breathing much easier because over time, they had built up their reserves. They could weather the storm. Within almost two weeks, things were worked out with Amazon and sales were booming. These sellers were able to use some of their reserves to increase their inventory buys.

I want everyone to have peace of mind and the funds to take advantage of opportunities. For that to happen, you must deliberately set aside your Amazon FBA income profit. Start with 1% and commit to grow it each quarter. A new business with real revenue of up to $250,000 (real revenue is Total Revenue less Cost of Good Sold - less Amazon Fees) should work up to 5% in their profit savings account.

Operating Expenses Checking Account

This is the account that you will use to pay for advertising, insurance, software subscriptions, etc. You want to keep it low. The funds you use here will eat into your owner pay and taxes, so keep this at a minimum. Be efficient, frugal, and innovative in your operations.

If funds start to accumulate in this account, then you are ready to move more money to profit or to consider creating an Owner Pay and a Tax account.

You can operate quite well with these bank accounts. As you start to get your legs under you, then you're ready for a true accounting system. Either QuickBooks Online or Xero works well for eCommerce businesses. To get them working in an automated fashion, we recommend using A2X to pull the details of the settlement deposits from Amazon. This combination will make recording revenue and COGS a breeze.

Learn from Your Data

Once you have your Amazon FBA income accounting system humming, take a look at your data. What can you learn? Print out your Profit and Loss statement for each month of the year. Then, do the same for your Balance sheets. Look for some trends.

Is your bank balance getting bigger or smaller? Is your debt growing or shrinking? What is the trend with inventory?

You will put a lot of effort into having these books in order, so be sure to finish your job as owner by looking at the results and analyzing your next steps. As you navigate this successfully, you'll know how to grow your business and your profitability!

Increase Your FBA Cash Flow

If your Amazon business isn’t where you’d like it to be in terms of profitability, check out my book, Profit First for Ecommerce Sellers. Take control of your money and your business and put Profit First to work for you!

You can also sign up for the Profit First for Ecommerce Sellers Online Course. As the founder of bookskeep, I will teach you how your behavior drives your money management habits for your business and how you can set up your business bank accounts to work with your habits.