Increase Amazon FBA Profits Today: Tips From A Finance Graduate Turned Entrepreneur

Managing an Amazon business can be both rewarding and challenging, especially when it comes to increasing profitability. As a finance and accounting graduate with experience in analyzing accounts and business operations, I will share several strategies that can help improve your profit margins. In this post, we will explore various accounting methods, cash flow management, product-level analysis, and other key metrics that impact profitability. Let's dive in.

Understanding Cash vs. Accrual Accounting

One of the first concepts to grasp when managing your Amazon business is the difference between cash and accrual accounting. For those without an accounting background, this may seem like a foreign concept, but it’s crucial to understand the nuances.

Cash Accounting

Most small businesses, especially those just starting out, use cash accounting. Under this method, transactions are recorded when money enters or leaves your bank account. For businesses with revenue up to seven figures, cash accounting is simple and easy to manage.

A major advantage of cash accounting is its simplicity in cash flow forecasting. Predicting your future cash flow is crucial for ensuring you have enough funds to cover orders, shipments, and other major expenses. Many businesses fail not because they aren't profitable, but because they mismanage cash flow. Cash flow forecasting ensures that your company has enough cash to sustain its operations through the next quarter.

Accrual Accounting

Accrual accounting, on the other hand, records revenues and expenses when they are incurred, rather than when the cash is received or paid out. For example, if you place a $20,000 inventory order, you record the expense when the sale is made, rather than when the money leaves your account. This method provides a more accurate picture of profitability.

While accrual accounting might not improve cash flow directly, it helps business owners understand their profitability on a month-to-month basis. This is vital for long-term planning and allows you to make informed decisions about future investments.

A Combination of Both

In practice, many businesses—especially those approaching the seven-figure mark—use a combination of cash accounting for tax filing and tools that provide accrual-based insights. Tools like Sellerize and Sellerboard offer valuable insights by showing you product-by-product profitability, helping you track performance on an accrual basis.

Digging Deeper: Business and Product-Level Performance

After getting a grip on your accounting method, the next step is to analyze your business performance at different levels.

Business-Level Performance

At the highest level, you need to monitor your total sales, ad spend, and overall profitability. But what if business performance isn't meeting expectations? It’s important to break things down further to identify the root causes of underperformance.

Product-Level Analysis

Your business is made up of multiple products, and not all products perform equally well. If sales are lagging, it's essential to look at the performance of individual products. Often, you’ll find that while some products are doing great, others are underperforming. This insight allows you to focus your efforts on the specific products that need improvement.

Niche-Level Insights

Going even deeper, you should analyze your products at the niche or market level. For example, if you're selling coffee cups, it’s important to examine the search terms associated with that product. By using search term reports or software tools, you can gain valuable data on click-through rates, conversion rates, and the cost of advertising for each market.

Understanding both paid and organic performance is key. If 50% of your traffic comes from ads and the other 50% from organic search, analyzing the true advertising cost of sale (ACOS) for each product or market will give you a clearer picture of overall performance. This type of granular analysis is essential to identify weak spots and take steps to improve profitability.

Managing Large Inventories

For businesses with hundreds or thousands of products, it’s unrealistic to analyze each product individually. In such cases, it’s more efficient to break down your products into groups based on factors like marketplace or niche. This allows you to focus on broader categories before diving into individual products.

Stockouts: A Key Driver of Profit Loss

One often overlooked aspect of inventory management is stockouts. When a product goes out of stock, you lose sales opportunities and damage your search ranking, which can be difficult to recover. Proper inventory management ensures that your most profitable products are always in stock.

ABC Analysis

ABC analysis is a helpful tool for inventory management. In simple terms, not all products contribute equally to your profit. Some are high performers (A products), others contribute moderately (B products), and some barely make a profit (C products). By prioritizing inventory for your A products, you can ensure that stockouts don’t occur where they would hurt the most.

In the past, I and my team made the mistake of treating all products equally when it came to inventory management. By focusing more on our high-profit items, we not only avoided stockouts but also had a record-breaking quarter of $300,000 in sales.

Shipping Evolution

Shipping logistics also play a vital role in determining profitability. Early in your Amazon journey, shipping products by air or through LCL (Less than Container Load) shipments may be necessary to test the market. However, the real profit lies in Full Container Loads (FCL).

As soon as you can shift from LCL or air shipments to full 20-foot or 40-foot containers, your shipping costs per unit decrease significantly. The economies of scale achieved through FCL shipments can dramatically boost your profit margins, especially when scaled to quarterly shipments.

Negotiating with Suppliers: The Power of Three-Order Pricing

Another strategy to improve profitability is by negotiating with suppliers using a three-order approach. Rather than negotiating based solely on your first order, which is usually smaller, you should plan for future, larger orders that will have lower price points due to economies of scale.

Negotiate prices for minimum order quantities (MLQ), medium-sized orders, and high-volume orders upfront. This allows you to plan for the long-term lifecycle of your product and understand where future cost savings will come from as your order quantities grow. This approach can prevent sudden price increases from suppliers and ensure you're maximizing your profit potential with every order.

Expanding to New Marketplaces

Expanding into new marketplaces is another relatively simple way to increase profits. If your product is already performing well in one market, replicating that success in another market can be a low-effort, high-reward move.

For example, expanding from the U.S. to Canada is now easier than ever. With fulfillment services that allow products to be shipped from the U.S. to Canadian customers, the expansion process can require only a few hours of work each year while generating significant additional profit. Similarly, expanding within Europe, from the UK to Germany or Germany to France, can open up entirely new revenue streams with minimal additional effort.

In many cases, you’ve already invested in optimizing your product listings, ads, and content for one marketplace. By simply replicating these efforts, you can unlock 10%, 50%, or even 100% more profit without reinventing the wheel.

Final Thoughts

These are just a few of the strategies that can help you boost profitability in your Amazon business. Whether it’s mastering accounting methods, optimizing inventory management, or expanding to new marketplaces, each approach offers a unique opportunity to grow your bottom line. Be sure to analyze your business at every level and take advantage of economies of scale to maximize your profits.