When starting an Amazon Fulfillment By Amazon (FBA) business, you will get bombarded with all kinds of metrics and figures. People are going to tell you different things about which metrics are the most important and why. It can be confusing and overwhelming. One of the contradictions that you will be faced with is cash flow versus profit. Some people are going to tell you that your profit is the most important metric when it comes to measuring the health or success of your business. However, in this video and in the text below, you will learn why cash flow is actually more important when it comes to running your Amazon FBA business. Let’s take a look:
One thing that people do not realize is that the term “profit” is quite subjective from the viewpoint of an accountant. There are a lot of questions: Should an asset be categorized as profit? Which items should be categorized as business expenses? These are just a few of the questions that must be addressed when determining profit. This makes the concept of profit a little bit too subjective to use as a good measurement of your business’s success.
The real issue at hand is actually more about the money that enters and exits your bank account because of your business, right? This is a much simpler way of looking at how much money you are making off of your business. This is called cash flow. If you have more money entering your business account than you do exiting your account, your business is making money.
Your cash flow is more about timing than you might think. The reality of it is that timing is as important (and sometimes more important) than the amount of money spent or made. Instead of focusing on all of the metrics involved and worrying about every penny all of the time, you should make your main goal to receive money quickly while spending it slowly. You should focus on keeping money in your account for as long as possible. The flow should be fast to enter and slow to exit.
You can look at the different ways to keep cash from leaving so fast as levers. You should “switch” as many as possible. When you owe money, that is your lenders’ problem. Not to say that you should not pay what you owe, but your lenders will be happy to receive your payments no matter what. You should always do everything that you can to keep money in your account as long as possible. Do whatever you can do to flip as many levers that you can to slow the flow of cash leaving your business. If one of these levers involves taking out a line of credit, you should always keep in mind that you should only take out lines of credit when you do not need them. Borrowing money when you need money will just put you in a bind later on.
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