Amazon FBA Income: Proven Money Management Strategies

As eCommerce is booming and many other business sectors are suffering during the pandemic, there is an influx of new sellers on Amazon. We are getting many calls from new sellers asking what to do to get started on a solid financial footing.

We have watched many businesses develop over time, and those that reap the rewards pay attention to their numbers. We recently worked with a client who went from startup to $33 million in sales in just two years.

While this shows the huge opportunity that exists in eCommerce, it is not the norm. It is common for clients who experience growth to make decisions based on data, not emotion or hopes and dreams.

Good Amazon FBA Income Data is Key

This is the step-by-step advice I give to new sellers so that they have good data from the start of their business venture.

First, get your business entity structure set up correctly. There are many considerations, including taxes, liability, and ease of operations. It varies state by state, so check in with your local CPA or someone who is knowledgeable about your state and your personal finances.

Next, get three business bank accounts set up. You need two checking accounts: one for inventory and one for operating expenses. You will also need a savings account. You will use the savings account to accumulate profit and it will also serve to hold your cash reserve as it grows. Let's dig into these a bit more.

Inventory Checking Account

As you plan for your first Amazon inventory purchases, consider the minimum order quantity (MOQ) and all the shipping, inspections, packaging, and other costs required to get that product to market.

Now double that number and add that amount to the inventory bank account. That cash is set aside for the sole purpose of managing your inventory. If you are a new business owner, you most likely had some seed money. You will use a portion of your seed money for this account.

The reason I recommend doubling the amount for your first order is that the timing from your sales and when you get your payouts will typically fall short of when you will need to place your second order. Your seed money should cover at least two rounds of inventory purchases.

Once you start selling, you will fund this account from your sales. With each settlement, you will look at the units sold times the unit costs to determine your Cost of Goods Sold. You will move this amount into your inventory account.

Units Sold x Unit Costs = Cost of Goods Sold

These funds will replenish your bank account to fund future inventory orders. If you want to grow your inventory levels, then add an additional percentage to this calculation. If you want to grow at 10%, take the Cost of Goods calculation above and multiply it by 110%. That is the amount of money from your settlement that you will need to move to your inventory bank account. When you place your orders and pay for inventory, you will pay for it from this account.

Profit Savings Account

When the pandemic hit, I had two types of phone calls: those panicking about a drop in sales or not being allowed to ship to Amazon, and those who said thank you so much for getting us set up on Profit First.

The Profit First crowd was breathing much easier because over time, they had built up their reserves. They could weather the storm. Within almost two weeks, things were worked out with Amazon and sales were booming. These sellers were able to use some of their reserves to increase their inventory buys.

I want everyone to have peace of mind and the funds to take advantage of opportunities. For that to happen, you must deliberately set aside your Amazon FBA income profit. Start with 1% and make a commitment to grow it each quarter. A new business with real revenue of up to $250,000 (real revenue is Total Revenue less Cost of Good Sold - less Amazon Fees) should work up to 5% in their profit savings account.

Operating Expenses Checking Account

This is the account that you will use to pay for advertising, insurance, software subscriptions, etc. You want to keep it low. The funds you use here will eat into your owner pay and taxes, so keep this at a minimum. Be efficient, frugal, and innovative in your operations.

If funds start to accumulate in this account, then you are ready to move more money to profit or to consider creating an Owner Pay and a Tax account.

You can operate quite well with these bank accounts. As you start to get your legs under you, then you're ready for a true accounting system. Either QuickBooks Online or Xero work really well for eCommerce businesses. To get them working in an automated fashion, we recommend using A2X to pull the details of the settlement deposits from Amazon. This combination will make recording revenue and COGS a breeze.

Learn from Your Data

Once you have your Amazon FBA income accounting system humming, take a look at your data. What can you learn? Print out your Profit and Loss statement for each month of the year. Then, do the same for your Balance sheets. Look for some trends.

Is your bank balance getting bigger or smaller? Is your debt growing or shrinking? What is the trend with inventory?

You will go to a lot of effort to have these books in order, so be sure to finish your job as owner by looking at the results and analyzing your next steps. As you navigate this successfully, you'll know how to grow your business and your profitability!

Interested in Learning More?

Learn more by checking out my book or sign up for the Profit First for Ecommerce Sellers Online Course. As a Mastery Level, Certified Profit First Professional and founder of bookskeep, I will teach you why this system works so well for eCommerce businesses.