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Amazon and other e-commerce sellers are like all small business owners in that two things are true:
They are in business because they want to make money and they aren’t as profitable as they wish they were!
Close to 80% of all small businesses operate at break even or at a net loss most of the time. That means that most business owners are essentially living paycheck to paycheck. This isn’t good and it means that you and I need to get better at managing our finances so that we can be the profitable exceptions!!
Below are 5 common financial mistakes that Amazon sellers regularly make. Limit these mistakes and good things will happen!
They focus on sales rather than profits
The first error that Amazon sellers make is that they get really excited about sales growth without actually making any money! I don’t know about you but I definitely fell into the trap with my first business of trying to “grow myself” out of financial trouble. I thought if I could just crest $500k in sales then I’d be profitable. Then I thought if I could just get over the $1M revenue hump that’s when things get good. How about $1.5M or $2M? You get the idea. At each milestone I learned that I was really good at “reinvesting in growth” and buying “scalable tools” but I wasn’t good at making more money!
What we learned the hard way is that profit needed to be our focus or it wouldn’t exist. In other words our default wasn’t to get more profitable as we grew and yours won’t be either unless you set specific bottom line goals and discipline yourself to get there. Sales is vanity; profit is sanity. Let’s stop being crazy.
They miss the timing of diversifying
The second financial mistake involves pacing your growth. Diversifying your e-commerce business is critical to your longterm success. Having one successful SKU on one platform like Amazon.com is a risky and vulnerable headache and isn’t a scalable business. The obvious solution is to diversify by selling more SKUs and ultimately to sell your products on platforms beyond Amazon.com. You get it…don’t put all of your eggs in one basket.
But here’s the challenge: It is possible to overextend your small business and expand before you master your first set of products. Being kind of okay at selling 50 things is worse than being really good at selling 5 things.
Find the right balance by fully optimizing your listings and making existing SKUs profitable before launching a new batch. I recommend testing a small batch of SKUs (4-10), fully optimizing those SKUs, kill the losers, reorder the winners, re-optimize the winners and THEN move on to another batch of 4-10 newbies. As you grow and your team grows you will be able to manage more volume but start small so that you don’t run out of cash by growing your SKU number too quickly.
They don’t save for emergencies
The third of the FBA financial mistakes sometimes flows from the previous one but having rose-colored goggles is the classic small business mistake. I can’t quote an exact stat but my experience would tell me that close to 50% of businesses that fail look like this:
- Cool idea leads to
- Limited cash investment which leads to a
- Can’t lose rosy growth projection but what happens is
- Slower than expected growth which leads to
- Running out of cash leading to the owner
- Finding a job and blaming the economy
Isn’t this what happens way too often? The answer is yes and I’ve seen it over and over again. The reason is that entrepreneurs are optimists and we have to be to put in the work needed to push our businesses into existence. Here’s my plea(and I’m preaching to myself here); please plan for a few things to not go perfectly. Slow down the pace of your spending to ensure that you leave some “oh-crud” dollars in your account.
Since Amazon can shut down a listing and sometimes does for no apparent reason you cannot afford to be so weak financially that your business goes under if Amazon shelfs an ASIN for 3 days. Build a war chest for hard times and make sure that your initial investment plan includes extra access to capital. Way more businesses fail because they run out of money then because the idea stinks. Good ideas need money to become businesses!
They forget about taxes
Financial mistake number four can be a sore subject and I’m sorry if I made you gag a little using the T word but let’s be real: Uncle Sam is 25-35% partner in your profits making him one of your highest paid employees. Seriously, after Costs of Goods Sold taxes are normally your largest line item on a healthy P&L. This means you should work to not be caught off guard when you owe taxes. Set aside some cash each month in a tax fund so that cutting your tax check doesn’t make your payroll check bounce!
They fail to keep decent books
The fifth and final of the financial mistakes is all about the reality that you can’t manage what you can’t see AND you can’t sell a business with crappy financials. Below are just a few of the reasons that you need quality bookkeeping and then I’ll give you my advice on when to start spending money on it.
You need great books…
- If you need a loan from a bank
- If you bring on a business partner
- To prevent employee fraud
- If you were ever audited by the IRS
- To allow you to manage profitability, growth, cash and taxes
- In order to identify errant fees from Amazon and keep from losing money
- To get the highest price when you sell or transition the business down the road
When should I start spending money on accounting?
You need a CPA to give you solid tax advice pretty much on day one. Bite the bullet, its worth it. My advice is to buy a web-based accounting software (Quickbooks Online is my favorite but Xero is also very good) once you have 2 consecutive months with $10k or more in revenue if not earlier. You probably don’t need help keeping those books until you reach $20-25k per month in revenue. At that moment you likely need to focus your time on growing your business and you may want to consider either hiring an employee or hiring a bookkeeping firm.
There are tons of good accountants out there but believe it or not there are only a handful of firms that 100% specialize in e-commerce businesses. Seller Accountant is one of these specialized firms and we’d be glad to help you if you haven’t found the right partner.
I hope this article will serve you in avoiding these key FBA financial mistakes! Check out our blog about why you should care about your accounting for more information.