E250: Know Your Numbers
Unless you took up a business degree (even if you did, it's still not a guarantee), you probably learned how to run a business on your own, in the process of running said business. If you're anything like me, you had no qualms about learning things as you go because doing ecommerce is fun.
However, there are many aspects of running a business that are NOT fun. Oftentimes these aspects are the most crucial ones and neglecting them can kill your business.
Case in point: accounting.
Today's episode is best summarized by Dave's favorite quote: “Revenues are vanity, profits are sanity.”
Thanks for listening to this episode! Until the next one, happy selling.
FULL AUDIO TRANSCRIPT
Mike: This is Mike and welcome to episode number 250 of the EcomCrew Podcast. So glad to have you guys along with us today. I think today might be one of the most important episodes of the EcomCrew Podcast I’ve ever recorded. So taking a little bit more serious tone today, a little bit different format, I’m going to just jump right into it. And it's interesting how life's journey takes you to different places. And sometimes you just kind of have an epiphany that things you just might not have realized in the past that are super important.
And this isn't going to apply to everyone. And I think that people that are out there listening to this that this doesn't apply to don't look down upon the people who this does apply to, right. I mean, it's very easy to say, well, they're an idiot, or they should have known better or whatever when it comes to this. But the reality is that everyone learns things in different ways. And things come to people in different ways, different order of operations if you will on how you learn this stuff.
And one of the things I've also come to realize is this stuff just is not taught in school, finances, bookkeeping, how to run a business, etc. That's certainly not taught in high school. Even most college programs don't get into this stuff. A lot of these things are learned from the school of hard knocks. You might not learn how to pay your taxes, how to read a balance sheet, how to read a profit and loss statement, how to do accrual accounting. All these different things are things that I personally learned from the school of hard knocks. And realistically, a lot of it is upbringing, an extension from that.
I mean, my parents almost kind of gloated about how they would avoid tax or they didn’t pay their taxes and I was never taught about how to pay my taxes. So when I was 18, I didn't pay my taxes, I didn't know how to pay my taxes. I didn't know any better. No one taught me or even sat me down and said, you got to do this stuff. When I was getting into business early on, when I was in my 20s, my late 20s, no one sat me down and said, Mike, you got to know your numbers, you have to really understand the ins and outs of your business, otherwise, bad things will manifest themselves.
And I was really fortunate that I was successful and made it through all this stuff completely in spite of myself, right? It wasn't because I was really smart or because I worked harder necessarily. I mean I did work hard and I think that hard work can get you really far in a lot of things. But you can work your butt off and still lose money or work your butt off and still go bankrupt in business if you don't know your numbers. And that's why I want to take a minute here today and talk about this a little bit.
And the reason that it's become so abundantly clear to me that this is probably a more profound problem than I might have even originally realized even though I have personally been through this myself in the early days, these are the exact types of things that people never talk about. No one ever says, oh, I didn't pay my taxes so I got a huge fine and penalties and interest. I didn't know any better. No one ever talks about how they almost went bankrupt and maybe even went bankrupt, or their business went out of business because they didn't know their numbers.
These are not things that people typically will share with each other. But the reality is because over the last couple of months, as I've been going around and doing EcomCrew roadshow and talking to more and more e-commerce entrepreneurs, I've come to realize that this is way more common than I even ever probably thought about. Again, maybe you're out there and you know your numbers like the back of your hand, and you're really on top of this stuff, I think that's great. Good for you. And if I was here, I would give you a handshake and a hug, and a high five for being in that position.
But the reality is again, coming to realize that probably more like 50% or 75% of companies or maybe even higher, especially if you're just getting started or you're a sub $1 million e-commerce company probably don't have this stuff in order. And listen, e-commerce is a difficult business because it's accrual accounting, there's inventory you have to buy, most likely you're going to have debt against that inventory, you'll see your sales continue to grow. And you could easily be losing money and working your butt off and actually paying to work rather than the other way around.
You are supposed to go to go to work to earn a paycheck. You're supposed to run a business to earn a paycheck and a livelihood for you and your family. But really quickly and easily, you could actually be showing really good revenue numbers and actually losing money. This is Dave Bryant's old saying, revenues are vanity and profits are sanity. And again, it's really, really easy to be running up your numbers and losing money. And so for me, I was really lucky when I got into e-commerce that I had figured this out. And again, not from a high and mighty standpoint of look at me, I'm really smart. I learned my lesson from previous businesses, where I did not know my numbers.
Accounting is not fun. And it's often the number one overlooked thing in business, because you're more excited about getting customers and getting the revenue and all these things. And accounting becomes this thing that just kind of gets pushed to the back burner. And you might not understand it. So you push it further down the back burner, and then you get three to six months down the road and you haven't done it and it's like, oh man, I'm just really going to ignore it now because it's too much of a pain in the butt to think about. And then it comes time to pay your taxes and you have no idea how to even reconstruct the last year or 15 months of your business.
And that was me. I mean, that was definitely me back in the 90s when I first got in the business. And even when I started figuring this stuff out, I still didn't get it done on a monthly basis in a timely fashion and in a way where I could use the data to really execute and make smart decisions in my business. So while we were running this affiliate marketing business back in the early 2000s, and it was an all cash business and money just kept on flowing in and flooding in, things were really easy to do from an accounting perspective. It didn't really matter, there was more money coming in than was going out.
That's all I had to worry about. Money came in every month from an affiliate payment on a cash basis. I paid some expenses, which were minimal on a cash basis. I could literally do accounting by just looking at my checking account balance. E-commerce accounting is going to be way different. And I knew that when I was getting started as I was saying, because of these past experiences, and I knew that there was going to be a period before I even really made my first sale. I knew there was going to be those long period of I was going to be putting more and more money into the business without seeing a penny come out of the business. And that in order to make financially secure and sound decisions moving forward, I'd have to know my numbers.
So I overpaid to get a bookkeeper on staff was my first hire and made sure that every month by the 15th of the month I had accounting for the previous month. And how far you want to push your business is up to you. Maybe you are a profit first person; you want to see profit from day one out of your business. Maybe you're using venture capital money and you're willing to lose a bunch of money to build a business faster. Everyone's going to be operating at a different scale of risk. But what's really important is that you understand how much risk you're taking on making an educated decision that yes, I'm losing $10,000 this month, but it's for a really good reason.
And so for me, what I was willing to do was run the business basically on an annual basis, at least for the first couple years at a break even. I wasn't willing to lose money to make money but I was willing to run it at a break even for the first couple of years so I could spin this thing up as quickly as possible. And then I shifted to a lower net margin and then eventually to what I would call a full margin. But I knew every step along the way that even though more money was going into the business than coming out of the business, that I was making financially sound decisions, that I was making a sound investment in my business that one day if my thesis paid off, my ideas for where this was going to go, it would pay off in the right way.
And ironically, we are recording these ColorIt business sale episodes right now so that the timing just happens to be that it shows that it did pay off. But that's not why I'm recording this episode at this time. It's more that this has just become something that I'd become more aware of right now. And so for me, again, I was able to make these decisions to invest heavily into my business to see the rewards later down the road. And as I always joke that the light at the end of the tunnel was not an oncoming train. That is a really easy position to get yourself into, oh, it's going to get better, it's going to get better. I can see the light at the end the tunnel, it's going to get better. I'm going to do this thing and I'm going to do that thing, it's going to get better.
And then you realize that that light in the tunnel is literally a freaking steam train coming at you at full speed ready to hit you and knock you off your feet. And so I wanted to make sure that I wasn't in that position. Because, again, we put a couple of hundred thousand dollars of our own money into this business to get it rolling. And I wanted to make sure that as always putting that money in that it was going to be returning the yield, the dividends that I wanted to see out of my business, and that it was a better investment for me and my family than having it in the stock market. It's really where it all came down to was that.
And then as we used up all of our own personal cash, I was going out and borrowing more money, it was even more extreme and more important to make sure that we knew our numbers. So I really want to just reinforce this that if you're listening to this podcast, you're not alone. Number one, that you're not alone. E-commerce accounting is pretty difficult. At the end of the day for me, it seems so simple, because I've been doing this for years, and I have an accounting background now from running multiple businesses. But if you're running an e-commerce business on multiple channels, especially if you have multiple brands, they can be really difficult to set up accounting the proper way.
And if you don't have this ready and working from day one, you're going to realize at some point down the road, again that that light at the end of the tunnel is literally an oncoming train. And I don't want to call anybody out by name here because this is not an opportunity to embarrass other people that I've talked to about this or again, make an example out of people at their expense for our game here for EcomCrew. This is a heartfelt episode that if you – you know who you are out there listening to this. If you realize that this is a problem in your business, you need to stop what you're doing, and figure this stuff out immediately.
Reach out to us or talk to other people in e-commerce or get a bookkeeper, whatever it is, you have to know these numbers. You need to be looking at your business every single month, understanding your top line revenue, understanding your cost of goods sold, what percentage of your top line revenue to cost of goods sold is your gross profit, understanding what I call your modified gross profit numbers. So what things are going directly into the sale that aren't cost of goods sold, things like credit card processing fees, things like email marketing, if you're getting a lot of your sales through email marketing, things like Facebook ads, or Google AdWords, things of this nature that if it wasn't for these things, you wouldn't have the sale. To me, that's a modified gross profit number.
And then you should know as a percentage of your sales, how much you're able to spend on advertising, as a percentage of your sales, how much you can have as overhead, as a percentage of your sales what your net profit margins are. And once you know these numbers, and these relationships and these values and how they relate to each other, from there e-commerce can scale a lot easier. I often joke these days that the math is always the same as you grow, you just keep adding zeros.
So there was a time when we were doing $10,000 a year in sales, and I was happy with that. And then we grew, it was $100,000, we just added another zero. And then we were at a million dollars. And we added like another zero. And eventually we got up to almost $8 billion in sales. It was not quite adding another zero but it was 8x the previous number. The math always remains the same. We always wanted to make sure that our cost of goods sold was a certain percentage of our top line revenue. We always wanted to make sure that we didn't allow our advertising costs to get out of hand. We always wanted to make sure that our overhead costs didn’t get out of hand.
And if our overhead costs got larger, there was a good reason for it. And it was for instance, I do think that as you're growing at 100% per year like we were, we made an investment in a calculated decision to skate to where the puck is going not to where it is because if you're doubling every year, you have to eventually get ahead of this curve. So we did hire and we did invest in certain things that would pay off as we got further down the line. But we made an educated decision to do that, and knew the numbers and the relationship of all that. And so anyway, I mean, again, we made sure that at the end of every month that we got our account together as quickly as possible.
We never went the entire four and a half years that we've been doing e-commerce more than 20 days after the end of the month without knowing all of these numbers for our business. Now, the 20 days was something that was more extreme. We tried to hit 10 to 15 days, and now we're actually going to be shooting for even more frequently or quicker from the end of the month, because we're switching accounting platforms. It will be easier for us to come up with these numbers. And this way you know much quicker if there's systemic issues within your business. And you know if you really are making a profit, or you really are losing money.
It's very easy to go an entire year in e-commerce and see your sales growing and then realize at the very end it was all for not, that you actually lost money for all of your efforts. And I really want to try to help people not be in this situation. That's what this episode is all about. And again, you know who you are. If you're out there listening, going, oh my gosh, Mike's right, that's me. All I'm trying to do here with this episode is have you realize that and do something about it. And we're here for you. If you do have questions, feel free to email us or leave a comment on the episode. Whatever it is, we're here.
Again, I feel like part of my job with EcomCrew and EcomCrew Premium, and just so many things that I've been able to do out here in the community partially is becoming a therapist, right? I mean, I feel like or the bartender, or whatever it is, we're just here to help people understand these things, be a shoulder to lean on or cry on when you realize that you're in some of these problems and help make that better for you moving forward. That's really what it comes down to. I wish that someone sat me down in the 90s and explained this stuff to me, right.
And I never really have talked about that stuff on the podcast very much because I just felt like I was the dumb one; that I was in the minority when it comes to stuff like this. That I should have known better but I didn't and I blamed other people for that or something and understated myself. What I've come to realize, again, really over the last couple of months in particular, but really over the last year or two is that I am not alone. I am certainly not the only one that's run into these things, that there are a lot of people out there that are going through the same struggles. And until you talk about or hear about it, it's something that you don't accept or you would feel bad about it because you may be making all the wrong moves.
But the reality is, again, you're not alone. This is something that a lot of people go through. And it's important to stop whatever you're doing, and figure this stuff out as your number one priority before you work on getting another sale, or investing in another product or launching another website or a brand or whatever it is that you're thinking about doing in your entrepreneurial mind that's got you bouncing from place to place because we all get squirrel syndrome.
Make sure you know your numbers. Make sure you can pay your taxes when April rolls around. Make sure that you are going to have enough money to fund your Christmas inventory purchase. Make sure that you're going to have enough money to fund your Chinese New Year purchase. Make sure that the money that you're spending and investing in inventory and in your business is actually going to yield you something positive in the end, other than a huge pile of debt that you're going to have to pay for years down the line or inputting a bunch of your time into something that isn't going to ultimately yield you something. Make sure you have this stuff figured out folks.
And again, if you have this figured out, I'm sorry for wasting your time on this episode. Not every episode is for everyone. But for those of you who are coming to a realization that this is you, I hope that even if it helps one person figure this out that this episode, episode 250 was worthwhile for all the people that were listening to us that maybe it wasn't as worthwhile for. So EcomCrew.com/250 if you want to leave any comments about this. Support@EcomCrew.com if you want to send us an email. Reach out; we can do this in confidence if you got something you want to ask us.
If you're already an EcomCrew premium member, even better, email us at the private address that we have for our members. And let's talk about this stuff. Make sure you have this stuff in order before you go to the next step of your business. I think it's really important. So that's going to really do it for this episode, guys. It's a shortened episode, in a little bit different format. It's just all meat and potatoes. I hope that this was helpful. Even if again, if it only helped one person, I think it was worthwhile. EcomCrew.com/250 for the show notes. Support@EcomCrew.com if you want to reach out privately via email. And until the next episode everybody, happy selling and we'll talk to you soon.
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Speaking of knowing your numbers what Episode did you or a guest mention the concept of “Optimal Distinct” ? I’ve scoured your website and also did a few Google searches and can’t find it
I *think* it may be this episode: https://www.ecomcrew.com/e203-stress-and-loneliness-in-ecommerce-an-interview-with-dr-sherry-walling/
I was wondering what accounting platform you have moved to?
Mike’s still on Quickbooks (as are we).
I like your podcasts lot! One of the biggest trouble that we have is with our accounting, the systems don’t integrate properly, similar to your issue with skubana! This doesn’t allow us to make the best decisions. Do you have any software recomendations for this? Maybe outsource the accounting? Have your heard of fully accountable? We really struggle with accounting due to the number of transactions that we have and the systems integration.
Excel :) I think there’s always going to be some bastardization needed in Excel. Every company big and small has to do it to some degree. Pick a few important KPIs and track those however you need to. As far as I know, the closest thing to an all-encompassing picture would be netsuite. I haven’t heard of fully accountable but they look interesting.
Thanks for this episode (and all others) Mike. Very important topic. I have been selling for 14 months and currently on track or about for 500K 2019 … I have been using Inventory Lab since day 1 and 99.9% of my sales are amazon FBA… My question, are you familiar with Inventory Lab ? Do you think it does a good job of giving a clear picture of my numbers, reconciling and creating the P&L? Should I continue to use IL or should I consider adding a booking keeper and upgrading to a complete accounting package ?
I’m not familiar with it. Mike, last time I checked does everything in Quickbooks and IMO you should definitely be in Quickbooks, Xero, or other major accounting software. Inventory labs appears to be an inventory/order management tool which is a supplement to your accounting software, not a replacement.
Thanks for bringing this out.
Is there a specific resource for ecommerce accounting within Ecomcrew Premium or anything else you offer/know of?
Thank you kindly,
We’re doing a Secret Sauce webinar this week for this :)