Messy Margins, Broken Balance Sheets, and the Real Cost of Bad Bookkeeping
Episode Summary
In this episode of the Free to Grow CFO podcast, Jon Blair and Melissa Cafagna discuss the critical aspects of scaling a DTC brand with a focus on bookkeeping, accounts payable, and inventory management. They explore the challenges brands face in financial management, the importance of accurate financials for capital acquisition, and the common pitfalls in bookkeeping practices. The conversation also delves into the significance of understanding landed costs, the integration of AP with inventory management systems, and the impact of tariffs on DTC brands. A case study highlights how effective profitability analysis can lead to smarter business decisions.
Key Takeaways
Integrating AP with inventory management systems improves accuracy.
Accurate financials are crucial for capital acquisition.
Effective financial management can alleviate stress for brand founders.
Landed costs must be tracked accurately to understand true profitability.
Episode Links
Jon Blair - https://www.linkedin.com/in/jonathon-albert-blair/
Melissa Cafagna- https://www.linkedin.com/in/melissacafagna/
Free to Grow CFO - https://freetogrowcfo.com/
Settle - https://www.settle.com/
Meet Melissa Cafagna
Melissa Cafagna is a passionate advocate for mission-driven brands, known for her customer-focused approach and her role as a 'financing fairy godmother.' With extensive experience in the financial industry, she is dedicated to helping small businesses grow through innovative and personalized financing solutions. While living in Europe for three years, Melissa transitioned from finance and accounting to sales, gaining cultural insights and developing a dynamic empathy that shapes her approach to building relationships. In her free time, she enjoys spending time with her family, exploring Chicago’s beautiful parks and city centers, and immersing herself in hip-hop and R&B music.
About Settle
Settle is the best way to power up your brand’s cash flow and operations—designed specifically for consumer brands ready to grow. With a unified platform tailored for 'finventory' management, you can seamlessly plan, purchase, manage, and pay for inventory, all in one place. Automate payments, 3-way match purchase orders, and real time accurate landed costs. For businesses that qualify, Settle Working Capital offers founder-friendly financing, so you can Settle now, pay later, and scale confidently. Join brands like Thread Wallets, Truvani, and Olipop to confidently scale for what's next. Learn more about Settle today.
Transcript
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00:00 Introduction to the Free to Grow CFO Podcast
02:03 The Importance of Bookkeeping in Scaling Brands
07:58 Challenges in Financial Management for Emerging Brands
13:59 Common Bookkeeping Issues Found in Brands
19:56 Integrating Inventory Management with Financial Processes
26:00 Streamlining Accounts Payable for Better Control
27:20 Segregation of Duties in Accounting
28:31 Understanding Landed Costs and Inventory Management Systems
33:30 The Importance of Accurate Profitability Analysis
39:29 Integrating AP with Inventory Management for Better Insights
44:00 Navigating Tariffs and Their Impact on DTC Brands
48:01Case Study: Improving Profitability Through Data Analysis
Jon Blair (00:00)
Yo, yo, yo, what's happening everyone? Welcome back to another episode of the Free to Grow CFO podcast, where we dive 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're the go-to fractional CFO firm for eight and nine-figure DTC brands, and today I'm back with my co-host, because I think I'm gonna be getting some questions, the financing fairy godmother herself.
Mel (00:26)
Yes, you are.
Jon Blair (00:30)
Melissa Cafanga Capital Partnerships Rep at Settle. Melissa, what's up?
Mel (00:32)
Yes, it's up. mean, busy, busy weekend, working all weekend. A lot of exciting things going on for Settle in the next few weeks. So preparing for that. But yeah, it's it's been really good.
Jon Blair (00:51)
You guys are, are you guys going to, is next week Expo West? It is, so you guys are getting geared up for probably being out for a week, right? Like being out in the field.
Mel (00:53)
Yeah, yeah.
Yeah,
yeah, it's so exhausting and you're likely gonna get sick from all the handshakes and stuff. I'm just already like, this time I'm taking my Emergen-C you will not get me down and making sure I get as much of a full night's rest as possible. Sometimes I don't know when to turn off my social butterfly battery and so I'm just on and on and on. And so I'm like, no, I gotta have some hard stops this time. So yeah, but it sense.
Jon Blair (01:04)
Hahaha!
Hahaha!
The conferences are fun, like it's like it is exhausting and Expo West is like pretty much everybody goes. Like I haven't been in a conference mode in a few years because of the age of my little kids, but I'm like feeling the itch. I was like, should I go to Expo West this year? I think I'm gonna miss it this year, but maybe next year.
Mel (01:30)
It is.
Yeah. Yeah.
Yeah.
Yeah.
Yeah.
What about SXSW? That's next week for you guys, right? Is that something you'd ever go to? Yeah.
Jon Blair (01:51)
Yeah, there I've been to a few things. I have a few local people who invited me to ⁓ you know, like a happy hour or dinner too. I might see what ⁓ what I can crash. So I'll probably go to something but it's a lot easier because it's right here in Austin. So Well, well, thanks for joining me again. ⁓ our last conversation was super awesome. And today we're gonna actually talk about something a little bit different. If you guys heard the last episode with Melissa, which by the way, if you didn't
Mel (02:03)
Cool. Yeah, right, exactly, exactly. That sounds so cool.
Jon Blair (02:20)
go back and check it out, was several weeks ago. That was about the different types of debt financing products that exist in the marketplace, pros, cons, when is a good situation or a bad situation to use different types of debt structures. Today we're gonna focus more on the accounting side because Settle is not just a capital provider, but Settle also provides several accounting enablement tools.
⁓ like probably the most famous that most of you brands out there use or are familiar with is Settle as an AP platform, but they also recently introduced, inventory or IMS for short. And so what I want to talk about today is kind of bookkeeping AP and inventory kind of best practices. And, and, know, even though this is a founder focused podcast, we're not going to get into all the debits and credits, but like, what, what, does the founder need to know?
about bookkeeping, AP, and inventory, and why is it important to get those things dialed as you're scaling your brand. actually, what I'm gonna do, something a little bit different, because we don't need to hear Melissa's background. If you wanna hear Melissa's background, you should go check out the last episode we did together. I'm gonna let Melissa ask me the first question. This is unscripted, so Melissa, what question do you have for me to get us started here?
Mel (03:31)
Yes.
Yay! I love it.
So
On the bookkeeping side, I really wanted to know, because it sounds like based on certain conversations we've had, like Free to Grow was mostly focused on CFO advisory, but it felt like there was like a need to also implement this bookkeeping service as an option to help brands. When did you guys realize that that was going to be a really super important part of helping your current customer base and also just attracting prospective customers?
Jon Blair (04:09)
Yeah, that's a really interesting question. So funny enough, I was an accountant. There's kind of like two different kinds of CFOs out there, right? There's the ones that come from like more finance backgrounds, so either FP&A or investment banking or private equity or something. And then there's the accountants who become CFOs. I first was a bean counter and accountant in the early days. And so 15 years ago, started doing accounting, rose the ranks to become controller and then eventually CFO. And so,
Mel (04:16)
Right.
Mm-hmm.
Right.
Jon Blair (04:38)
I actually, it's funny and I guess kind that when we started the firm, we didn't have an accounting service. But the reason why we didn't at the beginning was first off, started, I started free to grow about just pretty much exactly three years ago, February of 2022. And I was, it was just me. I was a solopreneur with an EA. And so like being an accountant or controller, bookkeeper, and a forward-looking strategic CFO, it's really hard for a single person to do fractionally, right? And really, when we started, the heart behind us starting was to come alongside brand founders and help them escape the stress and the overwhelm of all the decisions they have to make as they're scaling. And the FP&A forward-looking forecasting financial strategy, growth strategy advisory, that was where I saw the like the pain points first and foremost. So that's what we started doing first was forecasting. So projections, KPI tracking, overall like financial strategy, debt fundraising. within, I actually remember this, so like this is like I think two or three months in, I had like four or five clients I was managing myself and I was getting them on the cycle of like close the books.
Mel (05:36)
Totally.
Right.
Jon Blair (05:59)
and
then I had these dashboards I had built that tracked certain KPIs on the balance sheet and the P&L and I would analyze them and do what I call the monthly financial review. Well, by like month four, here's what was happening. I would have like one brand whose books were two months late and another's that were, there's three months late, another one that was actually on time and the one that was on time, the books were wrong and I was like, dude, I don't even know what month I'm doing a financial review right now.
and I'm basically going to do my analysis and I can't because I can tell the margins are wrong or the balance sheet is wrong. And so that's where the tension started and we first started to to partner with a couple of bookkeeping firms. That was hard because we just couldn't get enough of their attention to get them to do stuff consistently our way. And so I got fortunate enough to be able to hire my controller
from Guardian Bikes, the brand that I was on the founding team of, few months into the business, and that's how we launched our bookkeeping service. And at first we just did it by necessity of needing to get consistently accurate and timely financials done our way so that we could analyze the business and give really solid financial insights to the brand founders. Fast forward to where we're at today, we didn't.
go in to this endeavor of starting a bookkeeping service with this in mind, but it's turned out to like be one of the most important things that we do for brands. One, we can work with a brand who's not ready for a CFO, but very clearly needs their bookkeeping done and then help them graduate to a additionally, it actually takes a lot of weight off of the brand founder that they don't have to be a liaison between us and another bookkeeping firm.
or us and their in-house bookkeeper, we're just managing our team in-house here, right, getting the bookkeeping done. So it actually puts everything under one roof and it's better for all of us. We're able to deliver a much better service and experience than we could without the bookkeeping service. So it's actually kind of funny that we ultimately had to come back to And so I wanna ask you a question on the capital side, right?
of the world, I know for a fact, not just from talking to you, but actually talking to a lot of other lenders, one of the biggest pain points from a lender's perspective is like, there's this brand that needs their capital, they're likely, or you believe they're likely a good fit for your capital product, but their financials are such a disaster that underwriting can't make sense of them one way or another.
Do you see that often and what kind of challenges does it present when you're trying to the brands, brands the debt capital that they need to scale?
Mel (08:53)
Yeah, especially when we speak to emerging brands a couple of the problems we see are that they're not consistently closing on a regular basis And so maybe they're doing a quarterly month close. So at settle we require a monthly and as an inventory led business You're gonna want to see things on a monthly basis even like if you could get things down to like certain Like KPIs on a weekly basis knowing what those are. That would be amazing More for yourself, but as far like a Settle requirement, yes. To your point, I think it also shows that the founder is serious about their business, right? They want to make sure books are clean, right? I like to say like, bookkeeping is like keeping a personal planner for yourself, right? You think about, well, you wouldn't schedule lunch with a friend without looking at your calendar first, right? You don't want to double book, right? And you wouldn't also pay a large bill if you don't look at an AP aging report, right? To make sure, hey, like where's our debt currently at, right? So think about it like that, right? Are you going to be that responsible like person who's going to be like, no, let me check my calendar first before I make plans with you.
Jon Blair (09:49)
for sure.
Mel (09:59)
founders are in a way asking themselves those same things when they're making financial decisions, right? And so it's just that more of those things are like, hey, like tracking all of the transactions in your business and not only just tracking it, but making sure it's organized in a way that paints a story that's helpful to you, right? So I think...
Jon Blair (10:04)
Yeah.
for sure.
Mel (10:20)
That is huge. Another, I remember Chris, who is our sales manager, we were like looking into the data and actually we noticed that brands that...
had accounting firms and were doing those monthly closes, right? Because that's generally required specifically with the vertical specific accounting firms that we work with had higher approval ratings actually. So that means that, hey, they're handling the business responsibly, right? And so those are brands that our underwriting team wants to work with, right? And so I think it's really one of those things where from day one, you gotta get it figured out, you know, you gotta start tracking, finding a way to track it.
Jon Blair (10:51)
for sure.
Mel (11:00)
consistently. certainly there are certain, I would say like certain softwares are really helpful with that. If you have a finance background, you might be able to get away with tracking things on spreadsheets because you know stuff like that. I definitely recommend it just for like solving any problem or answering a question about any part of your business for sure. Yeah.
Jon Blair (11:22)
for
Yeah, that
was making me think like I'm curious. think my My guess is it's like very frequent but like how frequent do you guys see financials that were like the balance sheet is just broken
Mel (11:35)
Hmm.
Right, right. We're seeing negative cash balances, we're seeing negative liability accounts, we're, yeah, negative inventory. Yeah. Or like inventory not getting updated on a regular basis, which is a huge thing that our underwriters like to see, right? They want to see inventory actually moving, right? They want to see that it's actually being sold and that you're tracking your COGS right? So I think that that is huge. And I don't know, like I would say that
Jon Blair (11:44)
Yeah, negative inventory. always love seeing a I love a good negative inventory account, you know.
Mel (12:08)
It depends on the channel that that prospective customer comes from. I would say more likely than not when it's kind of like somebody reaching out from like just like checking out the website, clicking on an ad versus we have other other channels where we're partnering with folks that are already kind of in the CPG network or this consumer brand network where they likely are already set up with either the right tech stack, the right advisors.
Jon Blair (12:12)
Sure.
Totally.
Mel (12:38)
If they're venture backed, they'll definitely likely already have a team in place as well. So I would say it's dependent on the sales channel and the sales channel that probably is where we see the most books at a whack is kind of like inbound clicking on an ad probably. would be my guess, but yeah.
Jon Blair (13:00)
Make sense. Yeah,
hopefully, hopefully we're not ever sending a brand to you that we work with that needs financing and you guys are going like, what's up with these books? Although I will say there are times like sometimes we have a new client. I don't know if this has happened with Settle or not. It maybe has, but it's definitely happened with other lenders that we work with on regular basis. And it's like, hey, look, this brand's just started working with us. Their books historically do have issues. We are working on them, right?
Mel (13:11)
Yeah, right, right. Right.
Right.
Jon Blair (13:28)
we can answer the questions that you have in order to underwrite this. And so actually sometimes even though the books are not in perfect shape, we can kind of bridge the gap by working with the lender and giving them peace of mind that we are working on fixing things and still end up getting the capital for the brand that they need. it's interesting because bookkeeping, I always say like bookkeeping is one of those things that for oftentimes for founders,
Mel (13:30)
Yes.
Exactly.
Yes.
Absolutely, yeah.
Jon Blair (13:57)
Not important until it's important and when it's important It's usually really urgent and dire and like some of the common ones are like I'm going out for a fundraise and Investors don't understand the financials. I mean or a debt fundraise and the lender doesn't understand the financials or They get to this certain level of growth. I see it a lot of times between 6 and 10 million in revenue. We're like they've been able to kind of Follow their gut up until that point
Mel (14:02)
Yes, that's so true.
Exactly, that's a big one.
Yes.
Yeah.
Jon Blair (14:27)
and they're getting, they're approaching eight figures in top line revenue and they're like, I need to know if this number is accurate or not. I can't guesstimate it anymore, you know? So anyways, it's one of those things that like, like so many things in life, eating healthy, working out, like in the moment it feels kind of painful, right? But in the longterm, your future self will thank you if you get your bookkeeping dialed. I'm curious.
Mel (14:34)
Right. Yes.
Right.
Great.
Totally, absolutely. Yeah, and then, Yeah.
Jon Blair (14:55)
What other questions you got on that list over there?
Mel (14:57)
I know.
guess like this one was kind of just on the bookkeeping topic. Let's get a little bit more granular. Kind of what are like the specific issues that you see when a business is coming with you and maybe their books are not as clean and you're like, hey, I keep seeing this thing over and over again. And what are you constantly having to repair?
Jon Blair (15:17)
Mm.
for sure.
It's funny that you mention this because I run all of our sales and an important part of our sales process, which actually we didn't develop this part of the process because we're like some sales geniuses. This again, just like our bookkeeping service was out of necessity. We were closing deals with brands and then getting into their stuff afterwards and we're like, what have we done? We did not realize how bad this was, right? And so we actually do a free audit now.
Mel (15:53)
Yeah.
Jon Blair (15:53)
And I always tell brands, I'm upfront, I'm like, this is as much for you as it is for us. For you, it's to get some real clarity on where the gaps are that we can help you fill, right? But for us, it's to make sure that we give you a proposal that's truly informed and that we think we can do a great job at taking over your accounting and finance. And so some of the most common ones you mentioned, or like close to mention one earlier, one,
Mel (16:11)
Right.
Jon Blair (16:21)
When I see inventory on the balance sheet is the same number every single month, huge red flag, that means they're expensing their purchases straight to cost of goods sold and doing cash basis, COGS accounting. When I don't see inventory on the balance sheet split out between on hand and prepaid and in transit, and a lot of people, is super common, and I think brand founders don't realize how important it is. Here's the reason why it's important.
Mel (16:24)
Great, yeah, huge rich flag.
Exactly. Yes.
Yes. Yes.
Jon Blair (16:50)
Because a common way that accountants reconcile inventory at the end of the month is they pull a report of what's on hand at your warehouse and the value of that, they compare it to the balance sheet and whatever the delta is, they charge it off to cost a good sold. But here's the problem, if you don't have stuff that's in transit and prepaid, separated, they will assume that what's on the balance sheet is all on hand. And so that will be included in the reconciliation so it's an apples to oranges comparison and then sales tax We all when I don't see sales tax payable on the balance sheet and I instead see it as a revenue account or an expense account or I'll see it both sometimes like sales tax collected in revenue Sales tax paid as an expense that's incorrect. It should never be on the P&L It's a liability that gets paid out to tax authorities over time And then in the in the econ world specifically
Mel (17:28)
Yes.
Right.
Jon Blair (17:51)
when we don't see what we call merchant clearing accounts. that's the current asset accounts for Shopify payments in transit, PayPal payments in transit, whatever payment methods you accept. And it's because the cash received for orders paid in a given month is never fully received in your bank account by the end of the month. There's always an amount of cash that's in transit and so that's sitting in this like, it's not even really a bank account, it's sort of like a fake account, but it's this merchant, we call it a clearing account, but it's a cash in transit account. It's like customers have paid an order on your Shopify store on Amazon, but that cash has not been batched and sent to your bank account yet. those are the three or four things that I see all the time and if there are one...
Mel (18:24)
Yeah.
Yes.
Exactly.
Jon Blair (18:46)
Usually we see like, usually we see all of those issues or at least three out of the four, but there's ways to dig in deeper from there to basically confirm that they're doing cash basis, expense recognition and or cash basis revenue recognition. for those of you like who want to understand why that's so important, and I would be interested to hear the settle capital perspective on this, but that is, Cash basis means that revenue is recognized when the cash gets deposited in your bank account, right? And that the expense gets recognized when the cash is paid. As opposed to what's called the accrual basis, which is you record revenue and expenses when the economic benefit has been consumed or created, basically, right? And why is that important? It's important because cash gets received and paid on all different kinds of timing schedules and not necessarily aligned with this expense created this revenue and vice versa. Do you guys see a lot of cash basis financials? And like what are your underwriters? Think about that.
Mel (19:55)
yeah. I know.
I would say that it's kind of like sometimes a mixed bag where they're sometimes doing accrual right? And so, and then sometimes doing cash basis. Like I think the example that you said about inventory, for example, is a big one. So we'll see like, okay, like they're managing their AP correctly, right? But maybe the inventory not. And so I kinda, I think it just depends, right? Cause I think a lot of people think, hey, I have ChatGPD now.
I know how to do my accounting, right? And so there are certain things that like they do that is probably a little easier to do. And then other things where there's definitely a lot more complexity involved.
So definitely something that we do see all the time and I see all the time because as somebody who works at Settle, I'm usually like the first line of defense when it comes to looking at financials. And my job is to make sure that if I'm gonna pass this over, it's going to be worth their time to take a look at. So that's something that I do see all the time. given like my accounting background, like I'm able to make sense of it and figure out, what do I need to, what questions do I need to ask them? Like clarifying questions or what other accounting reports could I ask for to take a closer look? Because I know they're going to potentially ask for it as well. So yeah, absolutely. I would say all the time. All the time. Yeah.
Jon Blair (21:16)
You know, it's interesting that you guys that Settle recently launched an IMS, and again for listeners, that's inventory management system, basically in a nutshell software that helps you manage your inventory, right? And it's interesting because there are other, there's tons of IMSs out there, right? And different IMSs that are verticalized and some that are more horizontal and try to serve multiple industries.
Mel (21:46)
Right.
Jon Blair (21:46)
But all of the IMSs that I have encountered, I've always come to the conclusion as an accountant of like, this has to be integrated with accounts payable. And the reason why is that they're inseparable. Like the cutting of a purchase order, which is a step in the IMS, is actually the first step of accounts payable, of the procure to pay process for, they need, and,
Mel (21:58)
Absolutely.
Right.
Exactly. They need each other. Yes.
Jon Blair (22:15)
It has to be reconciled, the inventory transaction has to be reconciled back to an actual accounting transaction that ultimately at some point got paid, right? And so when you're talking to brands on the capital side, obviously Settle also has the AP solution, which is now integrated with an IMS solution. Are there any sort of like, like how frequently is it when you're,
talking to someone on the capital side that you're like, hey, I see the opportunity for our AP software or our IMS and are there any kind of specific triggers that cause that to go like, hey, I think we can help you with this whole stack, so to speak.
Mel (22:59)
Absolutely, yes. I would say like with our IMS in its current state because we are planning launches for like the rest of 2025, SPS integration coming soon. And so like that's kind of like an evolving thing, but I would say that right now a lot of the questions that we ask are like as working capital folks because
Jon Blair (23:11)
Hahaha
Mel (23:26)
A lot of times, most people want to chat capital, right? That's usually a really pressing need. And so I can dig a little deeper to see, what is their AP process like? And there are a couple triggers that I hear when I'm talking to founders where it's like, let's assume they're maybe not on an AP platform and they want to start considering it, right? So it could be things like, hey, like the velocity of AP payments, right? That's a big one, right? How many bills are you processing, right? I would say the second is international payments because there are a lot of different payments out there where, hey, they have interesting ways of charging you and then interesting ways of making money off of that payment in transit as well. So that's another thing to consider on top of like,
Yeah
for sure.
Mel (24:23)
foreign transaction, currency exchange rates. And so that's another big one. I would say another one is internal controls, right? You may or may not have a good relationship with your accountant, right? And if you don't, and they're fairly new to you, right? No, there's some funny stuff that goes on, right? And if you're like, hey, I don't want my accountant to have access to my bank, because that's what I'm currently paying my bills out of, but I don't want to pay my bills anymore.
Jon Blair (24:31)
Yeah.
You
for sure.
Mel (24:51)
Bill Pay Solution is like a really good idea. And then I would say, I want to say the third thing would, like the third or fourth thing would just kind of just getting a streamlined process that will equal better and faster bookkeeping. So it's just kind of like the way that you would create rules in QuickBooks on like how to tag certain expenses and categories, right? You want.
Jon Blair (24:54)
100%.
Mel (25:19)
You wanna really just start automating a lot of that stuff. So Settle can help with that as far as just creating a process for your AP from that PO that you just mentioned, from that PO generation up until you pay that vendor and on top of that, giving you the option. Like, know, when you go pay for groceries, right? You choose between debit and credit, Settle's the same way. You can either pay out of your bank account, right? Or you can pay using credit.
And so that process in its entirety is gonna really save you time. It's going to help you sleep at night knowing like, I am in control of my bank account and only me. also just a better streamlined process as far as from procure to pay. That's all being managed in a way where it's gonna make your life easier. It's gonna make your accountant's life easier, right? And also just, I think one of the biggest things is
Jon Blair (25:55)
for sure.
Mm-hmm.
Mel (26:18)
I think it was like 70 % of consumer brands are still operating out of spreadsheets for a lot of these things, whether it's PO generation or inventory management. The big thing is like just reducing errors, right? Not creating duplicate POs, making sure you're paying the right bill. You don't have a software solution that can kind of figure that out for you. Hey, you paid this, maybe you pay this bill twice. Maybe you already named a PO this, this...
Jon Blair (26:32)
for sure.
Mel (26:47)
number or letter or whatever is not new, right? So I think just managing that once the velocity really increases, it's like a huge time saver for sure. Yeah.
Jon Blair (26:59)
That's interesting, so there's a couple things I want to kind of double click into. I think the first one is the internal control piece, like with a solution like Settle. And so here's the thing, we tell all of our, we help manage the AP process as an accounting firm, but we don't ever press pay. And there's a couple of reasons for that. From a...
Mel (27:09)
Yeah, it's huge.
Jon Blair (27:26)
Generally accepted account. Well, actually this is more from an auditing standpoint, but from like a gap standpoint I know I don't like my my my my auditing classes are coming back to me from from back in the day But like here's the thing you don't want someone you don't want the same person to be able to enter a transaction So in this case enter a bill right or create a vendor, right? Create a vendor enter a bill and then hit pay cuz guess what they can create a vendor that is actually an
Mel (27:29)
You're really getting in the weeds now.
Now you're... Yeah.
Jon Blair (27:55)
LLC that they own, right? They can enter a bill for them and then they can pay that bill. it's a segregation of duties is what it's called is like a separate person should create the vendor from who enters the bill from who pays the money, right? And here's the other thing. We're an outsource accounting firm. So like we can make mistakes. We'd rather make a mistake on entering a bill than hitting pay, right? And
Mel (27:57)
Yep.
That's the term, yeah.
Totally.
Jon Blair (28:20)
And I think also there's the nuance side of AP, which is that like you as the brand founder and maybe other people on your leadership team, there's discussions you're having with vendors and you're maybe working out payment plans or you work, there's context behind AP, right? That you really want the right person pressing go, pay, money leaves the bank account, right? So that's the one thing, the first thing I wanna highlight. The second thing is this is where the overlap of this bookkeeping accuracy discussion we've had.
crosses over into the IMS side of what Settle is doing and it's all around accurate landed cost per SKU, right? And so people ask me all the time, like all the time, hey, how do I get a more accurate, how do I get an accurate landed cost by SKU every single month? And I'm like, well, at least in today's world, February 24th,2025, the answer is an IMS. However, the challenge for most brands that I see, at least in the lower to middle market where we sit, is some of the big robust IMSs, they're so rigid, you have got to comply with them, meaning you have to put good information in to get good information out. And if you put garbage in, you just get garbage out and you're better off having an inaccurate spreadsheet, right?
Mel (29:42)
Right. Garbage out. Yeah. Right.
Jon Blair (29:49)
What is interesting about what you guys are doing is kind of rolling out your IMS in kind of baby steps, right? Like let's get this first key functionality and then let's roll into the next one, let's roll. And what I find to be interesting about that is it doesn't force brands into this very, like it is challenging for them to all of a sudden be beholden to this very rigorous workflow that if they don't do it perfectly the whole way,
they actually run the risk of just having bad information that comes out of it. That being said, like what are some of the, I know you're on the capital side, so I'm probably gonna put you on the spot a little bit, and you're not necessarily the IMS expert, but like how do you guys view internally at Settle of the value add of the IMS, as well as like why is it so important that you guys don't just launch everything all at once, and you're launching it kind of sort of in phases?
Mel (30:31)
It's okay.
Yeah, great. Just wanted to take one step back to just kind of define landed COGS together because I think it's like another metaphor coming. So you can think of like landed COGS as like maybe if you've ever bought a house for the first time and you were just a renter your whole life, right?
Jon Blair (30:58)
For sure.
Mel (31:08)
So you might think, I just have to pay for my loan. And it's like, well, actually, that's not true. Right. You have to factor in closing costs, property taxes, home insurance, mortgage insurance if you don't put less than 20 percent down, HOA dues, moving expenses, renovations, utilities that your landlord was paying for. Now you have to pay for all of them. Right. And among so many other things that you don't think about. Right. But guess what? Your landlord, they know all of those. Like,
Jon Blair (31:11)
Hahaha
Mel (31:37)
I like to call landed costs like shadow fees, right? Because you don't really know, right? Because I think most founders are thinking, it's just like the cost of my product and a couple of other things. And it's like, there's a lot of other things and those things are constantly changing, right? We can get into the tariff change for Canada, Mexico and China as well, because I feel like that's so relevant today. But ultimately, it's like...
Jon Blair (31:38)
for sure.
Hahaha
Mel (32:03)
every like expense that gets your product into your customer's hand need to be included. And so some of the big ones that I think are going to make a huge difference in calculating like your true landed costs are we say duties, shipping and freight. Those are big ones that we see all the time. A couple of times I think we see like insurance.
as well, certain inspection fees feel surcharged. There's a lot of different things. It really just depends on how your like, logistics supply chain is currently set up. But we need to take that into consideration. And so to answer your question on the first piece, I believe was, you know, how settle
Jon Blair (32:50)
or like how do you guys
view, how do you view the value add of you guys having an IMS?
Mel (32:54)
of
yes, my God, so big, right? Because I think when we talk to accounting partners, one of the biggest problems among like, there are a few ones, like one is calculating the sales tax, right? What is like a huge accounting problem. Another one was calculating landed COGS, right? And I would say just profitability analysis is such a big, big.
big thing when you're running a consumer brand, right? Because you need to be able to truly understand what your margin is to make lots of decisions, right? So that can be just general profitability analysis. It can be pricing strategies, right? Who's gonna get hit when these tariffs change, right? It's gonna be the consumer, right? Somebody is gonna have to increase their price as a result of changes. And then another one is just making more informed purchasing decisions, how you purchase, you're good. So I would say that when you think about what our financing allows our founders to do, what our AP allows our founders to do, this felt just like a natural third step where we were kind of like, hey, everyone keeps talking about landed COGS. And so it was just when, similarly to how you guys were like, wait a minute, like...
Jon Blair (34:05)
Yeah, yeah.
Mel (34:13)
we should kind of include bookkeeping, right? Like we're seeing these brands are not giving us the information we need to make decisions, right? We wanna make sure that we're doing the same. And so it felt like a natural progression in that way. And then also we just felt like the big, I think the big thing too was providing as much as we can as like an ERP for consumer brands. We call it ERP Lite.
Because that is the magic of the ERP, right? It's really bringing all those tools under one platform, albeit many bells and whistles that you probably don't need. But there is a secret sauce to that, right? And making sure that I think all of those modules are in one place. So yeah, I think that we also just saw a lack in the market because it's kind of like, well, on the sales side, a lot of the merchants are handling that pretty well as far as giving.
Jon Blair (34:46)
for sure.
Mel (35:05)
brands like Shopify and giving brands a way to manage our sales, direct to consumer brands. So I think the biggest need was just that inventory management that did not forget about the AP side of things that gave founders the ability to finance those POs. That was huge. So yeah.
Jon Blair (35:20)
for sure. it actually
this goes back to I'm one of the other most common. You asked me about the common bookkeeping issues that I see and I mentioned cash basis cost of goods sold underneath that as like a sub point is expensing freight and duties straight to cost of goods sold. So what we'll see oftentimes is that maybe a brand was managing the purchased costs. So just the supplier invoice cost.
Mel (35:39)
Yes.
Jon Blair (35:49)
in their inventory account, so they're actually adding that to inventory when they purchase it, and then they're decrementing inventory as they sell, but just for the supplier invoice costs. But when they get a bill from their freight forwarder for duties and freight, that whole bill is just going straight to cost of goods sold in that particular month. And let's double click into why is this important from a financial analysis standpoint. It's because,
Mel (36:11)
Yeah.
Jon Blair (36:15)
Let's say that you have seasonality, which like what consumer goods brand doesn't have some bit of seasonality. That means there's seasonality in your sales, you likely have seasonality in your purchasing, meaning that like there's a few times a year when you have way more freight and duties bills than you do in other times of the year. And actually furthermore, you're probably getting billed not even in the months where you have the most sales, because you're probably buying ahead of the months where have the most sales. So that means,
You have all these freight and duty bills you're expensing to cost a good sold in the month that you got billed for them, not in the month that those got sold. So your gross margin is going to be lower in the month that you expensed freight and duties. So it's going to be understated. But then later when you sell that product, your gross margin is going to be overstated because the freight and duties is sitting back in a previous month. And so how do you know what your gross margin is? And actually maybe you can, you know, one work around is
Mel (37:05)
Mm-hmm.
Jon Blair (37:12)
Let's look at a trailing 12 month period and let's like remove the cash basis distortions. Okay, but how can you tell every single month if it's getting better or worse? The only way to do that is to track landed cost every single month on every PO, on every bill that's inventory related so that you can see every month, my gross margin got worse. My landed cost is going up on these SKUs or vice versa, right? And so this is really important, but again,
It has to be connected to AP because AP is where the landed costs get introduced into the business's general ledger. You get a supplier invoice for 10,000 units you purchased. You get a freight forwarder invoice for freight. You get a freight forwarder invoice for duties. You get an insurance invoice. You get an invoice from your 3PL for the handling cost to unload the container and put all that stuff away.
the AP that's in this case getting entered into Settle, that's where those costs exist. And what the IMS is doing is basically like helping you connect this invoice to that invoice to that invoice to this SKU and it rolling up the landed cost for a SKU somewhat automatically for you, right? But the key is you do it in the system, the AP system, where those transactions are already being processed. Because if you do it separate, which I've seen brands do this,
Mel (38:18)
Exactly, yep.
Yes.
Yeah.
Jon Blair (38:40)
They'll get a separate IMS, but you're just having to enter information again. And where are you having to look for all this information? Your AP bills, you're going back to your bills and trying to put all the pieces together. So I'm just saying that because one, it's an issue to expense your freight and duties that distorts your margins, which means you don't actually know how to make sound decisions based on margin data. And then the second thing is,
Mel (38:52)
Yeah.
Totally.
Right.
Jon Blair (39:09)
The IMS being native or connected to the AP system is a no-brainer because that's where all that data already exists in your AP workflow within your business already.
Mel (39:18)
100%.
Yes,
and so the way that Settle's features works is it's so seamless as far as what we do is when you're initially entering that PO, we give you the ability to enter an estimate for those duties and costs so that they're still getting, you can kind of think of it as like a little landed COGS cushion, but once you actually receive the real bill, you can attach it to that PO.
for that freight duty handling fee, you can actually attach it to the PO, record what the actual expense for that was, and properly adjust your margin again. So all we're really doing is working off of an initial estimation, but then giving you actuals once you receive that bill immediately. And so you're just seeing these ebbs and flows of your margin a lot more accurately than you would.
and doing it in a quicker way because the AP is embedded. And the second thing I want to highlight is we do have the ability to do what's called a three-way match, where we can, like, it's an accounting dream, right? Because it's an accountant's dream, right? Because you think about accountants on their eight screens. And so what we're able to do is say, hey, we're going to put...
Jon Blair (40:27)
Ha ha.
Hahaha.
Mel (40:34)
your invoice on one screen, your PO on one screen, and the goods you actually received on one screen, right? And then we're going to see, are there any discrepancies here? Because if you underpaid or overpaid your vendor...
your COGS are wrong, right? And so another ability to provide you with accurate profitability around your COGS, your landed COGS as well, because that's all taken into consideration. And so we're basically giving founders and accountants the ability to reconcile things in a seamless way, in a faster way, and in a way where, one, accountants can make their clients happy because they're like, hey, we caught this thing that...
you otherwise probably wouldn't have been able to see, and then on the founder, and if they're managing that themselves without an accountant, it's a huge help.
because it's something that had you had the extra set of hands, like this is making this more efficient for you. So I would say those are two really interesting features that we offer that that is going to set us apart as far as being an AP solution. When you think of Bill.com, Brex, Melio, and all of the large AP vertical agnostic solutions that exist, they are working with tech brands. They are working with service-based brands. We are building solutions for brands that hold inventory, for consumer brands that hold inventory mostly, but we also just, in any inventory, we can help you with that, right? And so I think that's just the Settle plus is we're building tools for your business model, right? That's so important, yeah.
Jon Blair (41:55)
Yeah, for sure.
Totally.
Yeah, yeah, there was something that you were saying, I lose my train of thought. Nope, here it is. Okay. So when you're talking about the three way match, what, what, what are most brands or what do I see most brands do that don't have an IMS or don't have a legit like AP like management system for their COGS? What they're doing is they're using an estimate. At some point they took a snapshot and they pulled some bills and they said, okay, this was my line of costs.
Mel (42:20)
Right.
Yeah.
Yep.
Jon Blair (42:28)
and they're using that on a monthly basis until they do another periodic update. It's called the standard costing method, right? The problem with that is you only reconcile it. You don't reconcile it in real time like what you just walked through, right? You reconcile it whenever it is you decide to reconcile it. And in fact, there's a brand that we have that's a mutual client and I was just talking to them on like last Thursday or something and they're working on getting onboarded to the IMS and he cited this exact challenge which is like, he's like, hey Jon, we've been doing this like, calculating a landed cost or estimated landed cost like twice a year. And he's like, that's great when costs are stable but like, when are costs ever stable in the DTC world? Costs are never stable in DTC, everything. The only thing we know about DTC is everything's always changing all the time and so.
Mel (42:56)
Woohoo! Yeah!
Right. Right.
Totally.
Jon Blair (43:20)
Having a real time reconciliation within the AP system is really important to get dynamically accurate COGS by SKU. So I'm gonna give you a chance to ask one more question if you have any more on your list before we gotta land the plane.
Mel (43:28)
100%.
Yeah, I definitely do.
to talk a little bit about the tariff situation going on right now and if you've seen any of your brands impacted by that and kind of how you're advising them.
One, and then two, can you think of a scenario, well, because so much of what you guys are doing is like this profit analysis, right? And getting brands to healthier margins. And so can you think of a scenario where you got a brand to a specific place when it came to their profitability and seeing accurate margins? And what decision
or impact was there as a result of that. So kind of like a case study, if you will, just to highlight a specific brand that you've worked with.
Jon Blair (44:13)
for sure. Yeah.
So really quick on the tariff side, we've definitely seen an impact, especially because we're vertical, we're verticalized focusing on DTC, right? And in the DTC world, there's a lot of brands who set up shop in Mexico to basically take advantage. A lot of people don't know this, maybe heard it called section 321 like exemption. What it is is the de minimis exemption, which is that if you ship direct into the consumer,
Mel (44:33)
Yep.
Jon Blair (44:48)
And the value of that order is below this de minimis threshold. I think it was $850 USD. don't quote me on that, but it's something close to a thousand. like, so, so like if you're shipping, you know, clothing from a 3PL in Mexico direct to the end user, and it's a $150 order, you could fall under that de minimis threshold and pay no tariffs. Whereas if you brought that container in and it was $50,000 worth of apparel,
Mel (44:54)
Okay, educate me. This is a new one for me. I love that.
Got it. Okay. Right.
Jon Blair (45:16)
you would pay the tariff, right? when these, so there's two things that changed related to, or that we're seeing is impacting our potential clients the most. One, if they were using a 3PL in Mexico and they were shipping stuff duty free under that de minimis threshold, that de minimis threshold got removed. So it's not helping you any to ship those. Maybe it's helping a little bit.
Mel (45:17)
get you're getting hit with that 25%. Yeah. Yeah.
Jon Blair (45:44)
in the fact that you're paying the duties one at a time as you're shipping it in instead of all upfront when the container comes in, right? So maybe there's some cashflow savings there that you're, and there's a case to be made for that, that that's still financially helpful, but you're ultimately still paying the duties. So that's one thing. The second thing is this extra 10 % on China, goods imported from China. like, depends on what product category you're in, but a lot of people are paying 25% on top of whatever the tariffs were pre Trump's 2020, you know time in office and now he added another 10 on top of that. So you're basically paying whatever your normal tariff rate is historically for China and you're paying an extra 35 % on top. it is now everyone has already priced in the 25 % because it's been around for several years. So the 10 % it's an impact, but it's not, it's much smaller incremental impact than when that 25 % got slapped on several years ago. But unfortunately, some brands who were doing the fulfill from Mexico under the de minimis rules, they're getting tagged twice effectively. Like if I'm a brand that was bringing in containers in the US from China, my incremental cost difference is the 10%, which sucks, but it's just the 10%. But if I've been fulfilling from Mexico, I'm now paying the 25 % again the extra ten and so it just depends on how your supply chain and your fulfillment network is set up and Then on the what was the other question you asked?
Mel (47:16)
Wow.
around a case study of where you've kind of seen Free to Grow in action and profitability in helping businesses make smarter decisions.
Jon Blair (47:26)
Yeah.
For sure, we have a ton of examples of this. Honestly, we do a terrible job of highlighting this in our marketing. It's something that I'm working on, because we have 30 plus really happy clients, and we just, we haven't done a great job of telling their story, but I'll tell you a recent one that comes to mind. So because we're vertically focused on DTC, a big, we always think about what makes DTC, DTC?
There's a few things, but one of them is, understanding ad spend profitability, right? It's a big thing. And so we actually break down, yes, we give you visibility into your contribution margin at the company level and at the sales channel level, so you can see Amazon versus Shopify versus whatever, walmart.com. But most, more importantly, on the DTC side, we dig down into metrics around how profitable a new, a first time customer is versus a repeat customer. And that's really, really important because depending on how much repeat purchase you do or don't have, we view repeat purchase as a subsidy. What is it a subsidy for? It's a subsidy that gives you extra dollars to acquire new first time customers. First time customers are expensive because you have to spend ad dollars to acquire them.
Repeat customers come back with little to no ad dollars having to be spent on them, right? And so, depending on how much repeat purchase you do or don't have, you either do or don't have a subsidy to plow back into faster new customer acquisition, which means we can actually tell you how fast you can grow, because we can tell you how much repeat purchase subsidy you do or don't have. And I was doing an analysis with a brand where we're breaking down these economics, and what we saw was margin dollars from new customers was like negative $100,000 a month. So they're losing money, 100K a month on new customers. And they were like, oh, but we're getting repeat purchase. But I was able to show them, yeah, but your repeat purchase margin dollars is only $25,000. So you're still losing $75,000 in contribution margin. So what I was able to show them was the trend over time of how much they were losing on first time customers versus repeat. And what we saw was,
Mel (49:24)
Wow.
Right, when you net that, yeah.
Jon Blair (49:49)
Their repeat purchase wasn't happening fast enough to pay back that loss on new customer acquisition. So what we're gonna have to do is help them figure out how much they might need to scale back new customer acquisition to bring ad spend down and hopefully make it more profitable and to better balance repeat purchase profitability with new customer unprofitability. And so that's a real game changer for these DTC brands to be able to have that.
Mel (50:16)
Yep, that's huge.
Jon Blair (50:18)
kind of visibility on their P&L.
Mel (50:21)
100%, yeah. And contribution margin is huge from a debt and venture capital perspective as well. Like if you want more money, they're going to be looking at that too. So that's really important. That's a great use case. It's something that I hear brands talking about all the time and I just never thought about kind of segmenting those two out and it definitely paints a different story. And it's kind of like, let's scale back so that we can figure out where the problem is, right? And then we can decide, yeah.
Jon Blair (50:55)
Yeah, and ultimately, like how to figure out either there isn't more profitable scale in new customers or what do we have to do to make it profitable? Is it a product thing, a pricing thing, you know? So, okay, we gotta land the plane, but you've already done the what's the little known fact question. And so, I actually made this up when we were talking before we hit record because we were telling like, stories about kids. I want to hear what is the best hack that you figured out this winter because you're in Chicago, cold Chicago, to keep your kids entertained in the freezing cold.
Mel (51:36)
My gosh, I know, yeah, no, I have to shout out the trampoline park in West Loop.
So like, like Jon, I am a native Southern Californian and sometimes I'm like, why did I move here? But Chicago is lovely. is truly a wonderful city. But figuring out how to adapt in the cold with a toddler is wild. So we basically just were like, like, let's get museum memberships. Let's figure out like what to do because we live next to if you visit Chicago, we like live near like where the museums are. So it's like perfect. And so
Jon Blair (51:44)
Hahaha
Mel (52:13)
That was the hack. It's like $50 a month, unlimited jumps, like for the whole family, a great way to bond as a family. he burns so much energy, he makes friends, like so socialization is there, so that right there, right? Because we went from like six months of going to the park every day to now, you know, not.
Jon Blair (52:20)
Super worth it.
one degree
outside. Yeah.
Mel (52:38)
Yeah, one degree outside, our faces are burning. So definitely that has been a huge hack for sure. And yeah.
Jon Blair (52:45)
I love it. I love it. Well, before we close out here, remind everyone where they can find more information about you or get in touch with you and Settle.
Mel (52:53)
Yeah, honestly really reachable via LinkedIn. You can reach out to me there if you type in my name, Melissa Cafagna it's very unique. Maybe you have to throw in the keyword Settle. And then also if you are in need of some solutions around capital inventory management, BillPay, Settle.com. If you are a consumer brand, Settle.com is the way to go. So yeah.
Jon Blair (53:20)
Definitely check it out. Remember, the key takeaway here is that your bookkeeping, inclusive of AP and accurate inventory is incredibly important for sound decision making, right? And as you scale, it gets more complicated to manage it and keep it accurate. And if it gets out of hand, you're gonna have bad data. And if you have bad data, you're not gonna make great decisions. So, a lot of really great nuggets in this one.
Mel (53:25)
Yes.
totally.
Absolutely.
Absolutely.
Jon Blair (53:44)
Before we shut it down though, I just want to remind everyone that if you want more helpful tips on scaling your profit-focused DTC brand, consider following me, Jon Blair, on LinkedIn. You'll see some of Melissa's comments, I'm sure, on my posts. And then if you're interested in learning more about how Free to Grow can help your brand scale alongside healthy profit and cash flow, check us out at FreetoGrowCFO.com. And until next time, scale on.
