Bookkeeping. We know, we know, not exactly a topic that gets most people excited!
Here’s the deal though, out of the 100,000+ new sellers added every year to Amazon, a large number will not survive past year one. As with other small businesses, poor accounting and bookkeeping practices feature highly as a cause for the business to fail.
If you’re not on top of it, your business can slip away from you before you’ve really had a chance to build it. The other side of that is businesses who don’t fail, but also don’t reach the levels of success which they otherwise might.
You don’t want to be paying more taxes than you have to, right? Nor do you want to be missing the fact that you’ve got products which aren’t actually making you money. Here are some of the most common mistakes FBA sellers make with bookkeeping;
#1. Mixing business and personal
One of the number one rules of tidy bookkeeping is to keep business and personal transactions to their own, separate accounts. So many business owners have muddied the waters by paying for their new inventory order from their personal account, or by paying the cable bill with their business credit card. Don’t do it!
A key efficiency for small business bookkeeping is to be able to link up your business bank accounts and credit cards with your automated accounting software. This means that transactions will automatically be uploaded to your accounting software so you don’t have to spend hours on manual entry.
If you mix up business and personal, your records going through to your accounting software will be inaccurate and you’re going to have to spend time manually sorting it out anyway.
#2. Leaving it “till later”
It’s true, there are a lot of us who would rather stick a sharp object in our eye, spring clean the house or change a dirty diaper (well, maybe not that), before we will sit down to take care of the business accounting.
Procrastination and “I’ll do it later” excuses mean that you can miss things, fail to see vital information in a timely manner or find yourself generally disorganized when it comes to crucial times, such as tax season.
The best remedy for this is to automate everything you possibly can, including invoicing, accounts payable and the recording of transactions. A good cloud-based accounting software will have integrations with other apps you use such as invoicing and time tracking. Once you’ve got this set up, commit to reconciling your books at least once each week. This means that it won’t grow into a huge, gnarly, unpleasant task that you’re more likely to put off.
#3. Not recording cash expenses
If you are used to everything being digital, you can end up forgetting that not everything is automatically recorded for you. If you make any kind of cash purchases for your business when you’re used to credit card and electronic payment, then you need to ensure you’ve recorded them.
This happens for FBA business owners too. For example, say you have employees or meet with suppliers and take them out for a coffee in the course of business, paying with cash. That would be a tax deductible expense which should be recorded.
The answer to ensuring your records are always accurate is to avoid using cash if at all possible. Try to stick to using your business credit or debit cards, or electronic methods of payment.
#4. Relying on armchair accountancy
You know what armchair accountancy involves? Taking all of your accounting advice from a website such as this. Besides that, your well-meaning friends or the strangers you ask on Quora might have some good advice, but they are limited by their own experiences and don’t necessarily know the ins and outs of your business.
By all means, build your knowledge from what you can read online (we love having you here!), but treat it as informational only, not specific advice for your business. Unless your friend happens to be a qualified accountant, take what they say as informational too.
You might be able to get by just fine by following some basic advice online and using automated accounting software, but it’s also possible you’ll miss things you need to deal with, such as taxes you must pay or deductions you’re eligible for. It’s always better to get some professional advice where you can, at least when you’re starting out or when you’re filing your taxes.
#5. Not understanding vital terms or measures
The fact is, you have to stay invested in the financial health of your business if you’re to make a success of it. You’ve got to have both a macro and micro understanding of what’s going on in your business so that you’re not surprised to find a product really isn’t profitable, or that you’re losing sales because you’re always running out of stock on popular items.
One of the big mistakes FBA sellers make is not factoring in Amazon fees properly when they source and price their products. You’ve got to know exactly what your net profit is going to be for each product that you sell — fees are often the biggest expense of the FBA seller. Calculate for each product because fees can work out to be up to 50%, (although around 30% is standard).
Know which key metrics and reports (such as balance sheets) you should be familiar with and get acquainted with these numbers often. At a minimum, you should be looking at cashflow reports, accounts receivable and payable, your balance sheet, and income statement. Your Amazon dashboard can help with the right numbers.
Again, you should develop a regular habit of going over the financial health of your business with these reports and metrics. Catching and finding ways to mitigate any financial issues early is a hallmark of the most successful businesses.
#6. Disorganization of expenses
Disorganization of expenses can be a big let-down for any business owner. Do you know exactly what you’re spending money on? When things get disorganized, business owners often miss the little things that add up to big money.
Expenses can become disorganized when:
- You purchase items on the fly, perhaps paying by cash.
- You mix up business and personal expenditure.
- You don’t pay attention to every little thing you are paying for (software subscriptions come to mind).
The key here is again to automate as much as you can, avoid cash and reconcile weekly. Another great feature of accounting software (such as Xero) which can help you is the ability to automatically categorize expenses. This way you can see immediately which are your “big spender” categories. Does anything seem out of proportion? A personal indiscretion tends to be paying for subscriptions I’m no longer using…
#7. Tax blunders
How prepared are you when it comes to tax time? Are you calmly handing off a neatly arranged folder to your accountant, or are you scrambling madly, hunting down reports and receipts?
On the other hand, there’s the business owner who tries the DIY route for tax filing, even though they may not have any expertise when it comes to dealing with taxes. This won’t necessarily end up as a blunder, but here are a few thoughts on these scenarios…
- If you’ve lost receipts, you may not claim the deductions you would otherwise be entitled to.
- If you don’t have a handle over your numbers, you risk over or under-reporting income — either way you can end up paying more.
- What about sales taxes? Know how to deal with those?
- The DIY route may be fine, but do you know all the deductions you’re entitled to claim? There are many and they can change from one year to the next, so a qualified accountant is (usually) the safe route.
Seriously, our overall advice here is to talk to a tax professional, at least once! You can usually find someone qualified who has good ratings (check those out — there have been known cases of crooked accountants), who can help you locally.
Avoid the blunders…
Hey, being a small business owner is not an easy task. It can be a steep learning curve if you’re new and can still throw the unexpected at you if you’re seasoned. One area where you shouldn’t have to blunder is with your bookkeeping.
Our overall message is to automate as much as you can to keep it simple and to stay on top of it by disciplining yourself to follow regular reconciliations. Know your numbers, act in a timely manner and set yourself up for the win.