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If you own an Amazon business or sell products online using any platform, then you probably already know every penny counts! Between platform fees, the cost of ads, and the cost of the inventory itself, there just isn’t a lot left over for the owners if you’re not careful, or sometimes even when you are.
Therefore, the last thing you want to do is lose more money in ways you could easily avoid, right? But unfortunately, we see it all the time.
The goal of this guide is to show you five things that can take money out of your pocket that you can avoid just by making some smart decisions once you know what to do.
Mistake 1: Profit Killing SKUs
When you only have one SKU and one product, it’s pretty easy to be aware of whether it’s making money for you or not. At least, it better be! As you grow, however, it’s also easy to start losing track of the individual products as you just look at the overall sales and the bottom-line profits. And what happens is, you start to have products that just aren’t performing well but their results may be masked by other products that are still pulling their weight.
In a real-world store, you can’t have empty shelves so you may be forced sometimes to stock products that don’t sell well or don’t sell very fast just to keep the place looking good. In the online world, however, you have no such requirement! You should never carry any product that doesn’t make a profit on its own merit. If it sells too slowly, or for too low a price, then either get rid of it, raise the price, or negotiate to get it at a lower cost.
But don’t let it simply sit there, losing money and tying up dollars that could be used for inventory that actually does sell well and make you money. It sounds obvious when we say it, but we see clients all the time who are sitting on inventory that is losing them money every time they sell one. The solution is to do a Profit by SKU report and make sure every single thing you sell is making you money. If it’s not, it has to get fixed or it has to go!
Mistake 2: The Sole Prop Tax Penalty
If your business is set up as a single member LLC, you may be paying a lot more in taxes than you need to be! When you are an LLC then you are paying self-employment tax on every dollar you make in profit (even if you aren’t paying yourself!) at a rate of 15.3%! This is because, unless you do something else, a single member LLC is taxed the same as a sole proprietorship and that means ALL your income is subject to self-employment tax.
That means if you make $100, you end up with only $85 before income tax! Then you also pay income tax on $92.50 of that $100! Ouch!
So what’s the solution? If your business is profitable and earns more than $25K in a year in profits, you are very likely going to save in taxes by doing what’s called an “S Election” for the business. This tells the IRS you want your business to be treated as an S Corp for tax purposes (although for legal purposes you remain an LLC). When you do this, you can then pay yourself a portion of the profits as wages, which are subject to the same payroll tax as above, but the rest of the profits are not!
As the business gets bigger, so do the savings. If you are profiting $100K in a year, but paying yourself waves of $25K, for example, the savings on payroll taxes would be over $11,000!
There are some more rules as to who can do this and when it can take effect, but it’s 100% worth checking out and we would say 90% or more of our clients making at least $50K a year are set up this way. If you’re not, it’s very likely that you’re giving away a lot of money you could be legally keeping! Ask us or your CPA (if they understand ecom sellers well) about if this is something you can do.
Mistake 3: Destroying Enterprise Value
Did you know that oftentimes the biggest value in your ecom business is the business itself? It’s true! We’ve seen many sellers grind for years taking barely a penny from the business and then end up selling it for seven figures! The reason of course is that in a growing business like this, nearly all the cash gets invested in more inventory to fuel the growth. The business is profitable on paper but there is never any left over in the bank account. When it finally comes time to sell though the business is able to generate a high value because of its profits on that same paper.
But this is only true if you don’t screw up now and really diminish the value of the business with bad decisions. Here are things that hurt your business value and may be the single costliest types of mistakes you can make:
- Co-mingle personal funds in with the business
- Co-mingle several brands into the same account
- Co-mingle different businesses together (ecom + consulting + rental real estate, for example)
- Not keep accurate, accrual-based financials
- Not filing accurate tax returns
- Generally, be disorganized and sloppy with your record keeping and business operations
By doing any of the above (or more than one) you are hurting your chances of getting top dollar for the business or in some cases being able to sell at all. Selling may seem like something far off but you never know what opportunities may come along so it’s good practice to always operate as if you could sell at any moment.
Being able to realize a six-figure, seven-figure, or even eight-figure value for the business is not only a reachable goal but one that we’ve seen happen over 400 times in the last few years. An ecom business is a valuable commodity as long as it’s got provable results and clean financials. If you avoid the above mistakes you’ll be able to expect a very profitable exit.
Mistake 4: Not Using the Data to Make Decisions
In order to decide what SKUs to keep and which to ditch, when to consider an S Election, and how much your business would be worth if you sold today, you need to have excellent financial data. This means solid ecom specific bookkeeping, done on an accrual basis each month and then actually reviewed by you!
Most bookkeepers have no idea how to do the bookkeeping for Amazon sellers or ecom business owners because it is really a specialty in the field. Many are also confused about how to do it on accrual or the tax implications of doing so.
For all the time and effort you put into your business, you shouldn’t make the mistake of not actually tracking the true profits and managing using solid financial data vs just looking at the bank balance or getting sloppily prepared bookkeeping from someone who isn’t an expert.
When you are using the data correctly to make data-driven decisions, you can both increase profits and cut costs that you would not be aware of, never mind reacting to, if you didn’t have this data. These businesses are simply too involved to “wing it” and hope for good long-term results!
Mistake 5: Not Keeping on Top of COGS Costs
Many sellers spend a long time searching for the perfect product to launch their business and more time finding the right supplier. Once that’s done though, it often seems to be forgotten in the search for the next product. Getting your inventory at the lowest possible price, however, is really a job that never should end.
As you do more volume you should be looking at price breaks and also keeping an eye out for alternate suppliers. You can also revisit the packaging and see if there are ways to cut back on that cost, size, weight, etc.
Many of our clients have been able to save a lot and at the same time get better terms, MOQs, quality, and service by simply continuing to check on their options and compare vendors. If you don’t then chances are you are leaving money on the table or may even run into out-of-stock issues or quality control problems by getting complacent.
There are many ways this can hurt you aside from falling profits! Bad reviews and higher shipping for small orders to cover gaps can all add to the stress and cost of running an inventory-based business. Keep a close eye on your cost of goods sold by SKU and as a percent of income to ensure you are holding your margins steady or improving and not falling off in the wrong direction.
Taken together, these five simple tips for managing the financial side of your ecom business should help you make significant improvements in your profitability and avoid leaving money on the table. On the other hand, ignoring them is absolutely going to cost you!
About the Author: Matt Remuzzi is the founder of CapForge Bookkeeping & Tax, an accounting firm that specializes in working with Amazon and ecom sellers to provide low-cost, fixed-rate bookkeeping and tax services that help owners grow profits and save on taxes!
Legal Disclaimer: The articles published on our platform are for informational purposes only and do not constitute legal advice in any form. They are not intended to be a substitute for professional legal counsel. For any legal matters, it is essential to consult with us or a qualified attorney who can provide advice tailored to your specific situation. Reliance on any information provided in these articles is solely at your own risk.