an accountant riding a money wave by good accounting for amazon sellers

Accounting for Amazon Sellers: The Keys to Profitability

If you can’t beat them, join them. That was probably said by the first third-party seller to join Amazon. Amazon is the most convenient selling platform in the world. For e-commerce shops entering the market, Amazon is your largest competitor. That means mastering amazon seller accounting is the best way to be profitable. 

In this guide to Amazon e-commerce:

  • 6 quick tips for Amazon bookkeeping 
  • Setting up Amazon seller accounting efficiently 
  • Best accounting software for amazon sellers 
  • Increasing your brand value
  • Understanding Amazon sellers metrics and tools

Accounting for Amazon Sellers

Whether your e-business is thinking of expanding to Amazon, or if you are already on the site. Using Amazon comes with a particular set of accounting responsibilities:

6 Tips for Amazon Bookkeeping

These are 6 things you could do right now to improve your bookkeeping for Amazon.

1. Keep business separate: Business accounts should be separate from personal accounts. Your Amazon store is no exception. Come tax time you can properly claim business deductions and have a clear paper trail. 

2. Accrual Basis Accounting: We always recommend accrual basis accounting for Amazon. It doesn’t matter what type of seller you are, this accounting method gives you greater control over your operations. By organizing transactions into periods, you have a better sense of product relevancy and profitability.

3. Accounting Software for Amazon Sellers: Have a cloud-based accounting software system that shows COGS, Amazon expenses, and other operating expenses all together in one organized area.

an accountant showing the best accounting software for amazon sellers handles COGs and expenses

4. Specific Chart of Accounts for Amazon: To relay all the necessary data from Amazon into your accounting system use specifically mapped accounts. Otherwise, information can slip through the cracks. 

5. Capitalizing Inventory: Keep inventory in a separate account so it is reflected as an asset on your balance sheet. As your products are purchased, inventory can be expensed in direct correlation to the amount purchased. This allows you to deduct any unsold inventory at the end of the year.

6. Amazon SKU Profitability: Use COGS to see which SKUs are costing you money by sitting on shelves.

Best Accounting Software for Amazon Sellers

To increase revenue for your Amazon store, you should understand your baseline. Amazon offers Income Statements and Settlement Statements to show financial activity for your account. Although, these statements are not a complete picture of your profitability. Often, they are missing key reporting information like Amazon-related expenses. 

Even more, programs that promise easy transaction integration from Amazon are error-prone. Batch settlement statements show different data than individual sales data. So it is essential to set up your accounting software for success. Here is the best accounting software for Amazon sellers:

Xero + Amazon 

This should be the heart of your Amazon accounting. It is likely you aren’t selling solely on Amazon, and Xero makes it convenient to integrate merchant platforms. Even if you are sticking to Amazon as your only source of income, Xero will track all your expenses, and make tax time a breeze.

Xero + A2X

A2X allows you to import settlements into Xero accounting software. It will reduce common mistakes that happen while reconciling individual transactions from Amazon sellers central. This saves time for those selling across multiple sellers central channels and in different countries. Be mindful though, A2X requires expert set up for correct account mapping. When the API is not fully tuned to Amazon, total income numbers could be off. COGS calculations for Amazon accounting are available as well.

Xero + Taxomate

This is another type of bookkeeping software for amazon sellers needing to speed up account reconciliations. It will auto fetch and process Amazon settlements into Xero.

Amazon Inventory Fulfillment and Management

Inventory is a beast in its own league. Proper inventory fulfillment and management is an essential to running an Amazon store. Throughout the year you should be monitoring inventory levels, and ensuring fulfillment from your suppliers. Your Amazon fulfillment option will determine costs associated with your inventory accounting. Additionally, you should be paying attention to how profitable each SKU is, to optimize sales. Automated inventory management can be achieved through a good tech stack.

Amazon FBA vs FBM

Fulfillment by Amazon (FBA): This option allows amazon sellers to hand off shipping responsibilities to Amazon. The items make it from the warehouse to customers quickly. Items reach more people, Amazon manages customer service, and FBA products are eligible for prime shipping. 

Fulfillment by Merchant (FBM): Amazon sellers fulfill all requirements of inventory: shipping, packaging, returns, and customer service.

Best Inventory Accounting Software for Amazon Sellers

You can use Amazon Selling Coach, a system built within Amazon Sellers Central, for basic inventory management. It will help you keep tabs on turnover rates, shrinkage, and hot sellers. They will notify you when you are low and need to restock. If you want to have full control over your Amazon inventory you should look for something that can: monitor inventory turnover rates; make automated orders; perform future sales projections, link suppliers, and link to accounting systems to perform COGS.

Xero + Veeqo

Veeqo is the answer to automate inventory. It allows you to connect all your merchant accounts to Xero, monitor your entire inventory across multiple channels. You can manage inventory for Amazon FBA or FBM. Plus it will automate COGS and inventory expenses for each product sold.  

Amazon Accounting Metrics to Watch

Accrual Accounting for Amazon Sellers is the best way to measure profitability. It is a clear bookkeeping system, with procedures for recording revenue and expenses. This gives accurate reporting via your income statement, balance sheet, and cash flow statement. Here are some accounting metrics amazon sellers should take note of:

Amazon Sellers Fees

Doing e-commerce with Amazon FBA, comes with the luxury of having all your business expenses happening in one location. Marketing, shipping, storage, and refunds are necessary expenses to drive sales. But if you are paying more than 50% in Amazon fees per product sale, it is time to minimize. Keep fees down by:

  • Storing lightweight items in FBA warehouses
  • Using FBA exclusively for inventory with a high turnover rate. Amazon charges long-term storage fees for items in warehouses for more than 6 months. 
  • Track sales closely to make sure you are shipping to the warehouses closest to the bulk of your customers.
  • If you are selling less than 40 units/month downgrade to the Individual Sellers Account.

Order Defect Rate (ODR)

This is calculated through customer feedback, guarantee claims, and chargebacks. You want this rate to be low. It is a marker for customer satisfaction and a big help for getting the buy box. For Amazon FBA sellers, this metric is attainable by providing clear listing information. As well as maintaining the right levels of inventory, so you are never out of something. 

Amazon sellers using FBM can keep their order defect rate low, by providing a tailored customer experience. Customers celebrate free shipping and reduced shipping times. You can make a lasting impression with tailored: shipping options, order tracking, price, and 24/7 customer service.

Cost of Goods Sold (COGS)

Why are COGS so important? Inventory is your business, when COGS is high that means you have been holding onto inventory too long, or are not selling it at optimal pricing. This metric will be a good indicator of any changes that need to be made to your product lines. At the very least you will need to perform COGS calculations at the end of the year. We recommend doing this monthly for larger inventories.

gross profit margin and quick ratio formula example for Amazon Accounting

Gross Profit Margins 

Are you making a profit? How much profit are you making in comparison to fees? Your Gross Profit Margin will tell you. This is the amount of revenue after COGs and expenses, directly related to your primary product. 

Quick Ratio 

This accounting metric measures how easily you are able to manage your liabilities, in the short term. You can figure it out by doing a quick ratio “acid test.” This calculation looks at current assets, inventory, and prepaid expenses in relation to current liabilities. The closer you are to 1 means you are managing business debt like a walk in the park. 

Net Profit 

It is important to monitor the percentage of revenue you are generating after all expenses. It is a percentage of how much profit you earned from each $1 you collect. Successful third-party amazon sellers will see 40-50% net profit. If you are dropshipping, margins will be lower. The key to monitoring this metric is consistency. You don’t want to see wild fluctuations from month to month. 

amazon sellers hitting the buy box

How to Get Sales on Amazon

With a good accounting system in place, you have a trove of data to elevate your business. Third-party sellers never win the price war against Amazon in the open market. Thus profitability comes by offering the customer a different experience than a private label product. Remember Amazon thrives because of the variety factor. Third-party sellers actually attract a wider set of customers. Plus Amazon Sellers Central is full of hidden treasures to increase sales and boost revenue, no matter which selling stage you are at.

Buy Box

To increase revenue, make the platform a better experience for customers. In fact, Amazon sellers are incentivized to do this with the Buy Box. This is the “Buy Now” call to action button offered on the listing page. Amazon bestows the Buy Box to sellers with sustained sales and a low Order Defect Rate (ODR)—amongst other qualifiers. Sellers have to maintain certain performance levels to earn and keep it. The buy box is the easiest way to increase your Amazon FBA income

Match Low Price for the Buy Box

This is a feature for Amazon sellers to quickly match the lowest price on Amazon for the products you offer. Going for the buy box price may not be feasible. Before clicking, explore the lowest prices to see if that is within your profit margins. As noted earlier you should be monitoring each individual SKU via COGs. Once you figure out the lowest possible price you can sell for, set an automated rule in Selling Coach. So you can win the buy box when it is favorable.

Warning: With the Amazon Pricing Parity Clause, you agree that your product pricing on other sales channels will NOT be lower than your Amazon prices. Otherwise, your Amazon Sellers account will be shut down.

What is the Amazon Accelerator Program?

Is your end goal to sell your Amazon business? Many entrepreneurs approach business as a means to make substantial returns on investments. With that in mind, the Amazon Accelerator Program may be for you. Amazon loves when brands exclusively sell on their platform. If your product is unique, manufactured, or only supplied by you, Amazon Accelerator is a fast track to success

Amazon will approach brands to sell exclusively on the marketplace. To speed up their discovery process, you can enroll your company in the program. Upon enrollment, your items will be tagged as “Our Brands.” Then your products will be heavily marketed to Amazon buyers.

an accountant selling a lot more units through the Amazon accelerated program

The Amazon Accelerator Program offers social media advertising, prime listing placement, and a solid review loop. Private label brands can test and review other private label brands. The feedback boosts store and product ratings. High ratings get products placed right in front of buyers. 

These well-priced, high quality items keep your profit margins high. There are a couple of caveats. Amazon charges brands a program fee to cover the cost of worldwide representation. If your products do really well, Amazon will likely purchase your brand. They retain the right to purchase your brand anytime within a short 60 day notice.

How Much Should you be Spending On Amazon Marketing?

Amazon Sponsored Product Ads aka Amazon PPC are a good way to get your products out to a larger audience. With the internal ad platform, you can create campaigns in minutes based on your current listings. A healthy budget for advertising can be determined by SKU analysis. Advertise a product when profit margins for an individual SKU are high, and Amazon fees are low. 

It doesn’t make sense to advertise a product that doesn’t have a high return. Instead try coupling that product with one of your better-selling SKUs, to generate attention, and eventually sales.

Amazon Sellers Can Scale With Accounting

This overview of accounting for amazon sellers, has the tools to help you gauge profitability for your amazon business. Set up your bookkeeping for Amazon with expert precision and benefit from clear sales reporting. In no time you will be gaining traction with your Amazon store. 

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