Cash flow is an often misunderstood or overlooked aspect of running a business.
It’s true that most modern businesses are service based, thus don’t have the same inventory concerns as brick and mortar stores or manufacturing plants, but it can still derail your plans quickly if you let it.
In retail, cash flow is the measurement of money that comes into and out of your business.
If you are an Amazon FBA seller, it’s important to understand how to manage cash flow so you can effectively maximize your profits on Amazon.
With more than 2 billion products listed on Amazon, there is a lot of competition for shoppers’ attention. When customers search for products to purchase, they click on the listings that appear first in their search results.
The more you spend on PPC (pay per click) advertising and other forms of promotion, the better your chances of appearing in those top spots.
Achieving success as an Amazon FBA business is all about generating sales and increasing profit margins. While advertising fees might be under your control, you can’t necessarily control how many sales you make or how much money you spend on each one. That’s why it’s critical to have a good understanding of cash flow management.
How to track the cash flow cycle for Amazon FBA businesses?
When running an online business, it’s important to understand your cash flow.
This is especially true for Amazon FBA businesses which are usually run by one person, the owner. If you are not tracking your cash flow you are putting yourself at risk of making bad choices that affect your business negatively.
Cash flow management refers to the steps an individual takes to ensure that there is enough cash on hand to meet current and future obligations. This includes day-to-day expenses, unexpected financial surprises, taxes owed to the federal government or state agencies, short-term loans you’ve taken out to cover income gaps and other liabilities.
One of the most important parts in running an Amazon FBA business is keeping track of your cash flow. There are actually two ways to keep track of your incoming and outgoing funds.
This means that at any given time you can see exactly how much money is in your Amazon account, how much money was received through sales etc. If your balance goes below a certain threshold it will send you a notification as well.
For example if you have set up a threshold of $100 and currently have $90 left in your bank account it will send a notification to your e-mail address or mobile phone number (if configured). That way you immediately know there’s something wrong with the availability of money!
2 ways to keep track of your incoming and outgoing funds
1. Using the Amazon FBA Calculator
This calculates all the important things for you, automatically. It is recommended to use the Amazon FBA Calculator as it is very simple and easy to use and you only have to enter a few numbers and it will do all this for you:
- Show your current available funds in your Amazon account.
- It calculates exactly how much money you receive from each sale on Amazon.com.
- You can see how many units are currently being stored in Amazon’s fulfilment center.
- How much it costs per month (incl. storage fees) to store items at Amazon’s fulfillment center and how this amount changes over time (this is especially important when planning ahead).
- Shows if your products make profit or not, yes, we mean loss . You can change the selling price of your products and see how this affects your total profit.
- Check a complete cash flow summary with all your numbers for one month at a time, or three months at a time. See exactly where you stand financially!
It is recommended to use the Amazon FBA Calculator as it takes about 30 seconds to set up and then calculate everything for you, including (and especially) all kinds of different cash-flow events that come with running an Amazon FBA business.
You can even configure e-mail notifications so it also sends each time a certain event occurs (for example if your inventory decreases below ‘x’).
With this calculator there is no more need for any kind of spreadsheet tracking! All you have to do is enter one or two numbers in the beginning and then just watch how absolutely everything gets calculated – without ever touching any formulas!
Free 30-Min Strategy Session
By the end of this Strategy Session, you will have a clear understanding of the next steps you can take for your business to take advantage of the tax deductions you are missing out on.
2. Tracking all financial numbers yourself
This means that you can track everything on your own, including incoming revenue, expenses etc:
- How much money comes into your Amazon account each hour / day / week?
- How many units were sold on Amazon.com and how much money did they generate for you?
- How much is the cost to store inventory at Amazon’s fulfillment center?
- What is the total profit or loss of this business so far (and over time)?
It is recommended to use some very simple tools to keep track of everything (we actually use Excel but there are also apps available which can help doing this). However these tools do not show some important things.
The biggest disadvantage: is that you need to change all formulas yourself, so every time something changes (for example if your unit price or storage fees change) you will have to go in and change it again manually.
This is not only very tedious but also might lead to mistakes at some point.
In addition, using specialized programs like Xero that automatically keep track of your incoming and outgoing funds, send notifications when there’s something wrong (e.g. low balance) and even handle purchase orders for you! Partially or fully automate your seller processes!
If you are an Amazon FBA business owner, managing your inventory can be a challenge. Using Xero software for amazon FBA stores is one of the solutions to this issue. This accounting tool enables users to monitor their stock levels with ease.
What is Xero and how it could help you
Xero software is an accounting tool designed with small business owners in mind, including those who run amazon FBA stores successfully.
Xero has many features that any amazon FBA store owner will find useful. Firstly, the tool allows users to have a better summary of your goods being stored at Amazon’s warehouses.
Users can see all inventory products under a single report for a quick reference. In addition, Xero software provides reports on which items are running low so you can restock them as soon as possible.
In addition to making it easier to manage inventory, Xero software for amazon FBA stores also makes it simpler to sell products online.
Allowing people around the world to purchase goods from an international seller is one of the most popular ways associated with the platform. However, organizing and managing this process can prove challenging without adequate tools in place.
When using Xero software for amazon FBA stores , it’s best if you have other business management tools in place as well. For instance, having a reliable payroll provider will ensure that your employees receive the appropriate payment every time they work.
Doing so helps improve accuracy and efficiency across all your departments. If you need additional help making sense of all the data that you have access to in your Amazon FBA business, a dedicated financial advisor might be just the person that you need.
Investing in a good credit score monitoring tool will help protect your Amazon FBA from being shut down due to issues with payment accuracy and/or poor customer reviews.
It has an easy integration feature with other applications such as eBay and Ship station so you don’t have to enter data manually.
Lastly, unlike stock keeping units (SKU), it allows users to keep track of product sales without entering every transaction into the system manually. This is perfect for those who sell unique or rare products on Amazon because there would be no duplicated data on Xero software.
3 Main sources of Incoming cash flow
To understand how to manage your cash flow, it’s important to know where your money is coming from.
There are three main ways that people generate cash flow cycle for Amazon FBA stores:
1. Amazon FBA fees
This is the traditional cash flow cycle for Amazon sellers who started out by finding small cheap items on clearance or that didn’t sell well in retail but were dying to be sold online.
These items are typically sold at a low price so people would still buy them even with shipping costs added in.
On top of this, Craigslist, yard sales and other places where these types of things are found are full of impulse buyers who could care less about getting a deal or if they get free shipping or not.
So in many cases what used to happen was people would use part of their profits from these small cheap items to buy more small cheap items and then they would end up with a ton of inventory.
Now, the practice of buying cheap wholesale products and reselling them online via Amazon FBA is not dead at all.
But because there are so many sellers doing this, the same things that used to be profitable aren’t as much anymore or even unprofitable sometimes.
This means that it’s important for you as a new seller to understand just how competitive this marketplace is now and what you need to do if you want to compete in this space.
You may also like:
2. Merch by Amazon royalties
Another great way to generate monthly cash flow is resale royalties.
This method is very similar to the Amazon FBA referral bonuses but instead of getting paid directly for each sale you get paid every time somebody else sells your item on Amazon.
The best part about this opportunity is that it’s open to everyone and not just a select few, you don’t need a big following on social media or even a popular website in order to make money selling other people’s products!
How does Merch by Amazon work?
“Merch by Amazon lets anyone upload t-shirt designs and earn royalty fees when their shirt sells.
Upload high-quality images of your art, illustrations, photographs, or text and set your price. Every time one of your designs sells on Amazon.com, you get paid.”
You can be selling items which are already selling well on Amazon or new products that nobody else is selling yet so it doesn’t matter if your designs are for old boring t-shirts that nobody wants to buy or for popular novelty shirts that everyone loves!
When someone buys a shirt with one of your designs you earn an initial 50% royalty payment plus you also receive another 10% of the sale price every time somebody else sells your design on Amazon since they will give you a cut of their earnings.
Merch by Amazon royalties are currently paid out every 2 weeks which works out to around 5-7 checks per year which cover all sales up until the previous pay period. This means you don’t have to worry about monthly cash flow until your royalties reach at least $5,000 per month.
Which is really nice compared to other revenue sharing programs where you have to wait for your first payment of several hundred dollars before the money actually hits your bank account.
3. FBA item sales fees
The Amazon FBA fees are very standard across the board, so if you sell other products on Amazon other than your Amazon FBA items, you will have to take this into consideration.
This is because Amazon collects a Referral Fee every time someone buys an item from your Amazon FBA store (if they don’t buy anything else). Sellers can choose how their referral fee percentage will be calculated: either by applying it only to the item price or to the item price plus shipping charges.
Amazon has implemented “Fulfillment Fees” with respect to Private label product sales. which means that if we decide we would like to sell a new product, we would have to pay $1.35 USD per unit up to 40lb which includes the cost of shipping and handling.
This fee is automatically deducted from our earnings each time we list an item on Amazon and therefore we receive only 70% of the sale price after FBA fees are applied.
Without a strategy for managing your cash flow, you’re at risk of going out of business.
7 steps to manage your Amazon FBA cash flow
1. Plan ahead for slow sales periods
There are two slow periods for Amazon FBA stores, one is in November/December before Christmas and the other is July.
In July there are many people who start their own amazon business as they have just finished University or College and have some spare time on their hands, but by November they have either ran out of cash and it’s too late to get a job, or they have got a new job and don’t want to run their business in the evening/weekends. This results in less sales for Amazon FBA stores because there is no motivation from these people to buy items during this slow period.
One strategy that successful Amazon FBA business owners use to manage their cash flow is planning ahead for slow sales periods. Those who use this strategy typically have a few months of cash on the sidelines to help them ride out slow periods.
Profitable Amazon FBA business owners plan for slow sales periods by creating several months of product to sell in advance. For example, if you typically only have three months worth of inventory on hand, you can increase that to six or nine months’ worth to help give yourself time to replenish your stock during the slower sales periods. The additional inventory that you have on hand gives you a safety net if your items don’t sell as quickly as expected during busier seasons.
You may also like:
2. Keep a cash reserve
Another strategy that Amazon FBA business owners use to manage their cash flow is keeping a contingency reserve of cash on the sidelines.
The size of your contingency reserve should be equal to three months of expenses, as outlined in “How Much Cash Do I Need To Start An Amazon FBA Business?”.
The reserve is to help you weather unexpected expenses, slow sales periods or if something catastrophic happens.
The size of your contingency reserve should be based on how much additional stress those three months’ worth of expenses would put on your business.
If you already barely make ends meet as-is, it might not be practical to maintain a three-month reserve. However, if you’re in a position to scrape by while waiting for your items to sell, a larger cash reserve might be the right option for you.
3. Understand Amazon’s inventory management policy
Amazon has its own rules about how many products you can store in your Amazon FBA business account before it charges additional storage fees. In addition, Amazon has rules within its warehouses regarding how many products can be stored at a time.
These rules are in place to ensure that your items aren’t being wasted by sitting on the shelves too long before being purchased:
- Amazon requires that the seller of an item be the manufacturer or a reseller with direct access to the manufacturer’s supply chain. As stated in its “Making Money” Selling Permission page, this includes not only items sold directly by Amazon but also items sold by any other third-party seller (no matter how they are listed). This rule has always been in effect.
- Brand-new products are not exempt from this rule (so if an item is brand new, but already listed on Amazon by the manufacturer, it’s still considered third-party).
- Besides creating a conflict of interest between Sellers and Buyers, selling items that aren’t available violates federal law. The Federal Trade Commission has rules regarding what kinds of ads are deceptive , one of which is “bait advertising” – which includes offering goods with the intent to immediately switch them for different goods once the customer arrives at your door .
There are some exceptions to the rules: manufacturers and distributors often require that you have a physical store-front in order to become authorized for sales of their products, even though you may be able to purchase items off of their website.
If this is not an issue then registering as an authorized reseller can also help protect your account by providing additional information on your seller profile that Amazon will review before making any decisions about whether or not delist your listing.
Understanding Amazon’s inventory management policy is important because it impacts the number of products you need to order to be able to ride out slow periods or unexpected expenses.
You may also like:
4. Charge customers promptly
Successful Amazon FBA business owners understand that getting paid on time is critical if you want to avoid unnecessary cash flow problems.
Charging customers promptly means that you have cash coming in on a regular basis to cover your business expenses. If you don’t, it can hurt your business in a number of ways:
- You may not be able to pay your bills
- Your suppliers may reduce or cut off your credit
- Your lines of credit and loans could be in jeopardy
- Customer returns and chargebacks: Customers will ask for their money back and in some cases Amazon will return the product cost to the customer which you have to cover with your own cash.
A cash flow crunch can affect the whole business, causing losses through missed sales opportunities, increased inventory costs with stock-outs, poor purchasing decisions with traders you have to deal with outside of regular hours.
Furthermore, it affects staff morale when they know that invoices are being paid late. Customers who are slow to pay create a backlog of work for everyone else in terms of follow up phone calls, etc., that eventually gets back logged due to personnel shortages.
It also creates additional workloads that need to be processed by billing/collections staff slowing throughput rates and tying up cash for resulting bad debts.
They know it’s important to be fiscally responsible because slow sales periods can lead to cash flow troubles if your customers aren’t able to pay on time.
They understand the importance of creating a strict payment policy and following through when customers fall behind.
5. Shop your competitors’ sales data
Another smart strategy for managing your cash flow is to shop the competitor’s listings on Amazon.
You can see how many units of inventory they’ve sold in a certain period and what price they’re selling at.
This allows you to decide if prices need to be dropped, if items need to be discounted or if you need to order more inventory before your competitors sell out.
SellerCloud, Jet, WalMart, eBay and Google to name a few are Amazon FBA’s competitors which are hustling hard to gain ground on the eCommerce giant, by essentially offering the same services at a fraction of the price.
That’s forced the eCommerce goliath to make some of its services more affordable, as well.
For instance, Amazon recently announced a new service called “Fulfillment By Amazon Small and Light”, which is a simplified version of FBA for small and light products. But now, there’s another contender in the form of ShopLocket , a startup that lets any prospective entrepreneur sell their product online without having to worry about inventory or shipping.
6. Set a financial goal for your Amazon FBA business
Another way that successful Amazon FBA business owners manage their cash flow is by setting goals and creating a plan to meet them.
As an Amazon FBA seller, your ultimate financial goal is to increase profit while minimizing product costs. To achieve this you should focus on the following 5 points:
- Lowering product costs: this means keeping an eye on your product costs every month, and automating when possible.
- Increasing profit margins: there are many factors that can increase or decrease your margin, from choosing the right sending option to optimizing your listings.
- Product cost optimization- is where you manage how much money goes into each item of inventory before it’s sold, in order to maximize profits while maintaining a reasonable markup.
- Lengthening your selling season: to do this, you’ll need to become an expert in your category. You can then identify ways to extend the buying season in which you are selling by creating new, seasonal products or adjusting when you list stock.
- Finding cheaper suppliers: you always have options for suppliers that may be able to beat the prices of your current supplier. This is where it becomes important to keep track of all costs and fees associated with each supplier so that you know who gives you the most value.
Also, in order to meet your financial goals, you need to invest money in yourself and your Amazon FBA business every month.
A cash flow management strategy for Amazon FBA business owners can help you scale up your business without going broke in the process .
While you might have a tough month from time to time, with an effective cash flow plan in place, you can manage your finances so that they don’t manage you.
You may also like:
7. Wait for the best merchandise
Finally, successful Amazon FBA business owners use waiting for the best merchandise as a strategy that helps them manage their cash flow better.
They know that by ordering in bulk when prices are at its lowest, they will maximize the return on their inventory. They know the average cost method doesn’t work when it comes to Amazon FBA and can create a larger profit margin by waiting for the right time to place an order.
Amazon Black Friday for instance, that time of the year when people get up at ungodly hours in an attempt to make shopping worthwhile.
Every year, the whole world waits for the biggest shopping event in December. Most of us know it as Black Friday or simply BF. Millions of people around the Globe head to their local shopping centers and provide them with huge amounts of money.
Amazon puts up its deals usually a few days before the big day.
On the other hand, Amazon has been studying customer behavior for a while now and they know how people shop on Black Friday. The point is for shoppers to always be ready to take advantage of an offer if something catches their eye.