How Do You Calculate Breakeven Point For Amazon FBA?
Trying to figure out your break-even point for your new Amazon business? Read our guide to find out how.
October 20, 2021
Deciding when you officially break even with your Amazon FBA store is simple in theory, but requires a lot of work.
Breaking even is when your income meets (or hopefully exceeds) your expenses in a business venture. In simpler words, when your direct costs, which are fixed and variable costs equal to your revenue. You can only start profiting off a business when you meet and surpass the break-even point - which is why it is such a critical number to understand.
Knowing your “break-even” number helps you determine your goals - goals for weekly, monthly, and annual sales, as well as your goals for pricing. It also helps you set a realistic budget and understand what your business can and can’t afford at its current status.
The tricky part with starting your own business, whether on Amazon or elsewhere, is that determining this number requires detailed tracking of any and all financial transactions that have to do with your business.
This can get messy if you don’t have a clear plan in place to handle your new business. Clarity and organization are the only ways to truly set yourself up for success with a realistic understanding of what your expenses are, and how much you need to see come in through your sales to offset those expenses and begin to see a profit.
Start Strong - Separate Your Finances
Many self-employed individuals keep all their finances in the same place. This can seem like a wise decision because of the simplicity, but it actually complicates your life.
Your best bet is to create a separate bank account for your business. You can register yourself as a sole proprietorship and even register a DBA (Doing Business As) so you can receive payments in the name of your business, without forming an LLC or a corporation.
Once you get yourself a bank account specifically for your business, make sure you have a credit card for all business expenses as well.
Keeping these things separate will save you a lot of headaches in the long term. Using your own personal accounts and cards for all your transactions will not give you an accurate picture of what you’re spending for your new business.
It’s not likely you’re carrying around paper receipts for all your transactions - but you need to make sure you at least have a digital record of your spending (and income).
Quickbooks Self-Employed is a great option if you’re just getting started - you can link your business bank account and credit cards (if you have trouble remembering to use these, link any accounts you use to receive income or make payments).
Quickbooks will track your expenses, and you can designate these as the proper type of income/expense. Not only will this help you ensure you’re paying taxes correctly, but will show you your real-time business expenses in contrast with your income.
You can also calculate your profit margin, net profit, FBA fees, even your total cost. Or you can have it separated into fixed cost and variable cost. You can get a full break-even analysis report that will tell you if you're losing money from the selling price you've set. This will also help you determine the fixed costs, variable costs, and sales price to get the profit margins you're looking for.
If you do have expenses that you pay for in cash (not recommended), be sure to get receipts and upload these expenses individually.
Determine Your Real Expenses
It’s easy to think that your only expenses with Amazon are paying for inventory, paying your Seller Central subscription, and perhaps paying for advertising.
There is a lot more, however, that goes into your store.
Here are some expenses that many people don’t take into consideration:
- Home Office Supplies: This can include ink, paper, shipping supplies, printer, WiFi, cell phone plan, etc. If you had to buy a computer, tablet, phone, or any other technology for your business - include it here.
- Third-Party Services: Repricing subscriptions, designer fees, copywriting fees, etc. Your investment into a training program could be included here.
- Rent/Office Space: Consider a portion of your rent or mortgage payment your office expense - this can be determined by evaluating the square footage of your office space in comparison to your home size and total house payment. This is most important if you are planning to make this your full-time gig and intend to work from home.
- Miscellaneous Digital Subscriptions: Dropbox, Loom, Zoom, Google Drive, even Quickbooks as we mentioned above - whatever minor subscriptions you pay for and use for your business. These add up!
- Social Media Ads: You likely won’t forget to track ads you use on Google or you may track your break-even ACoS for AMS, but it’s easy to forget to track social ads. Don’t!
- Legal & Business Fees: You may hire an accountant to help you with taxes or have registration fees as you work on your store. Consider these when tracking expenses.
Obviously, you will also include the more common sense expenses, like your Amazon fees, storage fees, and inventory cost. Anything that has to do with your business, must be tracked. You need to know what it is you’re spending and where it’s going to accurately confirm your expenses and determine what number is your goal for a break-even point.
Forecast Expenses For The Year
Most businesses and Amazon sellers have an annual budget. You need one too.
Using your record of expenses, set a realistic monthly budget for your store. You can organize your expenses into categories like:
- Administrative Expenses & Fees
- Digital Subscriptions & Services
- Marketing & Media
- Office Expenses
- Legal / Business
You may have more or fewer categories depending on your expenses. The important part is setting yourself up with a realistic projection of what you’re going to spend on these categories this year. Doing this annually (at the beginning of the year if possible), helps you to reevaluate your goals and achievements as a business owner.
Don’t forget to pad this budget in consideration that as you grow, your expenses may slightly increase throughout the year. Consider the likelihood of increased advertisement spending during the holiday season as well.
This budget should be built using your understanding of current expenses, and your projection of the next 12 months of expenses.
Once you have this budget - you’re almost ready to declare your break-even point.
What Do You Want to Walk Away With?
While technically, you don’t need to include this in your break-even projections, I suggest you do.
You may want to give yourself two numbers. Number one is the break-even point for your store, where you can finally say your investment has paid off, and you’re now turning a profit. That number is essentially the annual budget you put together using your current and projected expenses for the year. Once you surpass that in sales (post-tax), you’re in the clear.
Number two is your break-even point for your store, where you can finally say your investment has paid off, and you’re now turning enough profit to cover whatever level of income you want to reach to be able to do this full-time.
To do this, you can make a second budget for yourself. In this second, much higher budget - include your ideal annual income. This break-even point will be much harder to hit, but you’ll get there! When you finally clear this barrier, you can be confident that you’re able to provide for yourself financially through your store.
Until you meet this point, it is not wise to quit your job or lean on your store as your primary source of income.
Why It Matters
Does this all sound overwhelming? Well, I’ll be honest. There is a lot of work that goes into organizing your finances and clearly defining your annual budget and income. However, this will pay off when you have clarity about where you stand and confidence when it comes time to make this your full-time gig.
David Zaleski is an entrepreneur, Amazon seller, and the founder of EcomHub. He's been operating in the eCommerce space since the age of 14 years old. At the age of 18, he started his own Amazon business with just $4,800 in start-up capital.See more posts from this author