How To Manage Cash Flow Cycle For Amazon FBA Stores
Cash flow is an often misunderstood or overlooked aspect of running a business.
Most modern businesses are indeed 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 essential to understand how to manage cash flow to maximize your profits on Amazon effectively.
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 first listings 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 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 having a good understanding of cash flow management is critical.
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 one person, the owner, usually runs. 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 an individual’s steps to ensure 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 essential parts of running an Amazon FBA business is keeping track of your cash flow. There are two ways to track 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. It will notify you if your balance goes below a certain threshold.
For example, if you set up a threshold of $100 and currently have $90 left in your bank account, it will notify 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 straightforward to use 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 stored in Amazon’s fulfillment 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).
- It shows if your products make a profit; yes, we mean a 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 or three months. See exactly where you stand financially!
Using the Amazon FBA Calculator is recommended 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 specific event occurs (for example, if your inventory decreases below ‘x’).
With this calculator, there is no need for any heat tracking! All you have to do is enter one or two numbers initially and then watch how everything gets calculated – without ever touching any formulas!
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 this business’s total profit or loss so far (and over time)?
Using some straightforward tools to keep track of everything (we use Excel, but apps are available that can help to do this). However, these tools do not show some important things.
The most significant disadvantage is that you must change all formulas yourself, so you must adjust it manually every time something changes (for example, if your unit price or storage fees change).
This is very tedious and might lead to mistakes at some point.
In addition, use 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!
Managing your inventory can be challenging if you are an Amazon FBA business owner. 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 could it 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 helpful. Firstly, the tool gives users a better summary of the goods stored at Amazon’s warehouses.
Users can see all inventory products under a single report for quick reference. In addition, Xero software information 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 simplifies selling products online.
Allowing people worldwide 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 be challenging without adequate tools.
When using Xero software for Amazon FBA stores, it’s also best to have other business management tools in place. 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 you have access to in your Amazon FBA business, a dedicated financial advisor might be just the person 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 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 track product sales without manually entering every transaction into the system. 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
Knowing where your money is coming from is essential to understand how to manage your cash flow.
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 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.
So in many cases, people would use part of their profits from these small cheap items to buy more small, inexpensive items and then end up with a ton of inventory.
Now, buying cheap wholesale products and reselling them online via Amazon FBA is not dead at all.
But because so many sellers are doing this, the things that used to be profitable aren’t as much anymore or even unprofitable sometimes.
This means that it’s essential that you, as a new seller, understand how competitive this marketplace is now and what you need to do to compete in this space.
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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,. 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 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 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 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 is paid out every 2 weeks, which works out to around 5-7 checks per year, covering all sales 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 monthly.
This is nice compared to other revenue-sharing programs where you must wait for your first payment of several hundred dollars before the money hits your bank account.
3. FBA item sales fees
The Amazon FBA fees are standard across the board, so if you sell other products on Amazon besides your Amazon FBA items, you will have to consider this.
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 by applying it only to the item price or to the item price plus shipping charges.
Amazon has implemented “Fulfillment Fees” concerning Private label product sales. If we decide to sell a new product, we would have to pay USD 1.35 per unit up to 40lb, including shipping and handling costs.
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.
You risk going out of business without a strategy for managing your cash flow.
7 steps to manage your Amazon FBA cash flow
1. Plan for slow sales periods
There are two slow periods for Amazon FBA stores, one is in November/December before Christmas, and the other is in July.
In July, many people start their own Amazon business after finishing University or College and having some spare time. Still, by November, they have either run 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 fewer sales for Amazon FBA stores because there is no motivation from these people to buy items during this slow period.
One strategy successful Amazon FBA business owners use to manage their cash flow is planning for slow sales. 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 by creating several months of products 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. Your additional inventory on hand gives you a safety net if your items don’t sell as quickly as expected during busier seasons.
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2. Keep a cash reserve
Another strategy that Amazon FBA business owners use to manage their cash flow is keeping a contingency cash reserve on the sidelines.
The size of your contingency reserve should equal 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 barely make ends meet as-is, maintaining a three-month reserve might not be practical. However, a more significant cash reserve might be the right option if you can scrape by while waiting for your items to sell.
3. Understand Amazon’s inventory management policy
Amazon has its rules about how many products you can store in your Amazon FBA business account before charging additional storage fees. In addition, Amazon has regulations within its warehouses regarding how many products can be held 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 items sold directly by Amazon and 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 storefront to become authorized for sales of their products, even though you may be able to purchase items off their website.
If this is not an issue, registering as an authorized reseller can also help protect your account by providing additional information on your seller profile that Amazon will review before deciding whether to delist your listing.
Understanding Amazon’s inventory management policy is essential because it impacts the number of products you need to order to ride out slow periods or unexpected expenses.
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4. Charge customers promptly
Successful Amazon FBA business owners understand that getting paid on time is critical to avoid unnecessary cash flow problems.
Charging customers promptly means you have cash coming in regularly to cover your business expenses. If you don’t, it can hurt your business in several 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 cash.
A cash flow crunch can affect the whole business, causing losses through missed sales opportunities, increased inventory costs with stock-outs, and poor purchasing decisions with traders you have to deal with outside of regular hours.
Furthermore, it affects staff morale when they know invoices are being paid late. Customers who are slow to pay create a backlog of work for everyone else regarding follow-up phone calls, etc., that eventually gets backlogged 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 paid 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 shopping the competitor’s Amazon listings.
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, are Amazon FBA’s competitors 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.
For instance, Amazon recently announced a new service called “Fulfillment By Amazon Small and Light,” 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 worrying 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 production costs. To achieve this, you should focus on the following 5 points:
- Lowering product costs means monitoring your monthly expenses and automating when possible.
- Increasing profit margins: many factors 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 inventory item before it’s sold to maximize profits while maintaining a reasonable markup.
- Lengthening your selling season: 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 your current supplier’s prices. It becomes essential to keep track of all costs and fees associated with each supplier to know who gives you the most value.
Also, to meet your financial goals, you must 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.
While you might have a tough month from time to time, you can manage your finances with an adequate cash flow plan so they don’t manage you.
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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 their lowest, they will maximize the return on their inventory. They know the average cost method doesn’t work for Amazon FBA and can create a more significant profit margin by waiting for the right time to place an order.
Amazon Black Friday, for instance, is when people get up at ungodly hours to make shopping worthwhile.
Every year, the 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 vast 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 knows how people shop on Black Friday. The point is for shoppers always to be ready to take advantage of an offer if something catches their eye.