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Getting Your E-Commerce Books Ready for Tax Season – Return on Podcast Ep. 33

Getting Your E-Commerce Books Ready for Tax Season - Return on Podcast Ep. 33

The following is a transcript of Episode 33 of Return on Podcast, the show where we help e-commerce sellers improve their ROI in business and in life. For more episodes, subscribe to our YouTube channel or listen on Podbean, Apple Podcasts, Spotify, and Amazon/Audible.

Tyler Jefcoat:
All right. Welcome back to this Return on Podcast special series called From Pain to Profit in 2023. In our first session, I unpacked my five hacks in five minutes for how to crush, how to supercharge your annual planning. And if you didn’t get a chance to listen to that session or watch it on YouTube, I just encourage you, take a few minutes. It’s really easy to get through the content and I’m hoping that it’ll help you clarify in your own mind what it is that you want for your business going into 2023.

And so I’m recording this video assuming that you already have that on your calendar, right? You’ve already started the process of understanding the answers to the core questions that I listed in that video, and now we need to move on to the more technical, more accountant, CFO boy stuff. My team at Seller Accountant would love to empower you with going into the next year.

In this first of those technical videos, and by the way, just a quick reminder, this show, the Return on Podcast, whether you’re listening to this through one of the various podcast players or whether you’re watching this on YouTube, normally this is a 40 to 45 minute show where I’m interviewing key influencers in the e-commerce space.

We’re talking about strategy, hacks, and investment strategy, and that kind of thing. But coming in for a landing here in 2022, I decided to do something different for just a few weeks and unpack this series on how we can really get better at using our numbers to drive performance. Especially ’cause that’s a bearish, weird market.

And so this is gonna be the second of maybe seven or eight videos related to how to use your numbers better to move the ball forward in your business. Again, the first video was vision. Now we’re gonna get into the nitty gritty. And so in this, today’s session and in this particular session, we’re gonna talk about your bookkeeping because no one likes to talk about bookkeeping, but this is that special time of year.

Your tax guy is gonna start hounding you here in just a couple weeks to have your stuff together so that he or she can file taxes for you. And so in today’s video, in this kinda a short session, if you’re listening to it in today’s podcast, I want to give you three things really quickly. One is I’m gonna make a quick case for why e-commerce accounting‘s gotta get done correctly. The bookkeeping has to be done properly.

Once I make that case, I’m gonna walk you through the differences between accrual and cash basis accounting. So if you’re kind of confused as to what accrual accounting is, why I should care, hang tight for the kind of second session in this session, and I’ll walk you through it.

And then I’m gonna give you some, finally in today’s session, I’m gonna give you some actual things that you can take away, some tools, some resources that you can employ to actually get your books in order. So let’s launch in.

So first of all, let me build the case for why the books matter for an e-commerce brand. There’s a lot of reasons, but I’m gonna give you three that came to mind right away as I was writing today’s session. The first obvious one is taxes, right? I mean, your tax person is gonna be hounding you in the next few weeks. You’ve gotta get your books ready so that the tax person can file your taxes and keep you outta jail.

But what’s really funny is that we say that, that’s the joke we always say is, yeah, keep us outta jail. But most of the entrepreneurs that I meet, the problem is not that they’re worried about going to jail. The problem is that they don’t have good enough records that they can actually deduct more. In other words, the problem is not that you’re maybe not paying enough taxes. The problem is probably that you’re paying too much in taxes, and just getting your books in order would give you the confidence, would give you the defense-ability to deduct additional expenses, to use the full IRS tax code to your advantage.

I am not a tax guy. I don’t even file my own taxes anymore, but your CPA or your tax guy is gonna want you to have good records so that they can take full advantage of the tax law. So that’s the first reason to care about your books is taxes.

The second reason is due diligence. Now listen, we’re in a bear market right now, and it’s a little harder to get a loan, so to go through loan due diligence. It’s also a little bit harder to get a business sold. But guess what? Now’s the time to get your books in order, to get them correct, so that when you choose to sell your business in a couple years, once the market is rosy again, you’re gonna have your affairs in order, and you’re gonna be able to get the deal done.

I cannot tell you, friends, how many times last year when all of these businesses were getting acquired, how many times a deal didn’t get done because the bookkeeping was garbage. Or if you think about the current market right now, you’re trying to get an SBA loan, it’s not as easy anymore. I can’t tell you how many times those deals fall through because somebody doesn’t have their affairs in order. We don’t have their bookkeeping done correctly where they can get through due diligence.

And so taxes, due diligence. The final reason to care about your bookkeeping, and then we’ll dive into some more practical stuff, is for profit, guys. And then this is the purpose of this series is to go from pain to profit. You cannot afford to run your business with mud on the windshield, right? That would be suicide. You would wreck the car if you were driving a car that way. But a lot of times we try to act like we’re professional CEOs and yet we’re driving blind. We don’t know what our real numbers are.

And here’s the thing I want you to keep in mind. I had a friend say this the other day, and it’s all CEOs make money in a bull market. When the sun is shining and money floweth and e-commerce is up, and we have the huge Covid bump, everybody made money during that spike. But the real CEOs, the real leaders, the transformational wealth transfer CEOs are the ones that execute and execute well in a bear market, in a yucky market, in a weird recessionary market.

And I think that’s what we’re gonna be going through over the next year or so. And so this is an opportunity for you and me to know our numbers. Remember the last video is about knowing our vision. This video is about knowing our numbers so that we can make the right choices and actually make money even when the market’s weird. So that’s the case. Please don’t put off the bookkeeping. Please get it done right.

And so this leads me to the question that I get maybe as often as any other question as an accountant. Tyler, what is this thing, accrual accounting versus cash basis accounting? Why do I care? What’s the difference?

And for those of you guys who might be listening to this session on one of the podcast players, I’m gonna try to make this accessible, but I just want to let you know, I did create a kind of a, an example deck here so that I can show this. So if this concept ends up being something that’s important to you or it’s maybe confusing, this may be a good opportunity to go to the YouTube channel, Seller Accountant’s YouTube channel, and actually watch this video instead of just listening to the audio.

But let me walk you through this. Here’s on my screen, in case again, you’re listening, I have an example of cash basis versus accrual basis. And here’s what it looks like. If I paid for my inventory in the first month, and I was a cash basis accounting, then I would go ahead and expense the full amount of that inventory in that month.

If in the second month, I’m waiting on the inventory to arrive at the warehouse, then in my cash basis, by the way, my accrual also, nothing happens because I’ve already paid the money. In this example, in the third month, I sold one half of the inventory, but Amazon hadn’t paid me yet, or Shopify hadn’t paid me yet.

And so again, if I’m a cash basis accounting, nothing has happened because no cash has hit my checking account yet, whereas this is where we really see the differences for accrual accounting, which, if you’re looking at the screen here, is on the bottom half of the screen, where now we’ve booked $10,000 in sales and we’ve booked half of that inventory as Cost of Goods Sold, where we can actually measure a profit margin, right?

And then the final and fourth month here, we’ve sold the other half, and we were paid in full for all of the inventory that we sold. So again, if you’re looking at this, cash basis is gonna book all of the expenses way back when we paid for the inventory, and it’s not gonna book any of the good news, any of the revenue until when we finally get that cash from Amazon or from our any other accounts receivable.

And so when we look at this cash basis mock P&L that I have up on the screen, none of these months are helpful in terms of helping us understand how effective our business is at making money. When we look down at the bottom half of the screen on this accrual P&L, now we’ve taken the effort to line the sales activities with the month that we actually shipped the units, and we took the effort to line the inventory Cost of Goods Sold activities in those months as well. And as a result, our margins are consistent, and if there was a change in those margins, it would signal that we need to make a change in our business model.

And I’m, lemme show you another example here. So, again, for those of you guys who are watching this is gonna be easy for, if you’re listening, forgive me. I’m so sorry. This may be worth going and watching on the YouTube channel. But, if you look at your profit and loss statement split by month, I have an example on the screen here where there are five months of a e-commerce seller’s P&L, and this is a e-commerce seller that’s gonna do a little over $5 million in revenue for the year.

So this is, each month is over $300 grand, but if we look at their gross profit margins, month one was positive eight. Month two was negative 1%. Month three was 32%. Month four was 24%, and month five was 3%. My point is these margins are all over the map. And by the way, this is the test for you. If you’re listening to this or if you’re watching it, pull up your accounting system right now and pull a view by month like I have here. If your profit margins are all over the map, like the ones that I’m looking at on my screen here, you have a problem and you are probably doing your accounting on a cash basis, which is simple, but it is not very effective in terms of understanding your real performance.

I would really encourage you to transition to an accrual system where you’re putting in the effort to line up those sales in the month when we actually ship the unit to our customer and line up those Cost of Goods Sold in that same month when I ship the unit to my customer. Because when that happens, when they’re lined up and you have true accrual accounting, it forces you and me to pay attention to changes. So for instance, instead of the margins being all over the map here, if our margins were fairly consistent, but in one of the months it dropped down, we would have to have a timeout.

Let’s take a look and see what’s wrong here. Is it our advertising? Do we have an inventory error? Did Amazon overcharges for fees? Do we have a refunds problem? We need our accounting to give us the signals that force us to ask those hard questions so that we can make adjustments to the way we’re running our businesses and obviously make more money.

So that’s kind of the simple, how to view your cash basis versus accrual basis accounting. I have some other videos that I’ll post in the show notes here to make sure you can see more in depth there if you wanna learn more about it.
And then finally in today’s session where we’re talking about getting your books right, I just wanna actually share some, some tools with you. So we’ve talked about the case for having good bookkeeping. Please do it. Do it for taxes, do it in case you ever sell the business. Do it so you can make more money. And if you’re gonna do it to make more money and to be able to sell the business one of these days, that was the second point is, you’re gonna have to use accrual accounting and not cash basis accounting, especially as a larger e-commerce seller.

And then finally here with the last minute of this, I just wanna give you some resources. So I’m going to, we have a Do It Yourself course on the Seller Accountant website. Actually, maybe for those of you who are still watching this, I’ll show you what it looks like. So if you go to our homepage and you just hover over Services, you can see a little plus here next to accounting. That’ll take you to a page that’ll lead you right into this Do It Yourself bookkeeping course.

We also have a course for CFO. Both of them have been really well received that they may be something that would help you as you’re trying to get your books in order. But I wanna give you a gift. I wanna give you a hundred dollars off. So if you use the coupon code, SAVE, S-A-V-E, SAVE100. So literally the word save, and then 1 0 0, it’ll give you a hundred dollars off either of those two courses.

That’s one way. If you’re like, oh crap, I don’t even know where to start getting my books in order, one option would be to get a Do It Yourself course. Another option is we’re gonna make sure these show notes are chock full of as many of the back links that I can give you to other content that may help you untangle your books, may help you get Cost of Goods Sold – Cost of Goods Sold is really hard, and I have some fairly in depth videos on walking you through how to calculate COGS per unit, how to do the inventory correctly.

And I’ll give you links to that so if you want dig in, you can. And then finally, I’ll be honest with you, if you get knee deep into this and it’s overwhelming or you just don’t wanna fool with it, feel free to reach out to me. I’d love to talk to you and we can try to find ways to help you directly as an accounting firm.

Obviously that’s what Seller Accountant does. But I’m really hoping with this video to give you the mindset to go towards accrual accounting and to just give you some do it yourself options where, instead of having to pay monthly for a service, you can do it yourself. But once you’re done, once you’re over doing it yourself and you wanna offload this, we’d love obviously for you to explore partnering with Seller Accountant. We’d love to help you.

So I’m gonna make that the end of this accounting, bookkeeping video. Just remember we’re in this series, going From Pain to Profit in 2023. If you didn’t go back and listen to or watch the first session about how to get your annual planning done, I highly encourage you to do that. If you’re listening to today’s session and needed to really see those accrual accounting examples, go to the YouTube channel at Seller Accountant and, and check it out, right? So you can actually see what I was showing.

And then I want you to hang with me because now for the following sessions, after today’s, we are going to get knee deep into some of the KPIs, some of the performance metrics that have made Seller Accountant one of the most successful CFO firms in the country for e-commerce brands. We’re gonna walk you through exactly how to build your per SKU profitability analysis, how to understand inventory velocity, and I’m gonna give you, in one of our final videos, the Holy Grail KPI for e-commerce brands that is crucial if you want to outperform your competition. So hang with us as we get through the rest of the series.

Thank you for joining me today, Tyler Jefcoat. Again, normally Return on Podcast, we’re talking to e-commerce entrepreneurs that are not just me, but we’re gonna do this short series to try to unload some real nuggets of value that’ll help you make 2023 the best year ever. Have a great day. Take care.

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