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Profitability doesn’t always mean you have good financial health. A basic understanding of Amazon FBA accounting, and its implications for your business, is a critical skill for any entrepreneur.
Your Ledger = Your Wallet
What if you’ve made a £10,000 profit, but have zero cash in hand?
What if you are getting hundreds of orders but you have to turn them all down because your inventory isn’t properly managed and you are completely out of stock?
What if you end up paying the wrong tax amount and/or paying fines because you couldn’t compile your tax information properly?
You’ve heard how people are making thousands of pounds per month from their Amazon FBA accounting business. How they are making tens of thousands from a business that they only spend a few hours on every week. And how some have even managed to flip their FBA business for millions of pounds.
What you haven’t heard is how important transparent and efficient accounting has been for the success of these businesses.
A successful business is the result of excellent decision-making combined with fluid execution. However, decisions need to be based on either experience, a benchmark, a reference, knowledge, or some kind of relevant information.
For businesses, especially FBA businesses where you have a huge number of transactions, your accounting data is the most valuable asset. You will only get good-quality data if you have proper accounting systems in place.
To make the best use of your data you need to know what it means and what it represents.
Why FBA Businesses Need To Take Accounting & Bookkeeping More Seriously
Accounting often doesn’t get the credit that it deserves until it’s time to file your tax return or annual accounts, calculate your VAT payment or receipt, work out key business metrics for your insurance company, or determine the most tax-efficient way of paying yourself.
You likely also only realise the value of good accounting software when you find a discrepancy in your numbers that dates back a few years and you now have to process hundreds or thousands of transactions just to resolve one error.
Amazon FBA accounting sellers have access to some free Amazon-provided tools. However, these aren’t the most effective and they certainly won’t be the best choice when you scale up your operations in the future.
Starting off with the right accounting systems will help you build the infrastructure that you need to develop a successful company and it will also turbocharge your rate of growth.
How Bookkeeping Benefits FBA Businesses
There are a few very important benefits to good bookkeeping practices.
Clearer Financial Picture
It’s relatively easy to understand where your cash is coming from and where it’s going when you only have two products to sell and you have ten sales per week. As the amount of customers increases and the number of expenses also increases, it becomes harder to keep track of your cash flow.
Up-to-date bookkeeping helps you keep tabs on the entire cash flow cycle. This way you know exactly what you are earning and what you are spending it on.
More Efficient Processes
Cash flow management is a problem in itself, but it’s a whole other issue to have inefficient processes that are consuming more time or money than they need to. The more efficient your processes, the more time you have to focus on growing your business (and, let’s face it, doing much more interesting stuff).
Second, when you have a good accounting system you can study each area of your business and see how you can optimise it. You have a measurable benchmark to compare changes to. If you are improving a certain process, it will show in your numbers.
The end goal of your business is to make money. The better you can track your money, and the more control you have over it, the easier it will be to increase profits. As your financial history develops over time you will be able to see trends in your number which will reflect market sentiments, price sensitivity, product performance, and other factors that influence the profitability of your business.
With this information, you can make better decisions to focus your investment on the specific areas that earn you the highest returns.
If you want to obtain funding in the future, you will need a financial track record to prove your worth to a lender or investor. Similarly, you will also need good financial records to present to tax authorities and other stakeholders that are directly related to the financial condition of your business.
Without good accounting information, this will be impossible and you may be penalised for not maintaining good records. For example, HMRC can request your books and records as far back as 6 years from the end of your last tax year.
What Is Accounting Software?
An accounting software, at its very core, is simply a program that collects, stores, and illustrates financial information. It brings together all that important information that you need to take your business to the next level.
How the accounting software is implemented and the complexity of its operations depends on the particular system that you are using and the needs of your business.
Best Amazon FBA Accounting software for Sellers
Your best option, when it comes to selecting a platform, is to choose between the most popular platforms in the market which are Xero and Quickbooks. Both these platforms are available as cloud-based services and also on-site solutions. Generally, cloud-based services are much easier to use, you don’t have to worry about being limited to a single computer and if you have a remote accountant they are able to access the platform as well.
Xero is more common in markets outside the US and is the market leader in regions such as the UK, Europe, Australia, and New Zealand. Quickbooks is popular in the US because it has a few features that are better suited to the kind of accounting practice in the US.
With Xero, you also get a lot of powerful features packed into a very intuitive and easy-to-use interface. Quickbooks has a steeper learning curve and is better suited to professional accountants.
Xero gives you all kinds of advanced options including reporting & analysis, inventory management, payment integrations, and a range of other features through an interface that is easy to grasp. The premium version of Xero allows multi-currency accounting and is our recommended solution for eCommerce businesses that sell their products globally.
Whatever accounting software you choose, you can bet the accountants at Guide Hustle have used it!
What Omnichannel Integration Software Should FBA Seller Use?
To get the most out of your accounting software you will need an integration software that will bring together your accounting platform (e.g. Xero) and your Amazon Seller Central account. This way all your data is synced and changes on one software will be reflected on the other.
Two of the best options for this are ‘A2X’ and ‘Link My Books’. Amazon bookkeeping is already quite difficult as it is, especially if you are selling to an international audience, so the simpler the bridging (integration) software the better.
Link My Books and A2X are broadly similar in what they offer. They both connect your online marketplaces such as Amazon, Etsy, eBay, and Shopify to Quickbooks or Xero. A2X is more expensive than Link My Books, though it’s worth noting if you use Sage accounting software they are your only option currently.
Both calculate the VAT on your marketplace sales, which is critical if you are selling in the UK. EU or the US. They also both calculate your cost of goods sold. This all means that when it comes to keeping on top of your bookkeeping, you can be assured of accuracy, efficiency, and inevitably lower costs.
Putting FBA Bookkeeping Systems In Place
A good accounting solution stack will include the accounting platform, an integration software, and a defined set of accounting processes for users to follow.
It’s important to note that along the way you will need different kinds of applications to add to your accounting solutions stack. For instance, you may find that you want a dedicated platform to handle tax returns, you may want to integrate a new payment solution, you may need to have different receipts for customers from different regions, etc.
Given these variables, your best bet is to start off with a tech stack that offers flexibility and the possibility of integrating additional services in the future.
In this regard, the combination of Xero with Link My Books is an ideal choice. Since these platforms are industry leaders, developers launching new apps set these as the benchmarks and you will almost certainly have a way to integrate a new service with these platforms.
The protocols that you define for accounting processes in your business are also very important. For instance, you can either choose to follow cash accounting procedures or follow the accrual accounting framework, but have one way of doing each process. Failing to do things the right way will cause problems in the accounting system and you will have on your hands a messy ledger.
In terms of statements you should stick to the three main financial statements which include:
- Profit and loss account (AKA income statement)
- Cash flow statement
- Balance sheet (AKA statement of financial position)
These three statements combined will give you an overview of every aspect of your business. Of course, you can dive into specific accounts and ledgers if you want to get a more detailed view of something particular.
The Perfect Time To Hire An e-Commerce Accountant
This is a tricky one because it depends on how comfortable you are with doing your own accounting and how good you are at it. For those that are absolutely no good with numbers, it might be better to get a dedicated accountant right out of the gate (ahem, hi there!). For others, it could be a few months before the need for a dedicated accountant arises.
Generally, people start off handling their finances themselves. However, as soon as you start to gain some momentum, a specialised accountant should be your first hire. This is important because as your business starts to grow every operation gets bigger and more complicated and it requires more time to be managed.
When you are already handling everything else from marketing to SEO, to sourcing, to delivery, and all the other tangents of running an e-commerce store, the last thing you need is to be spending hours on end trying to crunch through a long list of numbers.
You need to save your energy for the tasks that help your business grow and tasks that require your direct attention because no one else can do them. Accounting is something that you can very easily delegate to a freelance accountant.
Moreover, a specialist accountant can maintain your ledgers on a daily basis. When you sit down after a week or even a month to sort out your accounts it will be a lot of work and there is a very high chance of errors.
Hustle Guide’s Amazon FBA Accounting Roundup
The Amazon FBA accounting industry is exploding with competition and to keep your business competitive you need to start with the foundational layer of accounting. Understand what your specific business needs are, look at what competitors are using, and get digital accounting solutions that will meet your needs.
Keep in mind that shifting from one accounting solution to another is very difficult and time-consuming. Starting off with something that will future-proof your business will save you a lot of money, stress, and time in the future.
If you aren’t already experienced with accounting and financial processes, get an expert to help you lay the foundations and get you moving in the right direction. Invest in yourself and your team to learn the ropes and really internalise the process of following good accounting practices. Integrate solutions when their need arises and always be proactive with accounting.
As you start to grow, branch out into onboarding professionals that can help with accounting and delegate this process.
The money you spend on accounting is not an expense but an investment (even if the accountant’s salary shows as an expense in the income statement). With your financial situation properly laid out, you will be on the path to rapid growth and optimum business performance no matter what the market conditions are.
If you feel overwhelmed reading this article, don’t panic! The accountants at Guide Hustle have seen this all before.