Podcast: The Silent DTC Brand Killer - Jacked Up Bookkeeping

Written By Sherilee Maxcy

Episode Summary

In this episode of The Free to Grow CFO Podcast, host Jon Blair sits down with Lio Pinchevski, founder and CEO of Finaloop, to dive deep into the challenges of managing inventory and bookkeeping for e-commerce brands. They discuss the importance of accurate and timely financial reporting, the difference between cash and accrual accounting, and the complexities of inventory management in the e-commerce world. With a unique background as both an accountant and an e-commerce founder, Lio shares insights on the complexities of managing finances for consumer brands and introduces the innovative solutions Finaloop offers. Tune in to gain valuable insights on optimizing your financial infrastructure for growth in the e-commerce space.

Key Takeaways:

  • Discover the financial blind spots DTC brands often face and the risks of using outdated accounting methods.

  • Learn how automated accounting solutions can provide real-time financial data to improve decision-making.

  • Understand why accurate inventory tracking and cost management are crucial for avoiding
    costly stockouts or overstocking.

  • Gain clarity on the different roles of
    accountants and CFOs, and when to bring in
    specialized financial expertise.

Meet Lioran Pinchevski

Lioran Pinchevski is the Founder and CEO of Finaloop, the leading ecommerce accounting and inventory solution that combines software and expert services to deliver real-time financial data and insights for multi-channel DTC brands. And if you wonder how he ended up starting an accounting startup for DTC, it might be helpful to know that he is a tax lawyer and CPA who also founded his own DTC brand before—speaking of putting your hands together... A former lecturer at Tel Aviv University, Lioran, who acquired degrees in Accounting and Law from the universities of TLV and Michigan with top honors, left his position as Partner at PwC to start Finaloop. You can't make this shit up.

Transcript

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00:00:00 - Introduction and Background of Lioran Pinchevski

00:03:03 - The Importance of Solid Bookkeeping

00:08:56 - Developing Financial IQ and Vertical Expertise

00:23:47 - Accrual Accounting for Measuring Margins

00:30:35 - Separating Tax Accounting from Financial and Managerial Accounting

00:32:26 - Accrual Accounting and Tax Books

00:41:32 - Challenges of Sales Reconciliation

00:25:22 - Navigating Inventory Accounting

00:38:06 - The Difference Between an Accountant and a CFO

00:57:29 - Final Thoughts

Jon Blair:

All right. Hey, hey, everyone. Welcome back to another episode of the Free to Grow CFO podcast, where we're diving deep into conversations about scaling a D2C brand with a profit-focused mindset. I'm your host, Jon Blair, founder of Free to Grow CFO. We're the go-to outsource finance and accounting firm for growing D2C brands. Today, I'm here with my friend, Lio Pinchevski, founder and CEO of Finaloop.. Lio, what's happening, man?

Lioran Pinchevski:

All good. Thank you for having me.

Jon Blair:

Thanks for joining me from the other side of the world. What time is it over there in Israel? It's 5.30. Okay, okay, well, I appreciate you taking the time to join and I'm looking forward to what we're gonna be chatting about today. Today's topic is not letting your bookkeeping constrain your growth, which is really, really important. I'd say for any business, maybe I'm biased because I was originally an accountant before a CFO, but in the e-commerce world and scaling a D2C brand, having solid books is just so incredibly important because if you don't know, if you don't have tight reporting, that's not just accurate, but also timely, you don't have the critical, critical data that you need to make decisions and grow your business and achieve your goals. And so couldn't think of a better person to chat with than you. And, you know, to get started before we really dive into this topic, I'd love if you could give the audience a bit of your background and the journey to, um, you know, founding and starting Finaloop.

Lioran Pinchevski:

Yes, of course. So again, thanks for having me today. So I'm Lio. I'm a lawyer and accountant in professions. Spent most of my career with PwC, the big four accounting firm. Half of my time in New York, half of my time in Tel Aviv, worked mainly on international tax M&A, just M&A and acquisitions between really, really large enterprises. And also started a direct-to-consumer brand in the fertility space as a side hustle due to some personal pains of my wife and myself conceiving for the second time. And this is how I got exposed to the e-commerce, the multi-channel, I'd say, e-commerce world. And as a founder, I felt that I'm quite blind with my business. It started very early. The business grew into high seven figures. And even though I was selling very nicely, I was still blind about my financials. And I could hire some external resource but never got the results that I was expecting. So I kind of built my own visibility through, you know, pulling data from different sources. And then I said, hey, you know, my Direct to c onsumer brand is a very nice side hustle. But here there's an opportunity to build something that is really, really, really big. because I thought that if I am struggling with understanding my financials, and I'm an accountant, and I have a tax background, I just assume that many other founders are suffering from the same problem. And in a space that is driven by performance marketing, and every penny matters, and the margins are very low, I thought that this is a huge opportunity to make a difference in the in the econ and consumer brand space.

Jon Blair:

Yeah, I love that. I love that one, and you know, so it's interesting because as a founder, the founder of Finaloop,, right, you have an interesting background as an accountant, but then also an e-commerce founder, right? And so you, in my mind, have this very interesting, unique intersection of understanding what it's like to be the person who started the brand, which oftentimes is not an accountant, right? Most of the brands we work with their founders don't have any sort of accounting background. Maybe a finance background, but certainly not accounting, right? And as related as those things are, they're different. And they take a different skill set and technical knowledge. And so that's what I found super fascinating when we first met you was the understanding that you have of not just who your user is likely going to be for FinalLoop, but an understanding of the technical side of accounting, which I think has positioned you guys to make a lot of progress really, really fast on FinalLoop. And so for those that don't know, can you just explain what FinalLoop is and at a high level how it works?

Lioran Pinchevski:

Yeah, sure. So, FinalLoop is a real-time accounting system for e-commerce and multi-channel consumer brands. It just means, basically, that we work only with consumer brands, whether you sell online or also offline retail wholesale. But on the other hand, the fact that we are a vertical product help us make all the data very visible and in real time. So if you think about it on a more high-level basis, we basically replace three main functions, I would say. We're going to replace the different integrations that you use to bring your data from the different services. Then we are replacing the manual reconciliation work as part of the bookkeeping process. Third, we're providing more visibility. The visibility side can be through having up your KPIs, giving you better inventory management process. I'd say accounting, finance, and a little bit on the operational side with respect to inventory and costs.

Jon Blair:

Yeah, and so, you know, I've been doing accounting for about 16 years and in different verticals. Started in manufacturing, got into e-commerce when I helped start a brand about 7 years ago. We always ran a really tight ship internally of getting the books closed in like five, six, seven days, but it's a lot of work, right? There's a lot to reconcile, especially if you are selling through, say, Shopify and Amazon, and maybe you now, in today's marketplace, you've got some other marketplaces like maybe fair or like walmart.com target.com right and maybe then you maybe have a little bit of like actual i'll call manual wholesale where you got actually like invoice customers when you take all of those channels um there's reconciliations included in making sure the bookkeeping is done properly on all those right and as you add one of each channel if you're doing everything manually becomes it becomes uh I'd say exponentially more complicated and time consuming to close the month in a timely manner. And I would say at Guardian Bikes, the brand that I helped start, we were probably from, in my opinion, we were probably in the top 10% in terms of being able to close the books that fast because we're free to grow sits in the marketplace. You know, we talked to dozens of brands. every single month, and most of them are closing their books, if they're even closed, right? And they're not behind by several months, which many of them are. Maybe they're closing them in 30 days. And so the problem with that is what? First off, if you're a couple months behind, you just don't even know what's really going on in your business. All you can really look to is maybe some reports in Shopify and Amazon, and then look and see how much cash is in the bank account. But that's no way to run a consumer brand. But even if you close your books in 30 days, by the time you look at those numbers, e-com changes so fast. It's basically, honestly, pointless, except for getting your tax return done. Tax accounting is not the same as operational financial accounting and managerial accounting. What you guys are trying to do, the problem you're trying to solve, is very, very important. Even such that Free to Grow CFO is one of the many firms that's partnered with you guys. We have many clients on Finaloop.. Jeff, my partner, and myself are also small angel investors. Because what you guys are doing is really, really important and is, I think, the future of bookkeeping. When you were building the product, and even I know you're still to this day talking to a lot of e-commerce founders, besides the books being closed slowly, like I just mentioned, what are the other really big challenges that you see time and time again that e-commerce brands keep facing in getting their books done accurately and on time?

Lioran Pinchevski:

Yeah, so I think in general, I think the main goal here is every brand should establish, I'd say, the financial infrastructure internally, right? The financial infrastructure that you would use for making business decisions, for financial planning, budgeting, cash flow, what have you, right? So the issue is how you build your financial infrastructure. Now, I think there are two sides, right? The founder side, the brand side, and then there's, I'd say, the vendor, the discipline of accounting. On the founder side, I think the key there is, let's say, to develop that financial IQ that many of the brand founders may not have because they're coming from different backgrounds. So you mentioned that a lot of brand founders would come with a finance background. But this, in my opinion, or if we're talking with the brands, would be the minority. The majority of the brand founders would come from more marketing brand, you know, content, storytelling, you know, performance marketing background. And I think for for these brand owners, the key is to develop this financial IQ. They don't need to be accountants. They don't need to be finance people, but they need to get into this level of understanding of finance that they own the financial IP internally. just like they do with marketing, right? So if you go to a marketing agency, you don't bring a marketing agency and say, hey, deal with my marketing. I'm not going to do anything. I don't want to hear about it. Just bring me these customers, right? Because then you cannot manage the process. Maybe you're missing on stuff. Maybe you're missing on income. Maybe you can do things better. Or if things go south, you don't even know how to end it. So my belief is that on the brand side, founders need to acquire this financial IQ, this financial IP, that they can then go and manage their vendors and manage their processes. I think it's, you know, there's a lot of content, there's a lot of education around marketing in the market, in the space. But I think that the consumer brand space need more education. I think people like you, like Jeff, like other people in the space, doing great job in educating the founders and educating the market, those who don't naturally have the financial background. And I think as long as we see progress there, I think people would be able to establish better foundations in terms of the financial infrastructure that they have. On the vendor side, I think the vendor, meaning the accountants and the bookkeepers and the CFOs in the e-commerce space, I see it as a growing trend because accounting in general, it's a very generic, I'd say, vertical agnostic profession. When I was a partner with PwC, I did tech companies and I did pharmaceutical companies and sometimes I had real estate. you know, kind of the professions that you see a lot of industries. So I think one problem in getting proper financials and proper books in e-commerce is the fact that most of the accountants, bookkeepers, CFOs in this space would be horizontal. and not vertical. So you guys are super vertical, but 99% of the market will be horizontal. And then for somebody that is not focused on consumer brands, the knowledge gap is just huge. It can be great accountants, super smart CFOs, but consumer is just a different animal. And even if you're a great accountant, if you don't have specific knowledge in the specific space, your books, the books that you're going to produce would just, you know, don't speak e-commerce and would be unusable. So I think the trend of more and more verticality into the space is a super important trend. Yeah. So this is this is one part of the story. The second part of the story, which is kind of more, you know, why we started Finaloop is Consumer brand versus any other industry is just a complex very complex business. Yeah you know you have marketing and you have logistics and you have you know, you have back office and you have finance and you have sourcing you have product and You usually have very small team with You know problems of you know, big companies. It's usually solved with a lot of people. Yeah so very complex business, usually high scale of information. So even for a vertical, super talented, super smart person to take all this data and being able to reconcile it efficiently on time to close the month, not 15 days after the end of the month or 30 days after the end of the month, but every single day, so you can run your business efficiently. This is something that technology has to support. Even take myself as an example, I'm now at the point that I understand e-commerce financials really, really well. If you let me manually manage books of an e-commerce business, a multi-channel e-commerce business, I would probably end up with tons of mistakes. Not because I'm not capable, just because the level of data, the level of complexity is beyond the capabilities of a human being in absence of technology or technology empowerment.

Jon Blair:

Yeah, those are all really, I mean, we could probably talk for the rest of this episode just about the several things you brought up there, but there's a couple of things I want to summarize and draw out for the audience. One, my buddy Ryan Rouse, I think you might know Ryan Rouse also, Lio, but my good friend Ryan Rouse, he always talks about like, look, founders. Whether it's, you mentioned marketing and you mentioned accounting and finance, but you need to know enough, you don't need to become an expert, but you need to know enough to know what good looks like, right? And make sound decisions, because if you just fully outsource everything, including the understanding of the various functions of your business, you'll be rolling the dice about whether it's going to go well or not go well. And so you need to know enough to know what good looks like and to be able to make sound decisions and delegate properly. And accounting and finance are not excluded from that truth. And then the other thing that you mentioned is the complexity of e-commerce and consumer goods together. There's complexity in e-commerce separately. There's complexity in consumer goods separately. And then when you bring them together, there's a lot of complexity, especially when you're talking about multi-channel e-commerce. And so that problem, that complexity is something that's ripe for technology to come in and really streamline things and make them more accurate. And I think you pointed out something that I actually wanna dive a little bit deeper on. And this is because we see this all the time at Free to Grow. It's that there's a lot of traditional CPA firms that are very horizontal, like you're talking about. Their claim is we serve all industries. And I, you know, I think that there are some industries that are not as complicated where you can be horizontal and still do a good job. But I've yet to find a, we serve all industries, CPA firm or bookkeeping firm or CFO firm for that matter, step into e-commerce, e-commerce consumer goods and do a really good job. The ones that are horizontal have like a partner or, you know, a division. that is very vertically focused. But what we see is the bookkeeping is just wrong and oftentimes actually it ends up being super late. And I think the conclusion I've drawn is the reason it's late is because they get stuck. and they kind of put it to the back burner and kind of try to figure out the easy stuff with the rest of their clients and come back to their e-com consumer goods clients and go, and I see this a lot in inventory, where I'll see the same inventory number on the balance sheet for like three months and then it'll all of a sudden change. And it's because it took them three months to figure out how to try to tie into ending inventory, right? So I was going to ask you if you see the same thing. I don't even need to ask you that because you already mentioned you do see the same thing. I mentioned why I think it why why there's such poor quality bookkeeping for these horizontal firms. But do you have any other thoughts on like why the bookkeeping is tends to be slower and inaccurate when there's just a very horizontal firm?

Lioran Pinchevski:

Yeah, I mean, I think it comes down to, you know, knowledge, expertise and tools, right? If you serve cross industries, even if you're a big firm and you have kind of vertical e-commerce partner, this is not the focus of the firm, right? It's not where all the resources go to. So you guys, for example, right, you live and breathe e-commerce. You know, 99% of your customers are, you know, from largely from this space. So you wake up in the morning and say, OK, you know, I'm an e-commerce finance guy, right? If you are not an e-commerce finance guy, the chances that you will be able to grasp all the nuances that e-commerce and multi-channel e-commerce brands encounter in the day-to-day, just impossible. So I can tell you that I've never seen a horizontal CPA, bookkeeper, accountant, or also a horizontal software, right? The reason we started Finaloop, we basically said, okay, I'm an e-commerce guy, I understand that if we take this vertical, we can do just great, build a huge company and make a lot of money. The reason I said that is that I understood that verticality here is an extremely important factor. So to your question, I don't see how a horizontal professional would get books of an e-commerce brand right. And if I was an e-commerce founder, I would never go and get services from any firm that is not 100% focused on consumer brands.

Jon Blair:

Yeah, you know, so it's funny and this is, I'm smiling because we have a small team, right? We're a very tight knit team of all CFOs and accountants that used to work in-house at brands, right? And it's because I was a brand founder. I was on the founding team of a brand and so I'm very adamant about bringing people in. who have worked in a brand before because they've dealt with those complexities and those challenges and we have a we have a meeting we run our company on EOS for those of you who are familiar with EOS because I'm also an EOS coach on the side and there's these meetings we have our service delivery team has a meeting every week where we have a list of issues that we've either discerned ourselves or that clients have brought to us, and we're solving them in highest priority. And we always make this joke about the fact that like, Is there, and there probably is another firm out there doing this, but there's probably very few. Is there another firm that's getting this nerdy about e-commerce? Because everyone loves it. Everyone on our team, I can honestly say that everyone on our team loves trying to figure out e-commerce. And every time, there are times when we're like, man, This is really challenging. Like, should we go do something easier? And it's like, no, this is what we were made for, right? And this is what we were made for. And that's what keeps it fun. And to be quite honest, you know what I always remember, Lio? And I'm sure this is near and dear to your heart, being a founder yourself of a brand. I remember what it was like when we started Guardian Bikes and we didn't know anything about e-commerce and we were just figuring it out. And what keeps us going is like, no, no, no, there are more brand founders out there who are lost. who need us to stay in the game, right? And that's the truth, and when I hear a founder, there's actually nothing better, truly, than a founder who says, hey, my life was like this before free to grow, and it's now like this, and it's so much better, and I'm sure you hear that about Finaloop.. They're actually, that is the whole reason we do this, right? That's what gets us out of bed every day, is like we can't let down those e-com founders out there who have it, who are struggling and haven't found out about us yet and haven't seen how we can help them. So what I wanna talk about next is the difference between cash and accrual accounting, because this is like front and center to consumer, well, I mean, I don't wanna say it's just a challenge for consumer goods, but because these are inventory-based businesses, right? And like you mentioned, margins, you have to know your margins because of the impact of variable marketing spend, right? You're always spending dollars on Meta, Google, and you need to know how that's impacting your margins, because that's ultimately driving either more contribution margin dollars or less, right? And if you don't understand that concept and can't report on contribution margin dollars, and also understand what your balance sheet looks like and where your cash is going. Is it stuck in inventory? Are you paying your vendors too fast? Is it locked up in receivables? If you don't have those things down, running a consumer brand multi-channel is going to be so, so hard. So, in simple terms, from your perspective, what's the difference between cash and accrual, and why is it so important for an e-commerce consumer brand?

Lioran Pinchevski:

In very simple words, accrual accounting would be accounting for transactions when they actually happen or materialize rather than when the cash actually moves. So a very simple example, I consume the services of a marketing agency. I haven't paid them yet, but I know that contractually I have to pay them. This becomes a liability and it becomes an expense today and not in the future when I actually move the money, right? So this is the base concept of Equal. I do see inventory a bit differently because I still think that you can, and I'll tell you in a second what my opinion about that is, but you can essentially run a cash basis a set of books for an e-commerce brand, but still on the inventory side, not be cash basis, meaning inventory for me is not cash accrual, but rather purchase-based versus sales-based. Whenever you purchase inventory, you recognize an expense. or only when you sell the inventory. Now, I have a very strong opinion. In my opinion, regardless of what we're reporting for tax purposes, right, which is, you know, it's, you know, sometimes for tax CPAs, it's just easier to, you know, to report on cash basis and not on accrual basis. For some of them, it just doesn't matter. But for accounting purposes and measuring your business, you have to be on accrual. And my recommendation is for every brand, which is already six figures and obviously up, to just manage everything on accrual, which means books on accrual and inventory on sales-based basically recognize the cogs when the inventory is sold and not when you purchase the inventory. those who still want to manage the books on cash basis, the inventory still needs to be sales-based. So I don't see how an e-commerce brand can operate based on cash inventory accounting, which by the way, is also not the right thing to report from a tax perspective, but this is a different topic. The concept is, you know, it's very... Obvious, right? You can buy an inventory, a tranche of inventory today for $100,000. You keep it in the warehouse. You didn't sell anything. It's not an expense. Whenever you sell the inventory, then you have the COGS as an expense. And any other measurement would just destroy the way you track your gross margin, the way you track your contribution margin, the way you measure your business. Absolutely. So for me, managing the financials on a cruel basis, sales base for inventory, and there is no reason to do anything else because the expertise is there, you have people to help you with that, and the technology is there. So I don't see any excuse to keep things on cash whatsoever.

Jon Blair:

Absolutely. So I have the same strong opinion as you and the way that I explain it to founders who are just starting to try to kind of wrap their mind around the financial IQ that you mentioned earlier is one kind of outcome of proper accrual accounting is you get revenue and expenses matched right in the same month. And what I often see, and I know you guys see this all the time, I can tell immediately when a brand has issues with accrual accounting, because I see their margins as a percentage of revenue swing up and down like the stock market every single month. And the ones who have it very clean, yeah, there's a little bit of variability up or down a couple points, right? But it's very stable. And so here's the problem. On cash basis, you see these huge swings where maybe one month your gross margin is actually negative. because you recognize all the inventory you purchase in that month. Here's a perfect example. Right before the holidays, most of these consumer brands have a huge sales spike before the holidays. But what else happens a couple months back from that? Purchasing inventory. So you see a negative gross margin a couple months before the holidays, because they're gearing up on inventory and they're expensing their purchases to COGS. But then in Q4 when they sell it, their gross margin's like 99%, because there is no cost of goods sold that's recognized. But here's the problem. How do you then decide whether the impact of shipping costs and fulfillment costs and marketing spend in those months, how that's accurately impacting your margin? You can't, right? Because you've got your cost of goods sold two months back in a different month. And so when accrual accounting is being done right, you see very stable margins. But here's the real important thing. When you're on cash basis and your margins are swinging up and down, can you really tell if they're getting better or worse? No, you can't. So as a founder, you may not even know until it's too late that your actual cost of goods sold has been rising, right? You don't know.

Lioran Pinchevski:

You're blind, right? You're not managing the entire books. You can't measure anything. My nightmare as an e-comm founder was this state or this period of time when you're running your additional marketing dollar in a loss, right? So I was obsessed about the numbers because I couldn't cope with this idea of I'm running now this campaign and I'm like raising the bids and I'm getting crazy. Okay, I see the sales, but actually I'm like losing on this marginal sale. And if, as you said, if you if you do cash basis, you have no clue. You don't know. Just don't know. It's too, you know, there's too much fluctuation to be able to say this is what I sold and this is what it actually cost me.

Jon Blair:

Yeah. And so if you have timely books, like you're using a tool like final loop, right. And you're getting your books done every single day and it's on an accrual basis. When you see your cogs go up right in pretty close to real time, you can act on that and, and, and dig, dive down deep and figure out what's driving this. Can I do anything to get this, these cogs back down? Right. You can't do that if you're on cash basis. And I've tell, I think one struggle that I have, and by the way, I have no personal vendetta against CPAs. They serve a very important function within the whole ecosystem, but for the size brands we work with, 5 million to 75 million, 5 million to 100 million, but there's only a few up there. CPAs in large part are doing taxes. Taxes are a very important function within your business, but it's night and day compared to financial and managerial accounting, which you actually use to run your business. You can't let a CPA tell you, hey, I want to do your taxes on a cash basis. and assume that's the way you do your internal accounting for decision-making purpose. You have to separate those things, and that's actually something that is surprising to a lot of the brands that we work with. Because in the early days, the CPA did everything, right? Did the bookkeeping and the taxes, but you have to start separating those once you hit a certain size, right? At least seven figures, maybe even before. we start saying, no, no, no, look, if your tax accountant wants to do stuff cash basis, you have to consult with them on whether that's compliant and that's best for your tax situation. But we can still do the books accrual and it can be converted to cash very easily for them to do the tax return. That's no problem. So like, I just want everyone to know, listening to this, you don't have to go one or the other. You can have tax books and internal books and they do not have to be the same. Exactly. Um, so one other thing that will, like, I want to talk a little bit about the common challenges. Cause final loop is like really big in, in helping overcome this challenge. Um, the challenges on accrual accounting with revenue recognition and revenue reconciliation from your standpoint, what makes that hard in the e-commerce world and how does final loop help, you know, overcome that challenge?

Lioran Pinchevski:

Yeah. So I think the main challenge that we are dealing with every day on the reconciliation side is the ability to, I mean, regardless of, like, regardless of accrual, I'm going to touch that in a second. You have the base challenge of you have sales on Shopify. Amazon is connected to Shopify and Fair is connected to Shopify. And then Shopify itself, in the sales reporting, are including many things that are not really sales. So you get a very noisy picture of your sales in the different platforms. Absolutely. Then you can have sales in the different platforms. Let's say you sold something on Shopify to a wholesale or retail customer and you didn't collect the money, right? You're going to still have a sale in Shopify, but it was never got collected and you're not sure that it's a real sale. So there's a lot of work in getting to all these channels. Make sure that you don't have duplications. between the channels and that every single sale or sale component is indeed income, not duplication of income, not just like something that a Shopify returns app just hacked in order to push the returns back. So there's a lot of cleansing of the information that you have in order to get to the base income. And one of the ways that we are doing that, because I don't think it's possible to do it only with the Shopify API or the Amazon API. So the way we do it is by way of reconciliation. So we basically bring all the data from Shopify, clean the data, bring all the data from Amazon, clean the data, and then we reconcile it against the payment gateway. And then we reconcile the payment gateway against the bank. We call it three way reconciliation. And it's never perfect, it's close to perfect because if you think about it, it's not the people that build Stripe are not the same people that build Shopify and the people that build Klarna are not the same people that build Stripe. So every service, you talk a different language and you don't always have a footprint to say, okay, this is a sale of Shopify and here is the payment on Klarna or on Stripe that basically clears the specific sale. So there's a lot of data modeling and reconciliation done on that part. This is just like the base mission of getting into, this is what you sold. Yeah. After you do that, you want to ask, okay, I'm on a cruel basis, so I also want to know what I actually sold, meaning I already delivered or fulfilled the order and it's on the way to the customer, rather than I just got paid and maybe it's a pre-sale, right? So then there's another layer, which is the fulfillment layer of saying, I had this sale on Shopify or I had had the sale on Amazon, but this sale is fulfilled or not yet fulfilled. If it's fulfilled, it's income. If it's not yet fulfilled, then it's deferred revenue. It's not actually income. And only when the order is fulfilled, then you recognize the income. So you have two layers of complexities, defining what a sale is and reconcile it against the payment. And then the second layer is to say, okay, now, whether the sale meets the cruel definition of the sale of an income item.

Jon Blair:

Yeah, you said, okay, so the first, what you ran through the sales reconciliation, you said that super well, which I'm not surprised because that is one of the areas of final loop is like the most robust in terms of like dealing with e-commerce specific challenges. But that three-way reconciliation, like that's something that seven years ago at Guardian we were doing manually, right? Like pulling in sales and we, you're passing it through a clearing account and then pulling out of that clearing account all the payments we could actually identify And then confirming those then went from that clearing account to the bank account and they actually existed. And that was. I mean, that's a lot of work, right? It's a ton of work. And I will say, contrary to what a lot of people believe, like the WebGility and A2X, those different connectors, they don't do it correctly. In fact, we used those for a while, and we would manually check what those connectors were doing, and it was wrong. And we actually went back to doing it manually. seven years ago because why because those connectors were wrong as well and so that Unfortunately, I'm in the believe me. I we wished back then the connectors works. Believe me We were like hoping that they would work and they didn't and and I you know I haven't used them in a long time or I haven't used them in years But we just kind of we're kind of scarred from that and so we never we never went back to it but I will say we still have this challenge and We have this challenge that comes up kind of two-fold every single month. One, hey, how come my financials don't match the Shopify report? We get that all the time. And then how come my sales don't match TripleWhale? And TripleWhale has the same exact problem as Shopify in terms of what, and it's actually the TripleWhale one is, is really challenging because it'll report ROAS or MER using what some of those revenue pieces of revenue from Shopify that are not actually revenue. Like one that drives me crazy, sales tax gets included in there and sales tax is not revenue. It's a pass-through liability that you put on your balance sheet because you owe it to somebody else. And so to say that that should be included in your return on ad spend is just misleading. And so I've actually had brands say, hey, my ROAS is 3.5. And I'm like, no, it's 2.9. And they're like, what do you mean it's 2.9? And it was because they actually just started collecting sales tax. So they went from like zero sales tax to like 350 grand in sales tax because they just started using like a service like Avalara. And all of a sudden their ROAS, I'm like, guys, it's 2.9 but they're making decisions on 3.5, right? And those two different numbers have a much different margin impact. And so I'm just, I'm using this example to show everyone that like, What Lio's talking about is super important. It's not like just, oh, debits and credits and like, you know, like I don't want to get into accounting. You don't need to understand the debits of credits, right? Finaloop does that and there's accountants who can help, you know, like kind of help you understand it, right? But what you need to understand is if these things are not going into the right place, they're not going into the right buckets, you will make decisions that you think are gonna lead to one end and actually lead to another. That's the important thing to take away from all of this. And in today's world in e-commerce and consumer goods, there's just not a lot of margin for error, right? You need to make good decisions and when you make a bad decision, you need to know quickly that it was a bad decision so that you can change, right? And so I just wanna draw that out for everyone to understand. This is not just a couple nerdy accountants talking, although maybe we are, but this is actually really important stuff to your brand. And so understanding these basics is just gonna set you apart as an elite brand from just an average brand. So there's something I wanna dive into from here, Lio, that this really makes you think about inventory accounting. Because this is like, that's the other hairy beast in all of this, right? Inventory accounting. Where do you see brands struggle the most with getting inventory and

cost of goods sold accounting right?

Lioran Pinchevski:

So I would split it into, I would say the greater purpose, right? The greater purpose in managing inventory is to avoid stockouts, right? Which is a bad thing for growth, a bad thing for your momentum, right? So this is one side of things. The other side is not to overstock. Because this is going to kill your cash flow, right? So the brands that we see struggling on Finaloop and based on a lot of discussions with the brands along the way, are brands that are getting into this problematic cycle of, I bought too much inventory. I now have it in my warehouse. I didn't sell it quick enough and I need to finance it, so I'll take a loan. But the loan has 25% annual interest effectively, right? So now we are in this death cycle of like a really, really bad cycle where you can't sell your inventory, but you need to serve the debt. So you're saying, okay, this line of inventory is not great. I'm going to tweak and I bring this new product and you buy inventory again and you finance it again. And then you go, just, you know, your cash flow is just getting super negative and that's basically it. So you want to avoid stockouts on the one hand, but you don't want to overstock on the other hand. In order to get that right, I think you need to have basically two components. One is to get really accurate about the financial side of inventory, which is our main focus. Basically understand what your lended costs are, which is not trivial, right? Because there's the price that you purchase the unit. But you have shipping and you have customs and you have many different indirect costs that in certain cases can be more expensive than the price of the product itself. So you need a great mechanism to measure your landed cost and then do it in high scale, right? Because it's really a lot of POs, a lot of indirect costs and The way you measure it based on FIFO or based on weighted average, this is something that is very, it's not trivial to do it when you have great scale in your company. And the second part is many e-commerce brands would have raw materials, but then they're going to assemble the raw materials or they're going to create finished products from the raw materials. So there's, you know, the disciplines of recipes and assemblies and being able to transform raw material into finished goods and understand what are the financial implications from this transformation in order to understand what a single unit actually costs you. So this is on the finance side, and it's a great challenge. We recently launched a great tool to help founders with that. It's called Inventory IQ. So basically a full cycle from PO into COGS calculation based on FIFO. that helps you with that. The only thing that you need to do is just to inject the PO and then everything goes automatically from there. I think that the second layer is just like, you know, the unit tracking to really understand what you have in the different warehouses, which sounds trivial, right? You have single warehouse or two warehouses and you have FBA. But as a matter of fact, it's not very trivial. So many brands struggling to understand how many units they have today in the different warehouses. And you need better processes or great processes to actually being able to efficiently understand how many products you have in each warehouse. And the combination between the finance side of inventory and the physical side of inventory, how many units you have should give you a great infrastructure to really understand whether you are getting into stockouts and you need to raise a P.O. or whether you are just going to overstock by understanding what you have and kind of project what you need for the next project that you have on your marketing calendar and the promotions that you're expecting. This is the third component, which is demand planning. You have all these numbers. Now you can plan your demand and make sure that you are not run out of inventory or buy too much.

Jon Blair:
Yeah, there, there's a common theme here, right, that I keep hearing you say, and I'm smiling

because we deal with this so much. It sounds trivial, but it's not right. And that's like, whether we're talking about the revenue reconciliation and we're talking about landed cost tracking. It all sounds trivial and then you get into it in the context of an e-commerce consumer brand and it's very much not trivial. But here's the real hard thing, is even if you get a process down, let's say you get a process down on the inventory side to track landed cost for ocean shipments. But then all of a sudden you get low on stock and you start air shipping stuff, right? And so you have lots that are coming out air shipped and then other lots that are coming out ocean freighted and we've dealt with this a lot. Or you have to like move to another supplier for a period of time because you reach the capacity, there's an issue at one of your suppliers. So you start buying the same SKU from a different supplier, different supplier costs, maybe it's a different country so it's a different duty rate and different shipping costs. So it's all fun and easier, easier, more trivial when you're buying from the same place and shipping container rates are staying the same and you're always shipping via ocean. But that's, that's like a dreamland. That's not the e-commerce world that we live in. you've got those things changing all the time, right? And you're having to make really fast decisions. And so really the complexity comes into play of like, do you have the ability to track your landed cost as all those variables continue to change over time? And mind you, if you're growing, You're scaling, you're also just busy. You're busier with more marketing stuff. You're busier with more hiring. You're busy with all kinds of other stuff. And so having the right tool is super, super important on the inventory side of the house. Because as Lio mentioned, it's actually not just, there's the financial side of tracking inventory and that's incredibly important. It drives accurate accounting. But just tracking your inventory from a quantity perspective so you can do things like demand planning, it's also an operational thing that can really, really screw things up while you're scaling. So unfortunately, I see a lot of brands who are scaling into seven figures who say, I'll figure out the inventory stuff later. But when you get to later, it's a lot more painful and it's actually more dangerous for your brand's financial health because there's more money at stake. And so this is a really, really important one to make sure that you're focusing on as a founder, that you have the right systems in place to be able to handle inventory from a financial and an operational perspective.

Lioran Pinchevski:

And going back is always more complex more expensive than doing it today, right? You have this false notion of I'm going to focus on something else today and I'm going to deal with it later. But the later cost a lot of money because rewriting the past is just so much more expensive than setting up the processes today.


Jon Blair:

Absolutely. And here's the thing, I like to differentiate pre-product market fit from post-product market fit and scaling. If you're pre-product market fit, leave some of that stuff till later. You're just trying to get people to buy your product and buy it at a price that actually is economically viable. But once you've got product market fit and you're starting to scale, you should start with these processes immediately, because the longer that you wait, the more painful it's gonna be. And that goes for actually even just more generally, all your general ledger accounting, get the right system and people in place early on. And here's the beauty, look, seven years ago, when I was part of the founding team at Guardian Bikes, I was on the team full time, right? And I'd say seven, eight years ago, it was a lot more common to find a full-time accounting and finance team in a D2C brand. Fast forward to 2024, there are, besides free to grow, there's so many other, there's so many choices. You got software like Finaloop,, you have tons of firms, and even freelancer, you know, D2C focused, fractional CFOs and fractional bookkeepers and accountants. You do not need a full-time team anymore in the modern e-commerce brand. We work with brands that are, that are 60, 70 million a year in revenue, and there's not a single full-time person in their finance team, right? And we serve them well as fractional CFOs. Many of them are on final loop, right? And we help oversee the bookkeeping and final loop. So don't think that today in 2024, Having the right accounting system and personnel is cheaper than it's ever been. It's more accessible than it's ever been. So there's actually honestly very little excuse. There's no excuse to not do it early on, like there maybe was seven or eight years ago.

Lioran Pinchevski:

For sure. The barrier is so low now that you just need to get it done. Absolutely. I fully agree. Five years ago, the only way to do it is to bring somebody, because of the horizontal state of the market five years ago, you needed to bring somebody on board coach them, make them understand e-commerce before they become productive. Now people can just go to a firm like free to grow and get the value from day one as a fraction of help. There's no reason not to do it because it would just get more expensive down the road.


Jon Blair:

Absolutely. Last question before we land the plane. This is important to the discussion we've been having here. The difference between an accountant and a CFO. They're not the same thing. You may have people who were accountants who become CFOs. I started as one. Became a controller, became a head of finance, became a CFO. They're not the same thing though. And it's important that brands understand that distinction. I love how you guys on your site and in talking to brands kind of separate out financial operations from bookkeeping, from CFO, right? And I think it's a very logical kind of like segmentation. From your vantage point, what's the difference between an accountant and CFO and why is it important for brands to understand that?

Lioran Pinchevski:

Yeah. So, even accountants are split into two groups, which would be bookkeepers, right? The main responsibility of a bookkeeper is maintain the books as a foundation to the tax work, right? So, this would be the second type of accountant. You're going to have the bookkeeper. You're going to have the tax CPA. Both of them, in my logic, are accountants or under the term accountants. And then you're going to have the CFO, right? So under accountants, you're gonna have the tax CPA responsible for tax planning, tax filing. Then you're gonna have the bookkeepers. The bookkeepers are responsible to get your books 100% accurate with strong financial infrastructure to facilitate the work, of course, the tax filing, but mainly throughout the year, facilitate the work of the CFO. Now, I would say the main difference between the work of a CFO and the work of a bookkeeper, bookkeeper is looking at the past and the responsibility is to bring the past into a digital form of books, which is the financial foundation. You know, what we are trying to do is not to look at the past, but to look at the present, right? But we stop at the present. CFO for me is anything that comes after the present into the future, right? So it's planning, it's budgeting, it's making decisions that would impact the next quarter and the quarter afterwards. This is one side. And second function of a CFO, in my opinion, is to set the right processes, to set the right operational processes. Because what I see is that many people would go to the CFO and say, hey, you know, I need this budget and I need, you know, this inventory forecast and demand planning and helping with this decision. But then when you dig in, you just understand that You need two things. You need one, the financial infrastructure, so you need the books, right? You need the financials, but you also need strong financial and operational processes. in order to make all this plan and budget and cash flow practical. Otherwise, it's going to stay a tab in Excel and nothing actionable. So for me, the CFO is future-looking, dealing with planning, budgeting, decision-making, and processes. The responsibility of the accountant, other than filing the taxes, is to build this financial infrastructure so the CFO can do the work in a professional level without dealing with you know, fire drills and like, you know, the data is not strong and then drilling down into the books. And then people end up paying so much for CFO consulting, but have their CFO just dig and do the manual entries in the books. This is kind of how I see the space of, let's say, vendors in accounting.

Jon Blair:

Totally agree. We see way too many CFOs who are mostly accountants or mostly doing bookkeeping responsibilities. Really, accountants, like Lio said, are, from a financial accounting or a bookkeeping standpoint, they're creating sound records and reports that can be used by the CFO and management to build the future that you desire to build in your business, to achieve your goals, to understand risks and potential rewards of decisions, and to really look at making strategic financial decisions. And they're both very important to a scaling econ brand. It's not one without the other, right? It's a partnership but knowing where each should be focused is very important and not calling an accountant a CFO or a CFO and accountant is very, very important because they have distinct roles. It's kind of like finance and accounting. They're not the same thing. Are they related? Absolutely, they're related. They're not the same thing. Very similar with the concept of accountant and a CFO. So unfortunately, see, I don't get to have a lot of accountants on the show with me, so I actually really enjoy this, but we do have to land the plane, and I always like to end with a personal question. So here it is. What's a little known fact about you, Lio, that most people would find surprising?

Lioran Pinchevski:

Yeah, so that's probably the toughest question for me, so I'll just, you know, something from today. So we're now recruiting a lot of people, and one of the candidates I came to the office and say, where is Lioran's office? And the people here told them he doesn't have an office. So where does he sit? He doesn't have even a space. So it looked really, really weird. And the fun thing about this topic is that for years, I feel that my role is just to you know, be there and move between different places. But for almost six years, I don't have a permanent place to sit, which is right in big accounting firm, right? This is the thing, right?

Jon Blair:

Yeah, corner office, you got the view, right?

Lioran Pinchevski:

Yeah. But the level of your seating, right, whether you have space or an office or a corner office. Yeah. And, you know, people find it really funny.

Jon Blair:

No, I'm actually, to be honest with you, I think that's actually one of the best ways to lead is to not put separation between yourself and everyone. And you guys are a fast-growing venture-backed startup. There's a lot happening all the time, right? And so it's hard to not be kind of like, you know, kind of moving across the business depending on what's going on. And that now, that does explain why every time we get on a video call with you, that your background is never the same. That's definitely, that definitely makes sense now. Well, before we end, where can people find more information about you and about Finaloop?

Lioran Pinchevski:

So the easiest way would be on our website, finalloop.com. We would be very happy to help with everything accounting, have great collaboration with you guys, with your firm on many customers. So whether people just need to, you know, the bookkeeping alone or the bookkeeping with extra layers of proficiency that this is, you know, this is the place to find us and work with great partners like you.

Jon Blair:

Absolutely. And look, if anyone ever has any questions about final loop, you can always reach out to free to grow where we get the question all the time. Is final loop like the real deal? And I say, yeah, it's so much the real deal that we've invested in it and we're partners with them. So it absolutely is. And we have a growing number of clients that are on final loop and and so it's been a pleasure i mean i think we've been partnered for not quite a about a year or so and um it's been cool to see the platform get better more and more brands using it everyone get more comfortable and be able to leverage it more so i highly recommend it um i definitely check it out and actually final loop makes it very easy to try the platform out. I think you can get a 14-day trial. Incredibly, incredibly easy. There's very little risk to just giving it a shot, so definitely consider that. And look, as always, if you want more helpful tips on how to scale a D2C brand, consider following me, Jon Blair, on LinkedIn. And if you're interested in learning more about how Free to Grow's D2C accountants and fractional CFOs can help your brand increase profit and cash flow as you scale, check us out at freetogrowcfo.com. Lio, this was an awesome conversation. I might have to have you back one day just so I can have another accounting nerd to chat about all the things I can't talk with everyone else about. But thanks for joining and look forward to chatting soon. Thanks, buddy. Until next time, as we always say around here, scale on.

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