Welcome to Basilio Inc. Build. Grow. Exit Big: The Professional’s Guide To Selling On Amazon. If you’re thinking about starting up your own business as an Amazon seller, stick around, because you’ve come to the right place.
Amazon is the world’s largest ecommerce site. As of 2018, Amazon had $233 billion in revenue, and more than 5 million third-party sellers currently operate across Amazon’s 12 worldwide marketplaces. So selling on Amazon represents a huge opportunity—if you know where to start and what to keep in mind as you build your Amazon seller business. In this comprehensive guide, you’ll learn everything you need to know about selling on Amazon. Here’s what to expect as you make your way through it!
Crash Course in Accounting
To effectively run a business, it is essential to understand how to keep track of your financial performance. This entails acquiring knowledge in accounting principles and becoming proficient in relevant computer software that supports your specific business operations. By attending educational courses and familiarizing yourself with accounting practices, you will be equipped with the skills to accurately track and analyze your business’s financial transactions, manage budgets, generate financial reports, and make informed decisions to drive growth and success. Additionally, mastering the use of appropriate computer software will enable you to streamline financial processes, enhance efficiency, and maintain accurate records of your business activities. Investing time and effort in acquiring this knowledge will empower you to effectively monitor and assess the financial health of your business.
Top Ten Do’s
- Gain a solid understanding of basic accounting principles before starting your business. Consider attending relevant courses or seeking formal education if necessary.
- Consult and engage an accountant who is knowledgeable about your industry before you launch your business.
- Determine the most suitable accounting software program for your business needs.
- Initially, handle your own bookkeeping to develop a comprehensive understanding of your company’s accounting processes.
- Establish inventory policies and internal controls that include measures to prevent fraud and dishonesty.
- Regularly reconcile your bank account at least once a month upon receiving your bank statement.
- Maintain and update your cash flow spreadsheet on a monthly basis to effectively monitor your company’s financial position.
- Consider outsourcing your payroll and payroll reporting to a reputable payroll service provider.
- Review your financial statements at least monthly to track the financial performance of your business.
- Keep your business records separate from your personal records to ensure clarity and accuracy.
Top Ten Don’ts
- Do not delegate the authority to sign checks to anyone else.
- Avoid using funds withheld for payroll taxes or sales taxes for other purposes.
- Refrain from mixing personal assets with your business assets.
- Do not delegate cash flow projections, as they serve as a critical tool for managing liquidity.
- Avoid being overly optimistic in sales projections or overly conservative in expense projections.
- Do not rely on verbal agreements for important matters, including purchases. Always document agreements in writing.
- Never pay an invoice without verifying it against your purchase order.
- Do not delegate the relationship with your lending sources; maintain a direct and proactive involvement.
- Do not wait until you need financing to establish credit sources; proactively build credit relationships in advance.
- Seek advice from your accountant and lawyer on significant financial matters, and do not overlook their expertise and guidance.
Three Types of Accounting
It is essential for business owners to have a comprehensive understanding of the three primary types of accounting.
These include:
- Financial Accounting: This type of accounting involves presenting information in the form of general-purpose financial statements such as balance sheets and income statements. It focuses on providing an overview of the company’s financial performance and position.
- Managerial Accounting: Managerial accounting is concerned with providing the information necessary to keep the business financially healthy. It includes both recorded transaction data and estimates based on assumptions, helping companies make informed management decisions.
- Tax Accounting: While CPAs typically handle business tax preparation, business owners must also comply with government regulations related to income, sales, and payroll taxes. Failing to report and pay these taxes can result in serious consequences.
Importance of Understanding Accounting Types
It is crucial not to rely solely on bookkeeping systems for managerial accounting. Most organizations do not have an all-in-one transaction database that provides every relevant report for management decisions. Instead, businesses often utilize various reporting tools, including channel management software, third-party marketplace tools, and direct marketplace channels, for inventory management, sales reporting, and SKU-level profit analyses. These tools are frequently more beneficial for making informed business decisions than traditional bookkeeping systems.
Financial Statements
Your business’s financial health will be evaluated based on three fundamental financial statements: the balance sheet, the profit and loss statement, and the cash flow statement. Understanding these statements is vital, as they provide key insights into your company’s financial performance.
Here’s what you’ll learn:
- The balance sheet reveals the value of your business and its assets.
- The profit and loss statement indicates whether your business is profitable or not.
- The cash flow statement predicts future cash balances, providing crucial insights into your company’s liquidity
Accounting Education
As a business owner, it is crucial to have a solid understanding of accounting principles and measurements. Familiarizing yourself with these measurements will enable you to make informed decisions and effectively manage your finances. Furthermore, having accounting knowledge is essential for evaluating competitors or potential acquisition targets and drawing intelligent conclusions.
To gain the necessary accounting knowledge, consider enrolling in accounting courses at a local community college. These courses will provide you with a comprehensive foundation in accounting principles and practices. Additionally, it is advisable to consult with accounting professionals before starting your business. Certified Public Accountants (CPAs) or large accounting firms can offer expert advice across various areas, although their fees may be higher. Enrolled Agents (EAs), who have passed a taxation test administered by the Internal Revenue Service, are another type of accountant you may consider. When selecting a bookkeeper, seek referrals from CPAs or EAs, as there are currently no national certification standards for bookkeepers.
Talk to the Professionals
The role of a bookkeeper can vary from bill payment and receipt processing to providing comprehensive bookkeeping services that can be summarized for tax returns prepared by your CPA or EA. If you require assistance with business organization and the preparation of income and payroll tax returns, engaging the services of a CPA or EA is recommended. However, the more you learn and handle routine bookkeeping tasks yourself, the better equipped you will be to work with a higher level of expertise from accounting professionals.
Accounting Software
Choosing the right accounting software for your business is crucial, and your accountant can provide valuable guidance in making this decision. To determine the most suitable software, consider seeking recommendations from trusted individuals in your industry who have experience with different software options. If you are using QuickBooks, you can explore tools like MyBizHomepage, which offers convenient financial snapshots accessible through any web browser. It is essential to find software that meets your business’s specific needs and streamlines your accounting processes.
Payroll Accounting
Managing payroll accounting and reporting can be complex, particularly as your business grows and you hire employees. Research payroll accounting service providers in your area, and consult with your accountant for recommendations. Outsourcing payroll functions can be cost-effective and alleviate the burden of handling this intricate aspect of your business operations.
Accountant as Advocate
Building strong banking relationships and securing financing for future needs are vital steps for any business.
Your accountant can play a crucial role in this process by assisting you in various ways:
- Preparing cash flow control statements that estimate your business’s future cash needs.
- Creating a personal financial statement that includes a balance sheet of your personal assets and liabilities, along with an income and expense statement showcasing your monthly cash flow. Banks often require a personal guarantee for financing.
- Connecting you with a banker who has prior experience working with your accountant, which can facilitate the process and enhance your credibility.
- Assisting in polishing your business plan to present to your banker.
- Ensuring that your financial statements and other relevant information are well-organized and presented in a neat and orderly manner, which is crucial for a positive impression during financial discussions.
Methods of Accounting
When starting your business, it’s crucial to determine the accounting method you will use.
There are two primary types:
Cash Basis Method: This method recognizes income when cash is received and expenses when bills are paid. It is commonly used by service-based businesses due to its simplicity. Under this method, income is recorded when it is physically received, and expenses are reported when they are actually paid. Sole proprietors and businesses with no inventory often prefer the cash basis method.
From a tax perspective, using the cash method can be advantageous for new businesses. It allows income to be deferred to the next tax year while immediately counting expenses.
Accrual Method: Under the accrual method, revenue and expenses are recorded as they occur, regardless of cash transactions. For example, a sale on credit is recorded when the invoice is generated, not when the cash is received. Similarly, expenses are recognized when materials are ordered or when work is performed, regardless of the actual payment date. The accrual method is generally required for corporations with annual sales exceeding $5 million and businesses with inventory. It is also recommended for businesses that operate on credit to match income and expenses accurately.
Choosing between the cash and accrual method depends on various factors. Corporations, businesses with high sales, and those dealing with inventory are typically required to use the accrual method. Small cash-based businesses or service companies may find the cash method more suitable. It is advisable to consult with your accountant to determine the appropriate accounting method for your business.
By understanding the distinctions between the cash and accrual methods and seeking professional advice, you can select the most appropriate accounting approach for your specific business needs and comply with relevant tax regulations.
Keeping Separate Business Records
Before starting your small business, it is important to set up a separate business account, even if you are a sole proprietor. This separation of business and personal records will facilitate the management of your finances and make it easier for you and your accountant to handle income taxes when the time comes. Your accountant can assist you in preparing and establishing company accounts, including setting up checking and savings accounts for your business operations.
Tax Liability Issues
There are several tax liability matters that you and your accountant need to address
Income Taxes: As a sole proprietor, your business activity will be reported on Schedule C, which is attached to your IRS Form 1040. In addition to income tax on business income, sole proprietors are also responsible for paying self-employment tax, which includes social security tax. This can come as a surprise for new small business owners who may not anticipate paying roughly 15% of net income for social security tax on top of income tax. Operating as a partnership or LLC does not exempt partners from paying self-employment tax. Your accountant can help you set up estimated tax payments to alleviate the burden of final tax bills and avoid penalties for non-payment.
Payroll Taxes: If you have employees, your accountant can assist you in applying for state and federal payroll numbers required for filing payroll tax returns. The federal number, known as a Federal Employer Identification Number (FEIN), can be obtained using form SS-4. Each state has its own requirements, such as applying for a state identification number in California to pay state withholding tax and state disability insurance. State unemployment tax is also applicable, and additional taxes may be unique to your local situation.
Financial and Technical Assistance
There are various sources of financing and technical assistance available to start-up businesses, provided by organizations and agencies that aim to support small business development. While your accountant may not be familiar with all these sources, it would be beneficial to inquire about their knowledge in this area before hiring them. Financial and technical assistance may be available through entities such as:
- The Small Business Administration (SBA): They offer SBA-guaranteed loans for businesses, facilitated through banks.
- Local community banks funded by the federal government.
- Tax incentives for hiring minority employees.
- Trade organizations.
- Service Corps of Retired Executives (SCORE): A nonprofit organization dedicated to helping small businesses succeed, offering workshops, seminars, and the opportunity to connect with experienced individuals who have traveled a similar path.
Internal Controls
Internal controls play a crucial role in safeguarding the handling of funds, whether in the form of cash, checks, or credit cards, during transactions for goods and services. The objective is to ensure that all income earned by the business reaches its intended destination without any losses due to waste, fraud, dishonesty, or negligence. Even a financially sound business can be susceptible to internal failures without effective internal controls. Your accountant can assist in establishing suitable controls tailored to your specific business needs.
Within internal controls, it is essential to have a comprehensive damage control plan in place to prepare for potential adversities. For manufacturing or retail businesses, implementing inventory policies and controls is vital as inventory, like cash, can disappear rapidly due to negligence or employee misconduct. Early on in the process, safeguards must be established to regulate the authorization of goods and services and monitor their release after processing is complete.
As you can discern, when selecting an accountant, it is advantageous to seek someone with experience in your industry. This expertise will enable them to offer insights and guidance specific to your business’s internal control requirements, contributing to its overall integrity and protection against internal risks.
Quarterly Returns
Quarterly returns encompass crucial obligations such as payroll tax returns and sales tax returns. For start-up businesses, it is essential to file quarterly payroll tax returns, ensuring that the withheld funds from employee paychecks, along with the employer’s portion of social security taxes, are submitted to the federal government. Similarly, state income taxes withheld and state unemployment taxes paid by employers must be accurately accounted for.
From the outset, it is vital to prioritize meeting these tax obligations within the designated timeframes to avoid penalties or non-compliance issues. Although start-ups often face cash constraints, it is crucial not to delay payments to government agencies. Delinquent taxpayers receive little leniency, making timely payments imperative.
Furthermore, in states that impose sales tax, the funds collected from sales must be promptly remitted to the state. The frequency of submission, either monthly or quarterly, depends on the sales volume of your business. Quarterly reports are required to demonstrate the amount collected and the timely submission of these funds to the state.
By diligently fulfilling these quarterly obligations, you will establish a solid foundation for compliance with governmental requirements, ensuring the smooth operation of your business and minimizing any potential repercussions.
Bank Account Reconciliation
As previously suggested, establishing separate business accounts is crucial for effectively tracking expenses and business income. To ensure accurate financial management, it is important to reconcile your bank account at least once a month upon receiving your bank statement. Learning to perform this task yourself can save costs, and your accountant can provide guidance if needed.
Reconciliation involves comparing the balance in your checkbook to the bank balance, accounting for any discrepancies resulting from checks you have written that have yet to be cleared by the bank. In such cases, your checkbook balance will be lower than the bank statement balance, as the bank has not yet processed those checks.
Therefore, it is vital to deduct the outstanding checks from the bank balance and compare the resulting figure to your checkbook balance. When these two figures align, it indicates that the account has been successfully reconciled. By diligently conducting this process, you can maintain accurate financial records and ensure that your business accounts are in order.
Employee Benefits Policy
As your business expands and you hire more employees, it becomes essential to establish an employee benefits policy.
Several key decisions need to be made in this regard
- Working Hours: Determine the standard number of hours employees will work, considering both full-time and part-time positions.
- Holidays: Define the holidays on which employees will be entitled to time off.
- Vacation Policy: Establish guidelines for employee vacations, including accrual, scheduling, and approval processes.
- Medical Expenses and Insurance: If you choose to cover medical expenses or provide medical insurance, carefully consider the type of policy you will offer. Options may include HMOs, PPOs, or plans that allow employees to select their own doctors.
- Sick Leave: Decide on a sick leave policy, such as whether employees will receive paid leave when they are ill or if such time off will be considered unpaid.
Ensure that you refer to the Fair Labor Standards Act (FLSA) while making these determinations, as there may be specific requirements for hourly and salaried employees.
To help you navigate these decisions, consult professionals such as your accountant and lawyer, who can provide guidance tailored to your business. Additionally, draw from your industry experience and examine the practices that have proven successful for similar companies. By aligning your policies with industry norms, you can remain competitive in attracting and retaining talent.
Organizations like SCORE can also provide valuable insights into establishing effective policies and procedures. Through careful consideration and professional advice, you can develop an employee benefits policy that promotes a positive work environment and meets the needs of both your business and your employees.
Next Steps
After consulting with an accountant and gaining basic accounting knowledge, the next crucial step is to take on your own bookkeeping responsibilities during the start-up phase of your business. This hands-on experience is invaluable as it allows you to understand the intricacies of record-keeping and puts you in a better position to train future employees as your business grows. It is recommended to choose the right software for your bookkeeping needs, such as QuickBooks or Peachtree, as they are user-friendly and can significantly streamline your accounting processes.
While making entries into the software does not necessarily require a trained bookkeeper, it is essential for you, as the business owner, to have a comprehensive understanding of double-entry accounting principles. This knowledge will enable you to maintain accurate and reliable financial records.
One aspect of bookkeeping that you may consider delegating is payroll and payroll reporting. Payroll Service Providers can handle these tasks efficiently and cost-effectively, freeing up your time to focus on other managerial responsibilities.
In the case of a partnership, it becomes even more crucial for all partners to have accounting knowledge and stay informed about other areas of the business. In a partnership, each partner has the authority to commit to the partnership, and a partner responsible for accounting must perform their role effectively to ensure the smooth functioning of the business and protect the interests of all partners.
By taking these next steps in accounting and bookkeeping, you will enhance your understanding of cash flow management, develop essential managerial skills, and establish a solid foundation for the financial success of your business.
Major Financial Statements and Software
Balance Sheet: The balance sheet is a vital financial statement that provides a snapshot of your business’s financial position at a specific point in time. It consists of two main sections: Assets and Liabilities and Owner’s Equity. By comprehending the components and structure of a balance sheet, you can gain valuable insights into your business’s financial health and make informed decisions.
Assets are listed on the balance sheet in order of liquidity, starting with cash as the most liquid asset. Cash represents the actual funds available to the business. Following cash, you have receivables, which include outstanding payments from customers. These receivables will eventually convert into cash when collected. Inventories, representing the goods or materials held for sale or production, are also classified as assets. It is important to monitor and manage inventory levels to optimize cash flow and ensure efficient operations. Property and equipment, such as land, buildings, vehicles, and machinery, are included in the asset section. These assets are typically recorded at their cost and may be subject to depreciation over time.
Depreciation is an essential concept to understand when reviewing a balance sheet. It is a non-cash expense that recognizes the decrease in value of certain assets over their useful life. By accounting for depreciation, businesses can allocate the cost of an asset over its estimated lifespan, matching the expense with the revenue generated by the asset.
The liabilities and owner’s equity section of the balance sheet represents the sources of funds used to finance the business’s assets. Liabilities are categorized based on their due dates or terms of repayment. Current liabilities include obligations that are due within a short period, such as accounts payable (money owed to suppliers) and accrued expenses (e.g., payroll taxes and sales taxes). Long-term liabilities consist of obligations with repayment periods extending beyond the next year, such as long-term loans or mortgages.
Owner’s equity, also known as shareholders’ equity or net worth, represents the residual interest in the business after deducting liabilities from assets. It reflects the owner’s investment in the business and the accumulated profits or losses over time. The owner’s equity section includes items such as capital contributions, retained earnings (profits reinvested in the business), and other equity accounts.
The balance sheet derives its name from the fundamental accounting principle of double-entry bookkeeping, where every transaction is recorded with corresponding debits and credits. This ensures that the equation Assets = Liabilities + Owner’s Equity is always in balance. Double-entry bookkeeping provides a reliable method of recording and verifying financial transactions, minimizing errors and maintaining the integrity of the financial records.
When bankers and investors review a balance sheet, they often assess various financial ratios to gauge the business’s financial health and performance. Common ratios include the current ratio (current assets divided by current liabilities) to evaluate liquidity and the debt-to-equity ratio (total liabilities divided by owner’s equity) to assess the leverage and financial risk. Comparing these ratios to industry benchmarks can provide insights into the business’s financial standing and potential areas for improvement.
Regularly reviewing your balance sheet, along with other financial statements, allows you to track the changes in your business’s financial position over time. It helps you identify trends, assess the effectiveness of your business strategies, and make informed decisions regarding investments, financing, and operational improvements.
To create your own balance sheet, you can utilize a Balance Sheet Template provided by accounting software or consult your accountant for assistance. As your business evolves, remember to update and expand the balance sheet to reflect any significant changes in assets, liabilities, and equity.
Understanding and analyzing your balance sheet is crucial for managing your business’s financial health and ensuring its long-term success. By gaining insights into your assets, liabilities, and equity, you can make informed decisions, allocate resources effectively, and navigate the financial complexities of your business with confidence.
Income Statement
The income statement, also known as the Profit and Loss (P&L) statement, provides a comprehensive view of a business’s financial performance over a specific period, typically monthly or quarterly. It reveals the revenue generated from sales, as well as the expenses incurred during that period. By examining the income statement, business owners can assess their profitability and make informed decisions to improve financial outcomes.
Unlike the balance sheet, which represents a snapshot of the business’s financial position at a particular moment, the income statement covers a specific time frame. Often, year-to-date figures are included to provide a cumulative overview of the business’s performance during the current accounting year. For instance, in the example provided, the income statement covers a six-month period, displaying monthly figures and a year-to-date total for the prior five months and the current month.
The income statement and the balance sheet are interconnected. If we refer back to the balance sheet, we can observe that the current earnings are reported as $6,000. Similarly, the income statement shows a profit of $6,000 for the past six months. This demonstrates the alignment between the two financial statements, as the income statement reflects the earnings derived from the balance sheet.
An Income Statement Template is a helpful tool to organize and refine your own income statement. It provides a structured format to report sales figures and categorize expenses, allowing you to calculate the net profit for the period. The income statement not only shows the overall profit or loss but also provides a breakdown of various expense categories, such as cost of goods sold, operating expenses, and taxes. By analyzing these components, you can identify areas where costs can be reduced, efficiencies can be enhanced, or revenue generation can be improved.
Timeliness is key when analyzing financial statements, particularly the income statement. The more current the statement, the more valuable the insights it offers. By regularly reviewing your income statement, you can identify trends, spot potential issues, and take immediate action to address any unfavorable developments. Timely analysis allows you to make proactive decisions to optimize your business’s financial performance.
Modern accounting software simplifies the process of generating financial statements with just a keystroke. It is crucial to acquire the necessary computer skills and utilize appropriate software that aligns with your specific business requirements. Utilizing accounting software streamlines financial reporting, enhances accuracy, and enables efficient analysis of your income statement and other financial statements. Investing in computer skills and leveraging suitable software empowers you to effectively manage your financial records and make data-driven decisions.
The income statement serves as a valuable tool for monitoring your business’s profitability and identifying opportunities for growth. By scrutinizing your sales, expenses, and net profit, you gain insights into the financial health of your business and can implement strategies to enhance performance. Regularly reviewing and analyzing your income statement enables you to stay on top of your financials, react promptly to changing circumstances, and steer your business towards sustained success.
Cash Flow Control
Cash is the lifeblood of any business, much like jet fuel keeps a plane soaring through the skies. Just as a pilot meticulously calculates fuel requirements, you must place equal importance on cash flow control. Running out of cash at any point in the future can spell disaster for your business, just as it would for a plane running out of fuel.
Cash flow control involves projecting your future cash needs. It entails creating an income statement that focuses solely on cash: cash inflows, cash outflows, and your cash balance at designated time periods. This powerful tool allows you to anticipate your future cash requirements well in advance.
In cash flow control, you estimate both conservative figures for incoming cash (IN) and higher estimates for outgoing expenditures (OUT) during each time interval. For example, in the initial period, such as a month, you start with your existing cash balance. Then, you add the projected incoming cash and subtract the projected outgoing expenses to determine the cash balance at the end of the month. This ending cash balance becomes the starting cash for the next period.
The attached cash flow control spreadsheet illustrates how the ending cash balance for one period becomes the starting cash for the subsequent period. This pattern continues for each period, ensuring a smooth flow of cash throughout the projection. When preparing your own cash flow projection, it is advisable to forecast for a 12-month period. The Cash Flow Template provided can be a valuable tool in this process. This projection serves as a powerful tool to arrange financing in advance, demonstrating to your banker that you are proactive in managing future cash needs and maintaining liquidity.
By utilizing this straightforward cash flow format, you can create a customized cash flow projection for your specific business. Although simple in design, this projection holds immense value. It empowers you to plan for and navigate future financial challenges by providing a clear picture of your cash position. With a well-prepared cash flow projection, you can make informed decisions to optimize cash flow, pursue growth opportunities, and ensure the financial stability of your business.
Remember, maintaining a healthy cash flow is crucial for sustained business operations. By implementing effective cash flow control and regularly monitoring your projections, you can stay ahead of potential cash shortages, make timely adjustments, and secure the financial well-being of your business.
Accounting and Cash Flow Punch List
To ensure the financial health and success of your business, it is essential to implement effective financial management practices. By following these best practices, you can maintain control over your finances, make informed decisions, and secure a strong financial foundation for your business:
Prepare frequent financial statements: Generate financial statements on a regular basis, at least monthly or even weekly. These statements provide valuable insights into your business’s financial performance and help you monitor key metrics.
Track income statement percentages: Monitor key percentages in your income statement, such as the cost of goods sold percentage. Comparing these percentages to industry benchmarks allows you to assess your business’s profitability and identify areas for improvement.
Compare with prior periods: Regularly compare your current financial statements with those from previous periods. This analysis helps you identify trends, spot deviations, and make necessary adjustments to optimize your financial performance.
Start with compiled financial statements: As a startup, you typically won’t need certified financial statements. Compiled statements, prepared by your accountant based on the information you provide, are sufficient for most businesses. They offer a clear snapshot of your financial position without the need for a rigorous audit.
Establish internal controls: Implement strong internal controls from the outset. Learn from industry best practices to safeguard against dishonesty and inventory shrinkage. By enforcing controls on purchasing, check signing, and inventory management, you can mitigate risks and protect your assets.
Preserve payroll and sales tax funds: Never use funds withheld for payroll taxes or sales taxes for other purposes. These funds belong to government entities such as the IRS and Social Security Administration. As a trustee, it is your responsibility to ensure these funds are paid as required. Consider employing a reliable payroll service provider to manage these responsibilities effectively.
Understand the importance of cash flow: Recognize that cash flow management is vital, even if your business is profitable. Profitability alone does not guarantee business success; running out of cash can lead to insolvency. Learn and practice effective cash flow control techniques to ensure the availability of funds when needed.
Project financial requirements: Look ahead and create a comprehensive list of projected financial requirements for your business. Consider factors such as premises, equipment, staffing, and working capital. By planning ahead, you can better anticipate your financial needs and take proactive steps to secure necessary financing.
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