5 Common Accounting Challenges Faced by Amazon FBA Sellers

Every industry has its pros and cons in regard to performance metrics, financial management, accounting and bookkeeping. And eCommerce accounting carries its share of unique accounting challenges. 

In some industries, Accounts Receivables and Margin of Labor can pose unique challenges. For many in the  Amazon FBA business, those challenges might involve inventory or sales tax liabilities. 

Although accounting challenges for e-commerce sellers are quite similar to the ones faced by Amazon sellers. This post will specifically focus on 5 accounting challenges for amazon sellers. 

TABLE OF CONTENTS

Inventory Management

Managing Transaction Volume

Handling Returns

Sales Tax Liability

Amazon Fees

Inventory Management

For most Amazon sellers and merchants who sell on multiple channels, figuring out how much inventory is worth is challenging. Failure to do so accurately can lead to an inaccurate balance sheet.

Keeping track of units that are in production vs your units en route can be a bit of a headache. Having to keep track of your units in customs, Amazon FBA, your physical location or in a returns pile only makes it worse. This is magnified by the various SKUs, and marketplaces. 

The matching principle rule under GAAP requires business owners to match their expenses with associated revenues. And that makes it difficult for the seller to track inventory value throughout the whole process: production to point of sale.

In E-commerce, having an integrated and mostly automated inventory management system that is scalable is crucial for accurate data. And accurate data is vital for effective decision making. 

Sellers who fail to manage inventory effectively always end up having to carry extra inventory. And that puts unnecessary pressure on the cash flow.

Managing Transactional Volume

In Amazon retail, as your business grows, you begin to deal with large chunks of data and transactions. Yes, lots and lots of transactions and chunks of data. 

Amazon accounting is very different from the traditional point of sale system you’re used to for your traditional brick and mortar.  You don’t have the ability to capture customer contact information for the purposes of selling to those customers. Amazon is also very creative with its diverse range of fees. Adding more work for you as you begin to categorize them accurately. 

Accounting software systems like Quickbooks Online and Xero are unable to handle large amounts of detailed transactions each month. They not only slow down the system but are also unable to actually handle that many transactional details and specificity. This leaves you scrambling to find an alternative intelligent way to sort out your transactions and seller accounting. Whether it’s daily, weekly,  monthly, etc. 

One such way is to batch all transactions at the same schedule that Amazon sends its settlement payments in. For most sellers, this means batching the cost of goods and sales every 14 days. Your typical Accounting system can easily handle this, giving you the ability to track your finances without having to blow up your accounting system. 

Handling Returns

Among the common accounting challenges for amazon sellers is the issue of returns. Amazon gives its customers the ability to return products. Amazon returns are sorted into the following categories. 

1. Sellable
2. Damaged
3. Customer Damaged
4. Defective
5. Carrier Damaged

Amazon deems a product as ‘sellable’ when it is in a good enough condition to be placed back into inventory. This can get tricky for sellers like yourself, because sometimes Amazon places a product back into inventory by mistake. 

Your margin of error is usually quite slim when it comes to  Amazon. You don’t want to ship faulty products to customers. That’s why you should consider changing the returns settings. 

You can choose to send all your returns back to your warehouse, allowing you to inspect them. This is especially a good option if your product is small and light and your business has a physical warehouse location. However it probably won’t work for larger or heavier products or if you don’t have a warehouse. 

When Amazon labels a product as ‘damaged’, you end up bearing the cost of inventory. That’s if the damage is deemed to be your fault. 

‘Customer Damaged’ on Amazon is when it has been opened and not in a ‘new’ condition. 

Amazon labels a product as ‘Defective’ when it doesn’t work. And ‘Carrier Damaged’ is when the product has been damaged in transit. 

Failures to account for returns effectively can make your books flush out irrelevant information. Accounting for all these categories can be challenging. Your inventory system needs to have a process for when and how to write off inventory. 

Sales Tax Liability

Amazon has over 90 fulfillment centers in 25 states across the USA. And in many cases, you have no choice in which fulfillment center Amazon sends your inventory to. 

For FBA sellers, that means figuring out where they owe their sales taxes and how much. Some states can even criminally prosecute you for collecting sales taxes from their residents without having properly filed for them. All this can cause some major issues on your end, not only from an accounting perspective, but also legally as well. 

E-commerce sellers selling on Amazon may end up making 20+ monthly or quarterly filings. Traditional retailers in comparison, only have to file for sales tax in the states where they have a physical location. 

Amazon Fees

There are 3 main fees taken by Amazon: Sales Commission, FBA Sales Fees, and ACOS (Advertising Cost of Sales). Your fees can vary quite a bit depending on your product factors. Product category, size, advertising strategies and how long inventory sits at the distribution center all affect the fees you pay. 

Sellers with good business strategies generally work with a good breakdown structure. A structure that aims to meet certain metrics for Gross Profit, Cost of Goods Sold, with Amazon’s fees structure. You need to generate profitability targets at the SKU-level. That will help you get down to the granular level of managing gross margins for each SKUs. 

To do all that, your accounting system has to be top notch. A system that can track everything effectively. Allowing you to figure out where you stand and how you can improve financial performance.