Jul 28, 2020
On today’s episode, we bring back Scott Scharf to talk
about how to build out an accounting system using
automation. Scott is the Co-Founder of Catching Clouds, an
outsourced cloud accounting service for e-commerce businesses.
Topics:
- Why accounting is a daily, weekly, and monthly endeavor.
- The best accounting software.
- Setting clients up for accrual.
- Understanding the technological ecosystem.
- Switching from cash-basis accounting.
- Refining the process of cash flow projections.
- Why cash is king.
- One thing to increase optimization.
Transcription: Joe: Mark, I
said many times that I actually fell asleep in accounting class in
college. And unfortunately, it was Northeastern University and
there were probably 200 people in the room. I was sitting near the
door. So 199 people marched out with me there, my head on my desk,
drooling, and then the next class came in yet somehow I’m in the
position over the last eight years of really revealing a bare
minimum of 5,000 profit and loss statements. And I get on my
soapbox and preach about this; how important good clean financials
are, not only for an entrepreneur's ability to analyze his own
business and make sure they're driving towards their goals
properly, but to be able to even just get in the room with highly
qualified buyers. Once you get in the room, there's a ton of other
things, but the P&Ls will get you in the room. And I understand
you just had another conversation with our good friend Scott
Scharff from Catching Clouds about building automation into
accounting so you don't have to actually do this yourself day in
and day out, week in and week out by building some automation into
the process, either through QuickBooks or Xero. I understand Scott
has preferences for both and good things and bad things to say
about both.
Mark: Yeah, so you're not the only one
that fell asleep in accounting class. I did as well. If you looked
at my grades, you'd wonder why I'd talk about accounting so much.
But you know this Joe I've been working my way through some
biographies of various titans of American business. I went through
John D. Rockefeller. I'm now in the middle of a biography on Andrew
Carnegie. And you know what one thing they both have in common?
They were religious about their books. In fact, that was one of the
big advantages that Carnegie brought into his business, was
detailed books that they could optimize. I just find it fascinating
that we can see that this is the case all the way through history
what the people have been super successful. Their books are up to
date. They're clean. They use them to optimize their businesses.
And Scott and I talked a lot about how to do that with an Amazon
business. I'm not going to lie, it was overwhelming, partly because
Scott is crazy intelligent when it comes to this stuff and he has
his systems all set up and he starts throwing around this system,
that system, you just hook this up and you do that and then the
other thing happens. And in my head, I'm thinking, how can anyone
even start this? And at the end of this episode, you'll hear me
kind of say that to him. I’m like Scott, this is overwhelming. How
do you even get started? But the idea is simple and it is you just
get started. He said something in this episode, which I didn't call
out in the middle of the episode, but I think is really, really
key. He said that of all the financial records that he sees people
put together, he will see sometimes accountants that don't know the
Amazon world trying to do books, and then he'll see some owners
doing their own books. He said both are typically a mess but the
ones done by the owners are less a mess than those being done by
the bookkeepers because the bookkeepers don't know anything about
Amazon.
Joe: That is CPAs you mean, right? Not the
bookkeepers.
Mark: Yes.
Joe:
Yeah, I'll agree with them a million percent because CPAs do taxes,
bookkeepers manage books, and owners try to manage books as well
but never quite as good. So I think he's spot on. Guys, listen, and
by guys, that's a unisex term. Pay attention to this. I know I
preach on it sometimes and I'm so sorry, but it's because I'm here
to help you. I'm here to protect you. We are entrepreneurs, we're
advisers, we're brokers, we're mentors, and we're your friends, and
we're sharing this information for you to help you build a better
business and have a better exit someday. Even if that someday is 20
years from now, if you've got automation in your books like Scott
is talking about here with Mark, it's going to make your life
easier and help you make more money. So with that, let's move to
it. But before we do, I want you all to send an email to Mark to
discuss whether Carnegie is pronounced Carnegie or Carnegie.
Mark: That's a really good question. I go both
ways by the way. The author of this; it's an audiobook, he's saying
Carnegie so I'm saying Carnegie now.
Joe: Okay,
Carnegie Hall is where I’ve been before, but I don't know either. I
actually said we have a client that is a one, two, three, fourth
remove descendant of Teddy Roosevelt and I pronounced it Roosevelt
because I Googled that.
Mark: That's wrong.
Joe: I know. It was dead wrong.
Mark: Carnegie, Carnegie Accounting, let's do
accounting.
Joe: There we go. All right. Here we
go.
Mark: Scott, thank you so much for coming back
on the podcast. I know you are on the podcast a while ago. I think
we talked about the ultimate seller's checklist about the things
that you have to do, both leading up to a sale and then after the
sale, closing on the business but I'm excited about today's
conversation. We're going to talk a little bit about bookkeeping
and the reason I'm excited about this and I know people in the cars
or wherever you’re listening at would be like I need to stay awake,
I want to talk bookkeeping. I hop on this all the time. Bookkeeping
is so important and there's so much data in your books if you keep
them right. I had a conversation with somebody just the other day
who is ready to sell. He's got a great business that's growing like
crazy and he's going to have to put things on hold to flip over to
accrual because that's what we require now. And so I want to talk
to you about this because it’s what you guys do over at Catching
Clouds. Why don't you just kind of give a quick introduction for
those that are listening to you for the first time?
Scott: Okay, cool. Thank you. That was a while ago
and that was a good conversation. So Catching Clouds, we provide
outsourced cloud accounting services to e-commerce businesses. So
our whole focus is only working with businesses that are selling a
physical widget on Amazon, eBay, Shopify, Bigcommerce,
TrueCommerce, House, Wayfair, Wish, Amazon Canada, CO, UK. Really
most of our clients are those more complex multi-channel sellers
and we're working with the larger established businesses and the
one to fifty million dollar range. But the main value we offer is
we provide the bookkeeping, accounting, and controller level review
of their financials and we do all the work. The clients get
read-only access to the financials. They threw everything over the
wall to us and we leverage technology to pull everything together
and then we turn that into accurate financials. And we just
consider ourselves part of our client’s businesses. Were just part
of their team.
Mark: Why? I mean, let me just
start off with kind of an obvious question and one that I think if
somebody is not at the million-dollar revenue or fifty million
dollar revenue level, why are companies at that level hiring and
spending money on a company like yours? Why is it that their
financials are important enough to have that controller level
service like yours?
Scott: Yeah, so the main thing
is that they feel out of control. And we have talked all about
management accounting, not just year-end for taxes; we're like a
clock, strike twice a day. And otherwise, you only know; and if
anything it is extended, you only know if you're profitable in
September for the whole prior year. And our whole focus is
accountings at daily, weekly, monthly piece and that the owners at
a minimum have to stop, take a step back and look at their
financials and adjust their gut feeling so they can make great
decisions on a daily, weekly, monthly basis, which are all those
decisions you have to make so that your business runs better. It's
more efficient, it's more profitable, and better to sell because
it's managed well. But if you don't get that feedback where we have
people; sellers that will go, wow, that was my best month ever and
we're like, yeah, you lost a bunch of money. And they're like,
wait, what? Well, you spend all the money on this and you didn't
pay attention to your marketing spend and you spent through all
your profit on the marketing spend. And if you don't see that, it
doesn't do any good to notice that six months from now. So it's
those kind of things. Or when they're looking at any of the many
real-time tools, there's a big difference between real-time tools
to do re-pricing and high-level reporting and you can use to make
real-time decisions on re-pricing product or what to buy and all
that stuff, and then double-entry accounting that accounts for
everything. And then we help them adjust they're gut. Hey, this
tool always shows you your sales numbers 10% too high, and then
they can adjust to it and make those real-time tweaks. But the real
value is they're serious about being entrepreneurs. They understand
and they hate doing accounting. Most of these businesses didn't go
into business to pay sales tax or do accounting and they want
somebody else to do it, but they want somebody else who can talk
the talk, who understands where the FBA is and FBA reimbursements
and inventory and accrual and landed costs. And they don't want to
have to train the accountants on just the terminology, let alone
what are all the crazy things Amazon does, what's the settlement
statement, and all that crazy. So that somebody that they can trust
is taking care of those financials and then it's our goal to
educate them on how to read the financials themselves and provide
insight.
Mark: Yeah, I think you talked a lot
about kind of those boots on the ground sort of decisions, those
granular decisions. I think financials and getting comfortable with
reading your financial statements there's two levels. I'm a big
picture type of guy and I actually just recently did this with
Quiet Light and with another company I own where I took a look at
my financials over the course of the last year and I just simply
broke down the expenses as a ratio of revenue in the big categories
and where are we? And with Quiet Light one thing I want to do is up
our data game. We've got a lot of data that we built on over the
years, but it's not organized as well as it could be. It's not
point and click we could pull this data up. It requires some work.
And you know what? It shows in my P&L because we historically
had a large tech department that's changing. With my other company,
we should be more marketing focused and it was this kind of bigger
directional sort of CEO sort of thing and saying, hey, you know
what, we really need to double down on the marketing. So I think
the financials have that kind of dual-level play of you get the big
picture, but the granular boots on the ground sort of decisions too
is important if you know how to read them and understand them. You
guys help with that. You help laicized some of it.
Scott: We do. And one of the key values we do is
each of our controllers who are CPAs we don't do federal and state
income taxes, but they understand accrual accounting, gap
accounting, and everything else. But each one is supporting at
least 10 sellers and we never share confidential information, SKUs,
or whatever but we can look across all of our clients and say, hey,
wow, you're spending three times as much on your Google ad spend as
we've seen with our other clients and we're not seeing that show up
in your income. And they're like, oh, I just launched a new
product, in four weeks I'm going to cut that back. And then our
controller as from an accountability puts it on the calendar, calls
the seller and say cut it back so you can start making profit. It's
okay to ramp up your marketing spend and burn through your profit
for whatever number of weeks to launch a product but sometime
you've got to back it down. And if you forget all your profit is
flowing out. And so it's that comparison and we can do that common
comparison, kind of small data, big data across our client base
because they're all consistent because we have no restaurants or
which would be bad or nonprofits or other things. So it's that
insight of being able to see multiples and your business too, you
have the same benefits of the fact that I've looked at over a
thousand seller’s books. You guys have looked probably at least
that many if you get that when you're in this niche and you focus
on these areas, you really understand the nuances and you see the
different scenarios and then you can provide that feedback.
Mark: Absolutely, specialization especially for
what you guys do. It makes a huge difference. Let's start with
talking about different types of software, because Joe Valley, the
co-owner of Quiet Light he often, says Excel is not accounting
software. Unfortunately, we see a lot fewer Excel books these days
than we used to, although they still come up every once in a while.
The two dominant ones seem to be QuickBooks and Xero. I have seen
other systems thrown in there from time to time. I know you've
dealt with NetSuite to an extent. What's your favorite, why, or are
they equally good?
Scott: So Pepsi, Coke, they're
great. It's so great that they…
Mark: I’m a pop
guy.
Scott: Okay, yeah.
Mark: Oh
no, I'm joking. I'm not, I don't drink pop or soda.
Scott: Yeah, I know. So in general it's great that
they're both out there, they're both heavy competitors, Xero does
much better internationally. Intuit has a much bigger footprint
here; a much, much bigger footprint here in the US. But because
Xero came along and has been in the cloud and about six years ago,
got 200 million in VC funds Intuit went uh-oh we better fix our
cloud solution. So that helped anybody that was on QuickBooks. So
today they're both feature consistent. Okay, so if you pick either
platform one or the other, you're going to be okay. We prefer Xero.
We think Xero is a better cloud platform. It's better with
multi-currency. If you're doing multi-currency, it is by far
significantly better. And then our view is that Xero is a better
company. Intuit is a shareholder driven marketing company and
that's all they care about. They don't care about accountants. They
don't care about small business. I mean their marketing says they
do. They are a big, big business. And Xero even though it's much
bigger, is still only a few thousand people. It started in New
Zealand and is very much about supporting businesses and being
engaged in everything else. And they're just really upping the
feedback always.
Mark: Yeah, I've got a soft spot
in my heart for Xero. I put my other company on it for a while. I
actually had to take it off because I didn't like their PayPal
integration at the time and that other company had a good amount of
PayPal sales, but I just like how they set up the system
philosophically. It just felt tighter. It felt like QuickBooks you
could have all these loose ends kind of floating out there and
Xero, like their name kind of alludes to, wants everything zeroed
out and they wanted all the balance out. And philosophically, it
felt better. What about NetSuite or other third-party systems? Are
there other systems that you think are good to work with?
Scott: Not really. Really it's in that small; even
if you're a startup, you should start on Xero and QuickBooks and
you should be doing accounting from day one even if you have no
idea what you're doing. And every business owner, entrepreneur, you
have to wear every hat in the business so you understand it enough
so when you delegate it, you can oversee it. So you can start at
that level and the only reason we would expect anybody that would
outgrow Xero or QuickBooks online or us at that 50 million or
whatever stage is when their supply chain gets more complicated. So
we can talk about cloud inventory tools but the idea is need and
I'm a big believer in best of breed; so Xero for cloud accounting,
Gusto for payroll, A2X for Amazon and Shopify income, Hubdoc for
document management, Bill.com and others and Veem for international
wire. So we've got these set of tools but then the cloud inventory
tool really has to be specific to the client. Almost all of them
suck in different ways but there are some that are getting to be
pretty good that you can use. But if you outgrow those or you can't
find a tool that you need that will meet your supply chain and the
number of 3PLs you have and your manufacturing process, then you
might have to grow up to NetSuite. And if you're a larger business
and you want to be able to; you're buying a lot of international
stuff and you have customs invoices that show up six months after
you've done a sale and you want to back-calculate all of your COGS
into the past, the only way to do that is on NetSuite. Because we
do monthly snapshot accounting so if there's an adjustment six
months later we posted in that month, we don't go unravel
everything and put it all back. So if you need that sophistication
or you need a more advanced one but you're going to pay for it
price wise and you're actually going to pay a penalty that in my
opinion, not great integrations to pull data from these sites and
it makes it difficult to impossible to at least reconcile Amazon
working with the different NetSuite integrations.
Mark: Well, let's talk a little bit about that
because I want to talk about some of the automation of this because
I think the biggest challenge with a lot of the software is
figuring out how to pull in the data in an efficient manner and we
especially run into this problem with accrual accounting. This is
why so many bookkeepers mistakenly or misguidedly tell their
clients you should just do cash basis, because for them it's a lot
easier, right? You see the purchase order, you enter it in, and
going through to an accrual, you need to check your beginning
inventory levels at the beginning of the month and ending inventory
levels to figure that out. And it's just more work than they want
to do, frankly. How do you set your clients up? I want to talk two
questions, one would be how do you set your clients up for
forward-looking moving forward we're going to be on accrual and
keeping that automation in place. And then secondly, what are easy
ways if there is an easy way to go back and get those historical
COGS on a monthly basis for an Amazon business?
Scott: Yeah, the two sides income. I mean, the
first piece would be the automation we look at is first making sure
you're posting your income properly. If you sell a hundred widgets
that you get paid for 100 widgets and so we use a tool called A2X
accounting to post the Amazon income. We've been using it for
six-plus years. If posted a penny, it breaks up a hundred plus
Amazon fees and follows the accrual method by posting a summary
invoice. Because the main thing we recommend for everybody, unless
you're doing B2B or direct manual sales on turns, every other sale
can be summarized on a daily or weekly or monthly invoice and A2X
will post Amazon and Shopify income. For Shopify, it will post
Shopify payments every day that matches the payout every day. So
the first thing you want to do is be able to get all the income
into the system properly and then A2X breaks out based on our
design. We’re their close partners. We’re using it for a year and a
half but we were in Alpha for about six months, but they'll post
and our standard is to post all the income by payment processor. So
on Shopify, if you’re using Shopify Payments and Amazon Pay and
PayPal and Globally and Sasol and Afterpay or whoever else. It'll
break out each of those posted invoice for each of those merchant
providers and then you can reconcile it. So that's how you get your
income and it's going to post it in the right period as to when the
sale happened, not when you got paid. The difference between
accrual, you track everything. And in our opinion and accrual, not
only do you need it for valuation, not only do you need accrual to
make sure you have a balance sheet so you can see your inventory
and your assets versus liabilities but it's also easier to look at
that if you have these huge expenses that you pay for or you're
buying a ton of inventory and you pay $100,000 this month in
shipping charges you want to spread that out and as you sell the
product, pull that out not pull it together. Now for COGS and
inventory, if you're looking for your values, the best tool is just
you can't do it on spreadsheets. Just like you can’t run accounting
on spreadsheets, you really need a cloud inventory tool. You need
the automation so you have a structured process to purchase
products through a purchase order so you know what you're paying
for. I mean you're constantly updating your costs, you’re receiving
that inventory. So whether it's fraud or they forgot to put a case;
you bought 20 cases and they only put 19 in and they were just
going super fast, which is usually the problem not so much
someone's trying to rip you off. And if you can't catch that in
controller control, you just have money that's just leaking because
inventory is just cash in a different form that you're trying to
turn into more cash. And so you really need those tools that are
pulling in every order because all of that detailed data doesn't
have to live in the accounting and it shouldn't. Xero and
Quickbooks online are not set up to pull in every Shopify
transaction, every Amazon transaction. They're not. The idea is you
want that summary information and then you want to make sure that
your cost of goods sold aligns with the income. So you have to have
a consistent process. For Amazon, we upload costs into A2X and
it'll post cost of goods sold so the same orders that were in your
income even if the settlement statement splits over the end of the
month all get posted in the appropriate month, and then you can do
the same thing for Shopify. And then for our clients that are on
cloud inventory, you can run as long as the tools provide in our
focus, which would be cost of goods sold per channel so you can see
your profitability per channel on the financials is really the
piece you want to make sure that you can get that number, be able
to validate it, and everyone's like, oh, that's this big accounting
thing. I’m like no your whole world is operations; its purchasing
product and shipping product out. Everybody will know we did 422
orders last month and they'll go, okay, and there's all the data
for it and that needs to get applied to the accounting and then you
need somebody who can do that properly.
Mark: You
said something just a little bit ago here which I find; it tends to
be a mindset shift among a lot of sellers and that is your
inventory is just cash in a different form that you hope to turn
into more cash. And this is where the switch from cash to accrual
changes and people that are on cash basis tend not to see this,
right? They see their business bleeding cash and they see a cash
in, cash out and when they spend all the money on inventory, they
see that as losing value but it's not. You're just transitioning
one asset cash into another asset inventory. And I think this is,
again, why this topic of discussing books excites me because it
causes you to think of your business in a different way; in
completely different ways, as a blend of assets. Most of what you
said, I already know our listeners are going to listen to this and
be like that is way too complex for me to go through and do. Can I
connect these things directly? Can I just plug and go or do I need
to hire somebody to do this? Can I train somebody to do this? I
mean, how do you actually go about implementing this?
Scott: So there isn't one tool that will connect
all the different pieces. Now Xero and QuickBooks online and A2X
for an Amazon-only business gets you a long way along the method
because if you're all FBA A2X will get you most of the way there.
But for anything else, there's no secret process. So someone's
like, oh, I'll just use what Logility and use their reports, they
connect everything. I just did a deep dive review of them again and
we couldn't figure out how they were posting the data and then we
couldn't rec because we were evaluating we were trying to implement
it. So you have to have a consistent set of processes to know
you're doing your accounting on a daily, weekly, monthly basis. We
do cost of goods sold monthly. So it's an hour or two per client
per month because we have a standardized process that we follow
through that shakes out vendor deposits and the other details. So
the first process is what are you doing, what are you trying to
accomplish, and just break that down, whether you're doing it
yourself. Look at resources. We have some online courses. We have a
bunch of YouTube videos to make sure we educate people. But then we
still have a manual process for Walmart and eBay and Etsy and House
and Wayfair and all these other channels where we download the data
monthly, pivot it to post the income, and reconcile it. But we use
the exact same data to apply a cost to post COGS. So it's a matter
of that. Now, there are consultants out there that will help you
set up the cloud inventory tool which we don't do, or you can work
with the vendors to implement it and then you either have to manage
it yourself or hire someone like Catching Clouds or another
e-commerce accountant that understands the technology, the
e-commerce space, and accounting.
Mark: I think
this is why it's so tough for so many people. Because as an
entrepreneur, I have an idea, I've invented a product or I’ve
identified a niche I want to go after and I'm good at that but now
you're asking me to understand my financial reports. And then on
top of that, you're asking me not to just understand my financial
reports, but to understand the technological ecosystem around these
financial reports to make them all work without hiring somebody
who's going to cost me $10,000, $20,000, $30,000 a month just to be
able to do this and suck up any profits that I do if I do have.
That’s why it is so difficult for people. The whole ecosystem is
complex and difficult to understand. But I do know once you do get
it set up, it is just a few hours a month. So you put in the effort
of what am I selling, what are my processes, and then how can I get
this into the system the right way? Once you get that setup, then
maintaining it isn't as difficult as the initial setup. Is that
fair?
Scott: That is correct. Once you get those
processes in place and you've got a defined process, you're just
not assuming you can set automation and set and forget it, you're
there. And then I would put the same due diligence that everybody
puts into outsourcing; I mean, e-commerce sellers, the big things
they outsource, except for the few that decide to buy a warehouse
and want to invest in property and that's important to them being
an entrepreneur and that's part of the journey. But that's, in my
opinion, a very small percentage of the sellers, everybody else is
working with 3PL warehouses or FDA or Walmart fulfillment service,
Shopify fulfillment network. The same due diligence that anybody
puts into that and understanding their supply chain or their
vendors or who they're purchasing from, you just need to decide the
financials are a priority for that order and then go through the
same due diligence where you know nothing as an entrepreneur about
whatever and then you start. But it is absolutely possible to put
these systems in place or outsource the work like most sellers
outsource and one thing I recommend every seller do is outsource
sales tax. Don't try to use a tool like TaxJar or Taxify or
Avalara. Just hire assault consultant or have someone like Catching
Clouds, which we do it only with our accounting services because
it's so complex. We're filing over 5,000 returns a year and even if
you do everything right, the states generate notices and you have
to deal with all of that. And the same thing applies to outsourcing
your 3PL and your fulfillment. And then I would recommend
outsourcing your accounting and finance because unless you're 30,
40, 50 million, it's really expensive to hire a bunch of
accountants and manage them and train them and make sure they stay
on top of the technology and all that other stuff.
Mark: You know this is the sort of field that if
you fall behind, is that much more work to get caught up. And I
know we've referred some business over to you in the past that need
some cleanup. We refer them to other partners as well that need
clean up. What does that process look like? I'm saying, okay, I’ve
fallen behind, I've been doing cash basis accounting for the past
forever and now I want to go back three years to do this right and
get moving forward. What sort of workload are you typically looking
at to be able to get that caught up?
Scott: Yeah.
So in general, unless they were using A2X and it's very, very rare
or they were doing things right or in a lot of cases it's
interesting if the owners are involved, they don't know all the
things in accounting and what they do they're very particular about
so they do less wrong. Invariably when we see other accountants
that don't work with any other e-commerce businesses, they're just
making it up as they go and they make it worse and worse. 80%, 90%
of the time we have to start over with a brand new Xero file even
if somebody is on Xero because there's just tens of thousands of
bad records in there and you can't get to it. So we set up a new
Xero file. You import all the bank and credit card transactions for
that time period. You categorize them and you reconcile all those
accounts. Then you post all the income and then you go through
accounts payable through all that time. And of course, once you
just identify the data and even if they have another system, we can
rip all that out, put it back in, but then make sure that no, no,
this invoice was paid this month, but it was from the prior month
to make sure that the bills are in the right period to get all that
going. And you just do those accrual things and then we can post
the income per month historically and then do the cost of goods
sold per month. And so if it's 12 months or; and so we have to go
back to either 1120 or 1119 to the prior tax return or back to the
beginning of the business and run that and that's what it's going
to take. We have looked at; we are Xero expert experts. My
co-founder, partner, and wife Patti teach Xero experts how to do
cool expert things in Xero and we have all these tricks to clean up
the accounting. And I've got a whole list of things that I want
Xero to do to allow us to make it so we can just take what's
already in Xero and clean it up because the bank feeds and the
fundamentals for Xero are great it's just when you connect all
these apps and push in data, you end up with whatever. So it's
really a process for us. It's about four to six weeks for one to
maybe a little bit longer but it takes time. It takes time to set
up the systems. It takes time to pull in the data. It takes time to
get through it all and redo it and then validate things with the
client go away. Hey, I bought a forklift. That was in inventory. I
don't sell forklifts. You go, oh okay that doesn't go in inventory.
We'll move it over to a fixed asset and off you go to the races.
But it just takes a fair amount of work to understand to pull in
all the data and do it. But for the most part, you just start with
a new accounting file, get all your data; bank, credit card, bills,
income, and COGS, and repost it following the accrual method.
Mark: Yeah, I get that. I've been there. I've had
to do that before. And you're right, going back when you have
thousands of transactions can be a nightmare. I want to know
where's the balance between good enough and probably not good
enough and too much. And here's what I want to bring up to you,
there's a well-known accounting company, which I will not name
names, that has a cloud-based service that I know does cash basis
and then at the end of the year does an inventory adjustment so
basically giving you a full yearly accrual basis. And I've seen
these financials before where all of a sudden December looks like
the worst month ever because they're doing this massive adjustment
at the end of the year. So that's one extreme and for a lot of
owners, they’ll say, well, it's good enough, I'm getting some
high-level understanding of my sales and maybe my some cost, but
not COGS. That's one and I would say that's not good enough but
that is the attitude. On the other end, you and I have talked
before about entering sales down to the individual sale, and being
that's ridiculous you don't need to go to that level of detail.
What is the balancing point from a controller standpoint being able
to look at financials and be able to understand these books and be
able to get both those kind of big picture decisions made, but also
those granular decisions of look you’re over overspending here.
This is not a profitable product line or you need to stop ramping
up your expenses in this area. What’s that balancing point for you
guys?
Scott: So, yeah, there are a lot of people
that really look at their financials and that other method is good
enough for a tax return. It's not good enough to make those
decisions to understand what's in your business. And it's just
making sure that you're doing all of the accounting, not
everything, right which means every bank. And the most common
things we see when we review books is that they're not reconciling
every bank account and credit card every month. Because if you
think your system; you downloaded whatever data and you think you
have $50,000 in the bank and the bank thinks you have 10, they win
unless you've caught the error and fixed it. And it's typically
just a data error so if you're not looking at the end of the month
settlement for every bank account, credit card, and merchant
account to say, hey, this is where we have clients were like, you
had $30,000 disappear. Oh, it's a reserve. PayPal's got a reserve
or Strike has a reserve which has been happening a lot recently. So
we want to have those triggers but you want to make sure you're
doing those reconciliations so that you know about all of those
expenses and all the things flowing through your credit cards. The
other thing is make sure every account's on there. If you're using
a personal credit card from the owner because you don't have an
Amex, Plum, or whatever in your business, and as long as it's
dedicated to that business, it should be on the books. You should
be tracking those expenses and then it's just do; and then you pay
it off and it's just payments to the owner and it all works out
from an accounting perspective. And then, like we said, you just
want to make sure you're posting the income in a summary fashion
and you could just decide to do it all monthly and know that I'm
going to take four hours a month, I'm going to post the income and
figure out COGS and get that done and it's good enough and if
there's any adjustments. And then the last thing is you have to
make sure that the balance sheet balances, which means all the
numbers and the liabilities and assets. If the balance sheet
doesn't balance you can't trust the P&L. You can't trust your
statement of cash flows. And so it's kind of a do those core things
and then go make sure you have somebody; an external party that's
reviewing what you're doing at least monthly or quarterly to say,
yeah, this is right or no, you have this write off or hey, you have
this big hundred thousand dollar adjustment leach let's go see if
we can figure out what's going on in there.
Mark:
It sounds like there's two steps here, right? There's the
validation of your financials, but there's also an understanding or
review of those financials. And maybe they're kind of linked
together in the same thing where when things don't add up right
that's a sign that you need to be digging deeper into something.
Maybe you have an inventory leakage or you're leaking money because
not all the inventory has been shipped or accounted for. And you
would recommend that on a monthly basis then?
Scott: Yeah, at a minimum, it's hard to do. We try
to do as much of the accounting daily as possible. We believe that
to stay on top of a dynamic e-commerce business, you have to be
pulling in the bank feeds from yesterday today. You need to be
looking at accounts payable and bills you know oh, I did a $30,000
prepayment on a $100,000 purchase order and I owe $70,000 in six
weeks when it ships. Like if you're not paying attention to those
things on a daily basis, then the owners are constantly pulling
money out when they have to pay bills out of the business; their
personal bills, and then the next week loaning the same amount of
money or more back into the business and you just go do this swing
if you're not staying on top of it. But if you're smaller and
you're ramping up and everything else, at least do it monthly and
then start doing a little bit more weekly. There is more automation
that's coming over time around bank feeds and AI and other stuff,
but it's going to take a while to get here.
Mark:
You know, one of the things that I think can really help once they
start getting the stuff together is the ability to forecast. And
I'm not talking about even on the sales side, that's kind of the
second level of forecasting. But on the expense side, because you
just brought it up right now, right? You have a bill of $70,000
that's going to come due. Have you planned for that or is that
something that's gotten lost with all the craziness of the rest of
your business? Or you want to launch a new product line what do
your expenses look like over the next three, four, or five months?
You can't do that if you aren't living to some extent in your
financials on a fairly regular basis where you understand what's
coming up. Do you guys get into much of forecasting even on the
expense side?
Scott: Not long term forecasting,
but cash is king and cash flow projections. So we're just refining
our process. So we have some clients that we’ll do it for a daily
for a short time when they've got lots going on at a specific time
frame. And then we'll just provide kind of a weekly cash flow
that's always that four to six-week view; here's where payroll
comes out, here's your expected income, here's what the Amazon
payments come in if you're not using Payability or something that
lets you cash out every day so you can manage cash flow but it's
really all about that. And we just haven't chosen to extend it for
a longer period of time because our focus is daily, weekly, monthly
but the idea is that the owner should take a step back and look and
say, oh, because what we're trying to always get to is to say,
here's how much free cash flow you have to buy inventory, pay for
marketing, invest in the business, new products, new design, new
people, whatever and then hopefully there's something left over for
the owner as well. Unless you're in that I'm continually investing
that's great but you need to know how much that is so you're not
constantly doing. And that cash flow and that availability can
include you have a $100,000 Amex plan card. That's just capital to
you because most e-commerce sellers love racking up points and
that's not debt. That's not a long term loan. They're going to pay
that Amex bill probably every two or three times a week to keep the
balance down so they can keep buying product to keep up with
demand. But you need to know where those numbers are, where are
those thresholds? When you're starting to push out against them if
you're growing and your sales are growing, which is what's been
happening for a ton of sellers in this big new world that we're in
where everyone's home and everyone's buying online and that's all
ramped up you need to know when you're hitting those limits and
that you either need to invest more money as the owner because
you're going to turn that cash into more profit; into more cash. Or
you're looking at different lines of credit whether it's with a
bank, which is usually the most painful way. But there are other
alternative ways that aren't quite online loan shark and you find
the balance between those to post that in. But it's really cash is
king. If you're not looking at it; there's so many businesses that
are profitable on paper, profitable on their P&L that go out of
business because they didn't manage their cash.
Mark: They didn’t manage their cash or the cost.
And you said costs are king what do you mean by that?
Scott: Cash is king.
Mark: Cash
is king.
Scott: Well, actually, costs are pretty
important. If you don't have a good handle on your costs, you're
going to run into the situation where you don't know what the value
of your inventory is. And the most important thing is you don't
know how to price your product. So if you have a product that you
buy in the US and you buy in huge volumes and that your suppliers
don't charge you shipping, you can use your buy cost. It's pretty
straightforward. But if you're buying a product, either whether
it's being manufactured or shipped internationally and it costs you
a dollar per unit, but it costs you nine dollars to get it live in
Amazon FDA or your warehouse, you need to know your cost is $10 is
your landed cost after shipping and customs and insurance and even
inbound into Amazon. So you know your all up cost to know what that
is. And if you don't have a good handle on one of the first things
we do with just about every client is revalidate their costs,
identify the ones that are wrong, and then look at what they're
selling it for. And they think they're averaging some margin and
it's usually a lot less because they're not aware of their full
cost for their product. And that's understanding that landed cost
and landed cost is a key accrual process where you pay for
everything and then you take that shipping and it gets added to
inventory and then as you sell, it comes out and it's value. And
that can make a huge difference on client’s business. We have
clients that are close and they're using landed cost, but they're
not doing that last accounting bit monthly to do a journal entry to
take hey, I spent as much on cost, customs, tariffs, whatever, and
moving that all into the inventory account. And then you go, oh, I
really have spent two million dollars on inventory and shipping and
everything else, and I'm pulling out 200,000 a month in cost of
goods sold. I have not just the number of quantity of units, but
you can see the money flowing in and out of your business.
Mark: Why don't we have you on monthly to the
podcast? I don't know I feel like we just scratched like the first
quarter of what you put together as far as the list of things we
can talk about. But we are up against the half an hour, so I am
going to cut it here and ask the best way to reach you; obviously
CatchingClouds.net. You guys have courses available. Is that on
Catching Clouds?
Scott: Yeah. So if you go to our
site, we have a contact form if you want to talk to me, especially
if you're a larger business, I'm happy to talk or email and
interact with anybody. I just enjoy interacting with sellers. Then
we have our YouTube channel, which we have over a hundred YouTube
videos, and we'll start adding more next month on basic topics. Now
it's all my wife mostly who can explain things better and doesn't
talk as fast as I do, but we're really there. And we have so much
more that we want to push out onto those YouTube videos because
we're happy to share the basics; how to read financials, and all
these different things. We just want to help those sellers that are
smaller than a million and or do it yourself. And then we also have
a Facebook group that supports that for sellers and accountants for
providing answers and questions for people that take our courses
and just have general questions and then we have our outsourced
service. So if you go to our contact form, reach out and I'm happy
to interact and have a conversation. And most of my focus is really
where your biggest challenge is and if I can help them figure out
the top two or three cloud inventory tools that would be there or a
developer that would do automation and build zappy integration to
improve their efficiency or point them in the right direction, I'm
happy to do that. And then our big services, we'll just take it all
over, clean it all up, and then run it.
Mark:
Yeah, I think for those that are listening here, especially those
that may not be in that one to fifty million dollar revenue range,
the one thing I can say just from my experience is the companies
that get there have books in order for the most part, much more so
than smaller companies. And part of the reason that they've gotten
there is because they have taken the time to put together good
books. And it does give you insights into the business that you
can't get otherwise. That doesn't mean that we haven't seen
companies in the one to 50 million dollar range that don't have
their books together. But all the more reason for those companies
to make sure you're are doing this because if you aren't, I can
almost guarantee you're bleeding cash somewhere and you're lacking
optimization somewhere. I think the biggest thing; let’s end with
this cut, people are overwhelmed by this, they may be not sure how
to start. What's one thing that they can do today? If they think
that they're under optimized with their books right now, what's one
thing that you would suggest that they do today?
Scott: I mean, it really usually just comes down
to education. So whether it's our YouTube videos or books like
Financial Intelligence for Entrepreneurs is a good book. It's
looking at that and then our big thing is process. So if you're not
documenting your process for receiving inventory and dealing with
returns, just take a whiteboard and put it on your wall and start
building those things. So it's called the combination of education
and then it's just organization so you can keep track of your to-do
list and you know, oh, I've got to block out this much time every
day or week or month for accounting. It's more about that
discipline and then just get an accountability coach. There are
other things you can do, like profit first for a different way to
look at profit. Or you can hire someone for EOS entrepreneurial
operating system and the traction books. So there are actual
structured processes that you can join in where it's not just you
have to determine it ahead of time, but it's kind of education.
Have coach as partners, whether that's Quiet Light who gives out I
know great advice. Even when they're talking to people two or three
years from when they're selling and they may never sell to say, no,
these are the smart things to do because everything they're telling
you to do smart to sell your business is the same guidance to run
your business profitably. And then get those external resources,
find your peers out there and talk to them and share best
practices, and just continue to evolve as an entrepreneur.
Mark: Scott, it's really good to see you again.
Thanks so much for coming on.
Scott: You're
welcome. Thank you.
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