6 Common Accounting Mistakes that FBA Sellers Make
This is a guest post from our partners at Bean Ninjas.
Did you know that more than 50% of Amazon’s $280 billion in revenue comes from FBA sellers?
The competition for sales has only grown with FBA sellers doing anything they can to get an edge. In some cases, this includes unethical or downright criminal practices to get more sales or hurt their competition.
So, the last thing you want to do is create self-inflicted problems.
That’s exactly what we see many FBA sellers do when it comes to their accounting and bookkeeping. They ignore it, put it off until tax time, or simply don’t have a firm grasp of their numbers, which can result in everything from inventory issues to tax headaches and even bankruptcy.
In this post, we’re going to share six of the most common accounting mistakes that we see FBA sellers make and how you can avoid them.
1. Focusing on revenue and sales at the expense of gross margins
Many FBA sellers practice what we like to call bank balance accounting. You probably know where we’re going with this. They log into their Seller Central Account and see that sales are trending up. Then, they log into their bank account, and if they have money in the bank, they feel they are doing great.
The problems emerge when they check their balance and notice that sales may be going up, but their bank balance is staying the same or even declining.
This happens when sellers focus on top-line revenue - or sales - at the expense of gross margins.
There is so much that goes into running a profitable FBA business than just increasing sales. You also have to factor in cost of goods sold (COGS), Amazon listing fees, sales tax, marketing costs, paying your team and yourself (as the owner), just to name a few.
If your expenses are rising greater than your sales, you are going to be in for a rough ride.
2. Using DIY spreadsheets instead of cloud-based accounting software
One thing you can do to make this process easier is to use cloud accounting software, such as Xero, QuickBooks, or MYOB.
The biggest advantage of using Xero is that you can sync data from your bank accounts and your Seller Central Account. This speeds up the bookkeeping process and also reduces the risk of error from manual data entry and spreadsheets.
Pro Tip: If you use A2X, it can automate even more of this process, ensuring that you always have up-to-date books.
Another advantage is it removes the shoebox problem. When you set up your chart of accounts and receipt tracking through a tool like HubDoc, which comes free with your Xero subscription, you can efficiently store and catalog your expenses. If you are keeping up with your bookkeeping regularly (at least monthly), you won’t have to spend hours frantically trying to search for receipts and remembering what you bought come tax time.
3. Not separating your business and personal finances
Are you paying for inventory on a personal credit card?
Or, using the business card to book the plane ticket for your next vacation?
It is tempting to mix your business and personal finances, especially if you are a solopreneur or only have a few contractors and freelancers working in the business.
However, mixing your finances creates problems because you won’t be able to have an objective view of how your business is doing. This makes it harder to know how much inventory to order, and at what intervals, how much to spend on Amazon ads, etc.
Pro Tip: Another reason to get in the habit of separating your finances is if you intend to sell your FBA business someday. In order to have seller-ready financials, you can’t have personal expenses clouding the data.Instill confidence with potential buyers through transparency and organization across your numbers. The investment in time or the spend on outsourced bookkeeping could return higher multiples at sale. Scraps of paper and bank statements are no match for professional-looking financial statements produced out of QuickBooks Online or Xero.
4. Not monitoring your customer acquisition costs
How much does it cost to acquire a new customer?
For example, Amazon ads can be an effective and lucrative way to generate more sales. However, they can also be a money pit.
If you “set and forget it” or aren’t keeping a close eye on how much you are spending, you could wind up eroding your profit margins quickly. This becomes even more important if you outsource your ad strategy and management to a PPC freelancer or agency.
5. Not reviewing your financial reports regularly
You wouldn’t go into the woods for a 3-day camping trip without a compass, map, and general food and supplies.
This is exactly what FBA sellers do when they don’t set up and review their financial reports on a regular basis.
Your financial reports are like a compass for your business.
Without reviewing your reports, you are flying blind. You might get lucky, and everything turns out better than expected. However, do you really want to leave your business up to luck?
Instead, if you are checking your accounting reports regularly, it can help you track your progress, spot any trends, see sales velocity, understand your top and bottom performing SKUs, and so much more. Then, you can use this data to plot your course of action.
6. Not eliminating single points of failure
What would happen if your top-performing product didn’t have any sales for a month?
Or, another seller starts selling one of your products for half the price?
Or, Amazon freezes or completely locks you out of your Seller Central Account so you can’t sell anything at all?
All of these scenarios - and many more - can and have happened to FBA sellers.
When you rely too heavily on a best-selling product or a single sales channel, like Amazon, you create fragility and single points of failure.
So, you want to find ways to diversify your business as soon as you can.
If you want to build a viable business for the long haul, it is worth considering establishing a brand and selling through more than one channel. That’s usually opening up your own shop through an eCommerce platform like Shopify.
In summary, running a profitable FBA business is hard enough as it is. These six tips will help you gain confidence in your business finances and make the process a little easier.