Getting A Salary From Your Amazon Business
Are you able to get a salary from your Amazon business? Or do you have to put all your cash into more and more inventory?
I am going to show you how you can both pay yourself a salary and have enough cashflow to fund your growth in inventory
In the last two years we have seen a number of factors that have put a severe dent in everyone's cashflow:
- Inventory limits - both in storage limits and ASIN limits which has meant extra costs in 3PLs
- Inventory delays - delays in freight in getting your inventory to USA from China and also getting your inventory in FBA. This has meant that you need to hold more inventory
- Increased competition in PPC which has increased PPC costs
The key for Amazon business today is to become more efficient with inventory
welcome to this week's webinar, it's been an interesting two years, for most of you sales are growing, your business is becoming better, stronger, and your sales are consistent.
this is what we're seeing across our clients, you're launching more products, your businesses are profitable, then you've been putting a lot of work into your business, but there's doesn't seem to be any cash to pay yourself a salary.
There's no free cash flow surplus cash. That's what we're going to talk about today is how to generate more free cash for your business.
Over the last seven years, you could run a pretty inefficient business, and still do pretty well on Amazon.
IIn the early days, you could basically just get anything and send it to Amazon and you do re4ally well. Since then, competition has increased, and there's still great opportunities and the ability to earn great money over the last two years. Over the next two years, it's about making your Amazon business really efficient. And that's going to be the difference, that's going to be the difference for all Amazon businesses, the ones who are going to succeed are the ones who are really efficient.
Our Amazon businesses basically doubled in sales every year. But our profits and cash flow got smashed.
So what's happened over the last two years? Well, the first one is the inventory restrictions that's affected everyone. So that's basically your asin limits, as well as your inventory storage limits. Most people didn't get hit with the inventory storage limits, but everyone got hit with the inventory limits.
The ASIN restock limits really caused great problems, especially seeing it wasn't consistent. Amazon was changing it all the way along. By the time we got down to fourth quarter, it was kind of about six weeks or less, it was about four weeks worth of stock. And if you couldn't get inventory into FBA, your ASIN limits started to reduce further and further. People got really caught out last year on having the wrong mix of products in there in Amazon, so they had too much of a product that wasn't selling well enough.
The other thing is freight delays. So we went from sending freight, basically straight into Amazon. And we went to just getting a container last year, let alone the additional cost for getting time and then getting delayed at LA Port. We sent stock into Europe. we finished production in January. We didn't get into Amazon Germany till September. Just hard.
The other thing we need is suddenly everyone needed 3PLs. So because Amazon won't allow you to send in all your inventory, they had to send it through into 3PLs. Then there was the delay in sending it into the 3PLs. We got stuck Christmas last year and the year before, where Amazon just had a whole bunch of our stock in transit. We just couldn't get it in for six weeks. We missed basically all of Christmas, all in November, and basically two weeks of December two years ago. Really painful. So then the inability to send it directly into Amazon.
A couple of years ago, we could just send it straight into Amazon really effective. Then we had increased competition, we had increased PPC costs. We saw across the board, profit margins dropped from 25-30% to 15- 20%. We're seeing very few businesses that are over 20% these days.
Inventory holdings have increased. So the that's mainly what we're going to talk about today is inventory. Your inventory holdings have increased. So rather than holding maybe 120 days of stock, that's moved to 365 days of stock, and all that's led to cashflow issues, which meant that you couldn't get you're hoping to be able to pay yourself a salary for this business and suddenly it can't because you had to put more and more into stock. There's always this difficult balancing act between cash flow and growth. Your limit on growth is always cash flow.The other thing we see on the Amazon space is this push on growing really quick as we've got this race, the pressure to be the biggest, fastest, most successful. you don't have to be in that race, you can decide whatever race you're going to be in. But you don't have to play everyone else's race, you probably should have a look at why you got into this business to begin with.
Now, I've been talking to Amazon clients for a long time now. And for most of you, it wasn't to get millions. it was to replace your job or to make your mortgage repayments easier to make things easier for yourself a bit more financial freedom.
If Australia, if your household income is $222,000, it puts you in the top 10% of all Australians, $354,000 puts you in the top 5%, the top 1% about $896,000 a year.
Your Amazon business can easily put you in the top 10%. And actually the top 5% is not far away. But how do we do that? I mean, I've got a lot of clients who have great sales, that they can actually pull money out of their business. So that's what we're going to talk about Inventory days, how can we get that money out of our business?
So the other thing to remember, is profits are not equal to free cash flow. So free cash flow is that money you've got available to put in your pocket? And so surplus cash in a stable business or other other types of businesses? Yeah, if you're running a consultancy or something like that, yeah, your profits probably pretty close to equal the cash flows. But an Amazon business, especially in the growing Amazon business, profits don't equal cash flows.
So the first thing we're going to talk about the day is this concept. Yeah, the accounting concept counting ratio effectively, which is inventory days, which is your inventory at cost divided by the cost of the product sold. So if we talk about Amazon, we've looked at cost of your gross profit and cost of cost of goods sold. Sometimes that is inclusive of your Amazon fees, your FBA fees, etc. But if we want to come back to we're just looking at that cost of the product itself, okay? And the freight, of course. So we want to the ratio is your value of your inventory at cost at any one time. And we'll look at how we can do this. And divided by the cost of product sold, times 365 equals the number of days of inventory on hand. Okay. So if you've got 365 days inventory, well, that means you've got a year's worth of stock available to sale. The object is in all businesses is to produce this on the way now, Amazon businesses are quite simple. Because this is the major formula you've got. If you had another business, you've probably got debtors days and creditors days in there. So you end up with working capital ratios and what you need to do there. And Amazon business, it's really just about inventory. We've got there is debtors days, but it's basically only two weeks, two weeks plus three days been the Amazon amount. So relatively simple. So an Amazon business, we're just talking about inventory. So let's look at what's happened over the last two years. So in the beginning, we get out okay, we place a deposit for your production 30 days, it's basically made 30 days freight if we sent it sea freight, Amazon receiving and be that seven days, and then we'd have your minimum stock level and Amazon would try and keep
that at 30 days, Debbie says as Can you explain more what cost of products sold means enrollees. So that is how the cost of your product so easy as product cost times plus 11 plus, so landed product cost plus freight times the number of products is units you've sold. So just that product costs for the year. Now if you if you kept going back to that formula. Oops, here we go. If you went back to this formula, it's just that it should be in your p&l it might be in the in your As soon as our purchases on the way, depending on how you do your accounting, so it's just that cost of the products, salt. So we ended up in the past with about 97 days minimum. Yeah, that was kind of that was pretty easy to achieve, which found a pretty efficient business. If you had a look through my earlier cash flow models, we kind of ended up with this type of models. So I think a lot of you look through those cash flow models, at some point we had about this. However, things changed, inventory limits came in Amazon was slow at delivering things, we suddenly need three peels. And with full freight issues, we went from production 30 days pushing out a bit more, maybe, freight winter, 90 days. Yeah, easily by the time you took into account, the time it took to get a container, or get freight, actually ship it and then have product in Amazon. I mean, on the ship, getting into LA port or whichever port it was. It was about 90 days from when they had finished to production to when it was actually available for your three bill to receive it. Now, your three deal then takes about seven days to unpack it, put in their shelving and tell you yes, it's already for sale already for sending, then we're basically you got another seven days for Amazon to send it that way for you to say, Okay, let's do a product shipment, tell you three PL, they kind of do it the next day, the next day or half, Amazon then picks it up. And then Amazon will take in a considerable amount of time, 14 days minimum to actually receive it and have it ready for sale. And then you need to have kind of this minimum level of stock in Amazon available all the time. So what happened was our inventory days, basically, you know, pretty close to doubled, they went from 97 days to 178. On the easy system. Now, this is assuming everything goes really efficiently we've we've basically doubled our inventory days. That means we've got more and more cash holding an inventory. So as inventory days is something that is where all your caches, and that's the fact the number that we need to fix fix. So what I've done is now let me see if I can share this with everyone bear with me a sec. Or let me think I could probably drop it into Chet, let me see if I can let me see. Sorry, I haven't really done this here. I think I'm not sure about how I can do this. Wait a sec. I'm gonna I'm gonna see if I can share this
I'm just going to share this model cashflow model with you. nice and small. So everyone should get this. So this is just something you can work through along the way. And in the first instance, I've just developed a just a simple model to so show you how the process works in terms of cash flow and things. So these are our figures. So we've got sales of $2 million. Okay, profit of 307 15%. Okay, our inventory as at this is actually December so our inventory December was $485,000 at cost. Okay. So in terms of these ratios our profit ratio is 15%. So which is profit divided by sales, our inventory ratio, slightly different to is a simplified version so slightly different to inventory days. We've just said inventory divided by sales is 24%. So let's look what happens if we say okay, we want to do $400,000 In a full million dollars in sales next year. Okay, As our budget, that's what we hope we can do, introduce some more products, etc. So based on nothing else changing based on a 15% profit margin, we should get about 600,000 in profit. And based on what our inventory holding levels were in the past, assuming nothing changes, we would require $946,000 in inventory, bit ugly. So the if we look at the cash flow, then we've got cash from operations, which is our profit. So our business generate $600,000. And if we didn't have inventory, yep, we'd have that available. And then we got to pay tax. But we don't have to pay this year's tax, we're paying last year's tax. So it's just 25% of this figure of 307,000. And then, less the increase in inventory, which is the difference between this inventory of 946. And what we've got now. So if we wanted to get to there, with nothing else changing in our business, then we would only have $61,000 worth of cash available. Which is to be honest, a bit tight. And I would honestly say there wouldn't be anything available there believe that we could say, oh, yes, we can pay a salary from that. So that's basically tight. So it means are we have to do something, to be honest, our inventory days are basically 300 or 373 days or something. It was hideous. Okay, so combination of factors there. I don't see. I suspect that is not unusual for everyone. Okay, we went into Europe, which was expensive in terms of cash flow. But that's where we're looking at the moment. So really not much playing there. So let's look what happens just in the simple model. If we said, right, we're going to still get 4 million, we're still going to have 15%. But we're just going to be more efficient with our inventory. So rather than 365 days or 373 books, we're just going to do 75%. And we're doing 18%. So we're just going to write rather than the $946,000. In inventory to service that level of sales, we're going to need $720,000 in sales. And so what it means is because we're needing less inventory, we've got $298,000, free cash available. That's where we want to be Yeah, that's a better position to be in. It's kind of half. So that's just a simple model. And in the spreadsheet, you will find that as the super simple model. Okay, we've got another one. So let's talk about how, yeah, a lot of people think are reducing costs. Yeah, let's reduce all our costs, that's going to improve our cash flow. Well, let's look at what we can change, we can actually change that much. Kind of the product costs will then comprise 80% of sales, the freight costs, and we can't really do a lot with the cost in terms of we've probably already negotiated the cost down to a reasonable level. Yeah, we can't drop it by heaps. Most of you can't some of you may be able to, there's probably things you can do in there. freight costs swamp, there's some things we can do there. But it's worth talking a fairly small amount advertising. Okay, we can do something about that. But advertising across the board has gone up. Yeah, advertising costs have basically gone up 25%, just in the bid price, let alone competition.
For those of you who are doing my having a look at my PPC course, I was saying okay, $1.20 as the bid opening bid price would probably get you top bid. That's now up to $2 across the board, so everything's gone up there. So we can actually do, we can try and make it more efficient. We want to keep it round that 15% That used to be nine, but I haven't seen anyone who's really doing it seven or nine at a decent level of sales and expenses will kind of go out 1%. So it's any small changes you can make to any of these items, and summarize that in reducing some of these advertising You know, some of these other costs, you're going to reduce your ability to sell anyway. So we've got in there, another model. And sorry, there's too many numbers on here. I apologize for that. But we've got another model in there simple cash flow, where we go into a bit more detail. And what I'll do is I'll go to the next model, which has got less numbers on it, so it doesn't scare you. Okay, so let's look at this. So in this case, and you've got these numbers in here, so you can muck around with these and put in your own numbers. So what we've got in here is the last 12 months is things go to your accounts. And look at the last 12 months period. So just check out last four months. And then you can put in your sales. And then we've got your product costs. If you may, if you scroll up, there should be a link in there somewhere in the in scroll up in the chat. The product costs total cogs, Amazon costs. So that's Amazon costs the FBA costs. What else we got in there, Commission's Amazon storage, etc. All those other costs, etc. Gross profit. So you just have to enter in these two, gross profit, advertising costs. Other costs, total expenses, profit, less tax taxes, just 25% profit after tax. And then you need to print out your balance sheet sorry. Print out the balance sheet and find out what the value of your inventory is at cost. Now, if you haven't got that as that, depending on how you do your accounts, just go through and basically kind of recalculate it, but just at cost. Few people are having problems and finding that. Let me just drop in that model again.
Okay, so then we've got a couple of ratios from here. Okay, so we've got the, these ratios are just based on this figure here. So we're just, they're just basically 22% 22%. So it's 450 divided by this figure, okay, we're just got these ratios along here. And tax is equal to the tax on the previous year. So then we can then say, Oh, we can change some of these numbers around. Okay. So these numbers linked back into here. So 400,000 times 22% is equal to this figure, okay? So you can change this figure here. And any of these percentages along the way. They should all add up properly. Haven't doubled, tested this. And then also calculate your inventory requirements. There's just a bit more detail in this figure. So again, nothing else changes. Okay, we've brought in this more detail model, it's 87,000. As the profit, that is the surplus cash that's available. Okay. So we can grow to there. Okay, we only got 87,000. So it's the figure we've got to looking at along the way. So how do we improve our cash flow? Okay, so we've got 87,000, which is not enough on sales of 4 million, we want to have a much greater buffer on that. Yeah. We expecting 600,000. Probably the figure $600,000 in profit. Let's have a look. Yes, $600,000 profit, we want more money available on that. Okay, so a couple of options, we can grow slower. Okay. So the faster you grow, the more cash flow you will use. So you don't have to be in that race. You can say, Okay, actually, I want to pay myself a salary this year, I may not actually grow that fast. It's more important that I take some money from this business. Slowing growth will enable you to have more available cash. You don't have to have those things. You can limit the number of markets you go into now having my experience in selling into Europe. I would only be doing that. If you've got cash available. Everything else is stable. Yeah. Okay. Let's do it. Okay, for the purpose of getting more sales. Do not go into Europe. Don't just concentrate, either. Go into Europe, and don't go into the US or just go in Give us but I think going into the US most of you, and staying there is probably the best option until you've got everything stable. Now, we've been running this Amazon business for a few years now. So we can launch less products, okay, so we may not, we may have all these products we want to launch, we might just take some simple way out, we may do the variations rather than launching new ones, because they can use a lot of money along the way. We can reduce our inventory days, we can make more smaller orders, we can use better stock management. So we're not over stocked in one particular thing. That's what caught out a lot of people this year, they had too much of one particular product in there, and it just killed their image, they just couldn't restock properly. So that was a problem for a lot of people, they just so we can say, Okay, we're going to be a bit better, and we can send directly to Amazon. So what we're doing this year, just our inventory days are horrible. So what we're going to do for the US anyway, is rather than do an order and fill a container each time, which is the cheapest option, we are going to basically do an order every month, and send it by less container, or we container for us will probably last about three months. So what I'm going to do is negotiate with the supplier that yes, I will buy. I agree to buy this much I have made pay the deposit on three months worth, but I want that delivered over monthly. And we will change that level of order around each time. So while we'll meet, we'll probably we will be paying more in
inventory fees, I'm sorry, in freight costs, but we'll have the opportunity to send it directly into Amazon. I mean, our our Amazon limits have gone up significantly. And we'll have the three pillars available as a backup. So basically going to try and get rid of that three bill, that's going to take 30 to 30 to 60 days out of the process by not having a three bill in there. And yeah, you can lower costs. But lowering costs in itself doesn't really you're looking to reduce basically your see if you can negotiate these volume discounts on more frequent orders if you're trying to get a volume discount, and reduce your cost that way, because that's the only real cost seeking if you've got that and advertising are the only two costs really, that you've got any control over. So if you're gonna get a volume discount for something, then you might have negotiated over a longer period of time, but not having it oh my goodness, I'm going to deliver so much stock every time three or four months worth six months worth, whatever it happens to be. Okay. So, okay, let's look at the couple of examples here in terms of how this works. So I got last 12 months here. This is the option we saw before 87,000. We're just going to grow to 4 million. Okay, let's see what happens. We grow it. We say yeah, we let's do 5 million this year. Now we've got these hot products, we're really going to make it work. We've got the special system, whatever it happens to be. Okay, we're gonna go for 5 million we can see here, nothing else changes. The only thing is we've changed in the yellow here. It grows, yeah, we're going to be we can't afford it. Okay, we're going to have zero cash available. That's all a simple model, assuming nothing goes wrong. What we will probably do also is have a look on a roll up on a more detailed version. So some most of you have probably seen our 52 week cash flow model, very in detail lot of work available to do that. But this is kind of just simple, almost back of the envelope type calculations, complex, large envelope. Chris has asked the manufacturer manufacturer the full stock and only send a portion acting like a Threepio could do it that way. Or you could say I I'm going to have them so that I've got one supplier for all our products, and I will probably say I'll pay the deposit on three months worth in general and then each month I will do an order for and we want that delivered over a month, a month, once a month. They don't necessarily need to. I think some of my orders are starting to overflow their ability Anyway, depends on your supply you may have acting like that. But I wouldn't want to be, if you want to introduce reduce your inventory days, then you would like paying for all that front is not going to really affect it. The other you, some people negotiate better terms with their suppliers. Okay, so I'd be looking at saying, I'll pay the deposit now. But I'll only pay for the as each shipment is manufactured. Okay, I wouldn't pay, it doesn't serve any purpose in if you pay the deposit and pay all of that upfront, you want to be paying less than three months plus, you also want to be changing that along the way, because otherwise one of these products may not be selling very well. And that's a problem a lot of people faced aren't going to think I've got three months and then something happens you lose your rankings or doesn't go quite as well as you thought. So I want that flexibility in there. So let's go back to this issue. So the five minute Oh, we've got a problem here. Okay. Let's just go to 3 million. Yeah, we've got less sales. Okay, but got $157,000 Cash tomorrow. Okay. better position? We've got a lot more room. Yeah, the item salaries. Okay. And 100? Yeah, 157,000, the current puts you a pretty good, wicked and free cash flow. So option then, okay. Let's go to the next option.
Okay, oops. So in this option, we're going to say, we're going to spend more, okay, so we're not reducing the costs, we're going to increase our costs. And this option, I have increased the product cost including freight by 20%. So significant margin. So in this case, we're saying, Okay, I am going to order. This is kind of slightly extreme, but I'm going to kind of forego some volume discounts, I'm just going to be really kind of tight and efficient in things. And I'm going to reduce my inventory by half. So I'm not earning as much profit yet. So we're down to pretty low margin there. But just as an example, we can see that by increasing our costs, and reducing our inventory days, we've increased the cash available from 87,000 to 314,000. So we're making less money, but we've got more, more cash available. In this type of model, the next year becomes a bit trickier to grow again, but because you don't have that, actually, you could do in the next year and at the same level of sales, and you'd still get another $300,000 Out $400,000 Out of it. Okay, except for the tax. We'll come back to a little bit more. So. Yeah. Okay. So in this example, we've, we have spent more, but we've got more cash. So actually having that issue of increasing your costs, is not necessarily bad. If you've got a plan for how that's going to be achieved. Increasing your costs without increasing you without having your inventory days, okay, that's going to be a problem. That's going to hurt. But if you offset one with the other, okay, can create a bit of a better situation. Let's look look at this case where we don't change any of the costs. Okay? We just keep everything the same. We're still inventory advertising in here at 17%. horrid we do something good that maybe we'll see what happens next year. We've had we last year we spent a lot of time fighting competition, which we did through advertising, mum win kind of 100. For those of you aren't aware, our products, were selling very well kind of top 500 of the category, overall category. We ended up with hundreds of competitors selling the same product. And we kind of like to sell our product about $25 They came in at basically $7.99 to $9.99. And heaps of them. Yeah, that they didn't. So what we had to do and what my other competitors did is we just took all the space. So basically, we bought all this, all the space along the way, and my competitors did the same thing. So they just didn't have a chance to get in the image didn't get any advertising space, so they just didn't have any, we wouldn't we no want to let them into the, into the front page and advertising. Expensive form off, most of them are gone. Because their models just couldn't withstand it. The cashflow just didn't work out. So But going back to this one, all we're doing in this model is changing it from 108. Well, 393 days down to 256. Now if we went back to that original example. Okay. Now, we looked at this one beam 178 days, and this efficient model been 97 days. So in this case, let's keep on going back there. We're going to 256 days, so still want super efficient, but we reduced it significantly, and the cash available increases significantly. That's what we've got to do this year. That's whenever and should be doing this year. So the key takeaway for this year is inventory management. Okay, reducing your inventory days, everyone is in the same boat as you everyone has had exactly the same issues. And if you're slightly inefficient, all those people who are selling at low prices haven't suggested you lower your price at any point
here. They're all in the same position, except if they're selling at a lower price, they're in a worse position. So the successful sellers this year, we're the ones that are most efficient with their inventory. They're the ones who are going to succeed. And you have to be flexible, because Amazon could change the rules in relation to inventory game. So he made sure you have enough inventory to cover sales and sales growth, but not too much. And in the right balance. So for this year, that one is going to be about it's that now if you're running any type of businesses, any other type of business, wholesaling business, any other type of with inventory, inventory is the issue. If you're running a wholesaling business, and you don't manage your inventory days and debtors days, but let's say they were okay. You had a business. Yeah, if you look at why distributors and manufacturers and wholesalers go out of business, it's because of inventory days. Okay. So that's what we that's really the key focus for this year, is going to be just managing that inventory, keeping that balance right along the way, not having too much of any one thing. And making sure you got enough to cover sales because I think there'll be a lot of people dropping out this year of Amazon. And some of you may have already seen that as well. But in the last year and a bit, there was a so much competition came in. And I think Amazon actually got flooded with all these people coming in with all this stock. And it seems to be that it's actually behaving itself quite nicely now. And a lot of those other competitors. The cheap ones have disappeared. I'd love to hear your opinion on that. Okay, questions.