The Consumer Packaged Goods (CPG) industry thrives on a high-octane mix of rapid sales, tight margins, and constantly moving inventory. Even minor accounting missteps can jeopardize your business’s success.

But you can make your CPG accounting practices your secret weapon. Beyond just keeping the books in order, robust accounting can empower informed decisions, maximize profits, and help you navigate the complexities of Amazon’s FBA (Fulfillment by Amazon) model.

This CPG accounting guide will equip you to identify and avoid common accounting pitfalls and build resilient systems that fuel growth. Keep reading to learn how to unlock the full potential of your CPG brand with these accounting best practices.

Understanding the landscape

Known for its high sales volumes, slim margins, and rapid inventory turnover, the CPG industry poses unique challenges for accounting. Missteps in financial management can quickly escalate and give rise to problems with inventory valuation, compliance with tax regulations, and more.

We recently sat down with Anthony Domenici, CFO and co-founder of BASECAMP Consulting Group, to hear his reflections on his career transition from large corporations to smaller, more dynamic enterprises. He noted the shift in scale and complexity, explaining, “I was running enterprise finance for a three billion-dollar company, then you kind of go into this, like, tornado where you really have to make an impact quickly and start moving things quickly.”

For Amazon sellers using FBA, the platform’s complex fee structures and inventory management rules compound these challenges.

Common pitfalls of CPG accounting

Inventory constantly moves in the CPG sector, so any error in stock count can lead to incorrect financial statements that skew your understanding of product performance. Inaccurate tracking often stems from manual processes that are prone to human error.

Misunderstanding FBA fees and revenue recognition

Many new Amazon marketplace sellers underestimate the complexity of FBA fees. They encompass a range of costs, including handling, storage, long-term warehousing, and even fees related to inventory disposal or returns.

Each FBA fee has specific conditions and triggers depending on factors like your product size, weight, and how long it’s been in storage. That complexity makes it easy to misunderstand these expenses and their impact on your profits.

To understand how FBA fees work and support accurate financial planning and reporting, you need to:

• Regularly review Amazon’s fee structure:
  Stay up to date on the latest fees and how they apply to your products.
• Integrate FBA fees into your accounting:
  Use accounting software that connects with Amazon’s reporting to incorporate these costs automatically.
• Consider consulting an eCommerce finance expert:
  A financial professional can help keep your records clean and in compliance with accounting standards.

By taking these steps, you’ll gain better clarity into your finances for proper record-keeping and make informed decisions based on accurate data.

Wondering how to minimize your Amazon costs? Check out our guide on understanding Amazon selling fees.

Poor cash flow management

The CPG industry experiences rapid turnover. Unlike sectors with slower inventory movement, CPG businesses constantly see cash flowing out for new materials and production while waiting for finished goods to be sold and generate income. This creates a cash flow gap that needs careful management.

Without clear insight into incoming and outgoing cash flow, it’s easy to lose track of your finances. That can lead to bills and overhead piling up before you realize there isn’t enough cash readily available to pay them (known as a liquidity squeeze).

The consequences of CPG accounting mismanagement include missed opportunities, strained supplier relationships, and even difficulty paying employees.

All of that negatively impacts growth, as poor cash flow management can stifle your ability to reinvest in your business. Without a healthy cash flow, you won’t be able to expand your product line, invest in marketing campaigns, or take advantage of new business opportunities.

Neglecting tax obligations

Sales tax can be a complex beast in traditional retail, but it becomes a hair-pulling enigma in eCommerce. CPG businesses that sell across state lines on platforms like Amazon especially feel that pain.

Unlike brick-and-mortar stores with a single physical location, eCommerce brands can have a virtual presence in multiple states, each with its own sales tax laws, rates, and exemptions. It’s even worse on marketplaces, where many states have enacted marketplace facilitator laws.

These shift the responsibility of collecting and remitting sales tax from the seller to the marketplace platform (e.g., Amazon). However, the laws vary by state and can be subject to change. To avoid potential liability, sellers must know their obligations and ensure their Amazon settings are accurate.

Another consideration is your “nexus” — that is, a seller’s connection to a state. If your business has a nexus in a state (which can be established through factors like storing inventory there or exceeding a certain sales threshold), you become responsible for collecting and remitting sales tax, even if you don’t have a physical presence.

Tax authorities are increasingly scrutinizing eCommerce businesses. So, if you’ve been passive about collecting and remitting sales tax, you could face hefty fines and penalties during an audit.

Setting up strong CPG accounting foundations

You need to build a robust accounting framework from the start to avoid these pitfalls. Let’s explore the key steps to building a resilient system.

Implement an integrated CPG accounting system

Ditch the spreadsheets and manual data entry. Choose an accounting software that seamlessly integrates with your sales platforms, especially Amazon. With this solution, sales figures from Amazon automatically flow directly into your accounting system. That not only saves you valuable time but also eliminates the risk of human error associated with manual data entry.

With real-time data on sales figures, inventory levels, and cash flow, you can make informed business decisions with confidence. No more waiting for end-of-month reports — you’ll have the information you need readily available to track your progress and identify areas for improvement.

Understand and regularly review FBA fees

Take time to learn the ins and outs of every category of FBA fees and how they apply to your products. You need to familiarize yourself with the different types of charges, including fulfillment, storage, disposal, and returns. Then, understand how each expense applies to your products based on size, weight, and storage duration. Set up a monthly review process as well to check these fees and ensure they’re recorded correctly in your financial statements.

Automate inventory management

Manual inventory management is rife with wasted time, inaccurate data, and potential stockouts. Automated tools, meanwhile, provide real-time visibility into your inventory levels. This eliminates guesswork and guarantees you have the right amount of stock on hand to meet customer demand, which prevents lost sales opportunities and overstocking issues.

With automated tracking, you can identify potential bottlenecks or areas where products are sitting idle for extended periods. This empowers you to optimize your fulfillment processes and ensure a smooth flow of goods.

Automated tools can also handle the complex task of inventory valuation to verify the accuracy of your financial statements. That, in turn, provides a clear picture of the true value of your stock, leading to better financial planning and decision-making.

Establish a routine reconciliation process

Just like balancing a scale ensures precise measurements, regular reconciliation is essential to maintain the accuracy and integrity of your CPG company’s financial records. This process involves comparing your bank statements with your accounting system’s records every month. It’s crucial for the early detection of discrepancies so you can make prompt corrections and prevent minor issues from snowballing into bigger problems down the road.

Financial statements are the foundation of informed decision-making, tax filing, and building trust with investors and stakeholders. Reconciliation ensures the accuracy of those records, providing you with reliable data you can depend on. It also demonstrates your commitment to financial transparency and responsible business practices.

Knowing your financial records are trustworthy fosters peace of mind within your business and strengthens trust with external stakeholders.

Stay informed about tax compliance

Keep abreast of changes in sales tax regulations and update your Amazon settings accordingly. Alterations occur constantly, particularly with the rise of eCommerce. Make it a habit to stay on top of new sales tax regulations, especially those impacting online businesses.

Resources like government websites, industry publications, and tax professional newsletters can inform you about the latest developments.

The importance of accurate bookkeeping

Accurate bookkeeping isn’t only about compliance or record-keeping — it’s a powerful tool for strategic decision-making.

Profitability analysis

Accurate bookkeeping reveals which products are your profit powerhouses and which are duds. Detailed financial records allow you to conduct insightful profitability analyses.

Domenici highlighted the significance of that practice: “Having really clean bookkeeping for CPG is difficult … you need to have data and make quick decisions, and if you don’t have that, I think that that’s one of the main things we really try to do.”

Armed with this knowledge, you can make informed decisions about resource allocation. That could involve optimizing marketing campaigns for high-performing products, adjusting pricing strategies, or even discontinuing low-profit items.

Budgeting and forecasting

Historical financial data supports accurate sales and expense forecasts. In turn, these display your future cash flow needs and empower you to budget smarter.

With a solid financial plan in place, you can chart a safe course for growth. You can allocate resources strategically, identify investment opportunities, and determine how best to scale your business.

Investor readiness

Accurate and organized financial records are essential if you intend to attract investors or secure financing for your CPG brand at some point. Your books serve as a window into your business’s financial health, demonstrating your financial strength and transparency to potential backers.

Robust bookkeeping proves your ability to manage finances effectively and generate consistent profits. It also inspires confidence and trust in investors, making your brand a more attractive proposition.

Wrapping up — Invest in a strong CPG accounting infrastructure

For CPG brands in eCommerce, particularly those leveraging platforms like Amazon and FBA, robust accounting practices are a necessity.

By proactively addressing common pitfalls and implementing the strategies outlined here, you can build a solid accounting foundation that empowers informed decision-making, streamlines financial processes, and fuels long-term growth. Every financial decision shapes the trajectory of your business, so invest in a strong infrastructure to support your brand’s future.