“What get’s measured, get’s managed” coined by management theorist Peter Drucker. One of the most important things in running a business is knowing your numbers. We talk to Scott Scharf of Catching Clouds about that exact fact and the value of a great accountant.
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On this week’s episode, we talk with Scott Scharf as he talks with us about the value of a good accountant for your ecommerce business. We discuss why a great accountant can not only save you money but also allow you to grow your business successfully.
What You’ll Learn From This Episode:
- Ecommerce accounting best practices
- How cloud inventory can help your ecommerce business
- Why you might be liable for thousands in sales tax
Featured On The Show:
Jock: Jock here, and welcome back to another episode of the Digital Exits Podcast, In this episode, we’re going to be talking about what I believe is a topic and business process that most entrepreneurs inherently really are bad at, and that’s accounting, specifically, ecommerce accounting with Scott from CatchingClouds.net. Scott, how are you today?
Scott: I’m doing well. Thank you, Jock.
Jock: Excellent. So we connected via Shopify. You’re a prolific publisher of guest posts on topics around accounting and ecommerce. Do you want to start with sort of a quick background on the company and what you do for your clients?
Scott: Sounds great. Catching Clouds is a partnership between myself and my wife. She’s a CPA and accountant, and I’ve been in IT for 30+ years, focusing really on process, and spent most of my career working with small businesses, but also some time working for large multinationals. Catching Clouds, we provide outsourced accounting services for ecommerce businesses. So we understand not only the accounting and the cloud tools and specifically ecommerce tools like cloud inventory, sales tax, and others, but we actually have virtual bookkeepers that do bookkeeping for our clients on a daily basis so your books are up to date. As ecommerce businesses, the things that you look to outsource, that you probably don’t want to do are your shipping, if you’re still fulfilling all of your own products, definitely help on marketing, even though I know Jock will say, “Look, you’ve got to do a fair amount in order to be yourself and understand what’s going on,” that’s his space. And then the accounting, because most people don’t go into business to do the accounting, okay? They go into the business to make money, to do great things for their families, and then provide great products as well as help the local communities. And they probably enjoy the products or hobby or niche they’re in, or certain aspects of their business, but it’s typically not accounting. We really focus on making that a manageable process for ecommerce businesses, so that they have current, accurate, and actionable financial information so that they can make the right decisions, as well as look forward and know if they’re profitable or not, and how they’re doing as a business.
Jock: So we’ve had a previous discussion about when your services are required, and there’s a certain threshold that you need to be at as an ecommerce business before you should start really considering outsourcing your accounting. So do you want to sort of go through the growth stages of an ecommerce business, and then when you start to make sense for the company?
Scott: Absolutely. Really, for businesses, same thing if you’re starting your own business, you end up doing the work yourself for a while, and there are definitely different stages in an ecommerce business. But you definitely have to hit at least $1 million dollars and be a million-dollar business, so you’re looking at $60-70,000 per month of consistent revenue. Anything below that, you really need to be looking at your business and spending that money, a certain percentage, whether it’s 50-50, or 66% and 33% on both inventory and marketing your business, so people continue to come to your business. You want to find that balance. If you’re spending money on either outsourcing your accounting before that time, or spending it on outsourcing to a warehouse too soon, it can slow down your growth and it’s not necessarily the best strategy. So we really want to give our clients the best advice. Anybody below that point, we really try to point them at how to do it themselves until they can’t take it anymore. Now, if you have really high margins, or you see a good run rate, and you’re really ready to invest in that, and you understand that it’s going to cost you in sales that you’re either marketing to or the products you’re buying, we’re happy to talk to people, but that’s really the key threshold, and then really looking at the complexity of your business. We work with mostly multichannel sellers, selling on Amazon, eBay, one or multiple shopping carts that really have a lot going on in their business, and they need someone that can help pull all that data together so that the information makes it into their financials and they can understand how their business is doing.
Jock: We talked about your outsourcing accounting. However, there are other services that you provide that, I think, is a unique proposition to any ecommerce store out there. Do you want to sort of discuss that?
Scott: We, of course, do the accounting and we actually do the work. Really, ecommerce businesses end up with a couple key things that send us all the copies of all the documents of what’s going on in the business and you still have to pay your own bills. We want access to your data, not your money, so we’re going to keep that information. What we’re offering is not only the accounting and doing the day-to-day bookkeeping and the controller who will help you interpret your numbers and walk through them. And everything we do is fixed fee. This isn’t an hourly, variable thing. You understand the cost to your business each month. And the other key piece we provide, with my technical background, is all the cloud accounting tools. We set up the accounting. We migrate your existing data. We help set up the cloud inventory, and help find the best cloud inventory solution for you. If your business is either mostly drop-shipping, or you’re doing lots of B2B and wholesale, or you’re multichannel, or you’re multi-currency, and you’re selling in multiple marketplaces and regions around the world. There might be a different cloud inventory solution that’s best for your business. We help you find that solution and then we help implement it so these things are set up properly. They’re integrated together, where we’re pulling all the data that we need from the accounting perspective, but then we really focus in on helping optimize the process for our clients, whether it’s optimizing your purchase process, your inventory management process…and then, of course, knowing profitability per SKU and the other components. So it’s a combination of not only the accounting, and somebody that’s actually doing the accounting for you, and then we’ll explain that information back to you, but it’s the automated technology tools to connect that data in the cloud. As an ecommerce business, you’re already in the cloud, and we want to pull that data together and make it more visible to you and provide tools that you can see. The nice thing about zero.com, the cloud accounting platform that we use, you can log in 24/7 and see your books, and know every weekday, by noon each day, everything’s been updated so that you know that you have current information and you’re not just running your business off the balance in your business checking account
Jock: What’s the biggest problem that your customers have when they initially come to you?
Scott: They don’t know if they’re profitable or not. They…they’re not quite sure and there’s a big difference between the cash in the bank and whether your business is profitable or not. They just don’t know where they stand, and so there’s a lot of stress related to not knowing. Think how stressed you’d be if someone told you that you had five minutes, and then you were going on Shark Tank, in front of the Shark Tank hosts, and you have to rattle off your customer acquisition costs, your profitability per SKU, what your revenue is, what your average margins are. And if you don’t know those things, you need know those inherently so you can sleep better at night. That’s really the main thing. And then, the time they lose, not just stress, spending time doing accounting, vs. focusing on sales or social media and driving more business to their business, or getting better deals on products they’re purchasing.
Jock: You talked about some key metrics there – customer acquisition costs, customer lifetime value, etc. Part of the accounting process is you calculate those things?
Scott: We pull different data together. So from the accounting perspective, we’re going to pull together and tell you if you’re profitable as a business. We’ll keep track of your sales tax liability so you know if you have $5,000 of sales tax that’s not yours. We’ll show profitability per channel – Amazon margins vs. Big Commerce or Shopify or other pieces. Then when we’re implementing different cloud inventory tools, we will focus on what your key metrics are and help implement the right tool. So cloud inventory is going to show you your profitability per SKU. The good ones will show you the velocity at which products…which products aren’t selling or selling slower. When you’re looking at your customer acquisition costs, and some of those other lifetime value components, then you need to adapt those and make sure that you are monitoring those metrics and pulling that data typically either into an ecommerce CRM solution. There’s the right place to do these things and aggregate the data. Cloud inventory is fundamental for keeping track of profitability per order, profitability per SKU, the cost of goods sold, the value of inventory, how much inventory or cash are you sitting on? And then you look at those different elements. We can help identify the best tools for your business to get those answers
Jock: Can you give some examples of how, when a client comes to you and they’ve started tracking their data, how that’s changed the growth and profitability of their business?
Scott: Yeah, absolutely. One of…the key challenges are is that you’re awash in data, and things like Amazon Seller Central can provide some insights but not great insights. The key thing is, we’ve had people that have held back on purchasing inventory, or moving into another channel because they didn’t think their business was profitable, and they kept putting more and more money aside into savings, not understanding that they could see the trends in their business to really identify how they were doing as a business, that they were doing $50,000 at the beginning of January of last year, and that they’ve been easily adding, and you can look at it, 20% doing the things that they’re doing. Then what we can do is identify those trends where you see a month that dropped off, not just because it’s a month that’s not Christmas, and dig in, pull up the data, and say, “Hey, because we know this challenge, let’s go look,” and we were able to find what was going on. In their guts, most business owners know something’s wrong. Sometimes, and a lot of times, they might have the right gut reaction as to what it is – customer service or costs are a problem or repricing or competitors, but you can’t really get to that final answer to kind of teach your gut. Over time, we provide more and more value of really being able to analyze those numbers, so on a weekly basis, when we provide a cash flow report, they know what they should be spending their money on, whether it’s more marketing or more products, or a balance between the two, or when they can be safe to actually take money out themselves. There are a lot of people that really starve themselves personally for funds for way too long when they actually have a business that’s successful. We have a client now that has a full-time job, has a viable going ecommerce business. They’re going to clear well over a million dollars, and they’re concerned that can they afford to quit the job and my – our – response is, looking at the numbers, is they really can’t afford not to, because they have plenty of cash flow to cover their overhead and their personal overhead, and they can cover that change in their income from the job that was going to be a fixed amount of money that year with maybe a little bit of a bonus, to making more money each month in a week, and then the other three weeks, they’re just making additional profit between focus on selling, purchasing smarter, adding products, listing products faster online that they’ve bought, which is just cash sitting there getting no interest. Those are the kind of things that those decisions – bigger decisions as well as point decisions – that we really help make on a consistent basis because these conversations come up every week.
Jock: Let’s transition to someone that’s not at a million dollars in sales yet. You’ve got a lot of data from your clients that is helpful for someone growing an ecommerce business. What would be your tips for someone not yet at that million dollar mark?
Scott: Treat your business as a business, not a hobby. That means, do the basics. Sign up as a business, as an LLC or a partnership. Open up a separate business bank account. Make sure you get a federal EIN so that you’re putting any of the business assets against the business tax ID, not your personal one. Open up a business checking account and keep as much as possible, your finances separate, and keep track of every receipt. Scan it, take a picture on your phone, but treat it like a business. That’s the first piece. Get registered for a sales tax license, at least in your own state. There’s other issues related to an Amazon FBA seller which we could or could not talk about, it’s kind of down the rabbit hole with those things. But treat your business as a business and don’t commingle things. It’s OK to use a personal credit card to fund the inventory and keep your business going. Don’t commingle them. Use a separate card for the business and then use another card for going to the grocery store and buying clothes and living your life. You can use a personal one if you don’t have credit in your business yet. That’s fine. But treat it like a business. And then the next piece is, if you’re treating it like a business, is set up accounting. Our preference is zero.com, but QuickBooks online is a viable option as well. Connect it and do enough – you’re becoming an entrepreneur! Learn about doing the basics in accounting. And then, you can look at cloud inventory, but just keep track of everything. Keep a copy of everything, so when you go to that point so someone like us, or another CPA or someone else that can help you really organize your business can get access to that information so you have access to everything. And then make sure you stay compliant with sales tax using a tool like Taxjar.com or Taxify.co. But those are really the basics. Treat it like a business. Think about it – you’re being a business. Learn about being a business. Set up the basics of registering with the state and becoming a corporation. Separate checking account and then set up the basics that you need. These cloud accounting tools are only going to cost you $30 a month. Sales tax might cost you $10 a month plus a little bit for filing. And then look at a cloud inventory tool that might cost you between $50-100 a month, but it will help you optimize your business. If you do those things and take the time to optimize those things, those are the core basics and then you can grow from there.
Jock: We were having a discussion about valuation on businesses that are purely reliant on Amazon. I’m going to add a high level of a discount to that business. What are your thoughts on that particular topic?
Scott: The challenge with Amazon – selling on Marketplace – is, if you’re looking and you have your own brand, that’s a little bit separate. You can control the MAPP pricing. Those are other pieces. You’re one of many. There are rarely any areas where you’re the only seller there. There are a couple other challenges too, if you’re selling on Amazon FBA – so fulfilled by Amazon – where you ship your 1000 widgets to Amazon and they handle everything else. That’s wonderful from a logistics standpoint. You’re not packaging every single product, you send a couple big shipments once a month, a couple times a month, and then money just flows into your bank account every two weeks, and then you monitor customer service and then buy more products and move forward. From a logistic and starting standpoint, that’s really great. The challenge from an Amazon FBA seller is that Amazon generates sales tax Nexus in fifteen states. And that’s wherever Amazon has a warehouse, they’ll dynamically take all of your product and move it around. As a single seller, if you’re not selling your business, from a risk-management perspective, you can decide to, “I’m only going to register in my state, or a handful of states,” but that is a liability to the business, which is that sales tax liability, where you’re not collecting and remitting sales tax in 1-15 other additional states, so that’s one of those challenges where it’s one of those technicalities. It’s a risk-management decision, as the business owner, if you’re not going to sell. But if you’re looking forward to selling your business in x amount of time, you want to focus on making sure you’re sales-tax compliant, your personal property tax returns for your business, and, of course, any income taxes are all up to date on top of making sure you have accurate financials so that you get the full value of the business.
Jock: So let’s talk about cloud accounting. For those who don’t know what it is, can you explain it for me, and then can you explain the benefits for someone who’s already got an existing solution in place, but the solution you provide and how that’s different.
Scott: There’s a new world of tools in the cloud. Not only are your shopping carts and Amazon online, but there’s a wave of cloud accounting solutions, and the benefits of working with these and many cloud tools is that they’re modern interfaces, they’re easy to use, they’re in the cloud, so they’re available any time as long as you have internet access, which is most places anywhere in the US these days. You don’t have to be concerned about versions, or backing up the data, or making updates when there are new features or updates or changes to tax codes or other changes. You don’t have to do that; you pay for a solution that is stable and online in the cloud. The advantage of some of – the additional advantage of the accounting solutions is online, they connect to your online banking. So online every day, real time, each day, they download all the transactions from the previous day from your bank. You don’t have to type any transactions in. You don’t have to export and import any data. It’s going to dynamically pull all that information together. The other advantage is having a solid cloud accounting platform that has an ecosystem of add-on partners, like Shopify has add-on partners for mailing, through MailChimp or Constant Contact. Accounting systems like QuickBooks online or Zero have a whole ecosystem of add-on tools, whether it’s expense management, or bill payment, or cloud inventory. These tools will integrate together and feed all the information from one cloud app to another so you don’t have to do the data entry. And it’s always online. Compared to what a lot of businesses are on, they’re either on QuickBooks Desktop, or they’re using QuickBooks Enterprise, and advanced inventory, leveraging that tool. Now you can take a solution like that, instead of having it on one of your PCs in your office, which you have to back up and protect, and make sure it’s protected from viruses, from power outages, and all the other things you have to do to protect a server or a dedicated system with that data, you can host QuickBooks in the cloud, and there are a number of certified QuickBooks hosters in the cloud that will do the online backup and get you partway there. You still have QuickBooks which is a much older technology. It’s not a great database, it’s not optimized for the cloud, but you can keep using QuickBooks Desktop and QuickBooks Enterprise hosted in the cloud at places like Right Networks or Cloud Nine, and get partway to the cloud, so you get some of the protections, but you still don’t get all the automation, the efficiency, the automated upgrades, and a number of the other capabilities you get with a new cloud accounting platform. The next level of these cloud accounting platforms, is they’re finding newer, better, more efficient ways to get things done with automating billing and payments and automatic payments and receiving information from different areas, where there’s new capabilities, features, functions, and whole new ways of doing things that are much more efficient, that small business leveraging very dynamic cloud companies like Zero, can take advantage a lot faster than either mid-sized companies that are working on big solutions like Dynamics or NetSuite or others. These solutions are evolving rapidly, and you can take advantage of these functions very easily on an ongoing basis.
Jock: Let’s talk about sales tax. The conversation that we had the other day. What are the risks for an entrepreneur and, first of all, what don’t they know? And then, now that they know what they know, what are the risks?
Scott: Sales tax, unfortunately, is a reality for really any business, whether you’re a retail store and you’re collecting locally, or you’re an online business. It is a reality. It is based off main term called nexus and where does your business have nexus? Your business has nexus where you are, where you’re registered as a business, where your employees live and work, and you’re where you have significant personal property, whether that’s a warehouse or your inventory, and you own your inventory until it’s received by the end customer at their home. It’s where you store inventory, not where it’s in transit. You’re only in one state, all of your employees are in one place, your warehouse is there, you have nexus in one state. Where you have nexus, you are required by law to register for a sales tax license, collect sales tax on every transaction where anybody’s buying in that state, not anywhere in the US, but in the state where you have a tax license, and giving all that money that you collect to the state. It is worse to not collect any sales tax and owe money out of your own profits to a state, than you holding money that you’ve collected as sales taxes and not given it to the state. That’s where you cross over into illegal criminal activity. It’s painful to register online for many of these states. Then you have to know how much you’ve collected and how much you should collect. Most shopping carts have an automated configuration, whether it’s Amazon or Shopify or Big Commerce, that you can say, “Hey, I’m in Florida or Colorado or California,” and it will start automatically calculating sales tax, collecting it, and giving it to you. So if you turned on sales tax a year ago, and you’ve never filed or remitted, you need to go look at how much money you’ve collected and make sure you go file that. Another challenge is, if you’re an Amazon FBA seller, you need to collect or remit in up to 15 states. It’s your decision on which ones you register in. You want to register. To keep track of that, manage it, you really want to look at an automated tool, like Taxjar or Taxify.co, that will pull in all the data from YouCommerce or Shopify or Amazon or wherever else and you can upload any direct sales or any other sales you have which will total up all the information and then show you how it needs to be broken down so you can fill and file those sales tax funds that you’ve collected. Or at Taxify.co, that will actually file in all 50 states. Taxjar will file in some states, up to 26 states, and Taxify will file in all 50 states. It’s kind of a matter of registering where you have nexus, collecting sales tax and configuring it, and another key component is if you have sales tax nexus, you have to collect on all sales, so if you sell on Amazon, EBay, Etsy, and your own shopping cart, and in person, you need to collect sales tax for all of those transactions. Make sure you’ve configured every site. It’s still fairly complicated for getting every site. In general, sales tax is extremely complex. There are 13,000 jurisdictions in the US. We’ve gone a little crazy on the compliance stuff. What you can do is make the best effort, find a balance between the time or cost that you’re paying for someone to either do this for you, or for you to do it yourself, to be compliant. And there’s no law that says that you have to spend 100% of your time or all your profits or anything else on the business. You need to find that balance of risk management, but you always want to stay current in your own state, where they can come audit you, both as a business in the state, and you’re physically there. So, those are the key elements. What you don’t know is that one of the hard things…it’s make the best bet, do a little bit of research, read a few blogs. You will hear people finding different things of “I found this trick to not do it!” Well….no. There are a few tricks, like with California. The big trick, I’ll tell you, is you want to register for a sales tax license, not with the Secretary of State, in any of these states, especially California, because if you register for a sales tax license, you’re saying, “I want to be able to sell products.” If you register with the Secretary of State, you’re saying, “I’m a business in that state.” Then you might have to pay income tax in that state, and a ton of other paperwork, you’ve got to pay your accountant to do an income tax return in that state. So when it comes to California or any other states, especially your Amazon sellers, you can only log on to the California site to log on and register online, but when you get to the point where it asks you for the Secretary of State information, stop there, save your reservation, call the Board of Equalization in California and tell them that you’re just a remote seller, and they’ll uncheck that requirement to register with the Secretary of State, and then you can get only a sales tax license. The only state, if you’re an Amazon FBA seller, that requires, by law, that you can’t get a sales tax license without registering in the state, is the state of Washington. That’s my super-detailed tip that I’ll cover
Jock: What haven’t I discussed that you want to talk about?
Scott: OK, you didn’t go into business to do accounting, but take the time to understand your business. Whether you’re watching TED talks, or you’re reading business books, you really want to take the time to continue to grow your education as an entrepreneur. I suggest getting the book Financial Intelligence for Entrepreneurs. It’s very dry reading. It’ll take you a while to get through it. Keep in mind, I’m not an accountant, my partner is. But you will start to learn the terminology. You’ll start to learn when you show some business people your financials, and they can look and in five seconds, tell you that your business is either failing or doing well or talk to you about it, and that’s where you can start learning about those things. So what I have to say is, if you’re going to do the accounting yourself, educate yourself. You don’t have to enjoy it, but it’s a reality of being in business. If you’re going to outsource anything, whether it’s the accounting or the warehouse or whatever else, do it yourself for a while so you understand what you are outsourcing. When you’re interacting, just make it clear as to what your expectations are. You want specific reporting and answers to specific questions, but in general, keeping track and knowing your numbers will help you stay in business. There are a lot of businesses that are profitable but go out of business because they’re not monitoring cash flow, which is critical. There are other businesses that you don’t realize you’re losing money, and you don’t take the time to cut back and drop products or make other big changes to stay in business because you’re just not aware of the issue until it’s too late. Take the time, and when you’re ready to outsource, do it as smartly as you possibly can.
Jock: If someone wants more information about your services, where can they go?
Scott: Thank you Jock. You can go to our website, which is CatchingClouds.net. Please look around. We have quite a few blogs. We’re constantly trying to share the information so if you have any specific questions. The best thing if you have very specific questions and you’re interested in outsourcing your accounting services, please contact us at 720-414-1444 ext. 1. Or you can reach out to email@example.com and we’ll definitely respond. We really enjoy working with entrepreneurs and ecommerce entrepreneurs that have already taken the risks, that are putting their kids’ college fund or looking to quit their job, or if they’ve quit their job or they have an established ecommerce business and they’ve been doing it for years, we really enjoy working with these people, helping them optimize their businesses and make them better. Jock, I really appreciate the opportunity to talk today.