The Importance of Bookkeeping
Mani from ZonKeepers shares what you need to know about bookkeeping with an Amazon business.
I think it’s fair to say that most people didn’t start a business to become a bookkeeper. It’s not usually a topic that prompts a smile. However, as a business owner it is so important to understand the need for accurate accounts and some of the basic principles and best practices.
Amazon businesses are amazing. If you want to, you can run an Amazon business with no virtual shopfront, and certainly you don’t need bricks and mortar storefront! Imagine the expense of fitting out a bricks and mortar store!
However, the expenses with any business do build up, and if you’re not keeping track of them, you may be paying more tax than you need to. We strongly recommend getting a business bank account as soon as you decide to proceed with your business and use it only for business transactions. That way, everything is easy to find, and all in the one place.
When you decide to use an accounting software, like Xero it gets even easier to keep track of your expenses. Xero has an easy to use mobile phone app. Once you have an expense, simply open the app, click “add receipt” ,take a photo and save – it can then be categorized appropriately at a later stage. At the end of the month you won’t even have to think about what the transactions were for; you’ve written it all down!
The best thing about selling on Amazon is that they take care of the majority of the logistics. You just send your products in, they have the customers, they ship your orders. They even deal with returns! Once you’re selling they simply deposit a tidy sum into your account every two weeks. Sweet!
But have you sat down and actually thought about what this figure is? It’s not just your sales revenue, it’s sales, minus FBA fees, minus storage fees, minus returns, minus advertising and not to forget even your professional selling subscription.
The problem is, if you just account for this figure as your “sales revenue” you’re grossly underestimating your product sales, and grossly underestimating your business running expenses. This means that you don’t have any idea what your actual profit margin is. Not to mention potential implications for tax at the end of the year.
This is why a software solution like A2X is necessary. It imports the data from Amazon into Xero, looks at the number of units sold and splits the financial information by sales, FBA fees, promos, advertising, subscriptions. It is worth noting that A2X only has to ability to pull historical data for 24 months, so if that 2 year mark is coming up for you, don’t delay!
What method of accounting do I use?
Your accounting method can either be set up as ‘cash’ or ‘accrual’.
Cash accounting tracks the money coming in and out of your business. In cash accounting, you don’t record the cost of things until you pay the invoice and you don’t record sales until you are paid. It is the simplest form of accounting, however it doesn’t show how much money is owed to you, or how much you owe to others. The problem with using a cash system for an Amazon business, or any business that holds inventory, is that the cost of Inventory has already been counted as an expense long before it sells , so you don’t actually get a true profitability.
When using accrual accounting, you’ll get a clearer picture of your company’s overall finances. You record expenses and sales when they take place, not when you’re paid. For example, if you have a massive Christmas season, but the funds don’t hit your account until January, you still record the income in December. The same is true for expenses and most importantly inventory. This means that your inventory is not a cost on your profit and loss statement until it is actually sold. It will sit on your balance sheet as an asset and gradually expense (COGS) as you sell.
Unlike cash accounting, where you get a short term vision of your financial situation, accrual accounting gives you a more long term view of your company’s financial position. This is because with accrual accounting you get an accurate record of how much you earnt and spent within a specified time period. This will give a true record of when your business speeds up or slows down over the course of a year.
Accrual accounting is more labour intensive than cash accounting, however, with an accurate record of expenses and income, you have a more accurate grasp on your company’s financial position. Additionally, when it comes to an exit, any business broker will need your accounts to be in the accrual method.
Clean ordered books are essential for the long-term success of your business, and absolutely imperative if you’re considering an exit.
I hope you have enjoyed this read as much as we have in sharing with you! Keep achieving! Angie