If you are wondering whether you should start an Amazon FBA business, this video will walk you through step-by-step on how long it will take to get your money back.
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Full Transcript:
Welcome to the Goodlife Warrior Podcast. I’m Yuping. We make sourcing easy, fun, and profitable for you. This episode was originally aired as a video on my YouTube channel, youtube.com/goodlifewarrior. As always, high quality professional sourcing content delivered to you with passion and my unique Chinese accent. Enjoy.
What’s up sourcing warriors? How are you, my friend? I hope your day is going well. This video is made specifically for those of you who are thinking about to start the Amazon FBA business, but you have been wondering, “How much money do I need? Is that 500 or 3000?” Actually, a better question, is how fast, how fast you can get your money back? If you know how fast you can get your money back, you will feel a lot more confident going into the process.
So, in this video I’m going to show you step by step, how much money you’re going to need in each sourcing step and how long that money is going to stay in the process. For those of you who have started the Amazon FBA business, this is a great podcast episode for you to better understand your cashflow situation. If you’re new to this channel, my name’s Yuping. I’m here to give you the best support and share with you the best knowledge I know, which is sourcing, everything about sourcing. If you have not joined the Sourcing Warriors Facebook group, I really encourage you to check it out. You will be impressed, because you are going to get so much tips, knowledge, and support from the Amazon sellers who have been selling. So, they’re giving you practical advice within the Sourcing Warriors group. It’s a great group to join.
Let’s get the video started. I’m going to hop onto my computer to show you the step by step on how we’re going to get the money back. Okay, my friend, let’s get our investment started. So, in this section, we’re going to make the investment. Every cell highlighted in yellow is going to be the cash outflow, as you can see this arrow. And then, in this section, we’re going to make the money back. Every cell highlighted in green are the cash inflow.
So, we’re going to start from your reserve. In day one, we’re going to say you have $3,000 to invest. Out of $3,000 savings, let’s take a look how much you’re going to spend on product. Let’s say your supplier is asking for 500 MOQ, per unit cost is $4. Then, your entire purchase is $2,000. Out of a $2,000, you don’t have to pay them all at once. In order for them to start the production, they’re going to ask you to pay down 30%, which is $600. So, the cash outflow here is 30% down payment, and that is equals to 600.
What else you need to pay? If you pay through TT, you may end up having to pay wire transfer fee. That could be averaging $30 to $45. Let’s just say it’s 35 bucks. This subtotal is automatically adding up each line item, and this is your ending cash balance. After deducting 635 from 3000, your ending balance right now is 2365, on day three after you made the wire transfer to start the production. Now, you’ll wait until your supplier finish your PO. Normally, the supplier would take 30 days to finish the production. Say on day 40, they notify you that your product is ready. Then, you are ready to send in the inspection to check the product quality.
In this time, there are three major cash outflow activities that we need to be prepared for. One is you send in the inspection. The inspection is going to cost, say between 150 to 400. We’re just going to put down $200 for budgeting purpose. So, 2365 now becomes 2165. What else? If the inspection passed, then you will need to pay this supplier the remaining balance, which is 70% of the $2,000 PO. That is $1,400. So, this is the major cash outflow, is pay the remaining balance. That is equals to $1,400.
Now, we have only $765 in cash. What else we need to be prepared for? Most likely, you need to prepay for your shipping cost, because you don’t have any payment term with any of the freight forwarders. It doesn’t matter they are Chinese or a freight forwarder you picked it out from your home country. They would want you to prepay for your shipping costs. So, for your shipment of a 500 at a unit price of $4, we have to make an assumption. Be sure you get the best shipping quote, because you know you have $765. So, let’s say we get a very good quote to ship this load, at $500.
So, on day 40, we have $265 left in our pocket. What else we could possibly forgetting, before this shipment get to the port? Normally, it will take 30 days to get to your destination from China, if you ocean ship the product. Let’s just say day 70, your freight forwarder told you that the $500 they asked you to prepaid did not including the custom bond. Now, you will have to buy a single entry bond. A single entry bond cost between $50 to $100. It’s a commercial invoice value based as a percentage. So, let’s just say, this is a small order, we’re going to pay $65 for a single entry bond.
Now, we have $200. What else? If the freight forwarders quote for this $500 that you prepaid did not including custom tax and duty, then you will have to pay the tax and duty to the government. How much? It depending on your product. In our case, let’s just put down 3.6% of your invoice value 2000. That will be equivalent of $72. Then, we’ll just put this as our cost. And then, if we forgot other miscellaneous expenses, we can just put down 50 bucks here.
So, this is day 70. We have $78 left, after we invested $3,000. After two and a half months, we need to make some money. So, let’s take a look of these selling or cash inflow situation. If our product is received into Amazon warehouse on day 70, we are going to make our product listing go live. Now, we’re ready to make our first week sales. First, we have to decide how much we’re going to sell this product for? We decided to sell it for 20 bucks per unit. Now, we sold 10 units per day for seven days straight, because the first three days we have done give away and promotion.
Now, by days 80, we have made our first week sale to be $1,399. All of the sudden, our cash situation improved quite a bit. But, wait. This cash is going to stay in Amazon’s system for at least two weeks. Amazon pay the sellers every two weeks. Right here, does Amazon truly pay us 1399? Did we forget something? Yes, we did. We have to remember to pay Amazon. If we are selling on Amazon, we have to pay them a fee. Amazon charge, 15%. So, after paying Amazon… Let’s pay them first. Now, they’re going to pay us 1189.
What else? We have to pay them the shipping and storage fee. Basically, they call it for a fulfillment fee. How much is the fulfillment fee we need to budget for our item? To figure out the exact fulfillment fee that Amazon is going to charge, we need to use a same or significantly similar item to the size of the product we are going to sell on Amazon. Because the weight and dimensions are similar, their fulfillment fee is going to be similar.
Let me use an example, so then we can figure this out together. If you are selling an item for 19.99, let’s just find an item for 19.99. But for you, you need to… Here is one. For you, you need to find an item that is significantly similar to yours. We’re just using this 19.99 product as an example. What we’re going to do, is to call out this ASIN number. It’s unique to Amazon SKU, and then we go to Fulfill by Amazon, this Amazon revenue calculator. You can just search in Google, Amazon revenue calculator. It’s going to give you this page. So, what you do is to paste the ASIN number we just copied from this Amazon website and search.
So, you’re following me, right? We need to identify an item that is significantly similar to the package you are going to send, in order to figure out this Fulfillment by Amazon fee, the shipping cost. So, now we need to figure out three things. Item price, we already know. We wanted to sell it for 19.99. This item is selling for 19.99. Ship to Amazon and cost of product. We know both field, because we paid our shipping cost and we know our product cost. We got the quote from the supplier.
So, let’s go back to our cost sheet. What is our cost? Our cost, it’s $4 per unit, right?, So we are going to fill in the cost. What about the shipping cost? For this item to ship to Amazon, we paid $500 in shipping, single entry bond, tax and duty, and we budgeted $50 miscellaneous fees. You add all these four fields up and divide the number of units we’re shipping to Amazon. We said we’re going to ship 500. So, per unit basis, we are spending $1.37 to ship this 500 per unit to Amazon. Let’s plug this number in back to the revenue calculator. Ship to Amazon, per unit basis it’s going to cost us $1.37.
Now when we hit on calculate, now Amazon is showing 4.84 is going to be the shipping cost or fulfillment cost, if they are to send this package to your customer. Now, we know 4.84 is per unit cost that Amazon is going to deduct out of our cash. So, now we are going to have to pay them first of the fulfillment fee, 4.84. Out of 70 units that we sold in the first week, we have sold in revenue of a 1399. We need to pay 4.84 for 70 units they shipped for us. So, what we’re going to do, is to use 4.84 times 70 units that we sold.
Now, after $200, 15% referral fee, and the shipping cost, we are now having $850 out of this entire week, that could potentially transfer to our bank. What else? Some people when they first launch to the product, sometime they run PPC. Some sellers, they don’t run the PPC. PPC is the advertisement cost, pay per click. So, if you’re wanting to run PPC and wanting to budget a percentage, you can do that. So, what you going to do, is to put a percentage here. Let’s say, if you wanting to run PPC at a 6% of your total sales, then you just budget that 6%, times your total revenue.
A word of caution here. Your budgeted PPC cost could vary significantly from your actual PPC cost when you run the advertisement, because each product is so different. And, the market is so different in terms of how fierce of the competition. Your actual PPC cost could be much higher. Or, you decided to not run the PPC, then you won’t have any costs right here.
This is only just to walk through the logic and potentially how much Amazon is going to deduct out of their fee, out of the fulfillment, if you turn on your PPC. They’re going to deduct all these cost line item first, before they transfer the money to you. There might be other items that Amazon withhold the payment, because they are judging your sales based on your rate of returns. I don’t know the exact factor, especially each product is different. But, these are the major categories you should taking into consideration.
So, let’s recap. We sold 70 units in the first week, almost 1400. After pay Amazon the fee, fulfillment and your PPC, they are potentially going to transfer $766. With the pocket money we had, 78 and 766 coming back, now, on day 94, after two weeks, Amazon paid us 766. Now, our bank should show $845. Guys, if you made $766 even after all these fees, I would still say that this is the beginning of a great business. So, let’s continue and sell into the second week.
In the second week, we’re going to make some assumptions. In the first week, we said we are going to sell 10. Now, we’re going to sell 12. If we sell 12 a day, seven days, we’re going to sell for 84 units. Out of 84 units, we need to calculate how much we’re going to pay for Amazon. So, second week we’re going to sell $1,600 in revenue. Let’s copy and paste all these fees and deductions. Except on the fulfillment, instead of 70, we’re going to change it here. We’re going to change to 84 units, because they’re going to charge by the actual quantity shipped out. See here, fees is at a 15% based on the percentage of the revenue. The PPC, continue to budget at 6%.
Now, our total net potential earnings to be paid after two weeks of day 101, we’re going to add the $919 back to our account. After second week, we are now progressing into earning more cash. That is 1765. This 1765, it is still short of our investment of 3000. So, we have to continue to push. In the third week, if we sell 15 a day, we have a potential to sell $2,000 in revenue. Out of this 105 unit, we need to pay Amazon the shipping and storage fee, once again, 15% referral fee.
So, right here, you can see the PPC is zero. Why is that? Because you could potentially turn off your PPC, if your unit is starting to root and start to build some organic sale to support the momentum. If you turn off the PPC, the PPC deduction from Amazon, it’s going to be zero. Now, the net potential earning is 1,275, that would be transferred to you after two weeks. Now, on day 118, you are making your $3,000 back.
Now, you might be saying, “After this many days, almost four months, I just got my money back. The money cycle is too long. Is there any way to make this cash flow in back to me faster?” Yes, perhaps. The way to shorten this money cycle, is by air shipping on day 40. After your product pass the inspection, you can just air freight instead of ocean freight waiting for 30 days for this product to get received into Amazon warehouse. If you air freight, then you effectively reduced at least 20 days from here. And then, you move this money cycle forward.
Of course, you’ll have to weigh your options here. If you air freight, your prepaid shipping costs maybe higher. That is the decision you’ll have to make, if you want it to have more margin or more speed. I hope you make an Excel to simulate your product costs and expenses and the projected sales, to truly understand how much money you need in each step. So, you can be prepared to understand how long this cash is going to go outward and when you’re going to get the money back. I made this Excel to help you understand the bigger picture of your cash outflow and cash inflow timing. Feel free to add or delete any of these line items specific to your product. This is just to help you understand the bigger picture.
Okay, my friend, I hope you enjoyed this video. If you really, really wanting to save money, I really want you to check out the course that I offer to you. My commitment to you, it is to give you support so that you don’t have to be so stressful. And, to save you money, especially when you are spending thousands of dollars going into the sourcing process. The Sourcing Warrior Mastermind course link is in the video description. Check it out. Until the next video, I hope you enjoy your day. Have a great day. I’ll see you in the next video.
