During these next couple of months, many Amazon sellers are focusing on Q4 and preparing to make the most of the holiday shopping season. By doing a little work now, you can make sure you keep more of the money you make during one of the busiest shopping times of the year. While inventory buying is center stage and in the spotlight, I suggest you spend a little effort working on your business to set up easy operations during your busy time. First, analyze your monthly operating expenses and make sure you understand what they are; and second, set up a savings account that we will call your Future Plans Account. Here is how you will use these two in Q4.
Know Your Monthly Operating Expenses
If you are using the Profit First method, you are already taking the payout from Amazon and dividing it into accounts for various purposes. When the payout comes in, you move funds to accounts specified for Inventory, Profit, Owner Pay, Taxes and Operating Expenses. You will continue to follow this procedure, with one exception. I recommend that you adjust the amount going to the Operating Expense account to be in line with your typical monthly expenses. To determine the amount you need for operating expenses, run your Profit and Loss statement YTD by month. Look at your monthly expenses and get an average for the months. Let’s say you typically spend $20,000 on operating expenses. This number will be the amount you want to keep in your Operating Expense checking account.
When you are dividing up the funds between the different bank accounts, using percentages of your payout, you will be allocating much more to your Operating Expense bank account when your sales go up. However, typically, your operating expenses don’t vary month to month. Software subscriptions, rent, payroll etc. are generally not tied to your revenue. If you deposit the typical allocation amount into your Operating Expense account, it will be tempting to spend it.
Future Plans Savings Account
If you are not using Profit First, look at your bank balance during your typical months. Keep that number in your mind and when you see your Amazon payouts hit your accounts, simply keep your bank balance at that typical balance level and move the rest of the funds to the Future Plans Savings Account.
The reason I recommend this strategy is due to Parkinson’s Law. It’s an economic law that states “we use what we’ve got.” It’s human behavior to adjust our consumption of a resource based on the availability of the resource. A way to avoid this temptation, is to continue funding the Operating Expense account at the level we need during the typical months. The additional funds should be moved to the Future Plans Savings Account.
Many times, it takes a trip to the bank to get your bank account set up. So, do it now! If you have it ready, it is simple to move your funds over with a transfer in Q4. It will be hard for you to find time to go to the bank and get this done when you’re in the middle of the busy selling season.
Prepare Your Business for Success
Your reward will be after Q4, when the dust settles. You can look at the account and determine the best use of those funds. In January when we’re making resolutions and looking back at the prior year, you can see with a clear head how to invest in your business in the future. Some of my clients have used the funds to move from retail arbitrage to wholesale. Some have decided to launch a new product; some have used it to pay down debt or set aside for taxes; and others have taken a distribution from the business for a family vacation. The objective is that you have the money set aside so you make a deliberate choice and not get caught up in the holiday spending frenzy. I look forward to hearing how you use your Future Plans Savings Account!