Podcast: 3 Warning Signs Your Bookkeeping is Holding Back Your DTC Brand’s Growth
Episode Summary
In this episode of the Free to Grow CFO podcast, Jon Blair and Jeff Lowenstein discuss the critical role of bookkeeping in scaling direct-to-consumer (DTC) brands. They highlight three warning signs that indicate poor bookkeeping practices, including the misclassification of sales tax, the absence of sales tax in financial statements, and the erratic swings in profit margins. Throughout the episode, Jon and Jeff stress the importance of having a clear understanding of your financial metrics and how they inform your decision-making process. They share real-world examples from their experiences with clients, illustrating the potential pitfalls of poor bookkeeping and the value of having a dedicated team that understands the nuances of e-commerce accounting.
Episode Links
Jon Blair - https://www.linkedin.com/in/jonathon-albert-blair/
Jeff Lowenstein- https://www.linkedin.com/in/freetogrow-jeff/
Free to Grow CFO - https://freetogrowcfo.com/
Key Takeaways:
Contribution margin is your real top-line revenue. Understanding it is key to profitability.
When you run your books on cash basis, you miss out on the true financial picture of your business.
Erroneous bookkeeping can lead to poor
financial decisions.
Meet Jeff Lowenstein
Jeff was previously leading M&A efforts at ecommerce aggregator Boosted Commerce where he was the 5th employee. He built processes across M&A, finance and operations to support rapid growth from 0 to 30 brands under management in 2.5 years.
He previously co-founded and exited an app for Shopify merchants and spent time in the Strategic Finance departments of Etsy and Caesars Entertainment. Jeff holds a BA from the University of Pennsylvania and an MBA from Harvard Business School.
He’s worked with hundreds of brands over his career and founded Free To Grow because of his passion for supporting entrepreneurs and helping them succeed. The analytical and financial tools he has developed over the years are specifically crafted for the modern consumer brand.
Transcript
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00:00 Introduction
01:09 The Importance of Solid Bookkeeping Beyond $10 Million
02:15 Warning Sign #1: Sales Tax on Your P&L
08:34 The Impact of Poor Bookkeeping on Decision Making
14:12 Warning Sign #2: Missing Sales Tax in Financials
18:12 The Importance of Accrual Accounting in E-commerce
22:40 Warning Sign #3: Wild Margin Swings Month Over Month
33:04 The Role of Intentional Bookkeeping in E-commerce
39:12 Closing Thoughts
Jon Blair (00:01)
All right, what's happening everyone? Welcome back. Another episode of the Free to Grow CFO podcast where we're diving deep into conversations about scaling a DTC brand with a profit-focused mindset. I'm your host, Jon Blair, founder of Free to Grow CFO. We are the go-to outsourced finance and accounting firm for eight and nine figure DTC brands. And today I'm here with my partner in crime, co-founder of Free to Grow CFO. Jeff Lowenstein, Jeff, what's happening, brother?
Jeff Lowenstein (00:32)
What's up? Good morning. Happy to be back here on the podcast, Jon.
Jon Blair (00:38)
Heck yeah man, happy to be back talking about the seemingly not important aspect of scaling a brand with solid bookkeeping. The reason why I'm saying that is because bookkeeping we see time and time again is often overlooked by the founders of the founding team in the early days and the way that I like to say it is that like getting your brand from say zero to 10 million, maybe a little bit less than that, five to seven, but we'll call it roughly, getting your brand to eight figures, you did it with decent or terrible bookkeeping in your gut. But when you're scaling beyond 10 million, you need rock solid bookkeeping as a foundation for financial analysis and ultimately planning and strategy. And so we're gonna get nerdy today and we're going to talk about three warning signs that your bookkeeping is jacked up. And remember, as we're talking through these, the context for you to think about these as a founder and operator is not that you have to understand all these nuances, but if you have one or more of these issues, your bookkeeping is jacked up, which is impeding your ability to make sound decisions, and it certainly is holding back your brand's growth. So we're here to help you identify these warning signs so that you can get in and you can fix them and you can move on to...better and brighter days scaling your profit focused brands. So let's start with number one. First warning sign that your bookkeeping is jacked up. We see this over and over again. Sales tax shows up on your P&L. To lay the groundwork for this discussion, sales tax doesn't belong on your P&L. It's a current liability, which we'll talk about in more detail in a second but sales tax collected, sales tax paid, no business showing up on your P&L as a revenue or an expense. Jeff, you see this a lot.
Jeff Lowenstein (02:45)
This is an easy one for us to point out and I quickly identify when the books are jacked up when we meet brands. This is an obvious red flag. it might sound weird, Like sales tax is something that the customer pays to me. And yeah, you pay it out later, but like it gets lumped into my Shopify payouts, right? And that's income that I receive. Well it's easy to make that mistake, right? And it's weird to think about, but that's why you need to work with a bookkeeper or a CFO that really knows e-comm, because we do see it a lot, and it really can screw things up in your books.
You can have dramatic swings, right? So really the right treatment is that it doesn't actually hit your P&L at all. It stays over on the balance sheet. You collect the cash and then it comes out as a liability that you record the liability and then you pay down the liability to the tax authorities, right? So that's how it should work. The problem is when people put it on your P&L, your margins get all screwed up because you have, it looks like revenue and you have extra revenue in one period with no cost then all of sudden you pay it out a couple months later and you have a massive expense with no associated offsetting revenue. And it's so obvious when we look at the brand's books, when we see this massive swing in margin, in margins, right? It's a very obvious mistake for us to point out. So it screws up your margins. You don't have a good understanding there. It screws up your understanding of your liabilities because you don't understand what's going on there. And then you're also not keeping clean revenue metrics either. This is something people don't talk about. It can screw up your efficiency metrics on the marketing side. So that's another point where we see people having issues. So I have a lot of thoughts.
Jon Blair (04:43)
Totally.
You know what though, I will say on that last one, what I was gonna mention is I actually don't blame brand founders and operators for getting this wrong. You know why? Because Triple Whale and Shopify include sales tax in their sales numbers. And so I actually think that Shopify and Triple Whale, and there's probably other tools out there that have the same issue, we just, see those day in and day out because we work with primarily DTC brands, but when you look at the sales dashboard in Shopify, that sales number includes sales tax collected. And when you look at Triple Whale and you look at sales and you look at ROAS, it includes sales tax. So unfortunately, you're being misled. You're being misled by two analytics platforms that are staples in the DTC world. So I don't blame you for getting this wrong. And quite frankly, it's aggravating that they have not fixed that yet because this has been going on for many, many years. But additionally, like Jeff was mentioning, there's a huge risk as a scaling DTC brand to looking at a ROAS number that in the numerator has sales tax included when in fact that sales tax collected is not a revenue item. I'll get nerdy on the accounting side should be classified as a current liability. The definition of a current liability is it's an amount due, an obligation that you must pay in the next year or less to somebody else. And that's what your sales tax collected is. You're collecting it on behalf of a taxing authority that you owe it to at a later time. Revenue, on the other hand, from an accounting standpoint, is income earned, earned through the fulfillment of services and goods, right, to customers or clients. Those are, by definition, two separate things. You did not earn that sales tax, right, that you get to keep based on fulfilling your order to your customers. You're just a pass-through, and pass-throughs, which means that it is owned by, definition by someone else who you're ultimately passing it through, it should be classified as a liability on the balance sheet. So it should never even touch your P&L in the first place. And the other important distinction that Jeff made, this is really important, margins. What's the denominator number in a margin ratio calculation? Revenue, sales, right? So if you have sales tax collected included in the denominator of your margin calculations, your gross margin ratio, your contribution margin ratio, any other expense to revenue ratios that you track as a brand, they're wrong. Cause the denominator is wrong because it includes sales tax collected. So I'm drawing these out. Cause what Jeff mentioned is those two points are really important. It's now all of a sudden bookkeeping, which didn't seem like a big deal. It's like, bookkeeping out of like, I don't want to deal with that. I'm the founder. I'm a product guy. I'm a sales guy. I'm a marketing guy. Well, guess what? That jacked up bookkeeping is actually making you think on the marketing side you're doing better than you actually are or on the margin side you're actually doing worse than you actually are because the numerator is higher, right? And so like this is, I just want to draw that connection for everybody between crappy bookkeeping bad decisions, right? Good bookkeeping good decisions. Jeff, you got something to say about that, I know.
Jeff Lowenstein (08:29)
Yeah, we're two finance nerds, so we're passionate about it, right? it's funny because our mission at Free to Grow is we want to support brand founders and help them scale profitably. And part of that is helping them sleep better at night and making quicker and more informed decisions. And so a big part of you what we're doing is we're trying to get these things right so that the founder doesn't have to worry about them. And it's an interesting, like, I think there's like a life cycle as to when this type of stuff becomes important. If you're starting out and things are humming and your MER is, you you're crushing it, maybe you're at a 5, it doesn't matter maybe if you're off by 10% in your MER metric because things are going, you're figuring out your channel mix, you're figuring out your products, what's working, and you're on fire. But you're going to hit a ceiling, Efficiency is going to go down 2.5, 2.4, 2.0, or maybe 3x MER. All of sudden, that 10% difference, so let's say it's a 3.0 MER you're measuring. Well, if the reality is actually that it's off by 10% because of sales tax, you're actually at a 2.7 or something like that, right? That's a huge deal, especially as you're scaling spend. So your budget is larger, your MER is smaller, but like that 10 to 10 has a much larger impact as you scale and things become less efficient. I think I understand why people don't care about this stuff in the beginning when they're trying to figure out, do I have a business here? What is my unique proposition in the market?
That makes sense. Bookkeeping is not your number one priority, but these types of details and financial metrics and, you know, they really do inform the decisions you make as you become more and more strategic and the thought process becomes more detailed and thorough as the numbers get larger, right? So like there is a natural life cycle to the decision-making process. It should change as you scale and you should be more exact about your numbers as you scale. that's a big part of how I think about it as well.
Jon Blair (10:53)
Totally.
Yeah, so a story actually that comes to mind right now with one of our clients, and this is very common. see this almost every single time when we onboard a new client. The other thing that you're not exact about in the earlier days is sales tax collection, right? Sales tax compliance. It's really hard to be compliant, and there's a cost benefit analysis, right, to that and like going and setting up tax accounts in all the different states through one of the various services out there like, it can be a waste if you're not actually getting enough traction, right, in multiple states to make it worth your while. And so at the beginning there's usually like very few sales tax accounts set up. A lot of times it's like in your home state wherever you're incorporated, maybe one or two other states. But once you get to like your 10 million or so in revenue, that's when you start bringing on like a ZAMP or a numeral, right, sales tax service to get you set up in basically every state in the country. And so I actually had a brand that scaled, that I was a fractional CFO for, scaled from 1.8 million to 35 million in one year, crazy ride. And along that, like in the middle of that $35 million a year, they were like, hey, it's time to get serious about sales tax. So they went and got Avalara set up and here's what happened. Before that, they were only collecting sales tax in their home state. So it was a very small amount. So the deviation between the variance between real revenue and revenue with sales tax was small and so it wasn't skewing their triple whale metrics by enough for it to matter. Then all of a sudden, it was this one April I remember, is April, Avalara turned on and they started collecting hundreds of thousands of dollars of sales tax a year. This is a brand doing five, six million a month at that time, their monthly run rate was that high. So all of a sudden, hundreds of thousands of dollars of sales tax. Now their revenue in triple whales overstated by hundreds of thousands of dollars.
Jeff Lowenstein (12:24)
Yeah.
Jon Blair (12:53)
So I'm running my own MER calculations and spreadsheets and their marketing team is making decisions going, dude, we're killing it 2.6, 2.7. And I'm like, guys, it's 2.1. And they were like, no, it's not. Triple Whale says 2.7. And I'm like, hold on, let me reconcile this. And so I went through and reconciled it I found the exact delta was sales tax. And so there's another, there's a huge, I mean, that was a huge example. 2.1 was below where they needed to be. So they thought they were profitable and they were scaling spend and they actually weren't, right? So they were actually losing margin dollars. And luckily we caught it quickly. That was another benefit of working with me as their fractional CFO is we caught it and we caught it quickly. But they would have gone for months like that and gotten their financials done at the end of every month and not understood why they were so far off from where they thought they were throughout the month. These things are important and like Jeff said, bigger and bigger dollar amounts as you scale, they become increasingly important as you continue to grow. And actually what I wanna do is I wanna segue, I had this as number three in terms of the third warning sign that your bookkeeping is jacked up, but I wanna segue to this because it's about sales tax. it's that here's the other warning sign. So one, we just talked about sales tax shows up on your P&L, shouldn't be there, right? And can lead to bad decisions.
Two, you don't see sales tax anywhere on your financials. You don't see it on the P&L or on the balance sheet. warning sign number one is very important, but warning sign two might be even more important because what this likely means, or at least what I always see, is that when you don't see sales tax anywhere, there's a really good chance that your bookkeeper is recording revenue equal to the amount of deposits that come over from Shopify. And so they're just taking the deposits, which are net of, those are really net amounts, right? Net of gross sales, refunds, returns discounts, Shopify payment fees, and sales tax collected. And that's net amount, that single amount is just getting deposited straight to revenue.
I'm gonna pull my hair out because like this is actually a almost, I would say quite likely a bigger problem. There's cash basis, there's a whole bunch of stuff. Like Jeff, when someone's doing their accounting like that, like what does that do from your perspective as a CFO like to your like ability to analyze the financials? Where do problems show up there?
Jeff Lowenstein (15:18)
It's a massive red flag because you know if that's going on there's gonna be all sorts of distortions in the financials, but I mean if you're booking net payouts for revenue that's like sirens are going off. I'm like my goodness, there's massive issues here. It probably means all through financial statements there's cash basis going on and this is the thing about e-commerce, you really can't do a cash basis because...cash basis P&L is going to look crazy different than an accrual P&L. In particular, the most obvious example is that we buy inventory in large chunks often from China. We pay for that some deposit and then maybe 30 % down plus 70 % on shipment or on delivery or something. But then we sell it over the next three, six, nine months. And so the actual cost of selling the physical product is disconnected from the revenue if you're on a cash basis and we want to connect those things with an accrual P&L so we have a clean understanding of margins and a consistent understanding of margins right that's just one example we see the same thing with 3PL invoices and other you know marketing every line item I could go through but if it's cash basis, it's going to be really negative one month when you pay for inventory or whatever else, and then really positive in another month. And so you're not going to know, am I profitable? Am I not? What is it going to be on a go-forward basis? What's my margins over the last couple months or last year? You can't analyze these crazy swings. It's really challenging as a CFO to use historical data that's totally...incorrect and messy to forecast the future. Of course we do what we can with limited information, but we actually spend a lot of time trying to clean up the historicals when we work with a client that has a messy situation like that before we go on to do most of our forward-looking CFO analysis. And that's pretty important. So what would you add to that?
Jon Blair (17:59)
Well, actually, I mean, to just be super blunt with the audience, this may be a little too blunt, but I'm just getting, I'm getting really, I'm the one who runs sales at Free to Grow CFO, and I do all of our audits for all of the, you know, prospective brands we may end up working with, and I'm getting fed up with this kind of accounting, and what I'm realizing, actually, is that if your accountant is booking revenue, based on net payouts from Shopify, they just flat out don't understand e-commerce. Like fundamentally, like think about it. They don't understand what's embedded in that deposit. If they did, they probably wouldn't do it that way. But they actually don't even know that that is net of gross revenue, refunds, discounts, Shopify fees, and sales tax collected. They're just, and it's usually, honestly, it's usually a CPA that runs a very horizontal firm that just they're basically a tax accountant and they've been given the bookkeeping work by their client who just so happens to own an ecom brand. And so they're taking the information that they have and understand about ecom, which is almost nothing or very limited. And they're just reconciling bank accounts and credit card accounts the best that they can. And so I don't really necessarily blame the CPA, but they just flat out don't understand ecom. If they did, if they knew what was embedded in those in those deposits, they wouldn't be, even if they were doing it cash basis, they would at least split out gross, refunds, discounts, Shopify fees, but they literally don't even understand that. And so they're just booking it. And that's why Jeff was saying, if you see this, there's a good chance that there's a bunch of other stuff that's wrong. And it's actually because there's just a fundamental misunderstanding of how an e-com's accounting transactions even work. So it's likely that your books are riddled with issues even beyond the revenue. And even worse, like Jeff was mentioning, it's probably being done on a cash basis. And so you've got expenses in one month when they're paid and revenues in another month when you collect them. then I just, I work with very few brands that are not seasonal.
And so if you're seasonal, your costs when you're gearing up for that season are all gonna be before the season hits and all your revenues are gonna be when the season actually happens. And so how do you know if your margins are going up or are going down? If you're getting better on your, how do you know if that negotiation you did with your 3PL is actually making your margin better? You don't.
Jeff Lowenstein (20:50)
You want to know something that's interesting this year, Jon? I'm looking at the calendar right now. Black Friday is November 29th.
Jon Blair (21:01)
I know, I was looking at that, I was literally looking at that with, I can't remember, one of my clients and I was like, hey, we're gonna have to, we're gonna have to do a little bit of work to make sure that we get revenues and costs in the right period because you're gonna have this, all this revenue is gonna get slammed into the system on the last few days of the month and probably some of those orders are gonna ship out in December and you're gonna get invoices from the 3PL in December and
to for us to get those monthly margins right on an accrual basis, we're going to have to do a little bit of work this year. And so what Jeff's pointing out is, it the last, what were those dates again?
Jeff Lowenstein (21:43)
So Thanksgiving is Thursday the 28th and Black Friday will be the 29th. Cyber Monday though will be on December 2nd. So it'll be interesting, right? Because you'll have probably the sales that happen on Black Friday and Saturday the 30th will be, the payout won't come until December. And so if you want to, it depends, you your setup, right? But like that's something to be, to talk to your bookkeeper about right now and make sure they understand that the revenue generated and those expenses incurred from those sales happened in the right period. Obviously that's like a huge spike in sales.
Jon Blair (22:26)
Yeah. Dude, that's interesting. Dun dun dun. It's not just Black Friday for like your sales promotions. It's actually Black Friday for your accountant as well, because we have a we have a month end period crossover this year from November to December for Black Friday Cyber Monday weekend, which means accountants who are doing things cash basis are going to get found out this year much more than in previous years. So you're going to get exposed. That's for sure. That's for sure. The the. OK, so sorry. You said something about discounts when you were talking before that I just want to respond to as well, because this this really bothers me as there's a it's very easy to have a disconnect if your bookkeeper doesn't understand how to book discounts and refunds. You know, gross minus discount minus.
Jon Blair (23:02)
Mm-hmm.
Jeff Lowenstein (23:20)
Refunds equals net. Let's say you go crazy and give a ton of discounts in one month. Well, you're going to have...you're have massive discount as a percentage of gross, but you still might have higher net sales because when you offer a great discount, people convert at a higher rate and you sell more product, right? And so I actually had a case where I was working with a client and they couldn't understand the way that their old bookkeeper was doing things. They're like, I sold so much product. How is it possible that I had way lower margins and I almost lost money for that month when I had such great sales?
What they didn't understand was that, yes, they were selling more units, but because those units were discounted so much, they actually lost money on a lot of those. so understanding that breakout and having those metrics clearly laid out in your financial reporting is like super important. You can't lose sight of that, especially during the holidays where you're going to have an increase in demand. It's very easy to let those discounts get away from you.
Jon Blair (24:08)
Mm-hmm.
Totally.
Jeff Lowenstein (24:24)
You have an overactive marketing team, right? You need to make sure that they understand the impact of those offers.
Jon Blair (24:32)
Well, let's take it a step further in like from an accounting standpoint why it's so important to get this right is because discounts and refunds and Shopify fees are legitimate per unit variable costs. That's what they really are, right? They're variable costs. And if you don't have your variable costs, broken out properly, you can't measure contribution margin. And contribution margin is the truth about profitability. And for those of you don't know, contribution margin, in my opinion, is your real top line revenue number. Because you don't keep 100 % of your gross revenue, right? You keep, after a sale, gross revenue minus discounts, minus refunds, minus...shipping and fulfillment costs minus landed product costs minus credit card fees. That's what you keep. And then you take out marketing spend, your variable marketing spend, and those are the dollars left over. So that's your actual top line. That's the real top line dollars, right, that are available to cover your fixed cost, your costs that don't go up and down when sales volume goes up and down. That is like a table stakes metric that we analyze and model and help our clients understand because it's the only way to really measure the efficiency of the business as you're scaling and to accurately assess if you're getting closer or further away from profitability. And you cannot do that if gross refunds, discounts, credit card fees, and even worse, sales tax collected are all lumped into this one net revenue number that is not even net revenue. So, and don't even try to calculate your other margin percentages if this is how the accounting's being done, because the numerator is not revenue. It's revenue net of all those other things that we just talked about. So interestingly though, the third warning sign that your bookkeeping is jacked up is connected to this, because we've already talked about how the sales tax issues can be one of the, the culprits, but it's that your margins swing wildly month over month. So third warning sign that your bookkeeping is jacked up, margins swing wildly month over month. So before we dive into this, just as a side note for everyone, we do this free CFO audit, right? It allows us at the firm to assess that there's a good fit on both sides for us to pull together the most well-informed proposal for our prospects and we also deliver some free value in the audit so that you can actually get a little test drive of what it's like to work with us. But the reason I mention that is because when I do these audits, I actually check for one, the first thing I check is, are margins swinging wildly month over month. And when I say that, mean, is the margin 50% one month and then 30 the next, and then 25 the next, and then 85 the next, and then negative 10 the next. When you see these wild up and downs like stock market like swings in margins, it's very rare that that doesn't indicate that there's an issue with the bookkeeping. We've already mentioned how sales tax can distort and screw up that calculation, but there's also cash basis accounting and there are other things. Jeff, when you see margins swinging wildly month over month, besides the sales tax that we've talked about, what are some of the other just like common culprits?
Jeff Lowenstein (28:12)
Yes, so I guess I went out of order because I mentioned the margins earlier. But what are the other culprits that caused margins to swing from month to month?
Jon Blair (28:16)
That's okay. It's all connected, man.
Jeff Lowenstein (28:28)
So a very obvious one is COGS like I was talking about before, you buy, of course you buy inventory before you sell it. It should be living on the balance sheet until it's sold. That's an obvious one. I also see a lot of issues with 3PL invoicing. That's a very common one where...It's a couple, it shows up in a couple of ways, right? Maybe the invoicing they give you, like the way that they pull the data, it doesn't map to when the sales are made. Another issue is like they could just invoice you late. And so sometimes we see people not accruing properly for that. They may lump, they may lump things together as well. like another common thing is your pick and pack fulfillment fee is often lumped in with like a shipping in freight out.
Jon Blair (29:21)
And maybe different periods too, like oftentimes, Pickpac will be for the whole month, like it'll be for a calendar month, but it'll be on the same invoice as shipping charges that cross over a month. And so that whole invoice actually needs to be broken up in order to get into the right period. I see that a lot too.
Jeff Lowenstein (29:26)
Yes.
Yeah, exactly. So yes, bingo. yeah, we try to pay attention, close attention to that. Obviously, 3PLs are pain in the ass to deal with, especially on the way that they invoice and bill e-commerce clients. so that's the...
Jon Blair (29:54)
And they're all different, no 3PL bills the same. I mean it-
Jeff Lowenstein (29:59)
They're all different. They all use different software. It's a pain. like you're not alone if you're struggling with that. But you know, we do look at it with a close eye to make sure we're getting it booked correctly. So that's an important one. And then, okay, so I'm just thinking moving down the P&L. So a lot of people have been forced off of credit card payments for Google Ads and onto monthly invoicing. And so make sure that you're getting those invoices for
a month to your bookkeeper in time for them to close the books rather than just, you know, if you're getting it, let's see, so it's September 30th today, if you can, your September invoice for Google Ads might be available on October 1st but not due until October 31st and then you might pay it in November. So if you're not careful, that could easily get booked in the wrong month.
you need to be paying attention to that. And that again is going to impact your marketing efficiency metrics and that's super important. that's another one that I would say is it's important for your overall financial margins but you're holding your marketing team and your agency accountable to those metrics as well. So that's super important.
Jon Blair (31:12)
Well, actually let's talk about that example. You brought a very interesting example up because you like, let's say the spend was for 9/1 - 9/30 but the invoice was dated 10/1 but then it's due or maybe you pay it November 1. So let's, let's go through each of those dates. If you do everything on a cash basis, the expense will be on November 1st, the month in which the cash is paid. If you just blindly post the bill on 10/1 the expense will be in October, which is the wrong month. So you actually have to have a keen enough eye to go, hey, I know this is dated 10-1, but the expense is for 9-30. And so we will either just date it 9-30 in the system so that it hits the right month or we'll manually accrue it via journal entry to pull the expense into September. But what Jeff just laid out is depending on how your bookkeeper is thinking about like either or incorrectly, or just like misses this like very important detail and isn't looking for it, you could end up with that bill in one of three dates and only one of them is correct, which is actually, you know, sometime in the month of September. And so that's like very, very important distinction. I think the theme I want to draw out is like solid e-comm accounting doesn't happen by accident. It doesn't happen by accident, right?
We understand, the reason why we are good at e-comm accounting is because we understand economically how these businesses work, right? And so we are looking for, and we understand, actually, and I know you can riff on this one, Jeff, because you say this all the time. When you go to analyze the financials, what are the metrics that matter? And doing the bookkeeping in service of those metrics existing accurately, right? Like Jeff calls FP &A ready or CFO ready financials.
Jeff Lowenstein (33:08)
Yeah. Yeah, I mean, I guess I talk about it a lot. So this is something I do care about a lot. We're a CFO shop that offers bookkeeping. And so think that informs, like our DNA is as a CFO business, We're all...
experience in the e-comm sector in finance roles and that informs how we do the bookkeeping because we want the books to be clean and ready for analysis and so even without one of our Free to Grow CFOs, a brand founder can read the financial statements that our bookkeeping team prepares and very easily understand exactly what financial position they're in and they can make very quick and informed decisions based on those numbers and I care a lot about that. I have lot of pride in us getting our output delivered in that way and helps that standard. So I think that's super important, something that we do. I mean, we only do e-comm all day long, right? So that helps a lot. Everyone on our team understands what we're talking about when we say freight in versus freight out or understanding contribution margin. MER is something people know through every last person who works here, right? So that is super important for us.
Jon Blair (34:40)
Well, yeah, and so like again, it's intentional. It's bookkeeping with intention, right? Like Matt, one of our accounting managers who was my controller at Guardian Bikes. He has been scolded enough times in the last 10 years for not getting marketing spend in the right month that he is looking for all the signs that...marketing spend get put in the right month, even if, I mean, the number of times he's hit me up and gone like, marketing agency invoices are also notorious for this too. Where like, if there's a variable component to a marketing agency invoice, meaning they charge you a percentage of ad spend, the number of times I've had Matt come to me and go, hey, I just got this invoice for this agency a week late, it's dated in the following month, he's like, but like this needs to be accrued, right? He's asking, this needs to be accrued in the prior month, right? Because I can see this is for services rendered and ad spend last month. And so he's not just taking the invoice date at face value. He's actually thinking about what the transaction is and saying, I know the CFOs need to see ad spend in the same month of the revenue that is generated. And so the point that I'm making is that it's not just about turning over clean books and going like, look how nice and clean these books are. Like no one cares about that unless they're in service of something else. And what they're in service of is solid analytics, right? That actually help you understand month over month margins. And I'll even say cash flow because I know we're talking mostly about the P&L, but cash flow is all about connecting the balance sheet and the P&L together.
Right? That like the balance sheet tells a story that the P&L can't tell in isolation. And so if you've got stuff like sales tax on the wrong, like not on the balance sheet and on the P&L instead, like having accrual financials really in its simplest form without being an accountant means you have a solid balance sheet. Right? That's what accrual accounting means. And when you have a solid balance sheet, you can actually understand why profit and cash flow are not the same, which they never are in a growing DTC like consumer brand. And so, like there's intention and purpose and massive amounts of usefulness behind getting your books right. So, look, just to recap really fast, what we've talked about here is three warning signs that your bookkeeping is jacked up. One, sales tax shows up on your P&L. Two, you don't see sales tax anywhere on your financials and three, your margins are swinging wildly month over month. Jeff, before we kind of land the plane on this, is there anything else that you want to say about what it means to you to have solid books and why it's so important when you're trying to scale a brand?
Jeff Lowenstein (37:39)
I just think that there's, there comes a time in every brand founder's journey where they, I see how stressful it is and I get it, the whole thing is stressful. There comes a time when you're growing fast enough, you're making larger decisions, you have more people running around, you have more SKUs more channels.
If your financials are not solid and you don't trust them, you don't feel like you can make decisions on them To me that is like a very scary situation You feel like there's a you're building the plane while you're flying it, but you're not sure if the engine actually works, right and so that's what I see as our mission is like helping people understand. yes, this engine works, pour some fuel in it or no, your engine's actually broken. Chill out before chill out, fix it up and then go and maybe go and you need to turn left here or whatever, you know, whatever it is. like to me, like that is very real. And like, I, I see the mission of what we're doing is helping people, make better decisions in a very pivotal time in growing their business, right? So it's not just about sales tax, it's not just about the balance sheet, like you're saying, it's in service of something larger and we definitely live that and feel that every day with all the brands we work with. It's about helping the people behind them sleep better at night.
Jon Blair (39:13)
100 % said beautifully, I couldn't have said it better myself. If you want a team of e-comm and accounting nerds to pour over your books, definitely consider hitting us up because no joke, when we have some sort of an issue with one of our clients' books, you've got probably four, five, or six just of the nerdiest accounting and finance people sitting on calls pouring over what the solution is. You're probably honestly getting like six to seven hundred dollars an hour worth of labor on solving your problem for and not and we probably don't extract enough value out of that but the point that I am making is that it's all about accountants who really get ecom and DTC and that know that nailing the books is in service of a greater purpose, which is helping you grow your brand profitably and achieve your goals. So I appreciate you all sitting through this super nerdy conversation. We love talking about this stuff more than you know. But don't forget, if you want more helpful tips on scaling a profit-focused DTC brand, consider following me, Jon Blair, or Jeff, Jeff Lowenstein on LinkedIn.
We're both putting out content week in and week out that is honestly in service of just trying to help you scale your brand profitably. And if you are interested in learning more about how Free To Grow's DTC accountants and fractional CFOs can help your brand increase profit and cash flow as you scale, check us out at FreeToGrowCFO.com. And until next time, scale on.
