Your accounting method can directly influence the price tag of your Amazon FBA business. 

Some methods can depress its value. Others, like the accrual method, can end up adding a few zeros. 

It might sound strange that an organizational approach can produce such different outcomes. 

But it’s true. And in this article, we’ll explain how in this guide to why accrual accounting is crucial when selling your Amazon FBA business:

• Why accounting methods matter
• The benefits of accrual accounting 
• How to get accrual-based accounts 
• Ensuring your Amazon FBA business is ready to sell

Let’s dig in. 

 

Why Do Accounting Methods Matter? 

You need information about your business to make decisions. 

Your accounting method dictates how this information is presented which will influence where you spend your money and how much.

So you need it to be accurate if you want a resilient, profitable business. One that buyers will pay good money for. 

There are a number of accounting methods but the two most common are cash and accrual. 

Cash accounting involves recording transactions when money changes hands. 

Accrual accounting records transactions at the time they are incurred – regardless of whether money has changed hands yet. 

It is required as part of the GAAP (generally accepted accounting principles) for businesses that reach a certain size, and many brokers won’t even consider listing your business if you don’t use it. 

Accrual accounting is also vital for inventory-based businesses, like ecommerce companies. 

“Accrual-based accounting is more sophisticated. It’s used to understand seasonal flows of cash in and out based on when activities are occurring.”

• Patti Scharf, Chief Process Officer at Acuity.

 

The Benefits of Accrual Accounting

It’s worth noting that accrual accounting isn’t just important when it comes time to sell.

Accrual-based books are more accurate, transparent, and reliable when running a successful Amazon FBA business. 

So whether you’re going to sell soon or not, you need to be using the accrual method. 

Let’s see why. 

1. It provides an accurate snapshot of the health of your business 

If you waited long enough, cash and accrual accounts would match up eventually. But this isn’t helpful if you want a revealing overview of where your business is at today. 

The kind of thing a buyer would want to see. 

With accrual accounting, your balance sheet and profit and loss (P&L) statement are up-to-date, accurate, and ready for action.

That might be for your strategic use, or checks by a prospective buyer. 

“Probably 75% of the sellers I talk to are using cash basis, usually with no balance sheet or a balance sheet that can’t be trusted.

This will lead to a significantly lower valuation if you can’t prove the profitability of the business. The buyer will want to drop the price to protect themselves.”

• Scott Scharf, CTO & leader of the ecommerce accounting practice at Acuity.

Buyers will want to repopulate your financial statements during the due diligence stage of the buying process. This is a test to see whether your records match up, and allows a potential buyer to spot weakness or mistakes. 

When disputes are raised during this stage, they rarely benefit the seller. So keep things transparent by using accrual accounting. 

2. It avoids skewed inventory records 

When you buy stock for your business, you are converting one asset (cash) into another asset (inventory). 

If you use the cash accounting method, you would likely record a large expense at the time of ordering new stock. Money would leave your account and depress your profits. 

This is incorrect, and would discount stock from your business’s valuation. You’d effectively be giving away any current inventory for free. This is sometimes referred to as the “ignorance discount”. 

By using the accrual method, your Cost of Goods Sold (COGS) follows more of a pattern. It is roughly the same percentage of your income from month to month and gives you a better picture of when transactions actually took place in your business.

The accrual method helps you maintain good inventory levels. You’ll avoid extra storage fees, tying up too much working capital, and running out of stock. 

These are all signs of a resilient business which will attract higher-paying buyers.

3. It allows you to forecast and budget more effectively 

The accrual method helps you accurately match up when revenue and expenses actually occurred. 

Looking only at how much cash your business has at any one time doesn’t enable you to understand the peaks and troughs of your business’ performance. 

(And plan for them accordingly).

It’s damaging for Amazon FBA businesses to have too much stock lying around (FBA fees increase substantially), or to run out altogether. 

And although critical, it’s not just about inventory. 

Your business will have a number of expenses that you’ll need to plan for throughout the year. The accrual method gives you a better idea of what’s coming up.  

You’ll know how much you can safely withdraw from the business, and how much needs to be reinvested for maintenance and growth. 

4. It increases the valuation of your business

When you take a snapshot of a business using the cash accounting method, it can leave out some of the assets the business owns. 

This lowers its perceived value and as a result, any valuation multiples that are used to calculate a sale price. 

The accrual method ensures that your actual profits are used to calculate the capital value, rather than a multiple based on cash movements.

The difference in sale price could be hundreds of thousands of dollars or more, depending on the scale of your operation. 

 

How To Get Accrual Accounts For Amazon FBA

If you’re not currently using the accrual method and keen to start, here’s what to do. 

Integrate A2X for Amazon with your Amazon Seller Central account and follow the setup steps to get started. Or get in touch with Acuity to help you out. 

Not only will you get accrual-based books, but a suite of other benefits that have earned A2X the nickname “the gold standard in ecommerce accounting”. 

“As thought leaders in ecommerce accounting, we work with the best partners who we can trust to provide automation to manage the complexities of posting income for Amazon. We have found that partner in A2X, their solution allows us to provide more value and guidance to our 7 & 8 figure sellers because of the efficiencies gained working with A2X.”

• Scott Scharf, CTO & leader of the ecommerce accounting practice at Acuity.

It’s accurate ecommerce accounting without the fuss.

 

Is Your Amazon FBA Business Ready To Sell?

If you’re ready to sell your business, just make sure it’s ready too.

There are plenty of things you can do to ensure your business fetches the highest price. Accrual accounting is just one factor. 

Check out this comprehensive guide packed full of expert advice and tips for selling your Amazon FBA business. 

Unsure whether now is the right time to sell? 

Use our free assessment tool to find out whether you’re likely to get the valuation you want now, and what to do to increase this value. 

 

 

Callum Armstrong (guest author): Callum Armstrong is the content marketing manager at A2X. To help ecommerce sellers and their accountants succeed, the content team at A2X creates educational resources around ecommerce, accounting, and ecommerce accounting.