This is an updated version of an older post. For the original post, click here.
Every seller we know wants to avoid the pitfalls of their industry, and we’ve worked with enough business owners to notice patterns of behavior from our best clients and our least successful ones. In this post, Tyler breaks down the five most common financial mistakes sellers make when running their Amazon business.
Sales Over Profit
It’s easy to brag about the amount of sales you’re doing as a company, but if your business isn’t turning a take-home profit, you don’t have a business – you have a very expensive hobby.
This point applies not only to your company as a whole but to your product line specifically. Is the product you’re selling making efficient use of the time, capital, energy, and warehouse space you’re putting into it?
If not, it may be time to reexamine your SKUs and invest in what makes you profitable, not just what gets you sales.
Expanding Inappropriately
It’s tempting to scale your business quickly as an e-commerce seller, but it can be equally easy to drag your feet when expansion is necessary. Many sellers struggle with determining when is the right time to take their business to the next level.
If you’ve got a product that’s extremely successful, take the time to expand that product line and capitalize on what you’re currently doing right. For a lot of sellers, this looks like expanding off of Amazon and establishing a customer base on your own website.
However, don’t be tempted to expand on products that aren’t pulling their weight. In the current market, investors and aggregators favor businesses that power through on a few excellent products in a single Amazon store rather than 100 SKUs that are underperforming across four unsuccessful sales channels.
As a rule of thumb, we tell our CFO clients to focus on building sales channels that can account for 10% of their sales and investing in products that can add to the effectiveness of their brand while being ready to kill the SKUs that don’t perform.
Shortage of Capital
The e-commerce sphere is full of unexpected challenges as the market evolves, so it’s important to keep enough cash to cover any mishaps that might arise in your business.
Much like how a personal emergency savings would keep you afloat if you had an unexpected medical expense, e-commerce business owners should keep a margin of capital available to solve any problems that might arise with tariffs, shipping delays, advertising losses, and more.
Your business shouldn’t be living “paycheck to paycheck”, so some liquidity of your cash is key.
Forgetting About Taxes
It’s easy to forget about taxes once your business starts making you a little bit of money, but the US government sure hasn’t forgotten.
Tyler likes the Profit First model when it comes to accounting for expenses and recommends putting a portion of profits into a savings account specifically for tax savings so that when the time comes, you’ll never have to worry about having the cash available to pay the government.
Ignoring Accounting
We’ve talked a lot on the blog about why you should care about your bookkeeping as a small business owner. Entrepreneurs are often great at growing their businesses, but it shouldn’t be at the expense of their financial health.
As an accounting firm, we’ve seen sellers perform better when they’re making data-driven decisions for their company and understand where their business stands financially. These sellers tend to be less stressed overall, perform better in sales, and sell at higher multiples on the market.
It’s pivotal to keep on top of your finances in order to make informed decisions – if you’re looking to outsource your accounting, Seller Accountant would be happy to help! Get in touch today for a free 15-minute discovery call.