Do you know exactly where your business is at?
Keeping a close eye on your numbers is critical for achieving overall success with your FBA business and perhaps leaving the option open to sell it later on. In fact, failure to stay on top of critical metrics is a common reason why many businesses fail. You won’t manage what you haven’t measured…
We recently wrote about 11 key metrics all FBA sellers should be monitoring, but there are still more which we’d like to address because they are vital.
Here are 7 more metrics you should be on top of:
Your logistics metrics provide the structure behind which your business will either struggle or thrive. You can have impressive-looking profit margins, but if your logistics are broken, you’ll miss so many opportunities you can fail to be as successful as you could be, or, as a worst case, might drive yourself out of business.
Stay on top of these metrics:
#1. Stock-out Occurrences
Have you ever experienced a stock-out on a popular item that you sell? Stock-outs can have far -reaching effects beyond simply missing out on sales. You may even find that stock-out occurrences are exacerbated if you don’t get on top of them quickly.
For example, sellers often have a tendency to underestimate their inventory requirements following a stock-out. You might look back over a 30 day period and see that you sold 60 units, or 2 per day, but what if you only had items in stock for 20 days? This would mean that you actually sold 3 per day and need to plan accordingly for stock.
It’s always a balance between having too much cash taken up by inventory sitting on the shelf and missing sales due to having too little stock available. We recommend monitoring your inventory movement closely and using a software (such as Forecastly) to help you make accurate predictions of your inventory needs.
#2. Stale Inventory Numbers
Taxjar posed the question; “is stale inventory sinking your Amazon store?.” They’re quite correct — having too much money tied up in stock which is not moving can be the undoing of young Amazon businesses.
As they say, “the first rule of an Amazon retail business is that you must have adequate cashflow”, (as is the second rule). This means that you need to be on top of any stale inventory numbers and determining whether you need to cut your losses, lower prices and (hopefully) sell them out.
What determines “stale” inventory may vary depending on your product, but Taxjar’s definitions for non-expiring products look like this:
“We recommend breaking up your inventory by time periods: 0-90 days (fresh inventory), 91-180 days, 181-270, 271-365, and 365+.”
Anything which is approaching a “very stale” status should have more aggressive pricing to try and move the stock quickly. You might sell at break-even, or even choose to take a loss in order to sell the stock and get some money into cashflow.
#3. Days in Inventory (or Sales Velocity)
This goes hand-in-hand with your figures for calculating inventory needs — how long does it take to sell each unit? This is an efficiency measure which provides you with an average figure so that you can plan better for inventory requirements. From this figure, you can estimate the number of days for which the average inventory balance will be sufficient.
Here is the formula you need to calculate days in inventory:
Days of Inventory = Number of Days in the Period / Inventory Turnover for the Period
Lower levels are usually more favorable for your cashflow, however you will also need to balance this with your lead time for new inventory orders.
#4. Lead Time
Your lead time is the amount of time it takes from you placing an order with your supplier to replenish your inventory, them shipping it and it being available at Amazon in your inventory.
When you’re trying to build safety into your stock levels, you need to think of worst-case scenarios in the timing. What if there was an issue at your supplier’s warehouse which slowed production time?
There are things that can happen which are beyond yours or your supplier’s control, particularly if you’re importing products. For example, ships can experience delays with being offloaded once in port (strikes of port workers often happen around the world).
Customs might be backed up or have some kind of issue which delays the release of your goods. Any issues with wire transfers can add days to the process too. Other freak events can occur — you name it if it involves imports. In one example this year, a South Korean shipping company went bankrupt, stranding container ships at sea. If your goods were on those ships, you’d be out of luck and having to reorder stock.
How much money do you really make? Is it worth the overall effort? Your financial metrics are the overall basis of whether or not you’ll make it as a business, yet many business owners become reluctant to keep up with their numbers, preferring to bury their heads in the sand.
Successful businesses are those who keep in close touch with their financial metrics, allowing them to make adjustments in a timely manner if necessary. You don’t want to become another statistic among the small businesses who fail each year.
Here are some metrics you should know:
#5. Adjusted Gross Margin
We’ve touched briefly on adjusted gross margin previously; it’s an important figure to know if you’re looking to scale up your Amazon business. A common mistake business owners make when discussing their margins is that they fail to account for every cost they have in order to get the product to market, such as the cost of carrying inventory (those FBA fees come in here).
Most healthy FBA businesses are working on average margins of 15% to 20% per product, which is not a lot, but relies on high sales volumes by having access to Amazon’s large user base.
Here’s how you can calculate your adjusted gross margin for each product:
n Period Gross Profit Dollars – n Period Cost Dollars / n Period Sales Dollars
Costs to consider for each product include:
- The unit cost at which you purchase from your supplier.
- Cost of shipping from the supplier.
- FBA warehousing costs.
- Other FBA costs such as fulfillment and other fees which they list.
Besides your FBA fees and the costs of sourcing and shipping your products, there are other costs which you need to keep a good eye on to ensure your business really is profitable. Here are some of those:
- Returns or defective orders.
- Marketing costs.
- Any staffing costs if you employ people outside of using FBA.
- Business registration and insurance costs.
- Office supplies, tech, and software.
Preferably, you should keep a separate business account and ensure all expenses are run through it. This helps to give a clearer financial picture than the murkiness involved if you mix business and personal costs.
#7. Cash to Cash Cycle
Put simply, the cash to cash cycle calculates the number of days for which your business must be able to support all of its expenditures.
It is calculated by knowing the time period between when a business pays cash to its suppliers for inventory and receives cash from its customers. You use this to estimate any financing requirements and to ensure that you keep enough cash on hand to fund the business continuously.
The formula to calculate the number of days in your cash to cash cycle is:
Days inventory on hand + Days sales outstanding – Days payables outstanding
= Cash to cash days.
To give an example, say you have 20 days of inventory on hand and 25 days of sales outstanding, with an average payables period of 10 days; put into the formula, you get 20 + 25 – 10 = 35 cash to cash days. You need to have 35 days worth of financing to support expenditure.
You can see why it’s important to know this — you don’t want to be caught short when you’re needing to pay suppliers and shipping for new inventory orders, while keeping up with your FBA expenses.
For most small business owners, measuring and keeping an eye on numbers isn’t the most exciting prospect to get on with during their day, yet it is vital if you want to be among those who are successful.
FBA owners should keep a tight watch over a number of key performance metrics, including the logistical and financial metrics mentioned here. Don’t let failure to monitor and measure become a reason for business failure.