As an e-commerce business owner, you’re always trying to keep as much money in your pocket as possible. But selling on Amazon can eat up an average of 40% of profits in fees alone, so what’s the best way increase profitability for an Amazon seller? According to Seller Accountant CEO Tyler Jefcoat: check your overhead.
What Is Overhead?
Overhead can be a tricky thing to parse out of your P&L because it excludes some specific categories. Overhead includes any money that your company spends to sell products that is NOT an advertising expense and is NOT a Cost of Goods Sold. So while overhead would not include things like packaging expenses, Amazon ad fees, or manufacturing costs, it DOES include the following:
- Salaries and contractor fees – the cost of paying your employees or any contractors that help you run your business
- Software – accounting software like QBO or Xero, sales dashboards like A2X or Helium 10
- Space rental and office expenses – the cost of renting an office space, as well as supplies like notepads, printer ink, and coffee
- Outsourced partners – any sales consulting, marketing partners, and accounting services not performed by in-house staff
- Outbound shipping – shipping costs associated with selling on non-Amazon channels (whether or not this is considered overhead depends on how you capture your sales data)
- Research and development – costs associated with hiring a team to design and market test new products for your brand
Analyzing Your P&L
When taking a look at your Profit & Loss statement (or P&L), it’s important to know how to recognize what a good margin looks like.
An easy place to start is by finding your PAG, or post-advertising gross, and comparing it to your overall net profit for the period. If you have a solid 23-24% PAG but you’re ending the month with a negative balance, your P&L is telling you that the best place to cut spending is overhead, not advertising or fees.
Since there’s not much you can do about the amount of money going to Amazon, reducing overhead is a great way to lean out your business. Take a look down the line of your P&L and keep an eye out for any category that makes up more than 1-2% of your expenses. These are the first categories from which to try and cut spending.
Remember to always use multiple months for these audits, since using a single month in which you did extremely well or extremely poorly may skew your calculations.
Trimming the Fat
Once you’ve isolated your overspending categories, it’s time to lean out your business.
One of the places we often see superfluous spending is in the systems and subscriptions categories. It is easy to forget to cancel subscriptions and software and end up paying either twice for the same service or for multiple systems with the same functionality. You’d be surprised how much money you can save by clicking into these categories on your P&L and doing a spending audit.
Another area in which sellers tend to overspend is warehouse costs and staff. No one likes to be the bad guy and have to let personnel go, but it’s common for sellers to go too big too quickly and overestimate their needs in the beginning of their business. Leaning out in this area may mean cutting down on staff size, outsourcing some roles to contractors or part-time positions, or renting out a smaller warehouse to store product.
The other common piece of advice we give to sellers looking to reduce overhead is to renegotiate supplier and space rental contracts. Do your research on cheaper options before approaching renegotiations, as you’ll want to have the leverage of competitive pricing over your current supplier.
Ready to Lean Out?
Overall, the most important question to ask yourself when performing an overhead audit is “where are we spending money that isn’t directly generating profit for the business?”
E-commerce businesses thrive best on a lean budget, and the team at Seller Accountant is ready and willing to coach you to your full growth potential. Schedule a free 15-minute discovery call here.