My Books Say I’m Making Money, So Why Am I Always Short on Cash?
Summer is here, and you’ve finally gotten through the push for year-end and taxes, field trips and graduations, and spring flings and concerts. Summer is the time to slow down a bit and spend some time reflecting. How are you managing your business? Do you really have a handle on your numbers? Do you have financials that accurately reflect what is going on in your business?
A common concern I hear from ecommerce sellers is that they are using Amazon accounting software and it shows they are making money, but they are always short on cash. There are a few reasons for this disconnect. The most common reasons I’ve found are:Not understanding the Amazon fees and deductions from your payouts that occur before the Payout is sent to you
-Not understanding the Amazon fees and deductions from your payouts that occur before the Payout is sent to you
-Not understanding how the bookkeeping software for Amazon Sellers is tracking your Product Costs
-Not properly maintaining your software to ensure the most up to date product costs
Let’s dive into each of these.
Amazon bookkeeping or Amazon FBA bookkeeping should help you understand what happens with your money at Amazon. It is not enough to record the deposit amount on the books as income. If you go back to your settlement report, you will find a page of activity that ends with the payout amount. All of that activity needs to be recorded when you make the deposit entry into your books. Systems like Inventory Lab allow you to see this activity easily because they can obtain the information directly from Amazon. As Amazon accountants, we want to also see it in your financial reports. We make a recurring deposit template in QBO and Xero that is pre-populated with the typical accounts found on the Settlement report. When we record the deposit, we open the template, add the numbers and record the deposit. Then when we review the Profit and Loss Statement by month, we can easily compare how each of these activities, such as refunds or promo rebates or shipping and gift wrap credits are tracking month by month. If any month is significantly different, it’s time to investigate.
Tracking Product Costs is one of the biggest challenges in bookkeeping for Amazon sellers. Knowing what to include in product costs is the first hurdle. We recommend that you use the direct purchase cost of the product, any additional labor that needs to be completed to bring the product to market, such as labeling, bagging and any other prepping activity, the costs of those prep items such as labels, bags, etc. Get each of these costs calculated on a per-unit basis and add them up. That will be your product cost to add into your Amazon Accounting or Inventory Management system. Note that we don’t typically recommend that you add shipping into your product costing. Shipping varies so much between choices of air and sea and fuel surcharges, etc. See our extended blog on Freight and Shipping Costs for more information. As Amazon accountants, we use that number to record your cost of goods sold and to true up your inventory account at least quarterly.
It’s not enough to calculate these Product Costs and set them up in your software and forget them. You must continually repeat this calculation when any of your costs change. And don’t forget you have to update your software, too. We all get in a hurry sometimes. It’s easy to create the listing and never go back and add those product costs or update them. Make it a habit to sort your inventory by cost once a month, to see if you have any zero cost products. If you do, get that updated so you’re looking at good numbers that represent your inventory and Cost of Goods Sold. Failing to do this step is the biggest culprit I’ve found when clients think they are more profitable than they actually are.
These Amazon Accounting Software systems have a valuable role to play in helping you manage your business day to day. However, they do not replace a true Accounting System like QuickBooks Online and Xero. The reason is the Balance Sheet capability. The Balance Sheet allows you to monitor the health of your business over time, not just the current year’s Profit and Loss. It helps you track your long-term value of Cash and Inventory Assets and Liabilities and Equity accounts. These systems are reconciled back to statements provided by outside financial institutions. This reconciliation feature is a must to ensure confidence in your financial data.
All great journeys begin with a single step. For bookskeep, that step was our very first Amazon client. I enjoyed working with them so much that through consistent referrals, I began partnering with more Amazon sellers every month. I quickly realized something: Many Amazon pros are pursuing the same flexible lifestyle I am. From that realization was born one of our primary goals at bookskeep—to loosen the financial grip your business has on you so that you can enjoy your life as you build your business.