In this article you’ll learn the essential financial and inventory metrics you should be tracking for your business.
Why It Is Absolutely Essential To Understand Finance?
The quickest way to lose control of any business is to lose control of the finance. We can’t stress enough how important it is that you understand finance, if you’ve never done it before you really need to learn.
We see a lot of people just winging it and they don’t do very well because they don’t understand their finances and can’t make good financial decisions because they don’t know how much money they’ve got available, or they don’t understand the concept of cash flow, and they also don’t understand forecasting.
If you’ve got any financial background you’ll know that it’s pretty straight forward, but for a lot of people who are selling on Amazon, it’s the first time they’ve ever attempted anything in business and they may not understand a lot of these things.
The Basics Of Finance Explained
The good news is that we’re going to share some of the basics on how to get started, but you need to take initiative to learn.
There’s key things that we recommend you learn, which we can’t teach you here because this is not an accounting course, but we’re going to share with you the basics of what you need to know.
Gross Profit Margin
Don’t get confused between gross profit margin and mark-up because they are not the same thing, this is the most common error in accounting for people who are new to business.
Net Profit Margin
You need to know your net profit margin, and the difference between the net profit margin and the gross profit margin.
Operational costs may consist of overheads for your rent, your computer, your salary, insurance and everything else that wasn’t directly related to the product.
Putting It All Together On A Profits And Loss Report
When you know all these things, you need to know how they’re reported on a profits and loss report. This is a simple report which shows you the direct costs that went into the product, then you have all your other operational costs, these costs will come off your gross profit and then you will be left with your net profit.
Basically profit and loss is just how much profit you’ve made and how much your losses were.
So these are the concepts that you need to get your head around, so we encourage you to start learning these things as an absolute minimum.
You should then start progressing into what a balance sheet is, and how to understand where your assets and liabilities are for your company.
Using Software To Track Your Metrics
One of the key things that we absolutely recommend you do is use a cloud accounting software. We use Xero, it’s very easy to use and it produces great reporting.
It can do this on a level that breaks down product by product for Amazon, because you can tag expenses to certain products, enabling you to work out exactly how much you’ve spent for marketing on all of your Amazon products.
You can also split it all out and get a profits and loss report based on a product by product level on Amazon, not just an overall profit and loss.
The great thing about the software such as Xero is it makes it really easy, it does all of those things pretty much automatically for you and creates beautiful reports. You can also access it from anywhere and have real time reporting on how profitable your business is 🙂
Why You Need To Understand How Profitable Your Business Is?
If you don’t understand how profitable your business is, you can’t make good business decisions.
When you’re running an Amazon business model it’s a stock model, and you have to pay for stock so you need to think about things like cash flow and the cash conversion cycle which is how long it takes from when you’ve paid for the stock until when the money returns back to you from Amazon when you get paid.
So the longer that time frame is, the more money you need to grow your company quickly. If you’ve got a long cycle the money isn’t going to be coming back in quickly so where do you think the next money is coming from to buy the inventory that’s needed to fund growth that you’re going through? It’s going to come through you or some financier that you’re going to have to go to. So ideally you need to know these things then you can do what’s called a cash flow forecast.
Further Recommended Reading…
Now you know the basics of finance, you may find our article ‘The Definitive Guide For Forecasting Your Amazon Inventory’ an interesting read.
You’ll learn the number one rule for Amazon selling is to NEVER run out of stock and why accurate and timely forecasting is a key part of your success.
It’s imperative you take the time to learn the basics of finance, please bear in mind the quickest way to lose control of any business is to lose control of the finance which you definitely don’t want!
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Tehmina Zamir is a Content Manager at Blackbird Suite. With 5+ years experience in the multiple-niche industry, she writes action driven marketing sales copy to help millions of Amazon sellers grow their business at a rapid rate. She is also an author of Global Patient Transfer, Gooline Space, Healthwiz360 etc.