Podcast: Do Your Brand's Financials Feel Wrong? Here's the Fix
Episode Summary
In this episode of The Free to Grow CFO Podcast, Jon Blair sits down with Free to Grow CFO’s Head of Accounting, Ruben Galindo, to break down one of the most common—and most dangerous—issues in DTC: inaccurate financials that lead to bad decisions.
They walk through where most brands go wrong with revenue recognition, including why booking deposits as revenue distorts your P&L and how missing components like refunds, discounts, fees, and sales tax can completely misstate your margins. Jon and Ruben also unpack the complexity behind reconciling multiple payment processors, and why most accounting setups fail to capture the full picture of what’s actually happening to your cash and expenses.
The conversation then shifts into the hidden challenges inside merchant accounts like Shopify, PayPal, and Amazon—where fees, ad spend, and vendor payments often get missed or misclassified—creating gaps between reported profit and reality.
This episode is a practical look at why accurate financials aren’t about accounting—they’re about having numbers you can trust to make better decisions as you scale.
Key Takeaways
If your numbers aren’t accurate at the line-item level, you can’t trust them to guide growth decisions.
If you’re not reconciling payment processors properly, you’re missing real expenses hitting your business.
Booking cash deposits as revenue hides refunds, fees, and timing issues that distort your P&L.
Episode Links
Jon Blair - https://www.linkedin.com/in/jonathon-albert-blair/
Ruben Galindo- https://www.linkedin.com/in/rubengalindo241086/
Free to Grow CFO - https://freetogrowcfo.com/
Meet Ruben Galindo
Ruben Galindo is a seasoned finance and accounting professional with over 15 years of experience spanning public accounting, manufacturing, and executive support across Mexico and the United States. Currently serving as Accounting Manager at Free to Grow CFO, Ruben brings a well-rounded expertise in financial management, accounting operations, and strategic financial planning to his clients.
Throughout his career, Ruben has held progressive leadership roles at multinational organizations, including Kromberg & Schubert and SEG Automotive, where he managed complex financial portfolios across multiple legal entities in North America.
Ruben is bilingual in Spanish and English, enabling him to effectively bridge communication between Latin American operations and U.S.-based clients and executives. He is known for his ability to resolve complex backlogs, drive compliance, and deliver measurable financial results in demanding environments.
Transcript
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00:00 Intro to The Free to Grow CFO Podcast
00:36 Common E-commerce Accounting Challenges
01:40 Common Issues in Revenue Recognition
06:05 The Complexity of Payment Reconciliation
17:36 Understanding Inventory Accounting
21:36 The Importance of E-commerce Expertise in Accounting
22:10 Final Thoughts
Jon Blair (00:19)
Hey everyone, welcome back to another episode of the Free To Go CFO Podcast where we dive deep into conversations about scaling a profitable DTC brand. I'm your host, Jon Blair, founder of Free To Go CFO. We are the go-to outsource finance and accounting firm for eight and nine-figure DTC brands.
Jon Blair (00:37)
Alright everyone, today's a big day. I've got my pal and coworker, Ruben Galindo. Ruben, what's up man?
Ruben (00:46)
Hey, thanks for the intro. I'm happy to be here, man.
Jon Blair (00:48)
Yeah, so for those of you who don't know, if you're a client of Free to Grow, you probably know who Ruben is. those of you know, Ruben is our head of accounting services at Free to Grow CFO. I'm really excited to have him on the show. It's something I've been wanting to do for a while. We're gonna talk through some of the common issues that we see out in the marketplace with e-commerce accounting and talk a bit about how we approach at Free to Grow CFO taking a brand's books from, you know,
incorrect and not useful for decision making to something that can be used to really take the business to the next level.
So Ruben, to dive right in, I'm curious, in your opinion, when we start working with a new client, what's the top area of accounting and bookkeeping where you see issues that we usually are coming in and fixing most frequently?
Ruben (01:40)
I think the main issue we find it's going to be the way the company is recognizing income. Most of the times is going on a cash basis. And that's the first thing we look when we're reviewing. And the second one will be inventory and COGS because normally it's also one that has been done on cash basis and it's all the way around. So those are the two main focuses we have at the beginning to get fixed and and on track.
Jon Blair (02:05)
So what do you, what's the most common issue that you see with the way that brands are doing their income or revenue recognition before they come to us? What do you see as the top problem or the top issue that's being done wrong most frequently?
Ruben (02:21)
So, okay, yeah, it's going to be that they do cash. So they get the deposit on the bank and they consider that straight away as a sale or income from the P &L. And with that, the error is that they are just not considering discounts, refunds, fees. So that split from the P &L would give a better decision making. It's not there. But at the same time, they're also missing sales on the month as they are just doing the deposits and they are not actually reviewing or confirming.
Jon Blair (02:27)
Mm.
Ruben (02:29)
but it was the actual transactions that happened on the store.
Jon Blair (02:46)
Yeah, so like said in other words or like in another way is there's at least two issues, there's probably more and we'll dig into that more together, but there's at least two issues that Ruben just brought up with the way that most brands are doing their revenue recognition when they come to Free to Grow. Transactionally what they're doing is they're posting deposits that hit their bank account, transfers from say for example their Shopify store. They're just the net amount of that deposit to their checking account.
they're calling revenue on the day that it hit their checking account. What Ruben just brought up is that one, that's an issue because it's not just one amount of revenue, it's actually gross revenue minus discounts minus returns or refunds and sometimes plus shipping income and also plus sales tax. Exactly, exactly. And so that's one issue. But then the other issue is think about the sales that you make on like the last couple days of a month, right?
Ruben (03:17)
And self-tax. Right. Yeah.
Jon Blair (03:28)
When does that deposit usually hit the bank account? The following month, the beginning of the following month. So if you're booking that transfer into your checking account as income on the day it hits your checking account, that's usually sales from the previous month, or it most often is. So you have a timing issue and you're missing key line items on your P &L. Curious Ruben, like what's the issue with the sales tax? Where is sales tax supposed to be recorded?
Ruben (03:54)
Sales tax just to get it started is not even your money. So that money belongs to the state's government. So anyways, that's not part of your sales is not even your money is just a withholding that you're helping government to get so that it belongs to the balance sheet. So putting that on your P&L is already a misstatement for you. And it's going to mess around your numbers.
Jon Blair (04:15)
Yeah, I like how you say that, like, it's not even your money. And the thing is, when something is not your money, it's a payable or it's a liability. And liabilities, right, don't show up on the P &L. Liabilities show up on the balance sheet. is there any common places where you say, like, if someone records sales tax income, or I don't wanna call it income, because it's not, sales tax collected on the P &L, where do you usually see it?
when they pay the sales tax, when they're doing it incorrectly.
Ruben (04:41)
If
think correctly, we normally would see the income, obviously a spot of the net deposit on the income account. And then when they are paying it, normally what they do when it's currently done, it's go straight as an expense on the P&L too.
Jon Blair (04:55)
And that's a huge issue because when you talk about analyzing the P &L, first off, you know, when you talk... The way that we analyze P &Ls is we break out contribution margin. We split revenue, variable costs, and fixed costs. So the first question I have as a CFO is like, okay, if sales tax expense is on the P &L, what... Is that a fixed cost? Is that a variable cost? No, it's not any of them. It's supposed to be on the balance sheet as a liability. But the other thing is...
If sales tax collected is included in income or in revenue, revenue is the denominator of all of your margin percentage calculations. So you're actually gonna calculate incorrect margins because you have something that should be on the balance sheet sitting in revenue. it's actually a bigger problem than most people realize. I think another really important thing, Ruben, that people need to understand is there's not just, you brought up like,
the timing of recognizing revenue and you brought up splitting out the bifurcation of, of, you know, gross refunds, discounts, all of that. But talk a little bit about importance payments, actual payments received versus income. And what let's start with, why is that so complicated?
in e-commerce when compared to like other types of businesses.
Ruben (06:15)
bit. yeah, one of the things when we are trying or we're working to reconcile these income coming in your accounts, the hard is this time issue when the transaction happened, when they actually reflect on the payment processor to when it actually hit your bank account. So trying to get all these lined up
to figure it out and be clear on what is spending for you to get to see if it's one of the complications we have. And then adding layers of topics on it will be that Shopify, most of the brands will have different ways to allow the customer to pay, which convert themselves in different platforms for us to reconcile and be sure that the money is hitting correctly and it's being considered as part of your income and as part of your receivable.
later in the month.
Jon Blair (07:02)
Yeah, so, okay, there's a couple follow-up questions I have for you. The first one is, what is, just off the top of your head, the most complicated brand that you've seen that we work with in terms of the most payment methods? Like, how many might that be that you guys have to reconcile? Is it two, three, is it five, six, seven?
Ruben (07:18)
⁓ Now I think we
have one with like around between seven, seven to 10 different ways to code. And they don't even use Shopify to charge for it. So these all different and outside of the.
Jon Blair (07:24)
Yes,
Yeah, so the, guess to kind of summarize or like go a step further on this so that everyone can understand, the complexity of this is that you may sell on Shopify as a sales channel. That's the channel that orders are taken. And it's even the channel that payments are processed, but Shopify is not the payment processor. There's a, I don't even know how many there are. I think there's even more than we've ever used.
We encounter new payment processors all the time. Sometimes with clients who just add a new payment processor a year after we started working with them, sometimes we take on a new brand and they're using a new payment processor we've never used before. But we know the method for going through and figuring out how to tie and reconcile revenue to cash received, right? And.
That's really important because that's not intuitive to every accountant out there who's never had to deal with these nuanced payment processing, these payment processing gateways. Ruben, talk to me a little bit about what are some of the reasons in your opinion why it's challenging to reconcile all of these different payment gateways?
Ruben (08:38)
Yeah, I think one of the first things that make it hard on accountants is to understand the flow of the transaction. So I think that's the first thing that we sometimes get hard to get understanding, right? So we are going to read the work, we understand how it's going now, how they are flowing through the different places, channels and ways so we know what to look for, right? But that's I think the first and most complicated part is understanding.
What do I need from this payment process in order for me to be able to reconcile versus Shopify? I think that's one of the big issues I figured out. other complicated parts, some of these places that receive payments also allow them to make payments to third parties. So more complications on that front. Then you know that we have, hey, I'm paying, we're using someone else to get my money. I'm getting charged for that money. So I'm paying a fee.
but I'm not understanding what other fees are not related to that. So all that little things or nuances between all different payment processors are options to do different stuff with that money out of the same processor. It's what gets layers of complexity that not everybody gets at the beginning until they need to learn how each one of them works. And most importantly, the bigger picture of how that income flows through them.
Jon Blair (09:30)
Mm.
Yeah, so there's a couple things here that I want to draw. One is we have to do like data analysis on all of these payment platforms to even pull together the data that's needed to reconcile them. It's not like just getting a bank account statement in PDF and it tells you beginning balance plus deposits minus payments equals ending. We actually have to oftentimes pull data and
develop those kind of statements ourselves. And it's so you're actually that's one complexity. We're not even just handed a statement. Right. And sometimes the statements were handed actually are not helpful for the reconciliation and we have to recreate it. But there's another thing you mentioned that's really important. We're not just reconciling or let me let me let me say this a different way. Why do we reconcile the income to
cash and the cash that's actually flowed through these payment gateways. It's because there's P & L, there are differences between the cash and the orders and there are impacts that need to be recorded against the P & L. you, you, mentioned one or two of them when you were just talking, but can you go through the common P & L impacting differences between the cash flows in those payment gateways and the actual order income?
that shows that we start with in Shopify.
Ruben (11:10)
Yeah, OK, yes. So normally as straight out of Shopify will be your refunds and your discounts those come right away from that began at the moment of time. Then processors we have extra fees related to the processor. Some of them will be payments to third parties contractors. Any other type of vendor. Other ones will be marketing campaigns that add within that platform. The other ones that we find out is related to.
Jon Blair (11:32)
Mm.
Ruben (11:35)
Customs payments for sales and other countries. else I found out? think those are the most common ones that I have on top of my mind right now. But basically marketing stuff, and fees are things that are hitting that we don't see other than payment to vendors. Yeah.
Jon Blair (11:54)
Yeah, it's what you're bringing up. So there's the obvious one, or least to us, the more obvious one is the transaction fees. Like all of these payment gateways charge some transaction fee. That's the easy one almost, right? The harder one is there's numerous different types of accounts or payment. We call them merchant accounts. Some people call them payment gateways. But the merchant accounts, there are merchant accounts you can make payments out of.
Ruben (12:02)
Yeah, that's kind of the common one, right?
Jon Blair (12:18)
You can make payments out of your Amazon merchant account balance. You can make payments out of your PayPal and actually PayPal is super common. like, like Ruben mentioned, out of your amongst other things, some common things we see people paying out of their Amazon merchant account balance. This is the balance of cash and transit that hasn't gotten transferred to their bank account yet. You can pay for your Amazon advertising straight out of there. That is a different, that has to hit the P&L, right? That has to be recorded properly.
Ruben (12:46)
And I miss the fulfillment. We're talking Amazon. Yes, fulfillment feature also included there that are big. Yeah.
Jon Blair (12:52)
Yeah, so it's, this is not just reconciling the balance sheet, like the cash in transit back to the order income. There are actually operating expenses that hit various lines of the P &L that also need to get recorded as a part of reconciling these merchant accounts. And there's another one. This one typically doesn't impact the merchant accounts as much. I'd say on average, there are sometimes when it's bigger, but charge backs, like we have a.
You have customers who assess chargebacks through their credit card company. Guess what? That doesn't show up on the order. If you're in Shopify and you see you a million dollars of sales on the sales dashboard, it doesn't tell you that, you know, 10K of that got charged back. And guess what? That money got taken from you by the payment processor. So we reconcile that stuff to identify some of those, you know, some of those differences. There's another thing that I wanted to mention, which is
or I just mentioned it but I want you to explain the kind of complexities of it. The complexity of paying bills out of your PayPal account. We see that all the time. like talk just a little bit about like what, why that makes the reconciliation of the PayPal merchant account a bit more complicated.
Ruben (14:13)
man.
So to add complexity to it, have times, or most of the times, even though the brands will be funding money to payments, so that adds an extra layer for those ones, because you have normal money coming from sales, adding funding from your other banks, which are transferring accounts. But what makes it hard for us on those payments is that most of the times, the brand will not inform us about those payments.
So we mean even we will not have an invoice. So sometimes it's not clear what type of expense it is. It's gonna be marketing. It's just a contractor. So that is what makes them hard. So maybe it's easy to identify that payments were done, but then understanding and getting a clear picture or where they belong on the P &L is what gets complex. Obviously we need to talk with the company. We will figure it out and we'll have, but that adds extra layers of going back and forward to get your merchant accounts reconciled and ready to go.
Jon Blair (15:11)
So what I want our listeners to hear in this conversation, look, you don't need to memorize all the stuff that Ruben's going through and make sure that this stuff is done properly. You're a founder who's probably more focused on product and marketing and brand. That's where you should stay focused. But what I want you guys to take away is that there's a lot of nuance and complexity that goes into just getting revenue and some of the variable or some of the operating expenses that are contained within.
these merchant account reconciliations to get that right. Why should you care as a founder? Because the reason at Free to Grow CFO, we're able to do this much more accurately and effectively than firms that are not focused on e-comm is because we just do e-comm all day every day. So we're always, we're on the lookout for these things. And we're better positioned to even, we're not perfect all the time. We make mistakes at times, but we're able to kind of reverse engineer and figure those mistakes out over time because we're,
always dealing with these nuances and complexities. And it's even faster for us to figure out a new payment gateway than it is for a firm that does a bunch of different kinds of businesses and maybe every once in a while does an e-comm. And it could take them forever to figure out how to do this right. And oftentimes they just do it wrong. They take shortcuts. And what does that mean for you and your business? It means that your P &L is not accurate on every single line. And if your P &L is not accurate on every single line,
It actually means that you might think your margins are one thing, but they're another thing. Or you think your fixed overhead is one thing, but it's actually another thing. This affects you, this impacts you making decisions around ad spend profitability. You might think you're more or less profitable than you actually are. And it just really distorts your ability to make sound decisions. So, look, we kind of camped revenue. We don't, like, I wanna just really quickly talk about
inventory. We could have we could talk for 20 more minutes about inventory so we won't go crazy deep maybe we got to like do episode number two but on the inventory aside because in my opinion besides revenue inventory and cost of goods sold is the other area where we see the most issues generally speaking. What's the most common issue you see with inventory accounting when we take on a new client and it's being done wrong?
Ruben (17:23)
Yeah, as we said, cash is a big thing that they are posting the cogs based on what they pay to the vendor. Most of the time that payment could be either the final payment on the purchases that they receive a couple of months back or the other way around is going to be the advanced payment for the vendor to create inventory for them. So just that is already understating or overstating your cogs in the month. So that's the big major issue without going or thinking on
the other parts of the landed cost that we're gonna be shipping in or trades or any other thing, right? Just thinking straight product that is thinking is big problem, recognizing the payment right in the moment that you did it as a cost.
Jon Blair (18:04)
Yeah, for sure. And sometimes we see a hybrid. Sometimes we see that the brand is trying to do accrual on just the supplier cost, but the freight in, they're expensing on a cash basis. And so it's like cash basis for part of the landed costs and accrual on the other. Either one causes these distortions where one month COGS is overstated relative to revenue and the next month it's understated.
And so when you look at your margins, they look like this up and down every single month. And what does that mean? It means it's really hard to know, were you profitable in a given month? Are your costs, is your contribution margin getting better or worse? Was your ad spend profitable in a month? It's like nearly impossible to tell. And so Ruben, the last thing I wanna talk about, and I think we're gonna do another episode about inventory and we'll go deeper. But,
This might be hard because you you know this at a detailed level and so do I, but high level, how should inventory transactions flow through the balance sheet and then come and eventually hit the P&L? How should that flow go?
Ruben (19:08)
Let me try to make it no go to the technical, but basically the flow should be, you will get your invoice for your product. This invoice will hit your balance, either sellability and recognize as an inventory in transit. Then during the month you will receive products on your warehouse to sell to your clients. Those products should grow through your inventory on hand. And then the sales that you have on demand to your clients, that should be
quantify at recognized as COGS. So you have your income and your COGS related to those income on the same period. This means you will have on your balance sheet, yes, your inventory on hand, which be something sitting in your warehouse by the end of the month, plus any other order, purchase order or invoice that is still pending to be received for you or paid. So I think that's a easy way to describe it.
put it in.
Jon Blair (19:58)
mean that's
the good, that's the big buckets. I think one question that people might be asking is like, why in transit and on hand? Why are those separate? The reason those need to be separate is because when you put them on one GL account on the balance sheet is just inventory. Some of it's on hand and some of it's still in transit or, you can't compare that value to an on hand physical count and do a physical reconciliation because you'll be comparing
the balance sheet which has stuff that's not in the warehouse plus stuff that's in the warehouse and you're comparing that to a report of what's in the warehouse. So one key thing that we see brands that we oftentimes are helping brands do for the first time they've ever done it is they actually have to come up with a tracking system to track inventory invoiced for or and or paid for but not received yet in the warehouse because we have to split those.
if we want to get a true on hand general lender balance on the balance sheet, which can then be compared to a physical count to do like a month end or a quarter end or a year end physical inventory count true up. So I would say that's the big takeaway. Ruben, any final thoughts you have for just like why it's so helpful to have an accountant who really knows e-commerce?
specifically when you're running an e-commerce brand.
Ruben (21:18)
would say an accountant on your team that knows how to do ecommerce and understand the nuance on this will be helpful and get your P &L acquired. That would be enough for you to take decisions and also to be able to measure your marketing companies, measure your actual results and give you a better picture on how to scale. To give you the basis for you to have.
that decision making and make things better for you. And also actually if you've been more comfortable, just relax that your numbers reflect what is going on with your business.
Jon Blair (21:54)
Yeah, very well said. This does not matter because of debits and credits and because of like technical accounting jargon. This matters because the end reports are what you need to make sound decisions as you scale. And these things matter. The things we talked about here matter. Not because you founder need to be able to do them yourself, but you need to understand that the person you have in place to do these things knows them so that the reports you reflect
the financial performance of your business so that you can make better scaling decisions. So, Ruben, thank you for coming on and chatting about this man. And if you'll let me, we're gonna have you back and we'll talk more about inventory next time.
Ruben (22:33)
And thank you, Jon Yeah, let's let's do a follow up and keep talking about this. So this was fun. My first time.
Jon Blair (22:37)
Awesome. Yes,
absolutely. Thanks for joining, Ruben.
Ruben (22:41)
Thank you.
Jon Blair (22:41)
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