Many times, you will only look at your Amazon earnings statement and as long as it’s...
Many times, you will only look at your Amazon earnings statement and as long as it’s growing and your bank account balance is increasing, you don’t need much more. Actually, this is a very common way to look at even bigger FBA businesses: you get a picture each month of your sales and your cash, the trend looks fine and management can get a sense that everything is under control before more comprehensive financial statements are prepared by the finance department.
However, having detailed and carefully prepared monthly financial statements that reflect the evolution of your FBA business is a worthwhile investment, for many reasons:
· It gives you useful management information
· It allows you to calculate standard ratios and compare to industry metrics
· Having this information ready and well prepared is useful for starting conversations in many fronts
· Compliance with local tax or corporate regulations
Use split between accounts that will help you making decisions. The following is a non-comprehensive list of profit and loss items for an FBA business and may help you setting up your reporting file:
· Gross merchandise value or gross revenue
· Revenue or net revenue: VAT/sales tax exclusive price of products sold. You may want to discriminate between merchandise and shipping. Having a separate line for refunds, which are deducted from your revenues, is also highly recommended
· Cost of goods sold: the total cost you incurred in acquiring or manufacturing the goods you are selling
· Inventory shrinkage cost: losses related to deterioration of your inventory
· Platform and processing cost: Amazon charges a selling fee or commission which is directly proportional to the price of your sales
· Shipping and fulfillment cost: the cost incurred for delivering the goods to the final customer
· After deducting all the above from revenue, you get to Gross Profit, which is the profit you make by selling and allocating the direct costs of each sale
· Marketing costs, including performance/PPC as well as any other general or branding marketing costs
· Structure costs: different expenses incurred for managing the business
· Stock: the way you manage your stock is very important. If you have too much you risk deprecation or excess storage charge, but if you don’t have enough you risk running out of it and not being able to service your clients, which can be double damage if not only they don’t buy from you but buy from your competitors. Investing in a stock keeping system is another good investment
· Accounts payable: in the beginning, suppliers will ask you to pay before shipping. Over time and repeat orders, you may get to pay an advance, then the rest when delivered, which will give you extra financial power for growth. For bigger merchants, advanced working capital tools like letters of credit can be used.
Accounts receivable are very simple in the case of an FBA business if a majority of your sales come from Amazon, as you will only have a little bit less than two weeks of sales outstanding, and your fixed assets will be small and related to your office equipment, software licenses, etc.
This is a good piece of advice that you have probably already heard. If you have read our post about selecting the right metrics, you already know that FBA Amazon investors don’t like what’s called “Add Backs” very much. The problem with this is that you will have to spend precious time explaining your add backs and the logic behind them so the buyer agrees to add them back.
The concept of accrual accounting is very simple, yet requires some planning work. Imagine you buy a one-year subscription in January for a warehouse tool costing $600. You pay it and receive a $600 invoice, which is what you account for in your profit and loss.
However, that means that in January you would have a $600 expense for a tool you’re going to use for one whole year, meaning your profit for January is understated, and from February to December you will have no expense for a tool you are using, meaning your profit will be overstated.
The correct way to do this is to account for the $600 in your prepaid expenses balance sheet account, then accrue $50 per month ($600 divided by 12 months) as an expense in your profit and loss, so every month is impacted with $50.
Now with a small tool this may look innocent, but imagine you are doing this with the inventory you are buying. The impact would be much higher and would distort the analysis of profitability month over month.
At Boopos we are used to seeing cash accounting of FBA Businesses quite often and will navigate through it. This will require extra analysis and work from our side. With all these tricks plus a seasoned external accountant, you should be able to have useful financial statements for you and for third parties.