One of the things that we see causes young Amazon businesses to struggle is not knowing their breakeven point and fixed expenses. We wanted to write a quick blog on how to get a rough estimate of your breakeven point and how to determine your fixed expenses so you can make better business decisions. We gave away a free coaching call to support one of the Amazon Seller Facebook groups. I received a call from someone who had grossed well over $200,000. To her dismay, when she finally finished preparing her taxes she found that she had made less than $1,000 in profit for the entire year. On further examination, we saw that it wasn’t that what she was buying unprofitable items and it wasn’t that she was buying items that weren’t selling. It was that she was not selling enough to allow her business to pay for all of her fixed expenses of tools and subscriptions.
By simply adding up the costs of what she was spending monthly, then looking at how much she needed to sell to breakeven she could have seen the problem and corrected it in one day instead of waiting until the end of the year to see that she had basically been working for free the entire year. The problem with not knowing a few basic numbers in your business is that without this knowledge you can work towards increasing gross numbers not realizing you ultimately are not going to be making more than you are now. You can pick up a lot of fixed expenses, lower ROI’s, and get inefficient and bloated. (I saw this from my mistakes, not from judgment of others.)
You cannot make solid decisions about the health and future of your business without knowing your monthly expenses. We recommend a 13-week rolling cash flow projection. After a few weeks, you can run your breakeven analysis. I have yet to see anyone (selling over about 10k a month) estimate their burn rate correctly that wasn’t running a 13-week cash flow projection or they were very intimately acquainted with their P & L. We have a blog post specifically on managing cash flow, near the bottom we have a spreadsheet and a video on how to use a 13-week rolling cash flow report. Filling out the 13-week rolling cash flow will help you understand how much is spent in your business every month. You can also go through your bank accounts and start by simply looking for reccurring transactions and adding them up.
Sometimes we forget how much we really are spending in our business! It isn’t just software, it is any coaching, lists, groups, it is inventory lab, your insurance, your cell phone, your power and internet and rent (if you have a warehouse), average hotel bills if you are traveling. If you are reliant on your business for income, you have to include your payroll too. Otherwise, you can get lulled into making decisions that might hurt your business long term.
Once you have an idea of how much you are spending on fixed expenses each month, you make a rough guess of your ROI on sell items at Amazon. (Inventory Lab makes this much easier). Then go to our Profit Calculator and put in your monthly expenses and ROI. That gross number that the calculator displays is the absolute minimum you have to sell every month to keep your business alive. It is only when you pass that gross sales mark, increase your ROI significantly, or lower your expenses significantly that you will actually begin to see bottom line profits in your business.
Again, this is a quick and dirty guide. It will not give you precise numbers, but it will give you a solid trajectory to build upon.