Cyndi Thomason 4:01
Alright. Well, I started my business in 2014. And I’ve specialized in e-commerce clients since 2015. And I met Mike in 2014. Actually, he was speaking at an accounting conference. And I was in this. I was in this session after lunch trying to stay awake. And he was in the room next door and the whole room would just, you know, go up in laughter every few minutes and I’m like I’m in the wrong room. So I went over and sat down in his room and met Mike and got the book and on the way home, I read the the first version of Profit First and I thought, I need this in my business and my clients need it. I can already see I only had my business a couple of years, but I can already see that many of them were struggling to make payroll. They were struggling to pay themselves if they did at all. And I could see that at some point they were going to struggle to pay me and I was going to be an expense that they cut. So it felt a little bit like self preservation. And, and so I was working with Mike I was Profit First professional number nine. So I’ve been working with Mike for quite a long time. And he was a coach to me in my business and he said, You got to niche you’ve got to specialize. And so we looked through my client roster and figured out who we really worked well with. And that got us working with e-commerce folks, because we’re fully remote business we like technology. And our e-comm clients do as well. And they like their flexibility, as well. And in working with Mike as he was revising Profit First to rerelease it when Random House picked it up, I kept telling him, You really need to add inventory you this is what my clients really struggle with my e-comm clients. And you’ve got to add that in. Well, when the Advanced Reader Copy came out, and I was reading it, I’m like, You didn’t talk about inventories. So called him up. I’m like, Okay, what gives you didn’t cover inventory? This is what my folks need. And Mike said, Well, you know, you need to write that book that’s too specific for a general audience, and the editors took it out. So you need to write that book. And I said, Okay, how do I do that. And so he was the first person to license Profit First as a derivative and wrote Profit First for Ecommerce Sellers. It’s almost five years old, it came out in January of 2019. And it’s just been the best journey because I’ve met the best people, they write me and tell me what they’re going to do with their first profit check. And then they keep me informed. I got a message on Facebook yesterday from somebody who periodically touches base with a question. And yesterday, his question was I I’ve been doing Profit First, like you said, I got it going on. We’re ready to scale. But I need some help. Will you help us scale? And I just love hearing for people that have, you know, he’s done it himself. And you know, I helped him a time or two with questions. But he’s really done it himself. But He’s ready now to, to actually scale his business and I can’t wait to work more closely with him on it.
Josh Hadley 7:02
That’s amazing. And Cyndi, congratulations on, you know, hitting that five year mark on you know, that book release, that is very impressive. And I love that you’ve really specialized in the e-commerce space. So I’m gonna jump right into the meat and potatoes of this conversation today, knowing that our audience is seven-figure sellers that are trying to scale their business to eight figures and beyond. Cyndi, what challenges or what are the biggest problems that you see when your clients come to you? And they’re saying, hey, I need help with my books. What do you see as the biggest problem areas overall?
Cyndi Thomason 7:42
Well, some of them really do need help with their books, they don’t have good books to help them make decisions. And honestly, that’s easy. We can get them on good books fairly quickly. The bigger challenges are when they come to us, and they don’t have a profitable business. They come to us and they’re having to either rely on credit cards or loans to make their business work. And they don’t understand what they need to do to actually start to generate cash in the bank. And those are really different challenges. You know, e-commerce. Bookkeeping is a specialty and and I really recommend people work with an e-commerce bookkeeper. And you know, one example that we had just recently, a new business owner who bought an existing e-comm business came to us and we were getting his book set up and working for him. And but he also wanted to work with us on cash flow, he’s really struggling with cash flow. So we’re working with him on cash flow and getting his books going at the same time. And one of our bookkeepers noticed that he threw his Shopify store, all of his cash was accumulating, and he was never getting the payouts. And she called me and said, “Is this right? Is this how this should work?” I’m like this person is struggling with cash flow. Why would they be doing that? Well, what happened was they threw all of the transition in the sale. They never connected that the their bank account that of course, the previous owner disconnected there’s so all this money was growing in a Shopify bank account, and they were not getting the benefit of it. You know, we’re talking about $47,000 that has accumulated here in a period of about six weeks. And so an e-commerce bookkeeper can help you understand when things don’t go exactly right. So, you know, I, I think all bookkeepers strive to do a good job, but e-commerce has enough different unique situations that I think it really helps to work with an e-commerce bookkeeper. Those kinds of things are easy for us to help with. The more challenging thing is when somebody really is struggling with cash flow, and what can we do to improve their cash cashflow to get their business on a good foundation so that it actually is gonna, you know, flow cash to them for paying themselves for growing unique cash to be able to grow. And if they’re in a debt situation, which a lot of times that’s when people reach out to us, we’ve got to get on top of that debt situation so that we can start to work it down and be able to put the money into growing the business makes a lot of sense.
Josh Hadley 10:28
So overall, it sounds like the main problems people are having is a profitability, B cashflow issues. And then thirdly, they might have taken on debt, which kind of has exacerbated some of the other issues going on in their business. Is that kind of a correct summation of those? Are those the three main things that you see?
Cyndi Thomason 10:51
Yeah, and of course, there are things behind all of those, but those are the are the three main things, they just don’t have a handle on the profitability drivers in the business to be able to have the cash flow working for them for
Josh Hadley 11:05
their for their growth. Okay, that makes a lot of sense. Well, let’s dive straight into those then. Cyndi, can you give us a list of what are the profitability drivers for an e-commerce business?
Cyndi Thomason 11:17
Well, you know, you’ve got to get your hands around inventory. And inventory is not only do you have to have inventory that you can then sell at a profit, where you have a good gross margin, you have to be able to get the orders in in a timely fashion, with a minimum order quantity so that you’re not putting all your cash into a product that’s going to hang around for a long, long time. So there’s just a number of factors that influence what’s going on with inventory. And one of the pitfalls that I see people make. And to me, this is one thing that every listener of yours can do today that will change their life. And I swear it’s like, so simple, but I just see it change people’s understanding of their business so much, if they will take their inventory activity, and move it to a separate bank account so that they can learn the cash flow around inventory. And it doesn’t confuse the cash flow that were all the other optics expenses are, when you put all of those things in one bucket. It’s kind of hard to know, okay, well, how much how many potatoes are in my soup, you know, if I got a pot of soup, how many potatoes are in my soup? It’s kind of hard to know, right? How many of these dollars in my bank account really are earmarked for my next inventory purchase. So if you put them in a separate bank account, and every time you get a payout from Amazon, you look at what your your cost of those goods were to generate that revenue and say, say you got $100,000 payout, and you know, $30,000 of it was your cost of goods move $30,000 into that inventory bank account, and it’ll just start to grow. And the next time you need to buy inventory, you’ve got that bank account sitting there with the dollars in it ready to make that downpayment, and you’re not wondering, okay, what am I going to? What am I going to mess up, if I take it out of my one, my one bank account, am I gonna have enough for optics or payroll or whatever, if you’ve got it set aside for that particular purpose, you can know with confidence where you stand on growing those dollars for your next round of inventory. And to me, that’s just it’s such a simple thing. But it makes all the difference in understanding what’s going on with the cash in your business. Because, you know, op X is pretty, pretty stable, you have about the same payroll, you pay about the same rent, your insurance will be about the same things month to month have a pretty, pretty standard, you know, low bumps type of line, if you were looking at it graphically inventory, on the other hand, you’re going to spend a lot of dollars and then after a while you’re gonna you know, dwindle down the inventory, you’re gonna have to order again, you’re gonna spend a lot of dollars. And so it’s got this huge roller coaster type shape to that cash flow. And when you put that with your optics, it just makes everything kind of bumpy looking. And you can’t make manage either account effectively with that going on. So if your readers or listeners will do that one change, they’ll start to understand their business at an innate level without having to look at financial reports. They’ll start to understand what’s going on in their business at a level beyond what they’re used to seeing.
Josh Hadley 14:47
I love that. So inventory being one of the number one profit drivers for the business. You talked about just simply moving, you know whatever your cogs are, let’s you brought in 100,000 dollars. If your cogs are typically 30% of your gross revenue, then immediately once you get that payout right from Shopify, from Amazon, wherever it’s coming from, put a 30% of that payout into that bank account. I love that strategy. And it’s again, you’re just you’re earmarking for future purchases, so that you’re not caught off guard. Cyndi, you also briefly touched on this, but you touched on, you know, ordering just enough inventory, not too much inventory. Can you elaborate a little bit further on that? Because I think people can see like, well, I get, here’s my price. If I order 5000 units, but if I order 10,000 units, I’m going to be able to save, you know, let’s say it’s an extra 10% off of their cost of goods? How do you kind of weigh those decisions? If $5,000 is meant to kind of cover you for the next let’s call it 120 days, but then, you know, ordering 10,000 is basically you know, now you’re up to 240 days, right? How do you make that decision? Because you’re right, you’re just now all your cash is tied up into inventory. So can you tell me more on that?
Cyndi Thomason 16:14
Yeah, I mean, your example, I think makes it really clear if, you know, inventory is like cash, but you can’t spend it, I mean, it can be turned into cash, but its own terms as to when that happens, or your buyers terms. And so you really have to understand what your cash position is, over a period of time to know whether you can afford to tie up dollars into inventory just sitting around, we work with our clients to help them understand how many days of inventory is optimal for them. So that, you know if if they’re buying from China, and there’s a 60 day manufacturing thing, and then they’re 60 days on a boat, and you know, they’re going to have to potentially have days at customs, getting it through and testing or whatever, we help them understand what that lead time is. And so that strategy is really different. And that inventory days number is really different from a client who can turn around to a supplier down the street, who’s agreed to warehouse their product. And when they need it, they’ll ship over their 30 units, you know, that day or whatever that I mean, it really varies by client. But the ideal thing is, you want to order the minimum amount possible. So that you can keep your supply going. And at the same time, keep as much cash in your pocket as you can for whatever other needs you have. Because while it may look appealing to get that discount, if you don’t have the cash to then turn around and advertise your product, then it’s going to sit around for longer days than what maybe you were expecting it to. So you’ve got to you’ve got to you’ve got to manage all of those pieces, that one is totally dependent and related to the other. And so understanding whether it’s a good deal or not, is more than just numbers on the piece of paper with regard to that transaction, you have to look at what your total lead times are, your cash availability is, etc.
Josh Hadley 18:21
Yeah, makes a lot of sense. And arguably, Cyndi, I would probably say to all of the listeners that are listening, right, until you’ve really kind of surpassed that eight figure mark, I would probably argue that you need to purchase the minimum amount of inventory to kind of get, you know, the best price break possible. Right. But just to keep again, going back to the example, shoot for that 120 days, not the 240 days worth of inventory, as a general rule of thumb for I would say 99% of our listeners, would you agree with that statement?
Cyndi Thomason 18:59
Absolutely. I’ve absolutely, you know, the smaller sellers have so many demands on their cash. And having that big inventory numbers sitting out there. It’s not really comforting when you can’t turn around and then advertise the product to get it moving. So, you know, waiting on, you know, the seasonality to come back into play or something. It’s tough sitting there with your hands tied, because you’ve got all this inventory. And the other piece on inventory that we really haven’t talked about, but I find as a struggle for people is when they have multiple products, they kind of my husband uses the term peanut butter spread, they kind of think oh well my gross margin is you know, 50% or whatever that number is, but in reality, they may have one product that has a gross margin of 80% which was phenomenal. Or another one that may be you know, 2% and Nice, they tend to lump all that together. And being entrepreneurs what they really do is they Agata 80%, gross margin and ignore the fact that their biggest selling product, the one that’s tying up the most of their cash is the 2%. product. And, you know, understanding your gross margin. And what’s going on with each of those products that you sell is huge. Because it’s you can’t peanut butter spread it? I mean, yeah, in a financial report, you can look at it and go, Yeah, this is great. But the reality is, until you dive into the details and understand product by product, what’s going on? Which ones you really just, this is a common situation I see with clients, they will invest a lot of cash, keeping those 2% gross margin products in stock? And how are they making any money on that when they turn around and have to advertise it. And so we’d like to try to optimize that product mix so that you’re not tying up cash into something that’s a poor performer, you’re tying up your cash and things that are going to turn over quickly, that are going to bring you the dollars in and that aren’t draining you from an advertising perspective. And so you can’t just look at the totals on your financial statement, you have to dive into what’s going on with your whole product portfolio.
Josh Hadley 21:25
Yeah, that makes a lot of sense. So would you recommend them again, a business similar to ours, we have over 1300 different SKUs. So saying, Let’s go SKU by SKU and map this out, is much easier said than done? But is what you’re saying that like you should probably — it’s worth the time and effort. And even considering cutting some of those products that are only, you know, well below? Maybe that gross profit average that you have for your business?
Cyndi Thomason 21:56
Yeah, it’s indefinitely hard when you’ve got that many SKUs. And so what we do with our clients is we say, Alright, we’re gonna pick the top 10%, we’re gonna look at the top 10% that are generating revenue revenue for you, and understand what’s going on there. And how can we do more of that? And then we look at the bottom 10%? What’s going on with these bottom? 10%? Is there a way to bump it up? Or should we just get out of this business with these, you know, these 130 SKUs or whatever? And, you know, every month we say, All right, well, we we’ve got something going on with these, the top 10 And the bottom 10. Let’s take it down another tier, let’s look at the you know, from 90 to 80. And what’s going on there. And through that process, you’re not trying to do it all all at once. But if you can get the top 20% And the bottom 20%, over a couple of months, you will see a dramatic change in your portfolio, and the profit that comes into your business, and especially the cash flow. Because if you’re not spending cash to keep those bottom 20% products in stock, and then spending advertising dollars to help them move, you will see a dramatic increase in your profitability, which is those with those changes, analysis and change.
Josh Hadley 23:12
I love that. Fantastic advice, Cyndi. Now, inventory turnover ratio, right? How many turns that inventory does in a given year? Do you have any recommendations in terms of like, how quickly or what should the inventory turnover ratio be for e-commerce sellers as kind of a general average?
Cyndi Thomason 23:35
You know, typically we say 60 days is our recommendations for clients. But then we dive in because it really does depend on where they’re getting their product from, how volatile it is getting that they have, you know, what that supply chain looks like are there going to be problems. So a general rule is 60 days, but we go off of that rule considerably depending on what’s going on with that client. In many cases, clients that are set up with local suppliers can turn it around much quicker than that. And, you know, it’s a good thing to look out into, to discuss with your suppliers, what you can do to actually facilitate that supply chain so that if there are bumps in the road, you can kind of smooth those out in the book. I talk a lot about Mark who had a CrossFit equipment business. And he worked out a deal with his manufacturer in China where they would manufacture and store his product, not only in China, but then in warehouses in the US, and it was never He didn’t have to take possession of it until he had a knee bid for it. And at that point, he could send a purchase order. But they had worked out this relationship over the years where that supplier would take on the burden of holding and storing product. And so we were able to reduce his advertising days down considerably. I mean, not advertising inventory days down considerably, because he now had his product which was made in China, warehouses in the US, and he didn’t take possession of it, until he was able to ship it into Amazon. So you know, there’s all kinds of ways to work that, but it’s the kind of thing where if you, if you understand there’s kind of an inventory, industry average, then see what you can do to work to improve it. And if you’re way off the average, what can you do to start to get to that average for yourself? And, don’t be hesitant to talk to your suppliers? Because there’s, I’ve seen all kinds of deals out there.
Josh Hadley 25:58
Awesome, I love that, Cyndi. Alright, Cyndi, we’ve talked a lot about inventory is your main profitability driver. Any other profitability drivers we should be discussing?
Cyndi Thomason 26:08
Well, advertising is the one that feels like, you know, get my hand sticky here. It’s a challenge. And unfortunately, what I see happen with people is they focus on inventory, and then they’ll turn around and they’ll focus on advertising. And the reality is you have to focus on both at the same time, it absolutely makes no sense whatsoever to the advertising a product that you’re about to run out of stock on, save your money, save, you know, save your rankings. So keeping those two things in your mind together. And if you’re working with an agency to help you, with your advertising, keep them in the loop on what you know, what you can afford, for your advertising. You know, you’re talking about 1300 SKUs. So, you know, I’m sure you can probably put those into some kind of buckets, where the treatment of you know, two or 300 of them, probably needs to be advertised in this way, and the others come along with it. But use your advertising dollars. And, and really understand what it’s doing for you. This is a sad story. But it’s something I see quite often a simple ratio, we call it the media efficiency ratio is to take your advertising spend and divide it by your revenue. And if you do that for one month will be you know, but if you watch it month over month, you will start to see what your media efficiency ratio is. And as you’re spending dollars for advertising, the idea is that should be driving your income up. If it’s not, if your revenue is not going up, and you’re spending more dollars on advertising, your media efficiency radio ratio is gonna go down. And it’s you know, there’s, there’s all kinds of, of talk around, you know, clicks in and row as and one thing and another and those all have their place. But the when it comes down to the bottom line, if you’re spending misses of an example of a client, if you’re spending 50,000 a month in advertising, you should see your revenue go up roughly four times that typically, and if you’re not seeing your revenue go up, then you’re not getting a return on your advertising dollars. And one of the clients I was working with a couple of years ago, we’d worked together a number of years and I was watching — his profitability just tanked. I’m like, where’s this money going? And he would text me “Why don’t I have enough money to pay my Amex this month?” I’m like, “I don’t know.” So we were diving in. And for six months, I was telling him you’re not getting any return on your advertising. I see you spending this $50,000 But I’m not seeing you increase your sales? Oh, yeah, no, I got a buddy handling my advertising. And I get these reports every month, it can’t be that can’t be that. I’m like, well, nothing else is changing. But I’m seeing major dollars go out. I’m not seeing revenue increase. So we watch it every month, I’d say I’m still not seeing any benefit you’re getting for this expense that you’ve got. And finally after six months, he was in a pickle. And he had spent you know about $260,000 on advertising. And his revenue had not gone up $100,000 And I’m like this is I’ve been waving the flag here. But it’s time to get serious because you’re gonna get yourself in a hole you can’t get out of. And at that point he stopped and realized, but it’s just a very simple calculation. Take your dollars that you spend on advertising. And if you’re spending it on an agency or on direct you’re directing it, you’re yourself and it’s just add spin, just divide that number by your revenue is a really simple metric. But if you understand that, and if you’re not seeing a benefit of those dollars, you’re not getting a return on those in that investment. And you need to work with your agency to understand what can be done differently. So that, you know, I mean, I’m not saying people aren’t working hard, but people are working for a result. And if that result is not happening, the quickest way to see it is that the dollars aren’t coming in. And let’s get on top of that before you’ve got yourself in a hole.
Josh Hadley 30:33
Yeah, I love that. And in the Amazon, you know, for Amazon sellers, what Cyndi’s talking about that advertising percentage, is what we refer to as the tacos. Right? That’s all advertising cost to spend. Right? And so yes, take your total ad dollars divided by your total revenue. So Cyndi, you kind of mentioned you want to see like a 4X, in terms of you know, that I guess that ratio, is that correct? Like, should people be targeting that works out to be about a 25% — is that the average? Or are you seeing averages even lower just to give people maybe a benchmark about what percentage of their revenue ad spend should actually be?
Cyndi Thomason 31:18
No, I haven’t done that analysis. My experience with it has been kind of anecdotal with a few clients. But that is something I really need to look at. And so I hate to give a Benchmark Number When I haven’t done the analysis of it. But I am working with a couple of clients right now. And we’re working towards that four times number. And so that’s, that’s more of an anecdotal number than something that I want to stand behind. Because I’ve done the analysis. I don’t I don’t want to give a number that I’m not confident in.
Josh Hadley 31:50
Yeah, fair enough. But I think the principle stands true with that story that you shared. Yeah, in terms of, if you see advertising spend increasing, while revenue is not increasing, at least the same rate that you know, even then that’s a challenge, because you’re gonna have, you know, gross profit margin loss, but it needs to be going up. And if it’s not, you need to be waving a red flag saying, hey, something’s going wrong, our ad spend needs to be a lot more efficient. So I think that’s a great example, Cyndi, any other profit drivers we should be talking about? We’ve talked about inventory, we’ve talked about advertising, what else drives profit in the business?
Cyndi Thomason 32:32
Well, one thing I would suggest back on advertising for just a second, is really understand the different platforms that you’re advertising on, and experiment with them. I can’t tell you how many clients that we work with, come to us and they Oh, we’re doing this on Google and this on Facebook, and this on three, four other things. And they’ve got this poor tacos number or media efficiency ratio. And I’m like, alright, well, what happens if you cut off Facebook for this month, you know, your profitability sucks? What’s the worst that could happen? This product is kind of, you’re about to run out anyway, what happens if we just cut that off, and they come back and they go, nothing happened? Like, okay, so, um, you and I, that’s happened a number of times, I can’t guarantee that’s everybody’s response. But I can tell you, for the clients that have experimented with it, they start to learn which platforms are working for them, and which ones aren’t for each particular product, and they come away with more money in their pocket. So you know, we’re all about having money in their pocket at the end of the day. So, you know, experiment, it’s, there’s, there’s no rule that says, if you cut it off, you can’t cut it right back on, just experiment and play with it. And the experiments that we’ve seen our clients run, they have been surprised with the thing that they thought they had to do, they didn’t really have to do their impact of their sales were really coming from a different platform. So if you’ve got a lot that you’re playing, you’re, you know, you’re investing in, start playing with those platforms to see which ones are really bringing you that return. Okay, so we talked about inventory, we talked about advertising. I think the number that I would just suggest people pay attention to is gross margin. And inventory is in that of course your your fees from Amazon or in that your shipping will play into that calculation. Advertising typically is below that gross margin line. It’s what we say is you want enough gross margin to contribute to provide a contribution margin for advertising and your other expenses. So gross margin is something that people I think there’s it’s getting more attention, I think right now, unfortunately, what we’re seeing is that sellers are are struggling a little bit You know, we had the great COVID year where everything sold and you know, everything just went up like a, you know, like a rocket. And then we had lots of a cash infusion from the PPP loans or and then we’re forgiven the eidl loans at such low interest rates, but those dollars now have been kind of depleted, and sales have come back to what is more of an expected norm. And cash is tight for a lot of e-commerce businesses. And so the place to pay attention is with your gross margin. And understand it, like we talked about from a product portfolio level, first of all, understand it from your whole business. And then and to do that you have to be running accrual books, or at least modified cash where you’re running a cruel down through the gross margin line, understand what your gross margin is, and what you can do to adjust it and things you can do to adjust it or play with your price. Play with the different platforms that you’re on, really understand if all of those platforms are performing for you. We’ve talked about, you know, cutting off one advertising platform, you know, really when you look at it, and maybe being on every e-commerce platform out there is causing you to have cash tied up in inventory in play on platforms, that’s not actually moving. And it would be better for you to drop those things that aren’t selling, or those platforms where you’re not achieving very much sales, because it takes energy, it takes your cash to keep those things going. You know that 80-20 Pareto rule is just so valuable as you analyze your business. So as you analyze the 80-20 rule for your SKUs. Also, think about it from the platform perspective. Maybe there’s a school SKU that’s just doing really well at Walmart, and not at Amazon. So put that inventory at Walmart, if you’re going to keep that going. Or if you’re just getting a trickle of income coming from that Walmart platform is it really worth you having that having your attention divided to trying to keep everything going on on that game as the same time as you’re trying to work on the Amazon game, the idea of focusing is something that is not given enough attention. In my mind, I think people focusing on what’s important to drive cash in their business means that you give up toying with all of the different things that are out there, but to play with the stuff that you do, and you do really well. And so it’s not a it’s not on your p&l and on your balance sheet. But an owner’s ability to focus on what will drive cash in their business is huge, that being distracted is a huge cost.
Josh Hadley 38:02
So really understanding where your sales are coming from is what you’re referring to, right? Like how much you know is coming from the different sales channels. I think there’s a lot of people that get started on Amazon, they can get to a seven figure business on Amazon fairly quickly. And then they hear everybody else is like, Well, you got to be on Walmart, you need to be on Etsy, you need to be on target, you need to have your own website, etc. Without then considering you know, you’re now tying up more inventory, right, because you can’t fulfill orders from you know, Walmart from Amazon, or else you’re just gonna get booted off anyways, which makes it challenging to a seller. But I think that’s so important. I think that’s like a really big golden nugget that you left for our audience is that really you guys need to take an analysis and understand, you know, maybe a product is killing it on Amazon, but not doing so well on Walmart, then pull back on what you’re doing with Walmart if, and maybe even shut down that product and close it out on Walmart and keep feeding the beast that’s actually providing and generating cash and profit for your business. I think that is so important.
Cyndi Thomason 39:17
So, it’s so easy to just broad brush everything and to hear what other people are doing and to think, well, I’ve got to try that too. Because I don’t want to leave any stone unturned. But the reality is a more prudent approach is to pick one that you know, do some research people that maybe have products in your niche or whatever and pick that one and play with that and go deeper on seeing if that one thing will work and what you can achieve there. As opposed to giving everything just a little bit of attention and realizing that nothing is working quite like you thought.
Josh Hadley 39:54
Yeah, I think that makes a lot of sense. Now, Cyndi, I want to kind of turn In our conversation now to kind of the Profit First methodology, for those that have read Mike’s book Profit First, they should definitely read yours for e-commerce entrepreneurs. So Cyndi, talk to us, you know, one of the methodologies, I guess, from that book, right, is that you should set up multiple bank accounts to cover the different expenses that you have in the business, right? There’s a tax account, there’s probably an OP X account, there’s a rainy day fund account. So tell us like, how do you actually implement Profit First into an e-commerce business?
Cyndi Thomason 40:34
Well, Mike’s approach, because he’s that kind of guy is to dive off a cliff and let’s open five bank accounts. And, you know, we’ll go swim in the deep water. My approach, because I’m not that kind of guy, and I’ve seen it not work for e-commerce business, is we’re gonna go in from the beach and kind of get used to what’s going on here, and we’ll get to that deep water. But by the time we get there, we’ll be able to swim and know what the heck we’re doing. So my recommendation is to start with a quickstart methodology. And if you like, I can give you our guide for Quickstart. And you can put it in with the show notes if you’d like. Right, that is simply this, it’s you, you want to have your main bank account that you’ve had in the past, which is an optics type account, you know, your your, your business bank account is what most people would call it, that’s really going to be used for everything except for inventory, and for profit. So in our little wading into the water approach, what I recommend is what we talked about earlier, where, with inventory, you’re going to evaluate what’s happening with your sales and how much of the cogs you can then move out from your payment over to that inventory bank account. So then, in our example, earlier, we had $100,000 payout coming in, we moved 30,000 to inventory, then looking at that $70,000, this left, take 1% of that $70,000 and move that into profit. So that profit account is going to start to grow. You mentioned your rainy day fund, well, your rainy day fund is your profit account. So we’re operating them with three bank accounts, your regular biggest business checking, where that’s where you’re going to pay yourself, and hopefully, you’ve made enough of a profit, you’re gonna have to pay some taxes. But as you’re getting used to taking a significant amount of money and putting it into a checking account that you can’t touch, because you’re getting ready to use it for inventory, you’re gonna realize you’re operating with a smaller pot in that regular business checking account, we’re gonna start calling that topics for now. But what happens is, you have to most businesses that have been operating with one bank account have to get used to this idea that there’s a substantial amount of it, they can’t touch right now. And so you have to watch that optics account more closely, because you’re going to be operating with a smaller pot than you have had in the past. And the reason that this is important is because it’s based on the principle that Profit First is based on which is Parkinson’s Law. And Parkinson’s Law basically says you use what you got. So humans, basically look at a big bank account, and they start having big ideas for what they can use that money for. And the idea of paying for inventory down the road, may nag in the back of their head, but it may not get the attention that the new computer system or whatever else starts to get into their mind. And then they end up spending money that they’re going to need for inventory on something that maybe they could have lived without. And then they come, it comes time to buy that round of inventory and you don’t have the dollars. And that’s where you start to have to figure out how am I going to borrow money or whatever. So that’s the first thing get that inventory separate. And, get familiar with how that impacts your operating expenses. It may be that you can’t move all of that money all at one time. It may be that this, we’re just going to move, you know, half of it to start building up that inventory account. But I’ve got to do some work on my optics to be able to afford for all of it to be moved. So while you’re doing that process, you’re going to be looking at your optics, and you’re going to be trying to figure out alright, what can I cut? What can I reduce? Maybe I’ve got the gold plan and I can get by with the silver or bronze plan. What can I replace? Maybe, maybe I’m used to using this software, but it comes with all these bells and whistles are never used. And I could just go with this cheaper software and it does the thing I need. So what can I cut? What can I reduce, what can I replace? And then what do you have to keep? So going through that and now says typically we can cut around 2000 1800 to $2,000 out of a person’s optics account each month. And that starts to put you in a better position to do without that money sitting in your optics, because you’ve segregated it and put it over here for inventory. So that’s what’s going on there, think the 1% is building in your profit account and the flow with profit. First is, every quarter, you’re going to take a portion of your profits and reward yourself as the business owner. This is kind of like being an investor in the stock market and where you get quarterly dividends. This is your, your dividend for being the owner for taking the risk in your business. And Mike and I differ on this strategy, my strategy is, you look at your bank balance that’s in that profit account, and you take half of it to reward yourself, I recommend a different approach I like to look at, alright, what money did you put in this past quarter. And if you put in, let’s say, you put in $3,000, take half of that $3,000 out. So you’re going to take $1,500 out to reward yourself, the other $1,500 is going to stay there. And doing it my way means that that rainy day fund, which is the other side of the profit accounts, all one account, it’s got two purposes, one purpose is to take money out to reward yourself. The other is to start to build up a balance in that account. So that God forbid, you know, Amazon loses your shipment or whatever, you’ve got some cash to operate with, for a short term, short timeframe, while while you resolve the issue, your rainy day fund probably will never be able to fund you, you know, for months at a time. But it buys you enough time that you can think clearly about how you’re going to get out of this struggle that you’re in, it gives you — it buys you the freedom to think about your problem without panicking. And so that’s what I love about this rainy day fund idea and why I want my clients to build that up as quickly as they can. Because the sooner you get there, the sooner you can start to operate your business from a position of control as a position instead of a position of feeling like well, what am I going to do today to solve the crisis does your and so you know, one of my clients on a tell the story in the book, her name is Carol. She had built her inventory balance up. So we were working that well. She had also built up her rainy day fund or profit account, and Amazon lost a $12,000 shipment that she had sent in. And so she texted me and she said okay, so can I just use the money in my inventory account and buy some more until they find it because I’m gonna run out. I’m like, Yeah, that’s what it’s for, you know, go ahead and use it. Would you know that Amazon lost them the second round of inventory as well? Well, she was not happy. And she was using the Jeff at Amazon email and writing and she was frustrated. And so she’s got two shipments of inventory now lost. And we’ve got money in the profit account. She said, should I spend it? I’m like, Yeah, well, you know, that’s your rainy day fund, let’s, you need that inventory there. They’ll figure the rest of it out. But you’ve got enough money in your rainy day fund. To figure this out. She got the third shipment and it was being checked in to Amazon. And they found the second shipment. And she’s like, okay, all right, where was gonna all work out? Do you know that Amazon then closed in, suspended her account for 11 days. So in addition to now three times the amount of inventory tied up cash tied up in that inventory, she was no dollars coming in. Because of her, you know, her sales, it stopped. She got somebody to help her she got it all sorted out, it was 11 days. And she, you know, worked through that, you know, excess of inventory, they ended up finding it all, thank goodness. But the thing was, she had time to work through each of those situations because she had money in the bank. And, and to hire somebody to get her out of the worst of it whenever they quit allowing her to operate her account. So I can’t stress enough the importance of having a rainy day fund. Just another quick story that I’ve you know, I’ve got clients that operate with profit first and then I’ve got clients that for one reason or another they just didn’t go down that path. And in early March when Amazon started sending out notifications that they were going to no longer accept shipments during 2020 When COVID was happening. I would get emails from clients going oh my gosh, I don’t know what I’m going to do. I’m just — I think I’m going to cancel my bookkeeping service because I don’t know if I’ll ever sell again, I don’t know how I’m gonna get out of this. Or I got emails from clients who said, you know, thank God, we have Profit First, we’re going to be fine, it’s all going to work out. Thank you for for making sure we got money in the bank. And I’m like, Okay, which one of these do I want to have, I like these emails a whole lot better than these other kinds of emails. And that’s what what happened is we started working with clients, the ones that were using Profit First, just went through and had the money to take advantage of the, you know, the boom, that happened, whereas the ones that didn’t, we’re in a crisis mode, and then ultimately didn’t have the funds to take as much advantage as they could have of the odd situation we were all in.
Josh Hadley 50:49
Yeah, those are some fantastic examples, Cyndi, and how important it is to really focus on you know, not just living off of, you know, what’s in my bank account today. Okay, I can spend all of that right now, it’s having enough in multiple bank accounts, being able to cover different expenses. And I think that’s one of the most important things. For a business owner, as a CEO, I see your job, you have three main responsibilities as a CEO of a business. Number one is to cast the vision for the overall business, right to be able to know this is where we’re going and to bring your team alongside that right. Number two, is to make sure that you have the right people in the right seats in your business, right. Last but not least, probably one of the most important things is making sure you have enough money. Right. And that is why I think this episode is so important. I think some people when they hear oh are talking about accounting, finance, their eyes glaze over. And like that’s not important. I just need to go outsource this to somebody else that understands numbers. And I would say if you want to be a true CEO, and a real business owner, you have to invest the time to understand bookkeeping, how to read financial reports, and how to understand the Profit First methodology that you’re referring to. Because it is vital, most businesses go out of business, because of poor cash flow management, period. That’s it. And so all of these principles are so important today. Now, Cyndi, I have let’s call this like a little bonus segment here. I want to go back to inventory real quick, you had mentioned that you kind of have seen some very creative ideas of ways that sellers have partnered with their manufacturers to a extend their lead times or be able to have inventory already manufactured that they haven’t even paid for. Can you give us some of you know, maybe three or four of those kind of like creative ideas that you’ve seen in ways that people have partnered with their manufacturer?
Cyndi Thomason 52:56
I think the most creative has has been that they don’t pay for the inventory, until it’s actually shipped into Amazon. And I was surprised that this deal even existed. But it allowed that seller to have a lot of cash to be able to grow her business because she and then her manufacturer was in the US. And that just surprised me. But this particular manufacturer agreed to have all her products, she ordered it said in his warehouse, and the day she was ready to send it to Amazon was the day she paid for it. You know, there are those creative ideas along that lines of working not only with your manufacturer, but maybe with your three PL, what can you do with them, that maybe is outside of the box. I’m trying to think if there’s some others that I can can recall, you know, storage in in country is is the thing that I try to get my clients to try to figure out if there’s some way that if they’re, you know, having product made overseas, to look for ways to have it stored in country to help smooth out these big spikes of buying inventory. And sometimes the manufacturers will agree to not charge you for that. It’s unconventional, but it’s certainly worth talking to suppliers about what else other than price they’re willing to work with you on. So another thing but I’ve lost it, I’m sorry.
Josh Hadley 54:33
Those are some great ideas. I think the most important principle here is that you need to see your relationship with your supplier as a true partnership. Right, you guys are in this together and they can be honestly your biggest financing partner in your business.
Cyndi Thomason 54:56
So yeah, just came back to me. The other thing is, if you’re not getting the deal you want, then look for somebody else. I mean, many times people thought, well, I’ve got this kind of golden handcuff with this supplier. But there’s this piece of it, that doesn’t work anymore. Maybe it worked before, but it doesn’t work. Now, there are so many people and honestly, manufacturing is coming back in the US. So it may be worth looking for somebody in the US that can work with you. But don’t be hesitant to go and look for somebody else. If you’re feeling like the partnership was good at one time, but you’re not getting what you need. Don’t be afraid to look, I mean, I’ve got clients that have, you know, chemical compound type products, and they’re like, Oh, nobody else can quite produce this. And they found that they could get somebody and then once they did find somebody, then they started realizing that the situation was very one sided, and they were getting the bad side of it with their former supplier. So don’t don’t be afraid to go and look about other suppliers there. There’s a lot of options out there. And I’ve heard all the reasons why you can’t do it. But for the clients that persevered and actually did go do it. I’ve seen some really good outcomes.
Josh Hadley 56:16
Yeah, totally agree. Cyndi, thanks for sharing all those quick, quick strategies right off the top of your head, put me on the spot. As we wrap things up here, I love to leave the audience with three actionable takeaways from every episode. Cyndi, here, the three actionable takeaways that I noted, you let me know if you think I’m missing something. Okay, action item number one is focusing on the number one driver of profitability in your business, which is inventory, we just talked about that previously, there are so many ways that you need to be optimizing inventory. Number one, make sure you’re ordering kind of the minimum order quantity that you need. Don’t go for the you know, excess inventory order that covers you for a year just because it saves you 10%, right, you need to order just enough so that you can get a return on your cash quicker. Turning that inventory into cash is going to be your best way to be able to scale. So make sure you focus on that. Secondly, what you just talked about, in regards to this is an action item number two yet this is still on inventory, but really becoming creative with your partner, Cyndi, we didn’t have enough time to talk about financing and debt, because you see a lot of people, you know, kind of get into sticky situations, they end up taking loans from, you know, Amazon lending or eight-figure, sellers fi. And if people really understood what those interest rates were, they would be blown away with how much money they are spending to those people. As a quick note of reference, you’re probably paying more than 20% interest on that. So don’t be fooled by their low APR offers that they claim on the front end. Here is — I’ll give everybody the best secret hack out of all of this. If you want the best financing partner in your business, okay, you want to know who that is? It’s your manufacturer, period, your manufacturer can be your biggest financing partner. In fact, you may pay 0% financing with them. Can you take possession of the inventory? And have it be sent into Amazon before you’ve ever paid for it? As an added bonus? Could you even get that push that pay from 75 days from the moment my product arrives at Amazon? I know that’s when the term start. Imagine being able to generate sales before you’ve even paid for your product. And that might sound outlandish to others. But that is what is actually happening with many of the successful sellers on Amazon. So if you’re wondering, why can other people scale so quickly, it’s because they have a better relationship with their manufacturer in general. And so I would definitely focus, focus, focus on that relationship with your manufacturer and inventory. Action Item Number two would be focusing on your advertising spend just what Cyndi talked about, make sure you understand the ratio, right your tacos number, as a kind of general rule of thumb without data behind it 25% would kind of be your max threshold that I’ve seen, arguably in the Amazon space, I think you see like a 15 to 20% Tacos being like on the higher side but in healthy average. And if you’re below that, it probably means that you could spend a little bit more and maybe see additional increase in your revenue. But most importantly, make sure that any advertising dollars that you spend on you see an increase in revenue that is directly related to that ad ad spend. And a quick hack that you shared on that is, sometimes people are advertising on Facebook, Pinterest, Google, and they think they need to keep doing it. Whereas they could just cut it overnight. And if nothing changes in their business, you just saved yourself a lot of money, right? That happens more often than not. All right. Last but not least, this is my third and final action item. And I’m going to wrap this up to basically say, in any Amazon or e-commerce business, we’ll focus on Amazon first, there are three main drivers where your expenses go in your business. So if you can focus your time on any of these three aspects, you will drive profitability. Number one is your inventory. So what is your cogs as a percentage of your revenue? Right? Are you at 30%? Are you at 20%? The lower the number, the better, right? So talking about that kind of gross margin? But then secondly, is your Amazon FBA fees. Okay? Are you watching those fees, right, Amazon fees are only increasing. So if you’re not sequentially, increasing your price, as well, guess what’s happening over time, you’re just losing more and more and more margin. So one of the things that our team looks at is we have three, three kind of like percentages that we really look at. And that’s number one, the cogs as a percentage of revenue. And number two FBA fees as a percentage of revenue. And then the third, last but not least, is your ad spend as a percentage of revenue. Those are your three main drivers, right? And so if you can invest any of your time into any of those three areas, you can’t really change your FBA fees unless you’re going to change packaging, make it smaller, etc. That’s another topic for another day. But those are my three action items for people. Cyndi, anything else that I didn’t discuss that you think we needed to?
Cyndi Thomason 1:01:57
Well, I do think what you mentioned about FBA fees, we didn’t talk much about that. But I do believe it should be spelled out in your book, you should see some level of detail of what’s going on there. Because it’s easy to say, well, it’s 35%, or whatever that number is, and just kind of take it at hand, well, I can’t do anything about it. But if you break it out in some detail, you can start to see if something trends in a certain direction. And you know, if it’s trending up, or or you just see one month, and it suddenly went out the roof you’ve got it points you to the data, where you can go back and do something about it. And so keeping enough detail on your p&l to be able to understand when something’s changing there, and that’s when you want to dive into it. You know, most of the time, it just clicks along. But many times I’ve seen where there has been a spike in one month. And when you put it all in one big number, you can’t see the details. But if you’ve got some sub accounts where you can dive into it, you can start to see, well, this just went crazy this month, what happened there, and that gives you some clues as to where you can make some changes and improve things.
Josh Hadley 1:03:08
100%, certainly we could go on for a whole other hour. Cyndi, as we wrap all this up, I love to ask each guest the following three questions. Number one, what has been the most influential book that you’ve read and why?
Cyndi Thomason 1:03:22
Um, most recently, I’ve read a book called Buoyant, that’s about creativity, and bringing creativity into your work. And I am, it’s really changed the way I approach my day and how I approach my business.
Josh Hadley 1:03:37
I love that. I’ve now got that added to my list. I have not heard that before. All right, question number two, what is your favorite productivity tool, or maybe a new software tool that you’ve recently discovered that you think is going to be a game changer?
Cyndi Thomason 1:03:52
Oh, well, I know, like the rest of the world. I’m in love with ChatGPT. It’s just amazing what it can do. I think the application within ChatGPT that I’ve really enjoyed recently is taking our meeting notes and asking it to summarize those meeting notes and you know, instead of having to go back through myself and pull out the main bullet points having the software do that has been really helpful for us in our team.
Josh Hadley 1:04:23
I love that that’s a great use case as well. Genius. All right, Cyndi, last but not least, who is somebody that you admire or respect the most in the e-commerce space that other people should be following and why?
Cyndi Thomason 1:04:35
You know, I really, I really like what Andrew Youderian does at E-commerce Fuel. And I participate in that community and learn a lot from those folks. And so I know he also has a podcast and some live events, but that e-commerce fuel community has been really helpful to me.
Josh Hadley 1:05:01
I love that. Andrew is a good man. Yeah, good guy. Cyndi, this has been fantastic. If people want to follow you, they want to hire you for your bookkeeping services implement Profit First and their business. Where can people follow you and learn more?
Cyndi Thomason 1:05:16
Well, we’re on Facebook, LinkedIn, Twitter, of course our website is bookskeep.com. And my email address is Cyndi@bookskeep.com. We’d love to hear from anybody that has questions or, you know, have something they’re struggling with, I’d be glad to try to help.
Josh Hadley 1:05:35
Awesome, we’ll send it. Thank you so much for your time today. And I think we’ll hope to have you on the show again, and we’ll dive even further into profitability of the business.
Cyndi Thomason 1:05:45
Yeah, I’d love that. I’d love to talk about what to do with all that cash that you have after q4 and because I know as people get ready for their tax time, it can be a struggle, so I’d love to talk about that at some point. It’s been great, Josh. I’ve enjoyed it. Awesome.
Josh Hadley 1:06:03
Thanks so much for your time, Cyndi.
Outro 1:06:06
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