Proven Profit Calculation for Amazon Sellers

Proven Profit Calculation for Amazon Sellers

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Michael Schwartz

Amazon Sellers FBA Profits

One of the most important questions you're going to have to deal with as an Amazon seller is whether you made money or not. Now, this might seem like a pretty straightforward question, but what if I told you most sellers I speak with have a tough time figuring this out?

How come? They struggle with accounting and bookkeeping.

In fact, if you were to ask the rank and file Amazon seller, most are just winging it. That's really what they're doing because they don't have a rock-solid, bulletproof way to track their profit performance.

Make no mistake, if you're not using a cash flow statement, balance sheet or profit-loss statement, you really don't have a clue as to where your business is, where it's headed, and whether you're making money or not.

I wish I could tell you that this is a small thing. But unfortunately, if you just focus on revenues, you might find out too late that you're actually losing money hand over fist.

The bottom line is simple: you can't just focus on sales. You have to get a clear picture of your profits

I went through the same phase as an Amazon seller. I had a tough time trying to figure out whether my business was making a profit or not. I was eight months into the Amazon selling game and I was struggling because I was unclear regarding my Amazon costs.

I reached a point where it quickly became clear that if I did not get my accounting tools and business priorities together so I can clearly identify and contain costs, my Amazon business was going to die.

In fact, I originally created taxomate accounting tool for this same reason. I needed a way to export my transactions to QuickBooks (and later Xero) in order to easily run reports, including Profit Calculation.

Let's get one thing clear. It's easy to get excited about revenue, but this doesn't tell you anything about the overall health of your business. The question that you should be excited about is whether your business is profitable or not.

1. First Level Sales Analysis

Analysis FBA Seller

Your initial level of analysis involves the top key figures on the default view of the dashboard of your Amazon Sales. This just gives you a nice instant snapshot of how much you're selling during a particular sales period.

The first thing that stands out is Ordered Product Sales. This gives you a total revenue amount for the respective period.

Then you pay attention to the sales trend line. This is broken down in terms of time, so you can see which parts of the week a particular product is selling the most i

To make sure that your suspicion holds true, you might want to change the date setting of your dashboard report to cover a larger time frame. If the pattern holds, for example, if you sell most of your products on Thursday and Friday, then you're definitely on to a very important piece of information.

This impacts your marketing schedule. This might also impact your promotional scheduling. Maybe you can hold a special sale on those days to boost interest further.

2. Second Level of Analysis

Seller Reports

After we have looked at the overview of the sales dashboard, we then look at the payments report. This shows you how much your Amazon expenses impact your sales revenue. Please understand what this means because it boils down to your profits

On the Payments page, you will see the total amount of Amazon fees you had to pay. What makes this tricky is that you cannot just look at the number. You also have to look at the total revenue you have and then compare it with the total amount you have to pay.

For example, if your total revenue is $3,000 and your Amazon fees come out to $750, this means your fees are 25% of your total revenue.

You should have a mental cap for the fee percentage you can live with. If it turns out that you're paying more than that fee cap, you might want to switch products or look to make your promotion costs more efficient so as to drive up more sales, and this can lead to a lower overall Amazon fee percentage.

Use the Threshold Approach

Now that you have a clear understanding of the total percentage your Amazon fees take out of your revenue, the next step is to identify a target and use the threshold approach.

Look at your fee target percentage as a threshold. As long as these fees stay under this threshold, you're not going to freak out. You don't have to make important changes. However, just like in a flood, if the expenses creep up your threshold, you need to take quick action. Things get urgent quickly.

This means that you're going to have to investigate why your fees are so high, and this might mean that you have to make decisions. Either you are going to be more efficient regarding your ads, make certain changes to your promotions, drop promotions, or possibly switch product lines. This is a big deal.

What Options Do You Have Available?

Assuming that the threshold alarm goes off, what kind of decisions can you take? Well, first of all, you can raise your price. As you probably already know, when you do this, this might depress demand. You can also decrease your pay per click spending on Amazon.

These are the most obvious things you do, but keep in mind that this has a cascade effect throughout your whole operation. This can start a chain reaction that might increase your profitability or decrease it.

You can also work to slowly control the amount of FBA fees you pay. This takes a lot of research. You definitely don't want to do this kind of thing abruptly. You have to learn how FBA fees are calculated and then make small incremental changes to get your fee levels to where you want them to go.

Accounting for Refunds :(

Nobody seller wants to deal with refunds. However, don't let refunds discourage you. Use it as a learning point and a way to whip you into shape.

Click through to the Refund segment to quickly identify your product's rate of return. Again, use the threshold method.

Set a certain percentage of returns which will drive you to action. If the refunds do not reach that point, then you have nothing to worry about. However, if it turns out that you are hitting that refund threshold, you have to make certain key decisions.

Refunds are a part of an Amazon Seller's Life

I hate to say it, but you're going to have to get used to refunds. You can try to micromanage every individual refund you get, but let me tell you, you probably would be better off if you spend your time doing something else like growing your business.

Refunds are simply just built into the Amazon selling game. Amazon bends over backward for its customers. And, unfortunately, a significant amount of these interactions lead to refunds.

The truth is, Amazon is focused more on their buyers. Even with the most basic and shallow analysis, this makes all the sense in the world because they want their buyers to come back. If you leave, there are sure to be other merchants eager to replace you.

Sellers are not as important to Amazon. They're important, but buyers take a higher priority. I don't want you to get down about this, but I just want to give you a heads up. You just have to understand that refunds are just part of the game.

For my threshold figure for refunds, I stick to a target of around 6%. In other words, when I look at my total revenue figure, I take 6% off. If my actual refunds are below that amount, then I don't take any action. If it goes over that amount, I sit up and pay attention because I would have to make some important decisions.

Another way to calculate refunds besides using a percentage of revenues is to calculate it by comparing units refunded compared to the total number of units sold. With this approach, you're basing refund rates based on product count instead of dollar value.

To get this information, just simply go to Reports, then Business Reports, then Sales and Traffic. Filter using the pivot element on the column on the right side.

If you were to ask me, I would focus more on the cash value of the refunds because that's the bottom line. If you focus on unit numbers, this can be misleading because if you are selling many different products that vary tremendously in price, you might freak out too much over a lot of refunds of low-value products.

Similarly, you might not be alarmed when you get very little refunds but the ones that do are actually high dollar items. Do you see how this works? This might lead to you either getting a false sense of security or subjecting yourself to unnecessary stress.

Neither of these situations is good. That's why I stick to dollar value percentages as far as my refund threshold goes.

Closing Balance

Amazon Closing Balance Profit

Another key page I pay attention to is the amount listed under “Closing Balance in my dashboard. After I look at this page and see the figure, I go to my online bank account statement and compare the two figures. They have to match.

After going through all these different sub-reports, I can see that I'm in pretty decent shape with this particular product. My thresholds are okay.

Accordingly, I check these figures every two weeks. I also check when Amazon closes out the reporting period. Another good time to check is when Amazon gives you your payment statement.

3. Third Analysis Level

Going a little deeper, we click through to these Level 3 pages. Pay attention to three key sets of data.

Payments Report

Payments Report Amazon FBA

This feature produces the payment statement you get every two weeks. This is the raw line item report that makes up the Level 1 payment statement you checked out above

Why should you download this statement? If you're looking for a transaction by transaction record within a particular period, this is the report to get. You use this to ensure that your summary amount is accurate.

I use this basically to make sure that Amazon did not screw up in calculating how much they're going to pay me. Also, there might be some weird transactions that might need your attention. You won't be able to catch them unless you view this transaction by transaction table or report

Please note that when you see "Commission," it's the same as your "Referral Fee." Also, when you look at the Shipping section, you should look at that as a "Shipping Credit."

Also please note that there is an item called "Goodwill." Don't freak out if you see this. What happens is that when Amazon gets a customer complaint, it will make an adjustment. It would either refund or give a partial refund and then take out the amount from your transaction summary in the form of a goodwill charge.

Usually, they will return this back to you (as a credit) in the next period. It's usually put in the Miscellaneous Adjustment section.

It's very important to reconcile these. So if you see a Goodwill Adjustment, look for the next statement to make sure that you actually got that amount.‍

Transaction Report

Transaction Report

When you click through Reports>Payments>Transaction View>Select Dates>Download, you get a nice clean looking transaction report that details every transaction within that time frame. This also includes promotions.

I have to admit, the raw form of this report is hard on the eyes. You're basically just seeing lots of numbers broken down by date, order ID, SKU, and then a quick description of the transaction. Usually, this takes the form of either "Order Payment" or "Refund.

If you don't like looking at a raw data dump like that, you might want to turn this into a pivot table, to sum up, these figures and you get a nice little breakdown. Why should you do this? It seems very labor-intensive. It can also be quite confusing.

Well, despite all of that, when you go through this process of getting a pivot table summary, you figure out where your money is going, how it's being split up, what you paid Amazon, and the amount to expect from Amazon for the given reporting period.

There is one final Amazon expense you need to wrap your mind around. When you look at your pivot table, it should be clear that you did not find any advertising costs. You get this information in the third report below.

Amazon Pay Per Click (PPC) Reports

PPC Reports Amazon

Accessing this report is easy: go to Advertising> Campaign Manager > See Ad Reports (little button icon over "Daily Budget") > Request Report > Download.

When you get this information, you get a clear idea of how much you spend to advertise and how much sales you got as a result of your campaign. Once you have all this information, you can make better decisions regarding your product choices, your paid promotion campaigns, and other activities as an Amazon seller.

Disclaimer: The above information is made available on a good faith basis and is intended only for general education. The article should not be construed as tax or legal advice. We recommend getting in touch with a duly certified tax professional or CPA to assist with any topics raised by this article.

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Michael Schwartz
Michael is the CEO and co-founder of taxomate, one of the leading eCommerce accounting integration software solutions.