Are you a bottom line guy / gal? Meaning, before you invest your time and energy into anything you want to know – what is the bottom line, how much effort will this take, and, ultimately, how much money will I make? This seems to be the most common question anyone endeavoring in any entrepeneuriship wants to know – because in our materialistic (and, realistic) minds – more money = more success = worth our time and efforts. It is a simple equation, really. So, when you deal with Amazon Merch then, how do you figure how much money you can actually put into the bank? What are the real numbers?
ACCOUNTING TERMS 101 – To begin, we need to actually define some basic accounting terms, because if you are anything like me, you don’t just know this stuff, and will have to learn it and attempt to understand it. Plus, I honestly thought that some terms meant the same thing – such as “revenue” and “profit” – and let me tell you, they are definitely not the same. Let’s begin!
- Revenue: the income generated from the sales of goods / services associated with the main operations of an organization or business before any costs or expenses are deducted. Also known as “sales.” Can be monthly, yearly or even daily.
- Royalties: the monetary compensation given to an owner for use / sale of intellectual property (i.e. your Amazon Merch designs) minus the royalty fees assessed.
- Costs: the monetary value of (1) effort (2) materials (3) resources (4) time and utilities consumed (5) risks incurred and (6) opportunity forgone in production and delivery of a good or service. All expenses are costs, but not all costs are expenses.
- Profit: the surplus (extra) that remains after all costs are deducted from total revenue / the number that taxes / dividends (money paid out to shareholders, etc) are calculated from.
- Expenses: money spent or cost incurred in an effort to generate revenue. In short, the cost of doing business.
- Gross Income: the amount of sales revenue which exceeds production costs
- Taxable Income: gross income from which standard deductions and other allowances have been subtracted
- Income: an excess of revenue (money from sales) over expenses for an accounting period. Also called earnings or gross profit.
- Net Income: the total revenue in an accounting period (month, year) minus all expenses during the same period. Also known as earnings or net profit or net loss.
- Net Profit: the amount by which income from sales is larger than costs. Also called profit after tax. 
So, in a nutshell: Revenue (sales) – Costs (expenses for production) – taxes = net profit
Are you feeling less confused now? Probably not. Many of these words defined above seem to be the same thing. Net Income / Net Profit – same thing, right? No, because profit means an excess over costs and taxes, whereas net income could be negative, as in a net loss as opposed to net profit.
Let’s give a simple example to see if we can clear this up.
- You sell your shirt for $20.00
- Amazon listing fee of 15% of price – $3.00
- Amazon printing costs per shirt – $9.80
Royalties (after costs) per shirt – $7.20
Now, let’s say you are pretty successful and end up selling 5,000 shirts in a year. Go you!
Your sales are $100,000. However, your royalties are only $36,000. Still not too shabby.
You have made over $30,000 in a year! Or, have you really? What about all those lovely accounting terms I defined above. How do those factor in? What is your actual net profit? Or, do you have a net loss?
So I said that net income means the amount of revenue (sales) [$100,000] minus expenses (costs). What are expenses? Well, for Amazon Merch, some of the aforementioned costs are irrelevant because Amazon supplies them and already deducts it from your royalties. For example – materials and production.
So what expenses are possible to incur when selling on Merch?
- Additional Content Creators: If you are on a higher tier (more than 100 different designs) you may need help creating and, obviously, these people get paid for their Let’s say you have one partner who wants 20% of sales. His take from sales is then $7,200.
- Design Software: You will most likely have some design software needs, especially with multiple designs. There are monthly fees associated with this type of software, so let’s say that you have to spend $30.00 / month. This will equate to $360.00 /
- Accounting Software: Entrepeurs often have accounting software fees in order to manage their sales (especially if they sell on multiple sites.) This is usually also a monthly fee, so let’s say it is about $100.00 / month. This equates to $1200.00 / year.
OK, here is the moment of truth. After all of this, what is your actual profit?
$36,000 (royalties) – $7,200 (creator fee) – $360.00 (design software) – $1200 (accounting software) = $27,240 = profit (pre-tax profit / gross income / taxable income)
Wow! You have made almost $28,000 selling shirts on Amazon Merch!
Nope. Not exactly.
Huh? What now?
What have you forgotten? I’ll give you a hint, Benjamin Franklin once said, “In this world nothing can be said to be certain , except death and ________.”
Oh yeah, taxes. *sad face*
Uncle Sam needs his cut because after all is said and done, you have actually made money, and turned a profit, so you need to pay your dues (literally). How much tax you have to pay depends on a variety of factors including how much money you have actually made and where you live (in country or out). While you will be able to take some deductions when filing your business taxes (such as for home office supplies, your accounting software, your design software) you will still have to give the good ole’ government it’s fair share.
However, even with paying taxes you will still have a net profit with the above scenario which would make it all worthwhile! So, now that you have a basic understanding of the numbers game, how can you save on expenses and maximize profits? We will delve into that one soon!
 Business Dictionary Online (2017)