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Guest blog by Cyndi Thomason, President & Founder of Bookskeep.
It’s no secret in the world of ecommerce sellers that the way many are operating their businesses isn’t quite what was anticipated when they started their companies. Relying on credit card debt or loans to pay for inventory or operating expenses is “the norm” for many hard-working ecommerce folks that come to me for help. Typical comments I hear are, “I work so hard and see little or no profit; what am I doing wrong? I feel like I’m getting nothing in return for my sweat equity. Maybe I need to rethink this business.” Does this sound familiar?
If achieving permanent profitability in your business seems to be alluding you, it’s likely because you’re using the wrong method yet hoping for the right results. The Profit First cash management methodology changes the entire formula under which you are currently operating and sets you on the right track to achieve your profit and growth goals. As a vital tool in overcoming the challenges of funding inventory, Profit First works extremely well for Amazon and other ecommerce sellers.
Sales – Profit = Expenses
If you’re familiar with Parkinson’s Law and how it applies to business, you know that your expenses will rise to meet your income; or how much you have determines how much you use. It’s human nature. We tend to spend more freely when we see the higher numbers in our bank accounts without giving much thought to the road ahead. Profit First flips the traditional business equation of Sales – Expenses = Profit to a more thoughtful equation that sets you up for profit from the beginning: Sales – Profit = Expenses.
Below is a condensed version of the 4-step process that is the backbone of Profit First:
This sets you up for success by separating your cash into bank accounts created for specific purposes. For ecommerce sellers, I suggest starting with these three accounts: Inventory, Profit and Operating Expenses. Once you understand the system, you can expand by adding accounts for Owner Pay and Taxes.
This creates a new behavior around the new bank accounts. As your Amazon or other income is deposited in your operating expense account, you will move the funds into the designated accounts based on a specific sequence, You start with the costs of products sold, and work through each step in the prescribed sequence. By doing this, you are setting up your business to ensure that profit is a habit, not an event that you anticipate at tax time.
This step is based on the realization that new behaviors are hard to learn and maintain. If a growing balance in your Profit Account is going to tempt you, then move that money to an account that is less accessible. Some of our clients customize their online banking profile to hide their profit account from view. Others transfer the funds for the profit account to another bank which in turn takes more time and effort to access, giving you time to contemplate how you intend to use it.
This step optimizes the time you will spend managing your funds. To truly understand the flow of cash, you should fund the accounts as prescribed in Step 2 every two weeks. Most Amazon sellers receive payouts biweekly, so this rhythm already exists. Fund your accounts following the sequence, then pay any bills due before the next payouts. If you’re using credit cards and auto withdrawals, look at the upcoming payments and ensure that you will have the funds needed.