Want to grow your online store’s earnings but unsure where to start? Find out how you can go from surviving to thriving with a few tips and tricks on Amazon accounting.
A Guide on Generating Higher Income Through Amazon Accounting
Being a seller on the world’s largest e-commerce platform can be immensely rewarding but just as challenging. Turning your online business into a lucrative venture takes more than a good product listing—you also need a solid understanding of Amazon accounting. Here are some important things to consider.
How Amazon Accounting Differs from Other E-Commerce Accounting
Accounting for e-commerce is a different ballgame from the typical business accounting, even more so when you’re a seller on Amazon. There are a few extra considerations to keep in mind, such as the following:
FBA vs FBM
Some e-commerce sellers are under the fulfilment by Amazon (FBA) arrangement, wherein they pass on their entire shipping responsibility to Amazon by handing off some or all of their inventory. Such service isn’t available on other online marketplaces like eBay and Etsy, and this setup is called fulfilment by merchant (FBM).
Accounting for inventory under the FBA is slightly more complicated than FBM of other platforms since it’s harder to keep track of your products. They could be at a fulfilment warehouse, en route to buyers, or for returns.
Since Amazon only relays the information to the seller, you don’t have an accurate picture of your inventory figures compared to when you manage the entire order processing.
VAT and sales tax are already confusing to begin with. And with FBA in the picture, Amazon accounting becomes even more cumbersome.
If you’re selling in the US via FBA, your tax nexus includes states where your products are warehoused. The same principle applies to Pan-EU FBA but not the term. Talk to an Amazon accounting expert from Sterlinx Global to determine if there’s a tax implication to your business and how you can address it.
Another aspect wherein Amazon accounting is unlike accounting for other e-commerce platforms is the fees.
As the largest online marketplace, Amazon understands how powerful its reach can be. If you want to make more sales, selling on the platform comes at a higher price—commission and FBA fees are some of the expenses weighing on your margins.
How Amazon Sellers Can Scale with Accounting
Growing your online store takes more than a keen eye for business—you also need to do your Amazon accounting right. Improve financial performance by being savvy with your accounts and books.
1. Stick to the Accrual-Based Method
There are two business accounting techniques: accrual and cash basis. Of the two, it’s better to use the accrual method to see your revenue streams and expenses more clearly—you recognise sales when earned and expenses as incurred, regardless of when cash exchanged hands.
As such, you can make more strategic decisions for income growth from the derived profitability figures.
That said, it doesn’t mean you should write off the cash basis method altogether. The technique comes in handy when tracking cash flow. However, don’t fall for the trap that being cash-rich is tantamount to profitability; it isn’t since it doesn’t consider accounts payables.
2. Pay Attention to Your Inventory
If you want to boost your bottom line, one of the essential Amazon accounting items to monitor is your inventory.
The e-commerce charges fees for products under FBA in exchange for handling storage and shipping—that’s the price of convenience. However, such inventory-related costs may set you back more than they should, narrowing your margins.
Figure out which products are more cost-effective with FBA. Amazon charges a range of fees related to inventory, including storage and returns processing fees, which can then add up to your cost of goods sold. Identify items that cost you more to maintain in your store than remove altogether.
If Amazon fees are trimming your profits, consider opting out of FBA to keep inventory costs down. A good rule of thumb is to downgrade when the total number of units sold is less than 40 per month.
3. Focus on Profitable Products
Another way to increase your Amazon earnings is by identifying products with high returns and focusing efforts on marketing them.
Many vendors make the mistake of maintaining excessive inventory in anticipation of higher profits with sudden increased demand. However, betting on trends doesn’t always translate to sales and higher earnings unless you’ve researched them extensively.
Instead, determine your top-performing products based on their margins and develop cost-effective strategies, like campaigns and bundling, to drive sales. As for your poor performers, decide whether they’re worth the push or better off taken out.
4. Keep a Close Eye on Expenses
Inventory-related fees aren’t the only costs you should be worried about—your overhead expenses will also weigh on your earnings.
Understand how the platform’s seller fees impact performance. You are likely incurring other expenses necessary to run your online business, including utilities. The higher your operational costs are, the narrower your margins will be. And an ideal net profit margin is around 40%.
Break down expenses and examine them on a more granular level to identify areas for improvement. For example, you may be better off with an individual seller account, purchasing stock with lower shipping fees, or streamlining operations.
5. Calculate the Correct Tax
Whether you’re collecting VAT or sales tax, it’s your responsibility to remit these taxes to the proper authorities. But with different local tax regulations in every market you’re in, it’s easy to get confused with compliance.
Paying the incorrect amount on your tax liabilities results in unnecessary costs to your e-commerce business. When you overpay, you cannot refund, but when you remit less than the tax due, you’ll be fined. Aim to compute the correct tax amounts to improve your bottom line.
6. Work with Professionals
If you want your store to gain traction and increase earnings but are unsure where to begin, it’s better to consult an Amazon accounting expert from Sterlinx Global. They have the expertise and experience in managing and analysing accounts, as well as providing accurate financial reports so you can make sound business decisions.
By handing off accounting services to professionals, you can focus more on growing your business instead of figuring out what the numbers mean.
Frequently Asked Questions on Amazon Accounting
Would VAT or sales tax reduce my income?
No, it shouldn’t. Consumption taxes like VAT and sales tax are charged to the buyers. As a seller, you are responsible for collecting and remitting them to the government.
However, many Amazon sellers incorrectly estimate their tax liabilities. When this happens, taxes become an additional expense that cuts through your profits.
Can I handle Amazon accounting myself?
Yes, you can manage accounting on your own if you have a good grasp of the basics. But, it can be time-consuming, especially when you’re meticulous in dealing with numbers. Also, it diverts your attention and effort away from activities with better returns, such as creating campaigns and improving brand reputation.
Amazon deposits an amount in my bank account regularly. Should I consider this as sales?
No, you shouldn’t. It’s a common mistake of many Amazon sellers to record these bank deposits as revenues.
While these cash deposits include store sales, they are net of fees charged by the e-commerce platform. Moreover, the remitted funds do not reflect the date of actual sales. Avoid using these as a gauge of your profitability.
Scaling your online store operations takes more than savvy marketing campaigns—you must also have a deep understanding of Amazon accounting to spot pain points in your profitability and address them.
Let an accounting firm like Sterlinx Global help in easing the burden so you can redirect your efforts to revenue-generating activities.