Bad Books, Big Problems: Avoid the Hidden Risks Lurking in Your Financials

Hey everyone,

It’s time again for another bite to chew on. 

Today we want to step away from the marketing tactics and back into the finance stuff. 

Because when you boil your business down to its essence, all you’re really trying to do is manage or improve a handful of ratios. 

Gross margin. Contribution margin. Profit and loss. Net cash/EBITDA. 

The better your vital ratios, the better your business. 

It’s simple, but not easy.

Here’s the thing though - you have to be sure your numbers are clean and accurate for those ratios to mean anything. 

And way too many founders fail to realize early on just how fundamental good bookkeeping and accounting is to the health of their biz. 

At best, a bad set of books can take you months or even years to untangle. 

At worst, they will lead you astray about your company’s health or expose you to huge tax liabilities. 

Bad accounting = the silent killer of brands.

If you’re beyond product market fit and hitting 7-figures a year, not having an accurate view of your finances is often THE reason you’ll fail. 

That’s why we’re going to go over the basics of DTC bookkeeping today to help expose and fix some of the common mistakes we’ve seen along the way. 

On the Menu

• Tune your P&L

• Find your vital ratio

• Get into the weeds

Today’s newsletter in partnership with… 

As Obvi has grown to other major sales channels like Amazon, Rite Aid and Walmart, our accounting needs have grown as well. 

These are all powerful revenue drivers for us, but they also have unique costs, operational workflows, and reporting requirements. 

That means we could no longer rely on “out of the box” accounting tools and templates that work when you’re only selling DTC.

After reaching out to other operators for help, UpCounting was recommended to us.

They stood out from the other 4 fractional CFO services we vetted, and we immediately got to work.

Their team made a completely unique dashboard reporting solution built on top of our QuickBooks Online platform.

(This means we didn’t have to onboard and integrate a new system - huge bonus!)

With the new dashboard, we can now →

• Quickly see trends in a high-level overview

• Easily double-click and dive deeper into any problem areas

• Make better decisions

Our accounting infrastructure went from a constant headache to becoming our “mission control”.

This would not have been possible without UpCounting's hands-on approach.

They truly function as an extension of our finance team, proactively addressing any issues that may arise while supporting our continued growth strategy.

If you’re a brand growing beyond the QBO basics, we highly recommend getting in touch with UpCounting to see if they can help evolve your financial operating system. 

Book a free call with them here.

Tune your P&L

Your Chart of Accounts (COA) is the foundation of your bookkeeping. 

It includes your Balance Sheet and Profit and Loss (P&L) statement. 

For now, we’ll focus on the P&L because it tends to be more operationally important on a day-to-day basis.

And because the first mistake we often see is using a generic, “out of the box” P&L. 

An e-commerce business is nothing like a media company or the corner bodega. 

So stuffing your company’s books into a templated profit and loss will not set you up for success.

For example, we’ve seen P&L’s where all of the various marketing channel spends are mushed together into a single “advertising” line item. 

Meta, Google, TV/traditional, etc. All just called one thing with a single number. 

But the biggest mistake is just aggregating a bunch of different sales channels into your DTC revenues and costs. 

Sales channels like major digital marketplaces (Amazon) and big box retail (Walmart) have very different swings, trends, and cost profiles relative to your Shopify store. In fact, each one is a kind of mini-business inside of your business, all needing their own level of analysis.  

There are many other examples of a bare-bones P&L being stretched to fit a DTC business. 

Usually, this happens when a founder is setting things up themselves without a background in bookkeeping. Or when they have hired a cheaper bookkeeper who has no experience in DTC or eCom.

The problem with a general setup like this is a lack of specificity in your line items. Your P&L needs to be clear and scannable for you as a business owner and operator. 

That means you need to tailor your line items to reflect the key aspects of your business:  

• Break out your advertising channels so you can immediately see their spend levels

• Parse out shipping if you are doing parcel for DTC and freight for wholesale

• Separate your different sales channels in your revenue section as well as their associated costs

Your major revenue sources and expenses should probably have “drill down” sub-items so you have a better view of what is making and costing you money.

But don’t get too specific…

There is a balance to be struck here. 

You probably don’t need to list every sub-item below “office expenses” on your P&L for instance. The amount you spend on printer paper every month probably isn’t a material concern to your business. 

(Or at least it shouldn’t be!) 

So there’s a level of judgment that needs to be applied here so you can tune your P&L to be clear and useful —>  

• Too much specificity clutters things.

• Too little obscures things. 

Beyond this, the act of digging into your P&L and tailoring it to your needs is a valuable one for operators. 

• It gives you a different view of your company.  

• It can reveal areas of opportunity and waste.

• And it can force you to define what activities and costs are a priority. 

BONUS TIP:  Avoid spending too much time on accruing to the right month.

For example, we used to instruct our bookkeeper to make every single change to ensure full accuracy. 

Now, we have a system in place where if it is not above $X amount, we leave it be since it would not make a material difference to our business decisions.

This has saved so much time when closing our books!

Find your vital ratios

So you’ve got your P&L tuned up and tailored to your business. 

The next step is to make sure you can draw useful insights from it. 

The basic profit and loss printout is just a big long collection of numbers. At a glance, it’s not going to tell you too much.  

The biggest drawback is a lack of apparent cost-to-revenue ratios. 

• What % of your marketing spend of net sales?

• How much of your revenue does Opex or salaries consume? 

• What is your net cash percentage?

Again, not every line item needs to be expressed as a ratio of your net sales, but understanding your major cost centers and their relationship to your revenue is non-negotiable for leadership.

Here’s how to set this up →

Income:

• Each sales channel → gross sales revenue

• Add in additional revenue sources (if you charge for shipping, for example)

• Less discounts, returns, etc.

• Now you have a total sales line item. 

The first ratio you want to understand is gross profit. That’s your total sales after your cost of goods sold, which should include things like:

• Manufacturing

• Actual cost of finished goods

• Warehousing

• Packaging

• Seller fees (Shopify, Amazon, etc.)

• Etc. 

Whatever it takes for you to get the product to the customer. 

Once you have that number, divide it by total sales. 

After that, you can go down the line and figure out what % of your total income things like salaries, sales, and marketing are consuming. 

You can ladder these up to an aggregated selling, general, and administrative (SG&A) cost ratio, but we recommend also understanding the percentage for all of your individual major cost centers as well.

This is how you get a feel for your company’s vital ratios → 

• Now you can determine at a glance if your COGs are too high, and if so, what aspects of your COGs profile are a problem.

• Or maybe your salary is 20% of your total income? Yikes, you need to grow aggressively or cut aggressively to make that work. 

• Did shipping as a % of revenue climb month over month for the last 3 months? Why? 

Keeping your finger on the pulse of your business is much easier when your P&L is tailored, specific, and expressed as a percentage of your total sales. 

Doing this month over month also allows you to identify trends or mistakes - 

For example, if you know your DTC COGS hovers around 15%, but this month it was 23%, is that due to a different product mix, or has something gone wrong?

Be sure to actively track trends in both your variable and “fixed” costs as you go.

Get into the weeds

Okay, none of that seems too difficult, right? 

Well, the thing is that the management and administration of your P&L is never a “set it and forget it” thing. 

This is another area where we see a lot of founders trip up. 

Your P&L is aggregating a huge number of different numbers and data sources. And there are just so many ways things can go awry here as a result. 

If you’re integrating a bookkeeping platform with a sales channel like Shopify and Amazon, for example, you have to consistently check to make sure the numbers being pulled are correct.

You also have to make sure administration and bookkeeping staff (be it internal or vendors) are assigning the right expense to the right line items. You’d be surprised how often a random judgment call by someone = entries categorized incorrectly.  

Oh yeah, and if you sell (or have expenses) in different currencies? Welcome to “fun with exchange rates”.

Bookkeeping and P&L management is a lot like logistics. It seems “simple”, but just underneath the surface, there are about 1,000 different ways things can go wrong. 

So you need to be regularly auditing and digging into your books to be sure your financial data has as much integrity and accuracy as possible. 

Because if you can’t trust the totals on the page, then absolutely everything falls apart from there.

This is why it can take a long time to recover from months or years of shoddy bookkeeping. 

Once you realize you can’t trust your numbers going back “N” amount of months, you will have to spend an indefinite amount of time picking through journal entries, receipts, and different channels/reports to right the ship. 

This can be an immense time and energy suck. It will shift your focus away from key activities that actually grow your brand.   

And in the meantime your financial standing may be completely different than what appears on the page, opening you up to all sorts of business-destroying risks. 

That’s why it’s important to avoid the temptation to throw in the towel if you’re in this situation. 

And even if you have fixed up your current bookkeeping processes, leaving your financial history in a mess means = not being able to make meaningful year-over-year comparisons.  

All together

Talking about accounting and bookkeeping makes most founders yawn. 

If it’s not a sexy “up and to the right” topline revenue graph, then it doesn’t make your heart race or get you out of bed in the morning.

But developing a solid, trustworthy, and insightful P&L is one of the best things you can do as an ambitious brand owner or executive.

The truth of your business lies in the numbers. This is an inescapable fact. 

Your understanding of those numbers will inform how you perceive the opportunities, risks, weaknesses, and priorities of your company. 

So if your understanding isn’t clear if it’s based on janky data, and if you don’t have transparency or faith in your P&L…

Then you’re working with both hands tied behind your back. 

And your business is headed for a catastrophe. 

One last thing…

If you’re one of those e-commerce brands looking to break into a new, major sales channel like Walmart.com, then you won’t want to miss our upcoming Webinar with Michael Lebhar of Sellcord.

Join us on September 24th to learn how to launch and scale w/ excellence on one of the fastest-growing digital marketplaces in the world.

Michael and Ron will take you through the key tips and tactics you need to know to maximize your Walmart.com revenue opportunities.

Register for free here.

All the best, 

Ron and Ash