Mini Episode: Why Your CPA Should Not Keep Your $10M Brand's Books

Episode Summary

In this mini-episode of The Free to Grow CFO Podcast, Jon Blair discusses the critical importance of specialized bookkeeping for e-commerce brands, particularly those generating close to $10 million in revenue. He emphasizes the inadequacies of using a general CPA for bookkeeping, highlighting the need for expertise in e-commerce consumer goods. The short discussion covers the differences between cash and accrual accounting, the necessity for timely financial data, and the challenges posed by tax deadlines that can hinder bookkeeping efficiency.

Key Takeaways:

• E-commerce bookkeeping is complex and requires specialized knowledge.

• Accrual accounting provides better visibility into cash flow management.

• You need timely and accurate financial data for decision making.

Episode Links

Jon Blair - https://www.linkedin.com/in/jonathon-albert-blair/

Free to Grow CFO - https://freetogrowcfo.com/

Transcript

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Jon Blair (00:01)

Alright, if you're a brand that's doing almost $10 million a year in revenue, and your tax accountant is the one doing your bookkeeping, you've got a big problem, and you need to make some changes. Why? Here's the thing. Most likely, your CPA, your tax accountant, is a very horizontally structured firm. Horizontal meaning that they serve all different kinds of verticals, maybe some service businesses, some manufacturing businesses, some solopreneurs, maybe some consumer goods brands. And by virtue of being horizontal, they just are not gonna understand the nuances of consumer goods and even more specifically, eComm consumer goods.

Here's the thing, eComm bookkeeping is hard in and of itself, consumer goods bookkeeping is hard in and of itself. When you smash the two together and you have an eComm consumer goods brand, you've got extra complicated bookkeeping, so having a horizontal CPA firm do your books is a bad idea. Once you get to 10 million or close to it, you need very solid financial data. And the way that you get that in the eComm consumer goods world is you work with a bookkeeping firm or an accounting and finance firm who specializes in eComm consumer goods. They’re going to be able to get you the financials that you need in a timely and accurate manner to support really sound decision-making.

So the first reason why having your CPA do your bookkeeping for your $10 million brand, the first reason why that's a bad idea is because they're probably horizontal and they're not vertically focused on eComm consumer goods. The second reason why it's a bad idea is actually because by virtue of being a tax accountant first, they're likely telling you to do your books on a cash basis just because that's easier for them to keep and it allows them to file cash basis tax returns really easily. Is that necessarily the best thing for you? Maybe it is from a tax standpoint, maybe it's not. Oftentimes I find it's actually not the best tax treatment is to do cash basis books and CPAs actually just tell you to do that because it's really easy to do selfishly.

But here's what I can tell you. If you've reached $10 million a year in sales as an e eComm consumer goods brand or close to $10 million in sales, you need accrual books. And so keeping cash basis books just because your CPA is telling you to do so because it makes it easy for them to prepare a cash basis tax return, that's a bad reason. That is not a good reason. You need accrual-based books so that you can truly understand month-over-month margin changes, and so that you can truly understand what's called your cash conversion cycle. Your cash conversion cycle basically tells you how well you're managing your cash flow, and most specifically for an eComm consumer goods brand, it's how are you managing your inventory and how are you managing your payables. With cash basis books, you have no visibility on that, and by the time you reach 10 million in revenue, you absolutely need to have a read on your cash conversion cycle.

Here’s the third reason why you shouldn't use your personal CPA to do the bookkeeping for your $10 million eComm brand. Because every time they get close to a tax deadline, your bookkeeping's gonna slow down. Most CPAs get your books closed in like three, four, five, six weeks. You don't have that kind of time running a growing eComm brand that's doing at least 10 million a year in revenue, right? You just do not have that kind of time every single month. You need your books closed in two weeks or less. Now, when they get close, when your CPA gets close to a tax deadline, either a personal tax deadline or a corporate deadline or even an extension deadline, so that means it's happening not only in March and April every year, but it's also happening again likely in September and October. They get super busy and guess what gets put to the back burner? Doing your books. And so, however long it normally takes them to close the books, it's gonna take even longer around tax deadlines and you don't have the luxury of waiting weeks and weeks to get your books done every month. They need to get done in two weeks or less so that you can use the data to make financial decisions and move on. If it takes four, five, six, seven plus weeks to get your books done, every year around tax deadlines, by the time they're done, that information will already be useless and you'll have moved on and made decisions blindly without any books to back them up. So to recap, three reasons why you should not have your tax accountant doing your bookkeeping if you're doing at least $10 million a year in sales.

One, because they're probably horizontally focused and instead you need an eComm consumer goods vertically focused firm doing your bookkeeping.

Two, because they're probably telling you to do it on a cash basis, which although that might be easy for their tax return preparation, you need accrual basis books to make sound decisions.

And three, because every year around personal and corporate tax deadlines, including extension deadlines, they're gonna get so busy that your books are gonna get thrown to the back burner and it's gonna take weeks and weeks and weeks for those books to get done.