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Financials and pricing

November 15, 2023

How to Build a Reliable Profit and Loss Statement for Your Amazon Business?

Building a reliable profit and loss (P&L) statement is essential for effectively managing your Amazon business. This article offers a comprehensive guide on how to create a reliable P&L statement, covering key steps such as revenue tracking, cost calculation, fee accounting, and financial data analysis. By following these steps, you can gain valuable insights into your business's financial health and make informed decisions for growth and profitability.‍‍

Selecting the Right Data Source

In the first step towards constructing a robust Profit and Loss (P&L) statement for your Amazon business, selecting the right data source is pivotal. Here's a breakdown of the options available:

  1. Amazon Seller Central: This platform offers a variety of reports, each with its own set of advantages and challenges.

    - Transactions Report:
    Pros: Offers real-time data, giving you the most current snapshot of your transactions.
    Cons
    : This report requires manual effort to integrate and can be cumbersome to manage.

    - Settlement Reports
    :
    Pros
    : These reports are well-formatted, making them easier to read and interpret.
    Cons
    : They are extremely detailed and specific to each marketplace, and not available in real-time. This could lead to a lag in the data reflected in your P&L statement.

    - Financial Event API
    :
    Pros
    : Provides real-time data, allowing for up-to-the-minute financial tracking.
    Cons
    : It’s technical in nature and integrating it can be challenging, especially if you don’t have a strong IT background.
  2. Amazon Advertising: For those who need to track advertising data at a granular level.

    - Advertised Product Report:
    This report is crucial for real-time and SKU-level advertising data analysis. It helps in understanding the direct impact of advertising efforts on product sales and profitability.

Each of these data sources has unique features that can benefit different aspects of your P&L statement. Your choice should depend on your specific needs, such as the level of detail required, the frequency of data updates needed, and your technical capability to integrate these data sources. Remember, the goal is to gather comprehensive, accurate, and timely data to inform your financial decision-making effectively.

Defining Time Aggregates

When it comes to analyzing your Amazon business’s financial performance, how you aggregate time can significantly impact your insights. We recommend focusing on three key time aggregates: monthly, quarterly, and yearly. Let's delve into why these particular aggregates are vital:

  1. Monthly Aggregate:
    This provides a near-term view of your business's financial health. A monthly check-in helps in identifying immediate trends, seasonal variations, and the effectiveness of short-term strategies. It's a granular enough timeframe to allow for quick adjustments in your business approach.
  2. Quarterly Aggregate:
    A quarter provides a broader perspective, smoothing out monthly anomalies and offering a clearer picture of sustained trends and patterns. This timeframe aligns well with business planning cycles and is ideal for assessing the impact of strategic initiatives and marketing campaigns.
  3. Yearly Aggregate:
    Annual aggregation is essential for long-term financial planning and growth strategies. It offers a high-level view of your business’s overall health, success in meeting yearly goals, and insights into year-over-year trends. This perspective is critical for strategic planning, budgeting, and forecasting.

While more detailed time frames, like weekly or daily, might seem appealing for their granularity, they often lead to a loss of focus and an overwhelming amount of data to sift through. This can hinder the ability to identify meaningful patterns and make informed decisions. By concentrating on monthly, quarterly, and yearly aggregates, you can maintain a clear focus on your business’s financial trajectory, ensuring that your P&L statement is both manageable and insightful.

Incorporating Product COGS

One critical aspect often missing from Amazon reports is the Cost of Goods Sold (COGS) related to your products. For a comprehensive and accurate Profit and Loss (P&L) statement, it's essential to integrate COGS manually. Here’s how you can effectively incorporate your product COGS:

  1. Understanding COGS:
    COGS includes all the direct costs associated with the production and preparation of your products for sale. This encompasses not just the purchase price, but also direct labor, material costs, manufacturing expenses, packaging, and shipping to Amazon's fulfillment centers.
  2. Beyond Amazon Data:
    Amazon’s reports provide valuable insights into sales and fees but do not cover the entire spectrum of your business expenses. To fill this gap, ensure you include all costs that are not part of Amazon's data in your COGS calculation. This might include indirect costs like warehousing, quality control, and any other overheads directly tied to your product.
  3. Handling Multiple Currencies:
    For sellers operating in multiple Amazon marketplaces, currency conversion becomes a crucial factor. Be meticulous in converting all costs to a single currency for uniformity in your P&L statement. This will provide a more accurate financial picture and prevent inconsistencies due to currency fluctuations. Utilize the average exchange rate over the period of the COGS calculation to maintain consistency.

By diligently incorporating these elements into your COGS, you can ensure that your P&L statement accurately reflects the true cost of selling your products on Amazon. This level of detail is crucial for understanding your business's profitability and making informed decisions to drive growth and efficiency.

Managing Inventory Adjustments

Inventory adjustments are an inevitable part of managing an Amazon business and can have significant implications for your Profit and Loss (P&L) statement. These adjustments come in various forms, and understanding how to account for them is crucial.

  1. Reimbursements by Amazon: In certain scenarios, such as damaged or lost inventory, Amazon reimburses sellers. These reimbursements should be accurately recorded in your financial statements. They often appear as credits but should be treated differently from sales revenue to maintain clarity in your P&L statement.
  2. Compensating for Loss in COGS: When Amazon reimburses you for inventory adjustments, this compensation should reflect as a reduction in your Cost of Goods Sold (COGS). This adjustment is necessary to accurately represent the cost of inventory that was either unsellable or reimbursed by Amazon, ensuring your P&L statement accurately reflects the true cost of goods sold during the period.
  3. Addressing Inbound Shipment Gaps: Pay special attention to discrepancies in inbound shipments. These gaps can occur due to various reasons, like shipping errors or inventory miscounts. It’s important to track these discrepancies and adjust your inventory records accordingly. This ensures that your COGS and overall inventory valuation on the P&L statement are accurate and up-to-date.

Effectively managing these inventory adjustments is critical for maintaining the accuracy of your P&L statement. It helps in providing a true picture of your business’s financial performance and aids in making informed decisions.

Defining Profit and Loss Aggregates

Creating a meaningful Profit and Loss (P&L) statement for your Amazon business involves distilling Amazon's detailed data into key aggregates that directly impact your Profit & Margin (P&M). Focus on these essential aggregates:

  1. Gross Margin: This crucial metric represents the core profitability of your products, calculated as sales revenue minus the cost of goods sold (COGS).
  2. Refunds: Monitor the total amount refunded to customers, as this directly affects your net sales and overall profitability.
  3. Adjustments: Account for inventory adjustments, which could include discrepancies, damages, or losses, impacting your financial bottom line.
  4. FBA Service Fee: Include fees related to Fulfillment by Amazon (FBA), as they are significant costs associated with using Amazon's fulfillment services.
  5. Advertising: Factor in the costs of Amazon Advertising, which are vital for driving sales but also affect your net profit.
  6. Service Fee: Don’t overlook various service fees charged by Amazon, which can include referral fees, subscription fees, and other operational costs.

By focusing on these aggregates, your P&L statement will more accurately reflect the financial health and operational efficiency of your Amazon business.

Allocating Shared Costs

In managing your Amazon business's financials, a crucial aspect is the allocation of shared costs. This includes costs like Advertising, Fulfillment by Amazon (FBA) service fees, and various Service Fees. Typically, these costs are not broken down per sales channel or per SKU in Amazon's reporting, yet they significantly impact your Profit and Loss (P&L) statement.

To address this, it's essential to reallocate these shared costs using a relevant allocation key. This approach involves distributing the costs proportionally across different SKUs and sales channels based on specific criteria, such as sales volume, revenue generated, or other relevant metrics. By doing so, you gain a more accurate and fair representation of each SKU's profitability and the cost-effectiveness of each sales channel. This precise allocation is key to making informed decisions about pricing, marketing strategies, and inventory management, ultimately enhancing the financial health of your business.

Utilizing Real-time Advertising Data

In the dynamic landscape of Amazon selling, the way advertising costs are reported and utilized in Profit and Loss (P&L) statements requires a strategic approach. Typically, Amazon includes advertising costs in monthly reports for each marketplace, offering a 'cash vision' perspective. However, for a more accurate and actionable P&L statement, it's imperative to shift towards a real-time view and allocate these costs at the SKU level.

Real-time tracking of advertising expenses ensures that you're always up to date with how much is being spent on promoting each product. This approach allows for immediate adjustments in advertising strategies based on current performance, rather than waiting for monthly reports. By allocating these costs down to the SKU level, you gain a clearer understanding of the direct impact of advertising on the profitability of individual products. This detailed insight is crucial for optimizing ad spend, adjusting pricing strategies, and improving overall financial management.

Navigating VAT in P&L Statements

Effectively managing Value Added Tax (VAT) is a critical component in the accuracy of Profit and Loss (P&L) statements for Amazon sellers. It's essential to approach your P&L analysis with all figures excluding VAT to maintain clarity and compliance, especially when operating across different countries with varying VAT regulations.

Leveraging Amazon marketplace P&L Software Solutions

In today's fast-paced e-commerce environment, leveraging advanced software solutions for Profit and Loss (P&L) management can significantly enhance the accuracy and efficiency of financial tracking. Platforms like Omny offer a sophisticated approach to P&L calculation, specifically tailored for Amazon sellers. These software solutions automate the complex process of data aggregation and calculation, providing precalculated P&L statements that reflect the true profitability of your Amazon channels.

By using such tools, sellers can bypass the tedious manual process of compiling and analyzing vast amounts of data. This not only saves time but also reduces the likelihood of errors, ensuring a more accurate financial overview. These platforms are designed to handle the intricacies of Amazon sales, including aspects like COGS, VAT, advertising costs, and more. Adopting a software solution like Omny is a strategic move to ensure comprehensive and precise monitoring of your Amazon business's profitability, aiding in making more informed decisions for sustained growth.

Conclusion

Building a reliable profit and loss (P&L) statement is crucial for managing your Amazon business effectively. By accurately tracking revenue sources, calculating costs precisely, accounting for fees, and handling taxes correctly, you can create a reliable P&L statement that provides valuable insights for informed decision-making. Regularly review and analyze your P&L statement to optimize your business's financial performance and drive growth on the Amazon platform.