As an Amazon Seller, you’re running your own small business. You want to make a profit but are you approaching this in the right way?
If you find yourself living from payment to payment or barely breaking even, then you could be making critical financial mistakes.
At Your Ecommerce Accountant we commonly experience sellers making the same mistakes. Rectifying these mistakes should help to put your Amazon seller business in a much better, and more profitable, position.
Here are 7 critical financial mistakes Amazon sellers must avoid:
1. Not Treating Your Business as a Business
To make selling on Amazon really work for you, you need to dedicate time and energy to it.
Treat it as a hobby and you won’t turn it into a profitable enterprise. Make no mistake, whether you are a sole trader or limited company, this is a business requiring a systematic, organised and strategic approach.
This includes the essential structures underpinning it, including your accounting.
Make sure you create a clear business plan which outlines your objectives and takes into account any challenges such as increased costs and disruption.
2. Putting Sales Before Profits
When you look at your sales growth this can give you a misplaced sense of achievement. Yes, it’s good that people are buying from you but is this increasing turnover resulting in profitable growth?
You can’t simply outgrow financial pressures. You need to understand the ongoing financial health of your business and what it requires to become profitable.
Understanding your COGS (cost of goods sold) and profit margin is the most important metric in your business, and maximising this will be vital to thriving in the long term.
3. Getting the Timing Wrong
Successful selling through Amazon requires adaptability and agility.
Generally, Amazon sellers find that diversifying is the key to long-term success, but this depends on getting the timing right.
Having one stand-out item for sale will only get you so far. The key is understanding and anticipating shifts in customer demand and sourcing the products to meet them.
But you also need to be wary of over-expanding or jumping on products that won’t sell long term (remember the fidget spinner craze?). Timing is also about knowing when to exercise caution. It’s better to be good at selling fewer products than being average at selling a wider range.
4. Failing to Save for Emergencies
In business, you must expect the unexpected. You cannot afford a rose-tinted view of your situation. The pandemic has been a huge lesson in how something unexpected can impact businesses in different ways.
For some, this has meant more opportunities, but for others, reduced circumstances and cashflow issues. In either case, cash reserves are essential for meeting surges in demand or to cover losses.
Even in less fraught circumstances, you should have the cash saved to cover slower than expected growth or economic changes.
5. Disorganised Bookkeeping
You need to keep on top of your financial records. If you are going to manage profitable growth, you must keep a close eye on your cash flow, expenses, invoices and receipts.
Disorganised bookkeeping obscures the information you need to keep your business on track. Without clear visibility of your financials, how will you manage your inventory or get your pricing right?
Sound bookkeeping in your Amazon business is vital for your future budgeting and for maintaining accurate records for tax purposes (see below).
Being financially organised is demanding on your time and resources, but it is simply something you cannot keep putting off.
6. Misreading the Metrics
Staying on top of things and monitoring the financial health of your business requires that you understand what you should be measuring. Good bookkeeping will help you do this.
As we’ve already mentioned, sales turnover alone is not an indicator of success. But you should also be clear about profitability and margins.
Don’t forget to factor in Amazon fees (which you can claim VAT back on in the UK) because they will impact your net margins. The standard is around 25%, but this can vary considerably.
Your key metrics are your balance sheet and profit and loss statement. Monitor your cash flow carefully.
Don’t ignore the key risks and challenges you face.
7. Ignoring Tax & VAT Implications
If you earn more than £1,000 a year selling through Amazon, you must register your business with HMRC. Prepare your business for tax. This is something you can’t ignore. If you do, you risk problems and pressures piling up around you.
Your business must be fully transparent. This means keeping clear, up-to-date records. Record all your transactions and report your income accurately.
Don’t claim deductions without the paperwork, such as receipts, as supporting evidence.
Being alert to your tax position also means completing your tax returns on time and avoiding late submissions and payments to HMRC.
If your turnover exceeds £85,000 in the UK you will also need to register for VAT. There are a whole host of other VAT considerations for sellers into the EU to consider.
You Don’t Always Have to Go It Alone
Yes, you do need to master various business aspects to become a seriously successful Amazon seller. But you should also be aware of gaps in your knowledge.
Where there’s an area where you’re not fully up to speed, accounting say, then bringing in outside help can save you time, money and stress.
Need help with your FBA accounting? Your Ecommerce Accountant are specialist Amazon seller accountants that understand the financial challenges Amazon sellers can face and how best to overcome them. Please contact us for a free, no-obligation consultation.