How to Keep Track of Your Amazon FBA Financials: Managerial Accounting, Cash Cycle, and Unit Economics
When you think of a Fulfilled By Amazon (FBA) business, what comes to mind?
Is it product sourcing? Suppliers? Logistics from the manufacturer to the Amazon warehouse? Marketing? Listing optimization?
All of the above are important, but they are also insufficient if you lack an understanding of your business financials.
Your Amazon financials are like the central nervous system of your business. You can spend thousands of dollars on Amazon Pay-Per-Click (PPC) campaigns—but if your unit economics aren’t profitable, most of that money will be wasted.
That’s why when we think about Amazon FBA, first and foremost, we think about numbers.
Your Amazon FBA Business Is an Investment
When Tim Draper—the billionaire venture capitalist and the founding father of Silicon Valley—was asked what a business is, he replied, “A business is anything with money coming in, and money coming out. Like a machine.”
Your Amazon FBA business is a cash generation machine.
Your Amazon FBA business, and most e-commerce businesses, have the following cash cycle:
- You pay to manufacture your products. Depending on your terms, it can be either a 100% upfront payment, 30/70, or something similar.
- You ship the product to an Amazon warehouse.
- You convert that inventory back into cash (with a markup) and receive your payouts from Amazon twice a month.
Of course, this cycle is more complicated than the one I’ve just described. You also have product development, research, negotiations, logistics, marketing, keyword optimization, and many other details to take care of within your business. But on a high level, you’re converting cash into a product, and then recovering that cash by selling the product.
A working cash cycle makes your Amazon FBA business an investment. And like any investment, it has a return on investment (ROI)—which you can influence by optimizing your cash cycle with marketing, keyword optimization, and other techniques.
However, if you fail to understand the financial building blocks of your business, you might close it before you even get a chance to start.
The Importance of Understanding Your Numbers
When Paul Faguet (CEO of Sellerscale—the #1 financial analytics dashboard for Amazon sellers—and an Amazon top-5% merchant) launched his first product, a meditation pillow, he did not yet fully understand how the Amazon cash flow cycle works, he did not spend time digging into the product’s unit economics (i.e., profitability on a per-unit basis) and overlooked crucial information that would have demonstrated the lack of profitability potential on that product.
As he mentioned in a recent webinar, the product wasn’t differentiated enough, it had low pricing power due to the high volume of similar products on the market, and its storage fees were too high to allow for good margins (due to the pillow’s size).
In the end, Paul faced a dire situation: he had to either spend thousands of dollars to scale this product indefinitely through advertising or close the business. He ended up restructuring the business and diversifying into other private-label products, and he eventually built a business generating more than $500K in revenue per year. But in his first attempt, he learned a valuable lesson: it’s much cheaper to do your due diligence beforehand.
Most Amazon sellers focus too much on advertising and not enough on cash flow. But failing to understand how this cash cycle works can easily put you out of business.
And when it comes to Amazon, it’s not even your fault.
Why Amazon Accounting Is Inherently Difficult
Sellerscale is a financial reporting platform for Amazon sellers.
As one of our first users, Omer Sidi, recalls:
“I didn’t know how much profit I was making, and if I was making any profit. I had like a guesstimate of something ranging between two or four or $5,000 a month. When I started using Sellerscale and put in my numbers, I realized that I was making less than what I originally thought I was.
I asked one of my business customers to install this tool as well. They were selling between $40,000 and $50,000 a month, and they were sure that they were making about $10K monthly in net profit. But after we plugged in our numbers, they realized they were almost not making any profit at all.”
Many business owners bury their heads in the sand when it comes to their Amazon FBA accounting. With so many other processes to attend to, such as overseeing logistics, marketing, and inventory management, Amazon sellers are often intimidated by the intricacies of detailed financial reporting.
There are a few reasons why Amazon accounting can be difficult for Amazon FBA business owners:
- Amazon has complex fees that depend on a large set of variables (for instance, storage fees depend on the product size, as seen in the example of Paul’s pillow).
- Amazon reports are hard to make sense of, and they often require Excel manipulation on the seller’s part.
- Amazon disburses cash bi-weekly; as a result, it’s hard to tie that cash to specific Stock Keeping Units (SKUs).
- The nature of the business requires long lead times and “freezing capital”: that is, the time gap between the moment you pay for your product and the moment you turn your inventory back into cash.
- Most software (like Quickbooks or Xero) aren’t Amazon-centric and are insufficient for managing an Amazon business.
- Amazon doesn’t have the Cost-Of-Goods-Sold metric, and so you have to rely on yourself to calculate profitability.
- External, non-product expenses, such as software subscriptions and marketing, are not calculated in your Amazon reports.
All of these reasons make accounting in the Amazon business inherently difficult and require sellers to come up with specialized solutions to keep track of their business financials.
Most Amazon FBA business owners don’t have the skills or mental bandwidth to construct their own Excel spreadsheets and, as a result, can be left in the dark—not knowing what’s happening with their business in real-time.
As an Amazon business owner, you should keep track of the following metrics:
- Your real-time revenue, profitability, and sales, organized by PPC sales vs. organic sales.
- One-time and recurring expenses.
- Inventory (to make sure you don’t run out of your best-performing SKUs).
- The cash flow cycle (to make sure you never run out of money).
- Unit economics: You should be able to understand the per-unit profitability of your product lines and be able to manipulate the data performing sensitivity analysis or outlining specific business scenarios.
You might be thinking about financial accounting software (such as Xero and Quickbooks) as a solution. But, as we’ll see, financial accounting might be insufficient too.
Why Financial Accounting Is Insufficient for Amazon FBA Business Reporting
When many sellers say or hear the word “accounting,” what they typically refer to is financial accounting (FA). It’s no wonder, because most business schools teach FA as the key way to ensure your business is healthy, and programs like Xero and Quickbooks focus solely on it.
However, for the purposes of maintaining an Amazon business, financial accounting alone is insufficient.
FA produces general-purpose financial statements for the government, regulators, lenders, and investors. There’s a lot of sense in this, and it’s an absolute must-have for any serious business. No matter what your business is (e.g., a restaurant, a blog, or a bookstore), your financial statement can be read and understood by key stakeholders.
But what makes FA so suitable for general reporting is precisely what makes it insufficient for Amazon sellers.
Because FA is for outsiders, its reports are standard and therefore not Amazon-specific. At the same time, because you file taxes once per year and usually generate business reports quarterly or monthly, the information it provides is not timely. FA is designed for periodic reporting, which is insufficient for high-quality decision making since you should be looking at key performance metrics as often as possible—ideally, every day.
Sellers need Amazon-specific, real-time financial data that they can use to understand how their business is performing and make data-driven decisions.
The story of Sellerscale’s first user (Omer Sidi, above) illustrates exactly that. He and his client weren’t able to see that although their business was generating substantial revenue ($30K/mo), they weren’t making any money because of the hidden Amazon fees and expenses that come with maintaining an ecommerce business.
So, how do you bridge this gap?
Managerial Accounting—a Solution to Amazon FBA Business Owners’ Problems
In short, managerial accounting (MA) is a system used by business owners to make internal business decisions. Unlike its counterpart, financial accounting, MA doesn’t have to be standardized, because it’s mainly used for internal business decisions and rarely “leaves the office.”
You don’t need to use any dedicated accounting software to perform MA, and you can create your system to suit the wants and needs of your Amazon FBA business.
Entrepreneurs use MA to understand their current levels of profitability, stay informed about key operational metrics, keep track of their expenses, and manage inventory and cash flow. In short, MA offers real-time financial management.
And that’s exactly what Amazon FBA business owners need.
Sellers require the following:
- Day-to-day performance monitoring
- Unit economics analysis
- Inventory management
- Profit and Loss (P&L) reporting and expense monitoring
A managerial accounting system fulfilling these requirements can be implemented with either dedicated software such as Sellerscale or Excel.
For example, Paul Faguet, learning from his first business’s mistakes, used to keep track of his Amazon business finances in a series of Excel spreadsheets, which he later turned into the Sellerscale platform. He used these to keep track of his inventory, cash flow, and expenses, as well as to understand his day-to-day business performance.
As an Amazon FBA business owner, you can also build a system like that for yourself without using any dedicated software.
Here are a few points to keep in mind.
Real-time performance monitoring
Sellers need a day-to-day performance dashboard to stay informed about their current business metrics—which isn’t practical with FA software such as Quickbooks. If you use Excel, you would have to monitor your daily sales and plug in the numbers manually.
These are the key metrics sellers need to keep track of:
- Sales: in both product units and your local currency.
- Costs, fees, and all hidden expenses that their business incurs.
- Ad metrics, PPC, Advertising Cost of Sales (ACoS), and a percentage of sales that are organic.
- Refunds: in quantity, money, and a percentage of units sold.
- Profitability: gross profit, operating profit, and a per-unit profit known as the “contribution margin.”
Knowing these numbers will help you make better business decisions and provide an overview of the health of your business.
Unit economics are the fundamental building blocks of any business. Essentially, they represent average revenue, costs, and profit on a per-unit basis. Understanding unit economics is key for introducing new products—and planning out specific scenarios (e.g., “What would happen to the margins if I created a 50% discount on one of my products for two days?”).
For Amazon business owners, understanding their unit economics will help them avoid investing in products that—although they might generate good revenue—aren’t ultimately profitable due to high hidden fees, costs, or marketing spending.
These are some important unit economic metrics to keep track of as a seller:
- Daily Unit Sales—this is the number of units you sell per day, on average.
- Average Order Value (AOV)—This metric is calculated by dividing your total revenue by the Daily Unit Sales.
- Advertising Cost of Sales (ACoS)—This indicates a percentage of spend in PPC to generate $1 in sales. For example, if my business spent $100 on PPC ads and I made $200, my ACoS is 50%. The higher this metric is, the more heavily I rely on PPC advertising as a revenue stream. Vice versa, the more organic my sales are, the lower the ACoS percentage of total revenue will be.
- FBA Fee—this is the fee that Amazon will charge you to fulfill a single unit of your product to your customer, including handling returns and shipping. You can estimate these fees using Amazon’s built-in revenue calculator.
- Unit Landed Cost—this is the total cost of manufacturing, packaging, and sending your product to the Amazon fulfillment center. Example: If your supplier quoted you a total of $2,000 to produce 1,000 units of product (including all packaging, marketing brochures, etc.), and your freight forwarder quoted you another $1k to ship this batch from the supplier to an Amazon FBA warehouse, your unit landed cost will be $3.
- Profit Per Unit—once you understand your costs, including Unit Landed Cost, FBA fees, and advertising, you can subtract it all from the AOV and calculate the profit you will receive per unit sold.
If your Amazon business is a cash generation machine, then each product is an investment, and you should always treat it as such by using data analysis rather than guesstimation. To help with product research, you can use Sellerscale’s free Chrome Extension (no registration required), which shows the profitability of different products on a per-unit basis.
Inventory is at the heart of every Amazon business.
FBA tracking of shipments, deliveries and inventory plays a vital role in ensuring you don’t run out of stock, suffer penalties, and are able to keep your customers happy.
An Amazon FBA business owner might use managerial accounting to keep track of the following:
- Stock levels
- Sales velocity
- Lead times
- Replenishment timing
- Minimizing excess inventory
P&L, cash flow, and expenses
Finally, as an Amazon business owner, you’d need to keep track of your business profitability, all of your recurring and one-time business expenses (including those not related to Amazon or the products themselves), and cash flow.
In an Amazon FBA business, if you run out of cash, you go out of business. This means you have to ensure not only that the cash keeps coming in, but also that it flows smoothly through the system to keep your business alive and functioning.
As an Amazon FBA business owner, you should do the following:
- Know exactly how much cash you have and have a separate bank account for your business.
- Anticipate cash needs for each SKU in advance.
- Know your contribution margins (also called “inflow rate”).
- Have a cash flow calendar to make sure you never run out of cash.
If you take away one thing from this article, let it be this:
An Amazon FBA business is both an investment and a cash generation machine. To make sure your business is healthy, it’s vital to see and understand your business’s financials, especially your product’s key unit economics.
Most content on the Internet regarding Amazon FBA centers around PPC, advertising, logistics, and product sourcing. While all of these things are important, they can’t save a business that’s running out of money. All of these things solely work to improve the cash flow cycle of the business.
At Sellerscale, we understand Amazon FBA business owners. We know that you don’t have time to waste on clunky interfaces or building your own managerial account systems.
We’ve hired world-class engineers to build the #1 financial analytics dashboard for Amazon sellers by taking into account all Amazon FBA business owners’ needs, such as
- understanding your business’s current real-time profitability,
- calculating unit economics of specific products, and
- having all of your expenses, products, P&Ls, and cash flow in one place.
We created a managerial accounting tool with a beautiful, blisteringly-fast interface that’s available now on your iPhone, desktop, and tablet, so you can take your business with you wherever you want.
With a special promo code for all Empire Flippers blog readers—empire752—you’ll be able to get a free 14-day trial and a 75% discount off the first two months of Sellerscale. Try it today!