Built Online Podcast Episode Summary: "Breaking Down the $20 Sale: Understanding Revenue, COGS, and Profit Margins with Nick Pasquarosa"

Episode Information

• Title: Built Online Podcast
• Host: Cody McGuffey
• Guest: Nick Pasquarosa, Founder and CEO of Bookkeeper360
• Release Date: October 15, 2024

1. Introduction

In Episode 71 of the Built Online Podcast, host Cody McGuffey engages in an insightful conversation with Nick Pasquarosa, the Founder and CEO of Bookkeeper360. The episode delves deep into the intricacies of bookkeeping and accounting for e-commerce businesses, highlighting how proper financial management can significantly impact business growth and sustainability.

2. Guest Background

Nick Pasquarosa introduces himself as the driving force behind Bookkeeper360, a comprehensive bookkeeping and accounting solution tailored for small businesses, particularly in the e-commerce sector. Established in 2012, Bookkeeper360 has grown to serve over 1,500 clients nationwide, offering services that range from basic bookkeeping to advanced tax preparation and advisory.

[01:39] Nick: "We help automate and streamline all the messiness of doing bookkeeping for small businesses... we've started developing our own software that integrates with QuickBooks Online, Xero, Gusto, payroll, to name a few... my background is in taxation. I have a master's in tax..."

3. The Importance of Accounting for E-commerce Businesses

Cody underscores the often-overlooked significance of accounting in small businesses, especially e-commerce ventures. He emphasizes that while accounting might seem daunting or mundane, it is crucial for maintaining business health, ensuring compliance, and making informed decisions.

[04:56] Cody: "I was hoping today that we can talk about kind of the fundamentals of accounting... why it's even important for an E-commerce creator or any kind of online business creator."

Nick concurs, explaining that accounting goes beyond mere compliance. It provides valuable insights into business performance, enabling owners to avoid cash flow issues and other financial stresses.

[05:05] Nick: "Bookkeeping enables you to do so much more as an E Commerce... if you're not, if your bookkeeping is not organized... you'll be flying blind... leads to a lot of other stress in the business."

4. Fundamentals of Financial Statements

Nick elaborates on two primary financial statements crucial for business owners: the Profit and Loss (P&L) Statement and the Balance Sheet.

a. Profit and Loss Statement

The P&L statement provides a summary of revenues, direct costs (COGS), gross profit, operating expenses, and net income over a specific period.

[12:38] Nick: "We provide you with statements such as like a profit and loss, which will tell you your revenue, your direct cost... and after you subtract your revenue versus your direct costs versus your operating expenses, that becomes your net income."

b. Balance Sheet

The Balance Sheet offers a snapshot of the company's financial position at a specific point in time, detailing assets, liabilities, and equity.

[13:13] Nick: "The balance sheet is a point in time... it tells you how much cash you have in the bank, how much your liabilities are... and how much equity you have left in the business."

Cody seeks clarification on the importance of the Balance Sheet, prompting Nick to explain its role in assessing business health beyond mere cash reserves.

[13:39] Nick: "If you have $10,000 in the bank but $20,000 in credit card debt, you have negative liquidity... the balance sheet gives a granular picture on the health of the business."

5. Understanding Revenue and COGS

The conversation transitions to dissecting Revenue and Cost of Goods Sold (COGS) across different business models.

a. Revenue

Revenue encompasses all gross sales from products or services offered. This includes product prices, shipping fees, and any additional charges like customization.

[15:34] Nick: "Revenue is the gross sales for your products that you're selling... any money you're collecting in exchange for a good or service is considered revenue."

b. Cost of Goods Sold (COGS) / Direct Costs

COGS refers to the direct expenses tied to producing or delivering the goods/services sold. Nick differentiates how COGS applies across various e-commerce models:

1. Inventory-Holding Businesses:

   • Example: Selling physical products stored in a warehouse.
   • COGS Components: Purchase cost of inventory, shipping, and packaging.
   • Accounting Method: Accrual basis is recommended to match revenue with related expenses.

   [18:20] Nick: "The best practice is to be on accrual based accounting... if you're holding inventory."

2. Print on Demand:

   • Example: Using third-party providers like Printful or Printify.
   • COGS Components: Costs invoiced by the third-party for each order.

   [21:22] Nick: "Even though you didn't have the inventory in your warehouse, the costs are still direct costs."

3. Digital Products:

   • Example: Selling digital templates or guides.
   • COGS Components: Initial creation costs, which are amortized over the product's usable life.

   [23:44] Nick: "COGS is typically going to be a lot less... amortize the initial costs over the period of use."

6. Gross and Net Profit Margins

Understanding profit margins is pivotal for assessing business profitability.

• Gross Profit Margin: Revenue minus COGS.

  [26:54] Nick: "That's gross profit. That's before other expenses."

• Net Profit Margin: Gross profit minus operating expenses (e.g., rent, utilities, salaries).

  Nick highlights that healthy net margins for e-commerce businesses typically range between 30-40%, facilitated by strong gross margins (~60-70%).

  [29:51] Nick: "Typically a healthy range that gives the owners enough luxury to reinvest profits... tends to be like 30 to 40%."

Cody emphasizes the importance of tracking these margins as percentages to monitor business health effectively.

[32:22] Cody: "Financially, you should track percentages, not necessarily dollar amounts."

7. Common Bookkeeping Mistakes

Nick identifies frequent errors made by small business owners:

1. Improper Setup of Financial Categories:

   • Misclassifying revenues and expenses leads to inaccurate financial reports.

2. Inadequate Use of Accounting Software:

   • Tools like QuickBooks and Xero are powerful but require proper setup to extract meaningful insights.

   [37:57] Nick: "If you’re not gaining insights out of your bookkeeping, then to make like business decisions, it’s as good as nothing."

3. Neglecting Regular Financial Reviews:

   • Infrequent check-ins can result in missed opportunities and unmanaged financial stress.

4. Attempting DIY Bookkeeping Without Expertise:

   • DIY approaches can lead to errors, ultimately costing more to rectify than hiring a professional initially.

8. Recommendations for Business Owners

Nick advises e-commerce entrepreneurs to:

• Adopt Accrual Basis Accounting: This method aligns revenues with related expenses, providing a more accurate financial picture.

• Regularly Consult with Bookkeepers or Accountants: Monthly reviews are ideal to stay updated and make informed decisions.

• Invest in Professional Bookkeeping Services: Outsourcing to experts like Bookkeeper360 can save time, reduce errors, and provide valuable business insights.

[40:52] Nick: "Ideally it should be monthly... that's typically what Bookkeeper360 does."

Cody echoes the sentiment, sharing his personal experience of outsourcing bookkeeping to reclaim creative energy and enhance business focus.

9. Bookkeeper360 Services and Pricing

Nick outlines the offerings and pricing structure of Bookkeeper360:

• Entry-Level Package:

  • Price: $39/month after a 14-day free trial.
  • Features: Access to software integrating with QuickBooks Online and Xero, providing dashboards, P&L statements, balance sheets, and financial analytics.

• Full-Service Bookkeeping:

  • Price: Approximately $300-$400/month.
  • Features: Dedicated bookkeeper with a four-year degree in accounting or finance, monthly financial reviews, and access to a team of 75 professionals.

Benefits of Bookkeeper360 include:

• Comprehensive Services: From bookkeeping to tax preparation and CFO advisory.
• Consistent Point of Contact: Clients work with the same professional monthly, ensuring continuity and personalized insights.
• Cost-Effective: Access to a full finance team at a fraction of the cost of hiring in-house.

[43:41] Nick: "All of our staff are located in the United States... you get a full-time staff member... access to a finance team."

Cody praises the value proposition, highlighting how Bookkeeper360 offers a complete package that surpasses traditional bookkeeping services.

10. Rapid Fire Q&A Highlights

Towards the end of the episode, Cody and Nick engage in a rapid-fire segment, revealing personal insights and experiences.

• Favorite Business Book:

  • Nick: Turning the Flywheel by Jim Collins.

• One Thing Nick Wishes He Knew Before Starting His Business:

  • Understanding people personalities and improving interpersonal skills.

• Weekly Work Hours:

  • Nick: Approximately 60-70 hours, combining desk time and creative thinking outside the office.

• Worst Business Advice Received:

  • Nick: Encouragement to sell his business early on, which he resisted to further develop Bookkeeper360.

• How Others Would Characterize Him:

  • Determined, driven, and passionate about following his vision and helping others succeed.

[46:20] Cody: "What's the worst business advice that you've ever received?"

[47:30] Nick: "Early on... some advisors... told us to sell the business... I trusted my gut and ran with it."

11. Conclusion

The episode wraps up with Cody expressing gratitude towards Nick for sharing his expertise and insights. He assures listeners that links to Bookkeeper360 will be available in the show notes, encouraging them to explore the service further.

[49:39] Cody: "Nick, thank you so much, man. I really, really, really appreciate it."

Key Takeaways:

• Essential Role of Accounting: Proper bookkeeping and accounting are foundational for e-commerce success, providing clarity and aiding strategic decisions.

• Understanding Financial Statements: Mastery of the P&L statement and Balance Sheet is crucial for assessing business performance and health.

• Accurate COGS Calculation: Differentiating direct costs based on business models ensures accurate profit margin analysis.

• Professional Bookkeeping Services: Outsourcing to experienced professionals like Bookkeeper360 can enhance financial management and free up valuable time for business owners.

• Regular Financial Reviews: Monthly consultations with bookkeepers/accountants help prevent financial pitfalls and capitalize on growth opportunities.

For entrepreneurs looking to streamline their financial operations and gain deeper business insights, leveraging professional bookkeeping and accounting services is a strategic investment towards sustainable growth and profitability.