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71. Breaking Down the $20 Sale: Understanding Revenue, COGS, and Profit Margins with Nick Pasquarosa
00:49:50
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- [00:00]
Nick
You can be also doing your bookkeeping, and that may be good just to get you ready for tax filings, but it doesn't mean that you're actually getting value out of what you're doing. Doesn't mean that you're properly setting up all your revenue categories, doesn't mean that you're properly setting up all your direct costs or you're including the right things in your direct cost.
- [00:17]
Cody McGuffey
Hey there.
- [00:18]
Welcome back to the Built Online podcast where we talk about all things online business, from e commerce to digital marketing, to building your dream life and your dream business. I'm your host, Cody McGuffey, and if you've been with us for a while, you might remember us as the Etsy Seller podcast. Well, we're expanding, expanding our horizons and transitioning from just talking about Etsy businesses to covering all types of online businesses because we believe the opportunity is so massive that we should be covering so many unique businesses online and at ever be. We believe that everyone deserves the opportunity to pursue their passions, live life on their own terms. And we believe in making e commerce accessible to everyone in the world, no matter where they are, and be using it to make a positive impact in our families and in our communities. We believe that anyone who truly commits to something truly pursues it with undeniable force of will, that they will succeed. Let's jump in to today's show.
- [01:15]
Nick, what's up, man? How are you doing?
- [01:17]
Nick
Great, Cody. Thanks for having me on the podcast, man.
- [01:20]
Cody McGuffey
Super happy to have you on, selfishly, because I want to learn a lot more about tax and accounting, especially when it comes to E commerce and our e commerce creators. But also I just want to learn more about you and bookkeeper360 and kind of your story too. So if you don't, if you don't mind, just jump in, man. Like who is Nick and tell us your story.
- [01:40]
Nick
Sounds good. So my name is Nick. I'm the founder and CEO of Bookkeeper360. Bookkeeper360 is a solution for small businesses. We help automate and streamline all the messiness of doing bookkeeping for small businesses. We have over 1500 customers across the country that we serve and a lot of those customers happen to be in the e commerce industry. So we've been around for over a decade. I founded the company in 2012 and we provide everything from bookkeeping, helping out with bill pay, payroll solutions, tax preparation, advisory services. And we ventured out about four years ago and started developing our own software that integrates with QuickBooks Online, Xero Gusto, payroll, to name a few of the platforms. And that helps bring, you know, analytics to small businesses. So to get easy to understand dashboards so they can see when things are going good. You know, there's green indicators, and when things are bad, there's red indicators. So my background is in taxation. I have a master's in tax, and I could be a cpa, but I never decided to sit for the exam. But, yeah, we love working with small businesses. That's the bloodline of our business, and that's. That's why we serve small businesses.
- [02:52]
Cody McGuffey
Thank you for that, man. I think it's. It's exciting to have you on because accounting historically is just not like an exciting thing or it's. It's like not a fun thing for people to talk about, typically when it comes to tax or accounting. But for someone like you, it probably is exciting. Right? And that's kind of the beautiful thing about. It's not.
- [03:09]
Nick
No, I think. I think it's so counting trends to be the most boring subject possible. And historically, people just use it as a compliance function. Like, I gotta do my bookkeeping to get my taxes done, because if I don't do that, I'm gonna get fines and penalt. And, you know, Uncle Sam says I have to file a tax return. However. And what I realized when I went to, When I went into school to do accounting, that was the first time I was experienced when I found it was very boring. But I found that by doing bookkeeping, you were able to see the ins and outs of a business, and then you were able to see the more colorful aspect of it. When you're able to bring that back to the small business owner, then educate them on what's happening in the business. So that's the exciting part about accounting. But traditionally, accounting is a very boring industry industry. And it's very kind of black and white, if that makes sense.
- [03:58]
Cody McGuffey
Totally does. And thanks for sharing that too. I. I agree. And I, I think the biggest thing is, like, accounting and taxation and all this stuff is kind of scary for, like, a small business owner, right? Because you're worried about, like, somebody coming in, like Big Brother coming, watching over your shoulder every. Every move you make. And you better not make the wrong move, otherwise, like, you're just gonna get penalized and gonna get crushed for whatever reason. We've all heard horror stories, but what I've also learned as being a business owner myself is this can be solved with, like, just the proper maintenance and systems in place. Like, a lot of that stress can be alleviated with just with the right team, with the right systems in place, with the right mindset around it. And I was hoping today that we can talk about kind of the fundamentals of accounting of why it's even important for an E commerce creator or any kind of online business creator, and then we can just kind of see where the conversation goes from there. What do you think?
- [04:55]
Nick
Yeah, that totally makes sense.
- [04:57]
Cody McGuffey
What do you think is like why would, from your words, why do you think you need to be thinking about accounting if you're a small business right now and you're not even thinking about it at all?
- [05:05]
Nick
So accounting is critical because you're required to do it from a compliance standpoint. As we discussed, you have to file a tax return and or in order to do that, you have to have organized bookkeeping. So as a operating business in the United States, you have to do that. However, you know, bookkeeping enables you to do so much more as an E Commerce, particularly as an E commerce business. To better understand your business. Let's just take for example, if you're selling a widget online that you know you're selling for $10 and it costs you $5 to make it, and then you're, you know, you're increasing your ad spend to increase sales and that new ad stand is ad spend is costing you $3 per product. Now before you know it, you're left with, you know, $10 of revenue, 5 dol of direct materials and $3 of advertising. You're not left with very much. And a lot of times if you're not, if your bookkeeping is not organized and it's not well kept and things are not properly coded to the right areas, you'll be flying blind. And a lot of times you'll just be doing things haphazardly and then you'll run into cash flow issues and that leads to a lot of other stress in the business that can be avoided with the right books and accounting setup.
- [06:14]
Cody McGuffey
I love that. I think I love accounting and bookkeeping and stuff because I can look at it and I can get a peace of mind exactly where I am in the business. Like it tells the story versus oh man, it's not the end of the month yet. I hope that like we had a great month or I hope it's not the end of the year yet. And I hope that we had a great year. But we'll see. It's like that's how I think. In the past, my personal family has operated businesses like they didn't really know where their profit was going to be at the end of the year until it was after the end of the year and they couldn't make decisions. And it caused a lot of stress. I remember just a lot of mental emotional stress. And you're saying with the accounting and bookkeeping systems that this doesn't have to be the truth.
- [06:54]
Nick
It doesn't have to be. It doesn't have to be. And traditionally that's how it was. When you look at the accounting profession in itself, you know, over the last 10 years a lot has happened and a lot has changed as far as accounting technology. A lot of cloud accounting systems like Xero and QuickBooks Online have come to market and that has given the power to small business owners to get real time numbers and they can see where they stand while working with an accountant that can professionally make sure that their, you know, their bookkeeping is kept up to date. Take your family's businesses, you know, into consideration for a second. Like I'm sure that they had an accountant. The guy was probably a really smart accountant, but they probably only spoke to that accountant maybe once a quarter, once every six months, even once a year just to do the taxes. And that point in time, then it's like, well, what's the surprise? You know, did I put enough money away for taxes? Am I, you know, am I going to have enough money to make payroll like next year or if I have to buy a piece of machinery or equipment, depending on the business? That all like was, you know, left up to guessing work. And like with cloud accounting today, and this is something that QuickBooks Online and Xero have really changed the game with, it allows a small business owner to run their business in real time, get the data from the banks on a real time basis and then have a professional like bookkeeper, 360 do all the grunt work. And then what we typically do with our clients is have monthly meetings so there's no surprises at the year end that you didn't put enough money away for taxes or you had, you know, you had the opportunity to maybe buy additional goods at a greater discount if you're buying the volume. So you know, when accounting is properly used, it's more of an education tool for small business now more than ever.
- [08:34]
Cody McGuffey
You know, I love that and I like that because we talked about like the why it's important and we just basically solidified that accounting is important. It is. Bookkeeping is important for your mental health, for the business health, for your family's wellbeing. Like you want to understand where you're currently at. And that way you can make better decisions for the future. So we nailed down, like, why it's important. Now if we can talk about kind of like the fundamentals. Let's pretend that somebody listening to this is they've never hired a bookkeeper before. They've only filed taxes, personal taxes. So this is their first time kind of even thinking about business taxes. And they don't really understand what, maybe even what revenue is, what a bookkeeper really supposed to be doing, what kind of things they're supposed to be expecting from a bookkeeper. They don't necessarily understand what different financial statements are important to run a business. And we could talk about some of those things. High level. They, they kind of understand cash flow as, like, the general term, but they don't really understand, like, what it actually means. They don't understand what EBITDA means. Can we. They don't, they don't really know the difference between gross margin, gross profit, and, you know, net profit. Let's kind of like shape this conversation around that person, if we can. And. Yeah. What, what are some things that they should know at the fundamental level?
- [09:53]
Nick
Yeah. So the first thing that they should know is not to be scared because there's a lot of solutions and resources out there to help them do it and also educate them along the way. We always like to say, well, the first, a lot of business owners, they fall into a passion, then they realize, wow, I'm generating a few bucks. Then that starts taking off. Then maybe you're doing a few thousand dollars a month. And then you start, you know, you start to realize, well, maybe I got to, you know, take a better, get a better look at this. And that also comes down to like, hey, should I incorporate a business? Should I be an LLC or should I be an S corp? Those are all really important decisions. Depending on how you plan to scale the business, if you're going to have different partners in the business and the way that the business is taxed, once that's all set up and thinking about the ins and outs of the business, it's a pretty straightforward formula. But a lot of small business owners struggle with this because they're usually used to only managing one thing. It's just their bank account balance. As long as there's a healthy amount of money in the bank, everyone's happy. But, you know, once you start taking out like a, you know, a line of credit or you start, you know, using a credit card, you know, you're not, you may not be considering that you may have a lot of money in the bank, but you also have a lot of debt and you may have interest on that debt and then you're gonna have to have payments on that debt. So when you are using accountant or bookkeeper, our job is to make sure that we provide you with statements such as like a profit and loss, which will tell you your revenue, your direct cost. So if you're an E commerce business, for example, if you're selling on Etsy, all the money that you received from, you know, your Etsy sales. Now Etsy does take, you know, their fees and you know, cost to doing services and then that would like be a direct cost. And then if you have materials that you had to, you know, provide and buy to, you know, fulfill those, those orders, that would also be part of direct costs and cost goods sold. And then that's your, that's your gross profit. Now let's say if you're a operating business and then you have like a overhead, you have some, a warehouse, maybe you have someone helping you out, package orders and stuff like that, and you have some other miscellaneous expenses. Those are typically your general and administrative expenses. And then after you subtract your revenue versus, versus your direct costs versus your operating expenses, that becomes your net income. And that's what you're taxed on as a business owner. And then depending on the tax, the tax entity that you are, like an LLC or S Corp, there's different taxes that you're applicable to as well. So that's the profit and loss. And then you also have a balance sheet which is quite honestly more important than a P and L. And the balance sheet is a point in time. It can be on a day at the end of a month. And that tells you how much cash you have in the bank, how much your liabilities are, your outstanding obligations, and then ultimately how much equity you have left in the business.
- [12:39]
Cody McGuffey
I think we probably lost a few people here, so I'm going to try to circle back and dive deeper and double tap on kind of everything. So you talked about two things, two statements. So far it is the profit and loss which is exactly showing like, hey, January, you did this many, this much in revenue. This is what your costs were. Here's your gross profit. Oh, and then also you have the operating expenses. Right. And like maybe that's your, your rent.
- [13:04]
Nick
More cost, whatever it may be.
- [13:06]
Cody McGuffey
Warehouse. Yep. And then that, that will be your net profit or your loss for that month of January. Correct?
- [13:13]
Nick
Correct. Yep.
- [13:14]
Cody McGuffey
Beautiful. And then you also mentioned another financial statement which is the balance sheet. I think this one is probably tricky for people because you mentioned that it's one of the most important things. But the majority of people listening to this right now have no idea how to use this as a tool. And I personally like to learn from you as well. Can you explain to me why this matters so much? Like when you say like equity in the business and like how much cash you have, can't you just look at your bank account? Like, why is the balance sheet so important?
- [13:40]
Nick
Yeah, perfect. So if you're just looking at your bank account balance and let's just say you bank with like Chase and you have $10,000 in the bank, that's great. But if you have $20,000 out that you own credit cards, you actually have negative liquidity in the business. You have less money in the bank than you do having credit cards. So that's why it's very important that small business owners use a balance sheet and they understand it because that helps give a granular picture on the health of the business. The balance sheet is like a health check on the business. And for e commerce businesses, a lot of times you may have like, let's go back to that same example. You may have $10,000 in the bank, you may have $20,000 owed on credit cards or like a line of credit, but you may have $50,000 in inventory. So that, so in that case you have maybe $60,000 in inventory and you know, and between inventory and cash you may have $20,000 in debt. So you then have positive liquidity there. And a lot of small business owners, especially e commerce businesses, sometimes don't always realize that their inventory is cash and that the faster that they can convert that inventory into sales, that will give them cash flow that helps them fund other operations in the business, but you know, rebuy new products market for the business. So if you were to just look at the profit and loss, which is typically an easier formula for a small business owner to understand, that's great. But the balance sheet is really where a lot of the, a lot of the opportunities are that a small business owner typically needs to understand to how they're going to scale the business.
- [15:11]
Cody McGuffey
That's interesting. Okay, cool. And so to dive deeper, and I want to go back to the profit and loss for a second and just kind of dive into these specific line items. So revenue, let's define what revenue actually is for. Let's call it an Etsy seller or someone that sells their website like on Wix, Shopify, whatever it is, or Anything like what would be revenue? What would you consider revenue?
- [15:34]
Nick
Revenue is the gross sales for your products that you're selling. So if you're selling on Etsy, any your Etsy sales that come in, if you charge for shipping, anything that you're collecting money for in exchange for a good or service is considered revenue.
- [15:49]
Cody McGuffey
Beautiful. So I sell this cup right here and I sell it for $20. That's revenue. $20 revenue. Correct. Beautiful. And now what if I charge $5 for shipping on this?
- [15:58]
Nick
The $5 for shipping, that's considered revenue for shipping.
- [16:02]
Cody McGuffey
Beautiful. So total of $25 in revenue there. Now what if I charge a personalization fee to say like, oh, you want your dog on it? Okay, cool, extra $5, what would that be considered?
- [16:13]
Nick
That would be considered like another revenue category. And with proper reporting you would probably want to separate that so you can see what the actual tangible goods are. So if you're selling like that cup for $20, you'd want that possibly in one category and then as a add on or a premium upsell, you'd probably want to put that $5 for the customization in another category because that could also then help understand how much your re. How much of your income is coming from different sources, which we could talk about, you know, maybe later on or a different, you know, you know, another podcast of like, you know, how do you start using this information that exists within your financials that you probably don't even know exists to make better business decisions.
- [16:53]
Cody McGuffey
Yeah, levers for sure. Okay, cool. So revenue. Got it. Now cost of goods sold and you call them also direct cost, is that correct?
- [17:01]
Nick
Yeah, same thing.
- [17:02]
Cody McGuffey
Beautiful. Cost of goods sold or cogs or direct costs. And specifically I'm going to throw you a curveball. And there's two types of. There's three types of people that really listen to this. And I've also been dipped in all three of these as well is there's the inventory, like the E commerce entrepreneur who has literally like these cups in their warehouse or in their garage and they're shipping them. There's that type of person and there's person number two, which is a print on demand seller which is like someone that doesn't have any inventory at all. They use a company like, called Printify or Printful or Gelato or something like this. And they literally don't pay for any inventory and they just only pay per. You understand that model, right?
- [17:42]
Nick
Yep.
- [17:43]
Cody McGuffey
And then there's the third one which is, I was gonna say the handmade type of seller who has, but they, they actually. It's the same thing as the inventory, I would say probably the handmade raw.
- [17:53]
Nick
Materials that go into the production of it.
- [17:55]
Cody McGuffey
Yeah, yeah. So sorry. There's also another one digital seller person who has created a product one time. It's a digital product, let's call it like the bookkeeping template guide. Right. And it's a financial sheet and it's called like, you know, and you sell for $20 and it's like it's a Google sheet essentially, and it's totally digital. They made it one time and they can sell it over and over and over again forever. Can we talk about cost of goods sold for each one of those things?
- [18:20]
Nick
Sure. So the first one, first example is someone that's actually holding inventory. So maybe they go out and they buy 100 mugs, for example, and then in the period of, let's say September, they sell 10 mugs. So to do proper accounting. And there's a difference between cash and accrual basis accounting, 101 of that, not to go too deep into it, is that cash basis accounting is typically not the best for all small businesses. Cash basis accounting, you typically just recognize income and expenses like when you pay for those items or receive that money. And it's a very limited way of viewing the performance of a business. Accrual basis financials is what all small business owners should be operating on, especially those that are selling product. Because accrual basis allows you to allocate those costs in the periods when you recognize that revenue. And I'll give you a specific example of that. So let's say if I went out to that a wholesaler and I purchased 100 mugs that I'm reselling on Etsy, and those hundred mugs to you would probably record that as you put those hundred mugs into inventory. And then if you sell 10 mugs, you then pull out these specific costs just for those 10 mugs in that period when you sold those 10 mugs. So if you look at your financial statements for that period, you see the revenue for the 10 mugs and then you see the direct costs for those specific 10 mugs. If you were using a cash based accounting, you would see only 10, you'd see the 10 mugs being sold in that period, but you'd see the cost for 100 mugs. So you'd actually show a negative gross profit for that period, which is not really a truth, truthful picture of what's going on in the business. So to your example, so if you're holding like inventory like that and you're buying it, that's typically what you would see on like your P and L for that, you know, that month for those sales, you know, and you then see your margin for those 10 mugs that you sold.
- [20:11]
Cody McGuffey
So the takeaway there is if you're holding inventory for sure and the best practice is to be on accrual based accounting. If you don't know what that is, you could ask your accountant, you can Google it. It's cash basis or accrual basis. And you're saying you highly suggest most businesses be on accrual base.
- [20:25]
Nick
Absolutely.
- [20:26]
Cody McGuffey
Yeah. Okay, so the inventory they we talked about, cost of goods sold for that. Did we finish that? Yeah. Okay, now print on demand.
- [20:36]
Nick
So something like print on demand, if I understand that's correct, it's a kind of a drop shipping situation. Yep. So it's not really that much different from holding inventory. The only difference is that you're paying a third party provider for those goods and services and free. So if you're selling those 10 mugs, but you're using a third party to fulfill and prepare those goods that are going out for sale, whatever that third party would invoice you for those volume of goods, that becomes your direct costs. So even though you didn't properly have those in your hand or in your warehouse, doesn't mean that they're not direct costs. There's still a cost of doing business, the cost of sale, providing sales. So that would then still go into your direct cost with that model.
- [21:22]
Cody McGuffey
Beautiful. So as an example here is let's, let's call this a 20 cup that we just sold online for revenue. And then we have now I have to go and I got that order. Congratulations. I'm super happy. I'm going to go to the platform, the print on demand platform. I'm going to place that order and it's a $10 purchase. Right. So I purchased it for $10. Also it charged me $5 for shipping. So $10 for the cup, $5 for the shipping and now congratulations, the customer has it and they're super happy and they love it. Now in this scenario, $20 was my revenue was $15. My COGS, my cost of goods sold.
- [21:58]
Nick
Yes, whatever. Yes, whatever. Your cost went into supplying you the product and the shipping to complete that sale.
- [22:04]
Cody McGuffey
Beautiful. So the cost in the shipping as well. Okay, perfect. Now jumping back to the inventory model, the shipping to fulfill that product was $5. Let's say in that scenario too, using the same exact scenario, is that still cogs as well. If it cost me $5 to ship that.
- [22:20]
Nick
There's different opinions on this. Sometimes you do see that below the line in operational expenses for shipping. I personally think that, you know, typically that if you're, if those sales are outbound for sales orders that you're fulfilling, I typically like to see those in gross cost of good sold because they are variable in nature. That if you sell more, you're going to have more of those variable sales. So they should be broken up. But they, I typically do advise that they're in cost of goods sold.
- [22:46]
Cody McGuffey
I like that. The way I've always thought about cost of goods sold is whatever it takes for you to actually deliver the specific product or service to the customer. And so if that costs you an envelope and it costs you the person to ship that thing out and then also the postage there, I would probably factor that in there somehow it to be cogs. I know there's, like you said, there's different opinions, but yeah, you bring up.
- [23:08]
Nick
Labor in the first example that you spoke about. When you have maybe a warehouse and you have, you know, personnel may be helping you like ship those goods and package those goods up those, those, those additional costs besides the overhead of the warehouse, that's typically in fixed costs. But if you have labor hours that are going to like packaging those goods and like boxes and other supplies that typically goes into your, you know, your cost goods sold as well.
- [23:31]
Cody McGuffey
Oh, interesting. Okay, I didn't actually know that. That's interesting. Okay. Now the third example was digital product seller. So they created this bookkeeper templates, right? It's $20. They sold it online for $20. They got $20 in revenue. What's the COGS?
- [23:44]
Nick
So the COGS is typically going to be a lot less and you typically have to amortize that over the period of the use of. Use of that template per se. And if you're creating like an online template, depending on how complex that template was, there's typically probably not a lot.
- [23:58]
Cody McGuffey
Of cost, $500 between everything and $500 worth of finances or into that package, into that product.
- [24:06]
Nick
I mean, so typically you'd want to amortize those additional cost, the initial costs of building that template and the usable life of that template. And then you would expense that each period, each month that you're selling that product. And then eventually over time, you probably would not have direct cost because you've fully expensed the, you know, what it costed you to create that template in the first case. So in example, save the five, save the template that cost you $500 to make if you want to amortize it over, let's say like a year, and then you have sales over the course of like 12 months. You know, after, after 12 months, once you fully amortize that template, you're not going to have a lot of additional costs because you're ready to fully, you know, expense those costs.
- [24:48]
Cody McGuffey
Beautiful. So if it's $50, then you just do the $50 over the one year and this turns out to be. And then what about year two? It turns into basically nothing. Right. Your cogs is zero Cogs.
- [24:58]
Nick
Yeah. You have no more fulfillment costs unless you have some other electronic delivery costs or something else that, you know. Yeah, you may have, but typically you have really high margins on that type of, you know, business.
- [25:08]
Cody McGuffey
Then how about like the commissions, like Etsy commissions or Amazon commissions or any of these transaction fees where they're not factored into costs. Cost.
- [25:17]
Nick
They definitely should be factored into. Cost gets sold because they are variable in nature like merchant fees and Amazon fees and Etsy fees that if you, if they're a cost that's directly attributed to, you know, generating a dollar of revenue, they belong in direct cost because that will help you and what your profitability is on, you know, on those products and goods that you're selling, then Beautiful.
- [25:40]
Cody McGuffey
Okay, so that's actually a very important piece for anybody too, is. So if you're selling this $20 cup online and it costs you $10 for the cup, $5 for the shipping, that's $15. But you also need to factor in the. Let's call it, let's call it $3 for all the Etsy fees, all the shopify fees, all the whatever fees. $3 total, that's another $3. So now it's $18 cost of goods on a 20 revenue.
- [26:05]
Nick
Exactly. And to your point, like without having that properly documented in, in the right buckets and the right areas of your profit and loss, you're selling some for $20. I forgot the question. So it's five. You're thinking you're making 15 for every mug you sell, but in reality you're making less than that because you have other costs that are associated to selling that product. But, you know, maybe they're like behind the scenes and maybe Etsy, the way that they bill you, may they bill you like once a month or it comes out of the net settlement or something like that. So that's where if you don't have proper bookkeeping, it comes to the point where you're not really managing the business. You're not understanding the economics of what you're doing as a business owner.
- [26:42]
Cody McGuffey
Completely agree. Okay, I love that. So I know we're just using this at high level numbers, but at the end of this, at the end of this example, you have a two dollar of the cup example, we have a $2 net profit. Or would you call that net profit or what would you call this? A gross profit?
- [26:55]
Nick
That's gross profit. That's before other expenses. Let's say if you have computer, you know, and Internet and you have a warehouse and you have, you know, a vehicle for the business, those are all things that are generally in like general administrative. So after all of those bundle of expenses and those expenses typically tend to be fixed expenses. A lot of times for like an E commerce business, the variable expenses are typically in direct costs. A lot of the fixed expenses typically are in overhead and operating expenses. After that, that becomes your net income which is what you're taxed on as a small business.
- [27:30]
Cody McGuffey
Beautiful. And so for, in this cup example, it's a 2$2 gross profit on a $20 revenue. That's a 10% gross margin. This is a bad example because that's a very low gross margin. We should bump this thing up a little bit and let's call it only $3 for shipping and whatever. Let's. The point is, let's make it just because.
- [27:50]
Nick
50% gross profit margin.
- [27:51]
Cody McGuffey
50%? Yeah, just because we control the narrative. Right. So 50% gross gross margin. Now you have. Now below this, now we're talking, talking about the profit and loss statement still. Now below this, you said we have these other costs. This is where electricity comes in. This is where warehouse space comes in. This is where you have an office space in your home office and it's 200 square feet. This is where this cost comes in. What other things are factored in to this cost? Operational cost?
- [28:18]
Nick
Yeah, it could be, it can be the owner's salaries as well or if you have employees like they're helping out with certain aspects of the business. If you have like a marketing agency that's you're using their software or they're helping you do branding. Those costs are typically in sales and administrative as well in those areas. So all those costs added up become like your, you know, your operating and what they call below the line expenses. So in your. Yeah, in your case like you can have a cup that you're selling for $20. Your direct costs are $10. That means you have a 50% margin and that's, that's pretty healthy for a business. But you can't stop there. You have to think about all the other costs that, you know, we just explained. And let's say if those are 25%, then you're left with 25% net income. And that's much different than, you know, thinking you're making 50% profit on what you're selling versus you're really in reality making 25% to the bottom line at the end of the day.
- [29:09]
Cody McGuffey
Completely agree with that. So all the subscriptions that you have to operate your business, all those, those, those costs, all need to be bloodline. And their operational expenses, such as Bookkeeper360. Right. If someone is paying for Book 360, that would be operational expense. If they're paying for every subscription, then that would be an operational expense. All these things would kind of fall into that. And yet at the end of the day, let's call it at the end of the day, you eventually get to this bottom number, which is if they only sold one unit, you're not going to be profitable in this, in this case, usually. But if they're selling, you know, a thousand units or 100 units, then they're usually going to be profitable. And what's a healthy net profit margin in, in an E Commerce, I guess, business, or really any businesses, what do.
- [29:51]
Nick
You think it can really range. Some businesses are very much different. Like a restaurant, for example, is going to have a much lower net profit margin than, you know, E commerce business. Typically a healthy range that gives the owners enough luxury to reinvest profits into the business while taking a healthy, you know, sense of distributions. Whatnot typically tends to be like 30 to 40%. But you know, every industry is quite differently. So.
- [30:16]
Cody McGuffey
Okay, so for you to have a 30% net profit margin, what kind of gross margin would you typically have to have? What do you see in your.
- [30:25]
Nick
Somewhere around 60 to 70%, you know, because if you're 100% in sales, let's say like, you know, 30 to 40% is going to be direct cost typically. And then, you know, operating expenses could be another 20, 30% typically.
- [30:39]
Cody McGuffey
Okay, so 70% gross margins would equal probably about 30, 30 to 40% net profit margin at the end of the day, assuming you have some volume going and you're kind of operating the business as a business at this point.
- [30:52]
Nick
Exactly. Yep.
- [30:54]
Cody McGuffey
Beautiful.
- [30:54]
Nick
And those are important. Like, those are very important. KPI's that. So this is something relating back to your profit and loss. And if you're using a Bookkeeper or you're looking to get geared to transparency out of your financials. Something you should ask your bookkeeper accountants, like, what is my gross profit margins on my direct costs and what are my margins on my net income? And that's something you should track as a percentage, not necessarily as a dollar, because it's very easy to say, wow, I made like $10,000 this month. And that's probably, maybe that's good, maybe that's really bad. But as it relates to a percentage of revenue, that's when you start understanding trend analysis and understanding, well, am I in line with my expectations or am I not saying you made $10,000 a month in cash, like profit is very different than saying, I mean, 2% net profit margin. It could be the same, could be the same situation. But you know, if you're, if you're saying, oh, I made only 2% net income, that sounds a lot different than saying I made $10,000. Because with E Commerce business or any business, your, your expenses can change very rapidly for factors that are out of your control. And you're, if you're only operating within a 2% net profit margin, like you can get wiped out. And you know, if something drastically goes up, like a shipping cost or one of your supplies or suppliers increases their prices by like 5%, you can then have negative operating profit. And then, you know, then you start dipping into cash reserves or you know you're borrowing money and you know, that's when businesses tend to get into some trouble.
- [32:23]
Cody McGuffey
Then you mentioned, like, talk to your bookkeeper or your accountant about like, what is my gross margin? Is that something that somebody can expect their bookkeeper or their accountant to know off the top of their head? I mean, is that something that's just expected across the line when it comes to, when you hire bookkeeper360 or any other service like this?
- [32:42]
Nick
Absolutely, because any modern or up to date bookkeeper is going to be using a software like QuickBooks Align or Xero. And as long as the things are categorized in the right areas, those, you know, gross profit margins and those metrics are very easily extracted and calculated within those platforms.
- [32:59]
Cody McGuffey
Interesting. You know, I wish I would have known about this stuff when I was first starting out in E Commerce. I just didn't know any of this. I did everything kind of seems like it was wrong. I did things like cash basis. I was doing things on my spreadsheet by myself and it wasn't even in QuickBooks. And I was just trying to like figure it out and try to make Decisions based on, best of my knowledge, common sense. But if I would have had, like, somebody that was kind of on my team and it kind of like knew how to do accrual accounting, I feel like I would have probably sped up the success process a little bit more because I was thinking I had the right mindset. I believe I just didn't really know how to apply that mindset properly in the accounting world. That's interesting.
- [33:32]
Nick
Yeah. And Cody, what we discussed before too, you're selling on Etsy and let's say you're selling also maybe on Amazon, and you're also selling different types of products. We've seen businesses most, most of the time. So anyone listening to this podcast, if you're not doing this today, don't feel bad because many small business owners are not organized and they, they come to a reflection point where maybe they think they should have more money in the business than they should or they want to expand, but they don't know how because they're not understanding how they're going to reinvest money into the business. But like, you know, a lot of times when businesses come to us, they have nothing. But the right way to set this up is that your financials tell a story about your business. So you should understand what your margins are by selling on Etsy and you're selling on Amazon. And if you have different product lines, say if you sell like household goods and you sell automobile, like, you know, you know, accessories or whatever you're selling, you know, those businesses, those product lines can be within one business and one brand, but they can also have very different margins. Your household products may have, you know, you know, much higher margins. Your automobile products may have much lower margins or whatever it may be. So it's important that you properly organize this so then you can understand if you want to scale the business. Well, where are my opportunities to scale? You know, would you rather invest money into a segment of the business that's only generating you, let's say, 30% gross profit margins? Whereas if you have the right information and you're seeing another segment of the business can be helping you generate 70% gross profit margins. If you have, you know, $1,000 to spend in marketing, you're much better off investing it on the, on the mar in the product that's going to, you know, wield you more margin. Right. So that's when, you know, when business owners start to be able to, you know, get out of like, hey, I'm just doing my bookkeeping for compliance and to file a tax return so I don't get a penalty. That's like, that's like old school thinking. You start, you have to start thinking like how can I, I'm paying for bookkeeping. How can I use this information to make a better business decision tomorrow?
- [35:30]
Cody McGuffey
That's so interesting for. I completely agree with this by the way. What is the typical revenue range that people are actually thinking about that making that next step? Because it took me a little while like I was when I was like the hobbyist and I was trying to figure it out and try to create a sale online. It wouldn't make sense for me to you know, use bookkeeper360 or really, really even hire a bookkeeper because I was like kind of make not even making any sales. I wasn't even sure how to create sales. When do you think that really is Makes it really clear that hey, you need to hire like somebody to either figure this out yourself and do it yourself properly or hire somebody.
- [36:06]
Nick
We find that typically businesses. So at Bookkeeper360 we work with a lot of different businesses. We work with pre revenue companies that have no revenue but they have a lot of expenses and maybe they have like a venture back or you know, they've invested, you know, personal funds to get the business off the ground. So revenue is sometimes not always the best indicator but for E commerce business it typically is because you're selling goods and you know, you're making money. So like revenue, typically a business starts to ask themselves those questions when they reach like the 3 to 5 to 10 thousand dollar revenue mark per month where their, their hobby or passion has now become something with momentum. And that also triggers other things like you know, how am I going to file my taxes? Are there more advantageous tax strategies whether I want to be an LLC or S corp. And if you're a S corp you have to then start taking payroll as a officer of the business. So it becomes more complicated. And as you get to like that hundred thousand dollar mark on an annual basis, that's typically when a lot of small business owners like you know, throw, take the hat, throw it out and say like okay, I got, maybe I don't want to do the bookkeeping anymore and you know, may I have to outsource to a solution like Bookkeeper360 and yeah, that's typically kind of that boiling point. Or it could be sooner, it could be sooner too when they're selling a lot of products but, and maybe they're buying a lot of inventory and they, you know, run out of Cash. And they're like, well, my sales are up and I have all this inventory but I have no money in the bank. I can't pay myself, I can't pay my, can't pay my bills. So there's a lot of different emotions that will hit a small business owner that then will drive them to seeking professional help. So I love this.
- [37:43]
Cody McGuffey
What are some. I have a couple questions here too. What's the. Some of the mistakes that you see when you have clients or customers come to you for the first time? What are some of the most common mistakes that we can share with somebody today to try to maybe, maybe solve them? What's the so a couple of them.
- [37:58]
Nick
A lot of times QuickBooks Online and Xero, they're great products. But account even accountants sometimes struggle with knowing how to use them the best way and setting them up. So going at it yourself may be something that you take pride on, pride up, pride in. You're like, wow, I'm going to do my own bookkeeping. And it sounds great, like I'm going to save, you know, three, four hundred dollars a month to do my own bookkeeping. But if it's not done correctly, you're going to probably have to pay a professional to fix it. And bookkeeping and it sounds simple, but it's not as simple as the Intuit QuickBooks commercials make it sound. It's complicated. And you can be also doing your bookkeeping and that may be good just to get you ready for tax filings, but it doesn't mean then you're actually getting value out of what you're doing. Doesn't mean that you're properly setting up all your revenue categories. Doesn't mean that you're properly setting up all your direct call or you're including the right things in your direct cost. So maybe you'll have your bookkeeping like everything's reconciled. But if, you know, if you're not gaining insights out of your bookkeeping, then to make like business decisions, then you know, it's, it's as good as nothing. You're just doing it to file a tax return. So you know, and a lot of times, you know, it's, you know, garbage in, garbage out. So if it's not set up right, you can't rely on any of the reports. So yeah, I agree.
- [39:12]
Cody McGuffey
And also I think it's a time suck. It just sucks so much creative energy out of most people. You know, unless that gives you power and encouragement and it gives you, gives you energy which majority of it's not going to give you energy. So I think bookkeeping for me it's like daunting. And then I not always ain't daunting. Then I go and do it, force myself to do it and then I'm like now I just used all that time to focus on something that's not creative and didn't even serve the business itself. And then I did it poorly usually too. And so it's like one of those things. I think it's, it was the first, one of the first things that we ended up outsourcing and hiring out for just because it sucked so much energy from us. And I kind of got that energy back and I applied that into the business. The stuff that I am good at and gives me energy and I feel like yeah, the rest is history.
- [39:57]
Nick
But yeah, especially with like Etsy and so many passionate business owners you, you know, if you remember what, what got you inspired to start your business and then you know, run with it and maybe leave your job to even like double down in it. It wasn't to do debits and credits. Like if it was you'd be me, you'd be doing bookkeeping for other people. But a lot of times it's like that widget or that service that you really enjoyed creating and that's really as a entrepreneur and that's what you should be focusing on. And you know, anything that you can outsource in your business, like administrative burden, like bookkeeping, you know, leave to the experts so you can double down on what, you know, what your roots were that made you start this business. That's something I always, you know, recommend to entrepreneurs, you know, as they can start scaling and stuff like that.
- [40:40]
Cody McGuffey
How many, how often should a founder, a business owner should be meeting with their bookkeeper or accountant or both? How often is like the ideal? Because I didn't even know this when I first started out.
- [40:52]
Nick
Ideally it should be monthly. So that's 12 check ins a year. It's not a lot. They don't have to be two hour meetings, they could be 30 minute meetings and you know, quick action items and observations. And that's typically what Bookkeeper 360 does. So the most common way that we engage with customers is that we do their bookkeeping. You know, once a month we wrap them up and then we, you know, we have a financial review with the business owner where we're there to educate them on what happened and our observations and you know, maybe what things that the entrepreneur needs to focus on for, you know, next month. If you're not going to do it monthly. Definitely do it quarterly. Do not do it any like less infrequent than that. Don't, don't wait six months and definitely don't wait one year.
- [41:31]
Cody McGuffey
Is the bookkeeper the same as the accountant in this case in your scenario or when does the accountants come in there and have that conversation?
- [41:38]
Nick
So the word bookkeeper and the word accountant can be interchanged in a lot of contexts. At bookkeeper360, we technically don't have bookkeepers on staff. Believe it or not, they're all four year degree accountants. Many of them are CPAs and whatnot. Bookkeepers are typically just doing a lot of the transactional work, a lot of the entry work. You typically, to get insights out of your financials, you typically want to be talking to like an accountant or like a controller level person because those are more experienced professionals that are going to be able to see what's going on in the business and then translate it to you in an easy to understand way.
- [42:12]
Cody McGuffey
That's interesting. Actually. I'm happy that I asked that because I didn't know that in my experience too. I think our first couple goes at our businesses in the past were we just hired bookkeepers, which was not an accountant and they were great at what they did, which was categorize transactions. But like we could never get anything else out of, out of them because they just didn't have that level of experience. Right. Or education. So we couldn't talk about tax stuff, we couldn't really talk about any of this. All this stuff is they just got it ready, at least categorized properly. So I could have a high level conversation with accountants but then it was too disconnected at that point kind of to really have a meaningful conversation without diving into so much history. So that's, that's a huge value add, I would say for bookkeeper 360.
- [42:53]
Nick
Yeah. And that's one thing that we've learned very early on. And if you were to read our customer reviews, our customers always read that we're a one stop shop. So we do your bookkeeping, we do your tax prep and if you grow to be needing a CFO advisor that you want to discuss new product launches and if you want to understand how to price your products and say if you want to acquire business like that, those are really complex formulas that you, you know, you need help, you need a hand, like is this a good idea or not? And you know, checking the numbers to make sure it's a good idea is always important. So at booking for 360 like we are that one stop shop. So a small business owner doesn't have to repeat themselves. They don't have to take information from one source, bring it to another and those you know, those professionals then pointing fingers at each other. You know we own it from start to finish. So then you can just you know worry about getting the information out of your business. So then you can go back to running your business.
- [43:42]
Cody McGuffey
Super valuable man. What is to somebody be expecting to pay when they're ready to make this type of move? Like maybe entry level. Obviously it can go all the way up to CFO advisory and all this stuff but maybe still like let's call book the one once a month check ins to make sure they kind of like get get into the game here. What does it typically cost?
- [43:57]
Nick
Yeah sure. So we have a lot of different packages and pricing opportunities for small businesses. The the easiest way to get started is if you want to sign up for a free trial of our software that will hook up to your Xero QuickBooks online account. That's there's a 14 day free trial then it's 39 per month and that gives you access to all the software that will give you your P L, your balance sheet, your dashboard and I'll show you like your goals and cash flow trends and cash Runway and all the analytics that does require your bookkeeping to be organized. So if you know but you can get some information out of assuming that your books are you know, let's say you know, somewhere organized.
- [44:32]
Cody McGuffey
That's for the person that's like willing to do the bookkeeping themselves. And they still want to go in there and categorize themselves and do all that stuff. But then they want to have like an extra layer of an analysis on their finances.
- [44:42]
Nick
Exactly. That's the starting point. And a lot of our small business clients start as just a trialist with that. And then they quickly learn that hey I can get rid of all the bookkeeping headaches for a you know, maybe a few thousand dollars a year which comes out to like you know, three to 400amonth. Those are some of our entry level plans. And you get a full time staff member at bookkeeper360. All of our staff are located in the United States that you're going to be working with. They come with a four year degree in accounting or finance or or entrepreneurship. And that's your point of contact. And you're meeting with that same person each and every month so you're not having to repeat who you are. You're not going to have to explain your goals again. That's your go to person. No different if you were going to hire that bookkeeper and they're going to sit in your office right next to you. The benefits of using something like bookkeeper360 though is that you get access to a finance team. We're 75 professionals. Whereas if you have just like one bookkeeper in your office, one you're gonna have to, you know, it's a full time person and you get act, you get a whole team for you know, a fraction of the closet, you know, of a, you know, a fraction of course a full time person. So that's, that's why you know, bookkeeper360. We, we as a business have done very little marketing to scale because it's a great value opportunity for like a small business owner that doesn't work, that's financing themselves.
- [45:58]
Cody McGuffey
I've hired a lot of bookkeepers in various different businesses and different capacities and stuff. And I feel like this is like the complete package. Some I'm inspired. It's very impressive that you guys have put together this type of package especially for all the value that you're bringing. It's really awesome.
- [46:11]
Nick
Thank you.
- [46:13]
Cody McGuffey
To wrap it up, I have some rapid fire questions. 45 minutes has already passed. Are you ready for rapid fire?
- [46:19]
Nick
Let's do it.
- [46:20]
Cody McGuffey
Cool. What's your favorite business book?
- [46:23]
Nick
My favorite business book would be Turning the Flywheel by June Collins. It gave me a complete understanding of how a business gets fed the cycle of it and how to grow a business faster.
- [46:34]
Cody McGuffey
You said Jim Collins? Yeah, he's also the author of I haven't heard that book. He's also the author of Good to Great. Is that the same author?
- [46:40]
Nick
Yep. I read that one a long time ago. I remember bits and bits of it. But Turning the Flywheel was the best read of his, I think.
- [46:48]
Cody McGuffey
Turning the Flywheel. Okay, I'm gonna have to write that one down. What's one thing that you wish you knew before starting your business? Geesh.
- [46:58]
Nick
People personalities and you know, learning how to work with people. And you know that that has been something I've been learning on the job a lot.
- [47:06]
Cody McGuffey
So how many, how many hours do you think you work in your business per week?
- [47:10]
Nick
So I'm at my desk for at least 45 to 50 hours and then I have shower thoughts and while I'm driving in the car and this and that for another 20 hours. So being an entrepreneur and it's very demanding in cases. So I'm probably like a 60 to 70 hour work, we type a guy.
- [47:24]
Cody McGuffey
So okay sounds like okay, very similar. What's the worst business advice that you've ever received?
- [47:30]
Nick
Early on we got a lot of opportunities to sell Bookkeeper360 and at the time, some of our advisors that didn't see the few, the full vision of the business were like, oh, sell the business, sell the business. But my gut told me there was more to take this business, there was exciting products that we can create that help impact even more entrepreneurs. And I said no. I said no to them and trusted my gut and ran with it.
- [47:53]
Cody McGuffey
So amazing, man. If your family, your friends and your customers all had to get together without you and they had to write like a long blog article or a book about you, characterizing your traits and kind of who you are as a man, as a person, what do you think? Some of the things, what would they say?
- [48:11]
Nick
I think they'd say I'm determined and driven. I don't take no for answer. I think anything's possible if you put your mind to it. And you know, I've always said to a lot of my friends and family that act like, how'd you do what you did? And I said it's like, doesn't matter in life what you do, it's how you do it. So put 125% into whatever your passion is and just unload into it and don't chase money and making money. If you follow your passion and you really care about your end users and your customers and your people, the money comes afterwards and it's just about following your passion.
- [48:44]
Cody McGuffey
I love that. I've always thought like, money is the byproduct of you serving, serving people. It's the value that you bring to the market. Money is just a byproduct that just comes naturally after that.
- [48:52]
Nick
Exactly. Yep.
- [48:55]
Cody McGuffey
Nick, thank you so much, man. Where can people find you? Where can people find bookkeeper360, learn more about you, all that good stuff. Yep.
- [49:01]
Nick
So it's easy to get a hold of us. Bookkeeper360.com that's our website, you can visit us there. We have chat bots and all that stuff. You can inquire there. And we're excited to announce that we're going to be having a mobile app that's coming out by the end of this year, 2024 that you can download in the iOS and Android store. So that will be up and coming in the next few months.
- [49:21]
Cody McGuffey
Beautiful. And for anyone listening to, we'll have a link, a special link in the bio or the description or the show notes, wherever you're consuming this. And we'll have a link to bookkeepers360 and kind of Nick stuff and all that good things. So, Nick, thank you for coming on, man. I really, really, really appreciate it.
- [49:38]
Nick
Thank you. Cody. It was a pleasure being here. Thanks so much.
- [49:40]
Cody McGuffey
Awesome. Talk to you soon. Talk to.