“Balance sheet” is one of those financial terms that makes an Amazon FBA seller’s eyes glaze over. You’ve probably heard your CPA talk about it before. Maybe you’ve even nodded your head like “Yep, I’m definitely going to get on that,” only to forget all about it as soon as you get back to your workspace.
Even the Amazon FBA seller who decides they'll pay attention to the balance sheet, discover pretty quickly that they don't know how to “fix” things when they don’t, you know, balance. (Things like negative bank accounts or incorrect loan balances that aren't correct). This would be a great time for them to reach out for help, but you know how it goes. You get busy, you don’t want to bother anybody, and the balance sheet just kind of gets swept under the rug.
Here’s the thing, though: Without a good balance sheet, your income statement cannot be relied upon. In other words, your steady cash flow might make you feel like your business is doing well. But that feeling means nothing if your numbers aren’t accurate. And the only way to know that your numbers are accurate is—you guessed it—a regularly maintained balance sheet.
What’s more, having a balance sheet solidifies your legitimacy in the eyes of the IRS, state, banks, future buyers, etc. These people don’t care that much about how excited you are about the direction your business is going, or even about the amount of money you’ve made this quarter. Every financial person you ever come in contact with take you much more seriously if you have a full accounting system with an accurate Balance Sheet.
Knowledge is power…it really is. So here’s how you can get the knowledge you need to powerfully steer your Amazon FBA business in the right direction.
So What Is a Balance Sheet (And Why Do I Care?)
I’ll be completely honest here: a balance sheet is a complicated accounting term that most people outside the accounting profession don't fully understand. To put it as simply as possible, a balance sheet is an accounting report that reflects your assets and liabilities, along with the cumulative net book value of your business.
For most Amazon FBA sellers, creating this report feels like an unnecessary step. You’ve got cash flow coming in, you’re paying your bills on time…what’s the big deal about putting down all the numbers on one sheet of paper?
I’m so glad you asked…
Why Amazon FBA Sellers NEED the Balance Sheet
The balance sheet includes three absolutely critical things for an Amazon FBA Seller:
- Your cash/credit card balances. If the cash/credit card balances on the balance sheet are not correct, your income/expenses are most likely wrong.
- Your loans. If your loans balances aren't correct, your interest or cost of goods may not be correct.
- Your inventory. If you track inventory and the inventory isn't correct, your cost of goods can be significantly wrong.
The benefit of an accurate balance sheet is that it results in an accurate income statement, which is key to your Amazon FBA business’ growth and success. For example, most banks won't give you a loan without looking at your balance sheet. And if you file a separate tax return for your business, this often requires reporting from the balance sheet.
The Work Is Worth It
The foundation of your balance sheet is setting up the chart of accounts. Again, I won’t sugarcoat it—this gets tricky. You need a basic knowledge of what accounts are asset/liability accounts, and what accounts are income/expense accounts.
The good news is that there are templates out there that can guide you in setting up your chart of accounts. (At TBL, we’ve created a few different templates that are available for our clients.) Having something to guide you makes a huge difference in the successful setup of your accounting system.
Maintaining a balance sheet can be very challenging. Balancing the cash/credit card balances to the actual statements seems easy, until you find the occasional error. With the hundreds of transactions that some of these accounts can have, one little error can mean one big headache. Then there are things like assets and knowing when things you purchase are an asset, as opposed to an expense.
Tracking inventory isn’t exactly straightforward, either. It's not just counting what you have (at cost)—it's also figuring out what products are in transit, what shipments you've made deposits on and where else you might have products that aren't accounted for.
Even if you use a software program like Inventorylab to create your balance sheet, you’ll need to evaluate the program’s accuracy. (This is something that frustrates every single one of my e-commerce clients.)
So yep, like many important aspects of running your business, it’s complicated. But it’s a lot less complicated when you have someone to get advice from, or just ask questions when you need to.
Okay, I’m Ready to Get Started…What Do I Do First?
First of all, you need to know that not all bookkeeping software/systems are full accounting systems. Some bookkeeping systems don't even track the balance sheet items—they are really just cash flow reporting.
In addition, no accounting system is (nor should it be) a set-it-and-forget-it system. It always requires maintenance and analysis. However, this regular maintenance really shouldn't take you more than an hour a week. (In fact, the time you spend on it should be much less if your Amazon FBA business is on the small side).
- Pick an accounting system.
At TBL, we use Xero, a software program we love because it's cost-efficient and will grow with you wonderfully, without having to change much. Plus, it’s cloud based…just like you probably work already. But the truth is that your balance sheet system doesn’t have to be any fancier than a Google sheet or Excel file. Just pick a system and move on to Step 2.
- Set it up.
Make sure the chart of accounts is designed for your type of business. Integrate the accounts you can feed directly into your accounting system (like bank accounts, credit card accounts and A2X). Reach out for help if you need it—this is the most important thing you can do in setting yourself up for financial literacy success, in my opinion.
- Code your bank and credit card transaction in full at least once a month.
This means every account and every transaction.
- BALANCE your bank account and credit card account balances in your accounting system against the balances on your actual bank/credit card statements.
If these two things don't agree, you have to figure out why and make those corrections. If you can't figure it out, get some help…it's important.
- Balance those loan account balances against the actual loan statements.
Then make adjustments for interest or other charges that have been assessed.
- Adjust your inventory balance, if applicable.
This is usually done through a journal entry.
- Now look at your balance sheet and analyze it.
Does it make sense? If not, try to figure out what is wrong and correct it. If you can't figure it out, reach out for help. The great news is that the more you analyze your balance sheet, the more it will make sense and the less help you'll need next time.
The Bottom Line
It’s easy as an Amazon FBA seller to ignore the balance sheet, especially when you feel like business is going well. But by spending time on it, you will know exactly how well your business is doing. You will know with razor-sharp accuracy what areas to focus on, and how to grow your business most efficiently and profitably. Once you have accurate numbers, you can grow, pay yourself more and realize the business of your dreams.
