A common mistake among Amazon Marketplace sellers is the confusion of profit with cash flow. This is common among many businesses and not just with Amazon sellers. We’ll just touch on some basic concepts since nobody here needs to know the nitty-gritty details. That’s what accountants are for, right?
Cash is money in your bank accounts or the business. It is not inventory on the shelf or money in your Amazon settlement account. These items may eventually be converted to cash, but they can’t be used to pay suppliers, bills, or employees.
It is easy to think if you are making a profit on each sale, then you’ll have the cash to grow your business. Unfortunately, this isn’t always the case. You can make money on each sale but still have your cash tied up elsewhere in the company. Most commonly for Amazon sellers, this means cash tied up in inventory.
To explain this in extremely simple terms, think of it this way. This may not be exactly correct in accounting terms, but putting it this way will help explain it for the average seller. To grow, you need to invest in inventory, and that investment will need to increase each month. If the growth of your inventory outpaces the growth of your profit, then you have a negative cash flow. In other words, if your inventory grows by $10,000 one month but your profit only grows by $5,000, then you have a $5,000 negative in cash flow.
You may have heard someone talk about a business that grew too fast. In the case of an Amazon Marketplace business, this commonly means buying too much inventory to grow. Inventory often needs to be paid for before you receive it or with net terms that are shorter than your sales cycle.
We frequently see sellers become excited about their growth on the marketplace, and they want to expand rapidly. They pick new items to sell, buy inventory, and ship it to the Amazon FBA warehouse. The problem starts when they buy too many days of inventory or the items don’t sell as quickly as anticipated.
Please remember that we are not accountants and that you should consult your accountant with any questions. It is critical to have a good accountant that can help you with cash flow management. Using a professional accountant is important even when you are just getting started selling on Amazon. If you are looking for a new business accountant, then we always recommend that you ask other business owners in your area for a recommendation.
How do you handle cash flow as an Amazon seller?