Many ecommerce entrepreneurs forget that the fundamental accounting principles and financial metrics that gauge the health of your business and should guide your future plans always remain the same, no matter what industry or sector you’re in.
That said, bookkeeping specialist Cyndi Thomason knows there are key ways online businesses differ, not to mention the unique challenges they face. With her company, bookskeep, she helps clients doing business online increase their cash flow and keep it steady.
A lot of what she does is somewhat counterintuitive… but very effective. We talk about:
- Why she doesn’t use QuickBooks (at least not for these key tasks)
- How to get an instantly updated snapshot of your financial health
- What it really means to put profits first
- Using multiple bank accounts to track your business’s finances
- And more
Mentioned in this episode:
Steffen Horst: Welcome to the Performance Delivered: Insider Secrets for Digital Marketing Success Podcast, where we talk with marketing and agency executives and learn how they build successful businesses and their personal brand. I’m your host, Steffen Horst.
Today, we’re going to talk about “profit first” for ecommerce sellers. It’s something different from digital marketing. But I strongly feel this will be a very interesting session for all of you guys and gals out there that sell products and offer services so stick with us and listen in.
So here to speak with me about the topic is Cyndi Thomason. Cyndi is the author of the best selling book Profit First For Ecommerce Sellers. She’s a master level certified “Profit First” professional and the founder and president of bookskeep. Her company consists of a virtual team located across the United States, providing bookkeeping and Profit First consulting services to ecommerce clients all over the world. She devotes much of her time speaking at events, such as ASD market week, Seller Con, Profit Con, and other industry events. Cyndi, great to have you on the show.
Cyndi Thomason: Thank you, Steffen, I’m delighted to be here.
From Bookkeeping To Business Owner
Steffen Horst: Cyndi, tell us a little bit more about yourself. How did you how did you become a bookkeeper?
Cyndi Thomason: Well, I worked in the corporate world for many years, and installed accounting systems as well as HR and contracting many, many different hats in the corporate world. And I got out of the out of the corporate world to become a mom and raise my daughter, and at some point, had a brand new needed a little help with a business that she was getting started, she needed some help with just contract work. And that led to accounting work. And I realized from working with her just as a friend to help her out, but I was kind of ready to get back into the work world. And that it was time.
In the time that I had taken off, the technology had changed so much that you could do a lot of work from home and work remotely. And because I was homeschooling my daughter I approached my friend and said: “Hey, how about I do this work from home?” And so through that relationship with her got started with an accounting system for her and keeping the accounting going for her business and that led to more clients and ultimately led to the business that I have today.
Steffen: How long have you been doing bookkeeping for companies then? In the form of being self-employed?
Cyndi: Actually, for about 10 years, but the company bookskeep was born five years ago. So coming up on five years at where I really started expanding and building a team and it was more than just me.
Steffen: And then what kind of clients have you worked with in the past in your role as a bookkeeper as you know, working at bookskeep and has that changed over the years?
Cyndi: It has changed it first, it was kind of geographically based, I was working with clients that are somewhat close to me. We were (getting new clients through) word of mouth. I started out working with a digital marketing company that referred me to a software engineering website design firm that referred me to a nonprofit. And that word of mouth kind of business grew quite a bit through that.
But again, they were all somewhat local to me. It wasn’t until I started working with Profit First that I started to specialize in a niche and started to realize that people in the ecommerce industry were folks that I could, I don’t know, we just clicked we were kind of at the same place was looking for a flexible lifestyle. They were comfortable with working with remotely with people, they were also comfortable with technology because so much of their business was managed online. And so over time, we have specialized and serve primarily the industry. But it certainly started out much broader than that.
Steffen: So the topic of today’s podcast is Profit First for Ecommerce Sellers. So let’s talk about– what is “profit first”? What does that mean?
What is Profit First and Why Does It Matter?
Cyndi: Well, it’s actually as the title of a book was written by Mike Michalowicz, he wrote the book in 2014. Really, I launched my business rebrand in 2014. At the same time as I attended a conference that QuickBooks held, and Mike Michalowicz was speaking and introducing his book at that point in time, and I was able to listen to him give a presentation at that conference, and knew that what he was talking about would help every one of my clients. But you know, when you base your business on other people’s success, you look for ways to help them be more successful. And wow, I felt like we were doing a good job with our accounting and bookkeeping services.
I knew that there were some challenges down the road because some of my clients weren’t creating enough cash to stay in business. So it was, you know, realizing that relationship and that I can help them with that was a big thing for me that, that at that conference. So hearing, Mike’s presentation really changed the direction of my business, because of understanding that there was a way I can help my clients with cash flow, improving their cash flow. And profit first really looked at things just a little bit differently, because it’s based on the way our behaviour work in our business around money. And it’s based on this model called Parkinson’s Law. Parkinson’s Law was created by in the 1950s by a British historian who was also an economist. His name was Tyrell Northcote Parkinson, and he studied the bureaucracy of the British Navy. And what he was trying to understand what why is it that anytime there was more money available that the Navy expanded and what he learned was a simple rule of you, basically, you use what you got.
So whatever resource you have, whether it’s time or money, Mike in his book, like to use the analogy of toothpaste, whenever you have, that kind of helps you meter out and determine how you’re going to use that resource. So for example, in the toothpaste analogy, I’ve been traveling a lot lately, and I’ve had this little tiny tube of toothpaste, and I knew that you know, it had to last me through the three weeks that I was only on my travels, and so forth, and in the end, I was just using a tiny, tiny little dab of toothpaste. And but now that I’m back home, I got my full tube of toothpaste, I, you know, I get just real luxurious and put a whole bead of toothpaste on my toothbrush. And it’s just a mindset that we have when something appears to be scarce, we use less of it, when something appears to be abundant, we use more of it.
And so that economic theory is the foundation for profit first. And its profit first really uses multiple bank accounts. So that you understand that these bank accounts have a specific purpose, like one of them would be for your profit, one of them would be for owner pay, one would be for your operating expenses. And when those funds are in each account, you can understand better really how much money you have to spend on an activity, because it’s not all lumped together. And so it … helps us understand how much money we really have to put towards different aspects of our business. It’s just confusing for people when everything’s in one big checking account, to really understand how much of that money is available for certain activities.
Steffen: Cindy, doesn’t it create more work having to manage several bank accounts?
Cyndi: Well, it does create a little bit more work, getting it set up takes a little bit of work, of course, you know, getting the paperwork done at the bank takes them a little more work. So what happens once you get the system in place, is you have a process where the money collects for a two-week period of time. And then you allocate your funding to your different account. And then you spend from those accounts just like you would have spent from having one account, you just direct your expenses to the account depending on what the purpose is for that account.
Most of my clients tell me that they can do them in less than five minutes, because you know, they’ve got a spreadsheet set up. The money’s collected in a bank account, they plug that into their spreadsheet, it figures out the percentages, and they just move the money. Online banking makes it really simple.
And the clarity that that you get from this information, being real-time. I’m a bookkeeper, so I value the reports that we create generate that are historical, being able to look at your bank every day. Most of my clients tell me that they’re in there looking at their bank account, daily or weekly, being able to look at your account and know where you stand at that instance is worth so much more than the time you expend trying to calculate to understand if you have money or don’t have money.
So yes, it is a little bit more work to get going. But the value that it creates in your understanding of your business is worth more than then that little bit of time you spend getting it going.
Steffen: So someone out there would not be able to do this by using accounting software, where I have my bank account, my credit card, and whatever other accounts, the business has set up, and then have individual accounts expenses, and then all those different things. Wouldn’t that person be able to to display to get the similar view of their financial situation?
Cyndi: You know, I thought the same thing and whenever I heard my expression, I went home and set that up in my QuickBooks account and I’m like ‘I don’t have to do this at the bank, I can just do it in QuickBooks’. So what I figured out was my QuickBooks was a couple of days behind, and then I would get real busy. And then it turned out it was a week behind. And I logged into my bank every day, I didn’t always log into QuickBooks.
And so the behavior that most people have is relying on the information from the bank, not the information from their accounting system. And if we get busy as entrepreneurs that happens to us, you know, sometimes we know that we can catch up on our bookkeeping later. And so we don’t keep up with that activity, we put it to the side. And so technically, yes, you’re correct. But the reality is, bookkeeping is often the first thing to go when we get busy. And we were going to rely on looking at our budget account anyway, we may as well just set the system up to work for us, instead of creating more work down the road.
The Profit First Approach in Action
Steffen: Okay, am I right to assume that you would have one account that is left? Or that there’s one account, where you literally see what you have leftover in a month, because you take that one account where you put all the money in for a period of time, and then you distribute the money depending on you know, who to pay, vendor pay in whatever other payments company has the distributor one account where I see how much money did I make at the end of the month? Is that assumption correct?
Cyndi: Well, it’s correct, but it’s kind of working backwards, you’re looking at it from the standpoint of what’s leftover. And Profit First approaches it from the opposite direction, and hence the name Profit First. And the idea behind it is the formula that we’ve used for years sales minus expenses equal profit, we turn that around, and we say, you know, you, as a business owner are investing in this business, you should set it up so that you are creating good habits from the beginning. And you’re getting the reward for being a business owner.
So we turn that business equation around to be sales minus profit equals expenses. So that what’s leftover in the scenario that you painted, is what we have left to run our business. So for example, you get the money in from your sales. And the first thing you do is you allocate it to the different buckets that you have, a percentage will go to your profit account, another percentage will go to your own or pay to your taxes. In ecommerce, one of the first accounts we’ve allocated to is inventory, because we have to keep investing in inventory to keep the business healthy. And so then what’s leftover, it goes to operating expenses. And that’s what we have left to operate the business. And it creates a different dynamic because you’ve taken care of you as an owner, you’ve rewarded yourself as an owner, you have paid yourself an owner salary, because you’re your most important employee, and you’ve taken care of your obligations to the government.
And really, what’s left is what you can afford to you operate your business with. And it creates pressure if you will, to be more innovative, to be more efficient, and to be more frugal. And that’s all good. positive pressure on us as business owners, because if we put too much money into operating expenses. For one, there could be a waste. But another thing happens is just blow and we’re not directing our resources effectively. And if you’re operating in a more lean environment, you’re going to be more judicial, judicious about how you employ those resources. So the process that you described work, but the result is that what’s left is what you run your business with, you’ve already taken out your reward.
Steffen: Profit First, obviously, can be applied to any business, it doesn’t really matter whether it’s an ecommerce, business or production, business, etc. Why is Profit First different for ecommerce? Tell us has it something to do as you just mentioned a second ago? What’s up inventory for eCommerce companies or businesses? Obviously, Paramount? If you don’t have inventory, you can’t sell anything?
Cyndi: That’s right. That, to me is a big difference. And Mike, you know, after he wrote the first book, he came, came back to Profit First professionals and said, hey, what should I do to when I do the second release, the book has been picked up by Penguin house, and he was doing a rewrite. And I kept going back to him and said, we’ve got to talk about inventory. You know this is just a huge thing. And finally, he came back to me said, you know, that’s the book you need to write because you are more in tune with that, then what I need to write for, for our, you know, for our larger, more general audience. So that’s, that’s why I wrote the book Profit First for Ecommerce Sellers, because I just told many of my clients to struggle over and over with how to have enough money dedicated to inventory, and how to understand that, you know, cash flow, we talked about cash flow in our business, and we make it sound like one thing. But in reality, cash flow is it can be two different things.
And what I see with my clients is there’s a cash flow around inventory that has a very different rhythm than the cash flow around their operating expenses. A business like mine, or a bookkeeping business, a service business, you know, we, we collect our money from our clients on a monthly basis, we provide services on a monthly basis, it’s kind of built on this flow of things that have happened monthly. And many of my clients from an operation standpoint, their cash flows on a monthly basis. Also, they’re paying their rent, they’re paying their virtual assistants, they’re paying for their subscriptions for software, those things happen on a monthly basis. But inventory has a whole different rhythm to it. And it really depends on the type of ecommerce business that you are and what kind of relationship you have with your vendors, what those terms might be.
So somebody that’s in an arbitrage business, where they’re buying from retail stores, and repackaging and shipping it out there, their cycle time around inventory, is very different than someone who might be a private label seller who has to order their product from China, and it’s got to get on a boat for 60 days to get here, they may pay 30% of it down 70% of it whenever it gets on the boat to come here. And then they got you to know, cash tied up so that two months until the actual product is, you know, in their hands or in the inventory at Amazon, for example. So understanding that cash flow around inventory is is a huge issue. client, my clients get into trouble sometimes, because when they see a big pool of money that they’re you know, their single checking account. And they’ve been collecting money on inventory that they pay for some time ago.
But they haven’t set it aside to be able to replenish that inventory. When they have to make that next order. They got to make sure that that cash is available to then place that second order. And if Parkinson’s Law starts working on our brain, when we start looking at a big bucket of cash we get really creative with what might we do with it, you know, will we make more money out so we can take a vacation? Do we want to leave it in the business and maybe buy new computers, we get really creative for how we can spend money. But we lose sight of the fact that that money is going to have to be repurposed for inventory as soon as we place that next order. So understanding inventory, cash flow, having a separate bank account for it, so that as you get your income in from, say, an Amazon payout, moving money over immediately to replenish that inventory that you’ve just sold is critical to to ensure that that money doesn’t hit spin on something that and then not be available to buy that inventory at the right time.
Steffen: For the for the person that’s listening to this podcast and says you know what, I get what she’s talking about. I always struggle to identify Okay, how much money we have to put aside for my next inventory order. And if that person says you don’t want to try profit first, the profit-first approach, how to get started with transitioning from the way how to do things now to a profit-first approach?
Cyndi: Well, we’ve got a quick start guide that will help. But let me describe for you the process. And then we’ll make the quick start guide available to the audience. So they can go get it and walk through the steps and have it there as a reference. But the thing that I would recommend is you probably already have a bank account that you use for everything. So keep that that’s going to be the account that you will use for operating expenses. But then you need to create two new bank accounts, one will be for profit, and the other one will be for inventory. And you probably want the inventory to be a checking account, the profit account could be a savings account. So just work with the bank, figure out how you can get to two new accounts, that doesn’t cost you a lot in fees. So, create the two new bank accounts. And then every payday from Amazon, what you want to do is look at the money that came in and determine how much those goods actually caught you cost you.
So for example, you sold goods from the first to the 15th, you got a $10,000 check from Amazon, it can apply to anything, you know Shopify pays out more frequently, you want to look at about a two week period. Amazon usually does payout every two weeks. So you get the money from Amazon, you’ve got $10,000, for example, in your account, you look back at what sold in that period, and you determine how much those goods cost you. So let’s say for simplicity, that it was $5,000 was the value of those goods. Knowing that you’re going to have to turn around and replace those goods, you want to take that $5,000 and put it in your inventory account, set it aside for the purpose of buying more inventory. So that leaves you than with $5,000. And the money that is last, you want to take 1% this is just a way to get started, you’ll increase this over time, but take 1% of what’s left and move that to your profit account. So you put your profit first, they taking care of your inventory, what last you put 1% in profit, and then the remainder will stay in your operating checking account. And that’s what you have to use to operate your business, whether it’s to pay yourself, pay your assistant pay for rent, whatever expenses you have, that money that’s left is really what you have to operate on. So that’s what I would recommend getting started.
Steffen: How do you mean 1 percent profit doesn’t really sound much like much? How do you go about to increase that what does someone have to have to look at, in order to make a decision on whether they are able to increase it to 2,3,4, 5%?
Cyndi: Well, I recommend starting there because when you take the inventory, money out of your account, suddenly you’re going to realize that you’re operating in the example I used was was basically half of what you had before. And that can create some shortages in cash if you’ve not been used to operating that way. Many people have left that those dollars build up over time, and they’ve got you to know, a cushion there. And they’re just hoping that it’s going to be enough for inventory this way. And you’re getting a little more exact about setting that money aside. But you’re going to have to operate with a smaller amount of cash. And so the 1% is just to get started to get the system going and get a rhythm going.
If you find that you’re able to operate that way for a month or two, then you can start to bump it up. In fact, every quarter, I recommend looking at your operating expenses. See, is that balance growing? If it is you can move that percentage up? are 2%, whatever, whatever feasible? If it’s not, you really need to look at Okay, what am I spending money on that I need to cut out because I’m not making the profit that I would like to make here. Mike and his research, he determined what a successful business ought to be generating in terms of profit and owner pay, depending on the size of the business. And so my book in his book, share that information so that you can see how what are some benchmarks that you should be working towards, and create those cuts that are necessary, or maybe there are improvements in your pricing. But whatever you can do to start to create more profit in your account is that the red flag where you need to be paying attention.
Once you see you see how that money is flowing through your account. And understand that that appoint you to where you need to be working to be able to generate more profit based on the size of your business and what your business can do to you. In terms of a return on your investment.
Steffen: If someone wants to get started with this, people are always interested in results, how quick can they see results? And what kind of results will they be able to see adopting this profit-first approach?
Cyndi: From the first allocation that you make, you’re going to be putting money aside to be profitable. And for many of my clients, when I start working with them, that’s the first time they’ve ever been profitable. But they follow on after that. It’s where you start to really see the magic because you really get clear about the cash flow, for instance, Tori and the cash flow for operating expenses. And you have to really dive into what it is you can do to reduce those operating expenses. I would say the first three months are critical.
Getting your process, getting the flow worked out making sure that there is enough cash to operate on when you start separating inventory, cash flow from your operating expenses, and start taking out a profit, that first three months are critical, just to be sure you understand you you have the processes worked out. But then after that, it should just be kind of a rhythm of what am I doing to cut my expenses, or increasing my pricing or reducing my costs on my cost of goods? What what are these levers I continue to pull so that I get an increase in my profit account.
And as I as you work through that, you just I say after about three months, you start to really get into with where your money’s going. And the thing that I think that is so powerful that that happens after about three months. I mean, after three months, you do get the benefit of taking the reward out of the profit account. Though, the tangible thing that happens after three months is you leave half of the money in the profit account to start to become like a rainy day fund. But the other half of the money you take out and you reward yourself for being a business owner, you don’t reinvest in the business, you take it out to do something for yourself, for your family. So the kind of the intangible thing that starts to happen at three months is you start to really feel more in tune with, with what your money is working for in your business and how that flow happens.
And you can use profit first to set up a few additional accounts. For example, I’ve got a client that was never really on top of his marketing, spin. And he wanted to, he felt like he was making investments, but he wasn’t always seeing the return. And so we separated out an account a bank account for his marketing spin, so that we could look at, okay, this is how much you’ve invested in your advertising, how much increase Have you seen in your sales, and he could start to understand that relationship between the investment he was making in marketing and the sales that were coming back to him.
And just by having, having that relationship between the money set aside for that purpose, and seeing the sales come in, he could understand better how those marketing dollars were working for him. So I would say, you know, initially, you’re going to start to see things accumulating in that account. After three months, you actually get to take money out. And that point is when people are also starting to really start to sense an understanding and awareness of how them how their money flows and how they’re operating. And that’s that intangible benefit is really huge.
Steffen: So for the listener who, who haven’t started accounting or bookkeeping, and I’m not so familiar with it, and rather would have someone that takes them by the hand and helps them set all of this up. What kind of companies what size of companies do you work with? Is there a certain size? Income wise? Or how do you find who, who you can actually help?
Cyndi: Well, you can go to the profit first professionals website. And if you’re in the ecommerce space, you most likely will come towards, towards me, if you fill out a form there. What if you’re in, you know, a digital marketing agency. There are other people that serve specifically clients like us. So the, it’s not so much size as more of a mindset of when you’re ready to get started. And if you’ve got issues around understanding how to make the numbers work, I hope that in my book, I’ve given people the tools that want to do it themselves and are really good with working with numbers that they can take it in and just work with it directly.
If you’re not one of those people that want to do it yourself, then we do offer coaching where we go in and do an assessment of your book. And help you determine how to get started. I do start people off rather slow because I want to get the process work. I don’t want any shot going into the bank account and get people moving forward. We work with clients on profit first, from the time that they’re getting started, and they want to make an investment to be sure that they’re started, right. They may not have failed yet up into two clients that are you know, 20 million in sales annually. So it’s not so much a side thing. It’s just when the business owner is ready to take that step in their business.
Steffen: Great. Well, Cyndi thank you for joining me on the performance podcast and sharing your knowledge on profit first methodology. If people want to find out more about yourself about, how can they get in touch?
Cyndi: Well, the best place is my website is bookskeepcom. And we’ve got we’ve got a very active blog there that we’ve been doing for a number of years. So a lot of what I’ve written about profit first is there about accounting in general. So it is geared towards ecommerce folks. So that’s a great place to just go and learn. And of course, you can reach out to me there through the contact form. And we’d love to talk with you about how we can help you get started on this profit first journey and start to make profit a habit.
Steffen: Okay, well, thanks everyone for listening. If you liked the performance podcast, please subscribe to us and leave us a review on iTunes or your favourite podcast application. You want to find out more about supporting digital you can visit us at symphonic digital com or follow us on Twitter at Symphonic HQ. Thanks again and see you next time.