Analyzing Your Profit and Loss for Better Business Decisions

1:42

Today we're going to be talking about how to use your profit and loss. Part three, I'm going to talk about how to use your balance sheet and cash flow statements. That's going to be in a few weeks, need a little bit of a breather due to some things that are going on.

If you need help with your ecommerce accounting, I know some of you are existing customers, I'm so happy to have you here with me. My team said this would be the best place to start a workshop. But whether you're a customer or not, love to have you as a customer. We do a lot of things here at LedgerGurus, one of which is just day-to-day accounting. I do a lot of the stuff at the bottom: reporting, analytics, budgeting, forecasting, advisory.

2:26

Okay, our goals for today's workshop. And I am going to wrap up the poll. Thank you for those of you who decided to participate. It's always helpful to understand who's here. It does look like we have a broad mix of people. We have some of you that are accountants. We have a lot of you that are working in consumer products businesses, which is amazing. And I'll share those results if you're curious, so you can see who's who.

All right, our goals for today's workshop. I want to help you learn how to read a profit and loss statement better than you do today. I want you to understand some key financial concepts in a profit and loss statement. I want you to be able to analyze profitability and how you might improve it. I want you to help understand how to compare prior period in a profit and loss statement.

3:28

And we're going to do this using QuickBooks Online. So if you're a Xero customer or using another accounting software, that's great. We are very specialized in QuickBooks Online, and so that's what I'm going to be using to illustrate how to do these things. And I'm also going to show you how to look at this data in a visualized format, one using some of the built-in capabilities in QuickBooks Online. And then I'm also going to show you a tool that we use for ourselves and for my customers. I'm going to preview something that we are going to be rolling out to you for no additional cost shortly.

All right, let's dive in. As I said, if you have a second screen, get it. Get into your QuickBooks Online and be prepared to follow along, because we're going to be doing a lot of hands-on.

4:27

All right. This will help me, one more quiz I'm going to launch, is help me understand your accounting education. Have you taken an accounting class? Do you have a degree? Are you a CPA, CMA, any of those things? It'll be very helpful. I personally feel like, what I'm going to be talking about, if you took an accounting class, this is the one thing that you should learn from it, is how to read a profit and loss. I would argue you should also learn how to read a balance sheet and a cash flow statement. They're very, very important, and I would invite you to join me in my third part of this workshop series.

5:06

And I'm also very interested in understanding your comfort level in reading a profit or loss. I realize I can't take you from a three to a 10. I see a couple of you that are rating yourselves three. But if I can take you from a three to a five or a six, then we've made some progress. And for those of you that are a 10, awesome. Hopefully I can show you some tips and tricks in how I use data, my profit and loss, how I visualize it to get more out of it, and why that matters. I'm going to leave this poll up for a few more minutes, love to get your feedback.

Like I said, we're going to use real-time data from a direct to consumer brand, Sole Toscana, which I co-own, which allows me to show that data. This is a business, it's going to do about half a million dollars this year, so not super huge. We bought it two years ago. My partner at LedgerGurus, who's also my wife, we partnered with a third partner who runs this business. I'm the CFO for that business. Brittany, my partner at LedgerGurus, kind of works on special projects, and Preston, he does all the work. And I'm going to show you how we've used a profit and loss, and how I've leveraged that, as well as those other processes of budgeting and forecasting, real-time analytics, to improve this business.

6:25 The continuous financial process

Now, this analyzing a profit or loss is part of what I have as a continuous financial process. It's a three-part thing that I've done across multiple businesses for over a decade. Essentially, I analyze what's happened in my business. I use that data to create a budget. And then myself, or whoever is running the business, is using operational analytics. Sometimes my customers say, I want a real-time profit and loss, and I say, no, what you want is operational analytics that map back to the outcomes of your profit and loss. In the case of an ecommerce business, this is probably going to be your marketing spend and your performance against marketing spend. It might be your operating expense control. And that is what you're going to be measuring. And if you've dialed in the right operational analytics, they should correlate fairly well to your outcomes.

7:26

And it's a virtuous process, because as we get our operational analytics, we kind of know what's going to happen. We confirm that what happened, we adjust our budget, we adjust maybe our analytics some. So this cycle allows me to measure results, project results against a business plan. So we're going to do X, this is what we think the results will be in the budget. We're going to use daily operational analytics to drive towards those results. And if we're deviating from those results, we're going to kind of know where we're going to stand from a profitability standpoint at the end of the month, a general ballpark. But we're going to validate that, and then we're going to adjust. Rinse and repeat.

8:13

I've used this process, like I said, across three businesses. Right out of MBA school, I was in a small technology company, software company. They asked me, I came in at one role, six months later they asked me to take over running the business. Business was in peril, we had six months of cash left. I used this methodology to keep the business alive while we did some changes with our product and our go to market strategy. And the result is it had a multi-million dollar acquisition a few years later. I've used this to grow profitably LedgerGurus. We've used this to acquire a business and then improve it, and I'll show you how it was really rough in year one and what we've done in year two, in year three.

8:58

But today's focus is really around analyzing the profit and loss. Those other two components that I talk about would be like a whole different workshop. If you're interested, I'd love, you know, send me a chat in the webinar chat if those other two topics are of interest. We could look at building workshops in the future around budgeting and whatnot. But today we're going to look at specifically the top of that cycle, and analyzing the profit and loss.

9:23 The profit and loss from top to bottom

Let's talk about the profit and loss top to bottom, and then we're going to dive into the Sole Toscana profit and loss. So at the top of your profit and loss statement, this is also known as an income statement, you'll hear me refer to it as a P&L. Ideally it is a profit statement. For far too many small businesses, it's a loss statement. I am on a mission, LedgerGurus is on a mission, to help people grow profitably, to help them succeed.

But as you walk down the structure of the profit and loss, you have income at the top. You're going to get your product and shipping income, and again, I'm going to refer to ecommerce specific, consumer product specific businesses. You'll also usually incorporate discounts and refunds as part of this, and you'll see this in the profit and loss statement that I'm going to show you.

10:20

Then you get down in your cost of goods sold. I would refer you back to my previous part one of this series. This is your landed product costs. A lot of people, again, I'm going to talk about this in terms of accrual accounting, landed product cost and landed product cost only. A lot of people, including a lot of our own customers, which we've allowed to happen and I am going to be changing, put a lot of other things there that really should go into the expenses. That's things like your cost of sale. Now, this is more of a just general best practice. Why would you not put your cost of sale costs, like fulfillment, merchant fees, in your cost of goods sold? Well, it's just not how the standard accounting is done. Can you do it, and is it going to hurt you from a tax perspective? Absolutely not. But if you go to get a loan, if you go to sell your business, and they see all these things in there, it's going to skew your data and whatnot. So we have allowed people to kind of be loosey goosey here. We're going to start putting our foot down, because we want you to be ready for loans, for sales. And I'm telling my team, it's like, it's been far too long that we've let people get away with non-standard accounting.

11:35

Other things that go into expenses would be things like non-advertising marketing, payroll, software, rent, travel, all those other things.

Then you get into your other income and expenses. What goes into this? Well, that's typically your other income earned. That would be things like interest income. That could be non-core business income. I'll give you an example. We don't have this in Sole Toscana, but like in LedgerGurus, we have a YouTube channel and we get a little bit of YouTube income. But it's not part of our core business. Our core business income is services income, and so that goes into other income. This is a little bit of a judgment call on what you want to put down here. I've done a whole bunch of videos on these topics, so if you want to go to our YouTube channel, Kelley might find some links that we could put out there. There's a whole bunch of stuff where I talk, I specifically made some of these videos.

12:38

Other expenses would be things like interest paid. Now, this is an interesting one. A lot of people want to put interest paid in your operating expenses. I recommend, again, you don't have to, but I recommend that you put this in other expenses, because you want to show your operating income as what profits were generated from the work that you've done in your business.

13:11

The other thing, I'm going to drop a link in the chat, Kelley gave me a playlist that's got all the videos for this. The other reason it's nice to go down is, other things that you put down are things like depreciation expenses, these are tax treatments. Other things I like to recommend is, a lot of people put discretionary expenses, like they'll put their car that's owned by the business in here. When you go to sell your business, it's really nice to be able to communicate what the operating income of the business is, and by doing some of these things, it makes it a cleaner picture. I'm not going to go into a lot of details here, we don't have time. If you want to hit me up, happy to consult with you, talk through this.

13:59

At the bottom of this is the net income. Now, there's a couple of key calculations that goes from what I just walked through there. Gross profit, net operating income, total other expenses, net income. Real simply, your gross profit is your income minus your cost of goods sold. Your net operating income, which should represent the income, the profits, hopefully, that your business is generating. Total other expenses, usually this is losses, and I'm going to show you in Sole Toscana last year how we had a cash profitable business, but tax treatment wise we had a loss. It was awesome. And then your net income is your net operating income minus your total other expenses. So these are key calculations that good accounting software is going to do automatically as you use that.

15:04 Reading Sole Toscana's real P&L

All right, it's time to dive in. If you have your own QuickBooks on a second screen, open it up. We're going to look at some data.

All right, so what do we have here? What I want you to do, if you're in your QuickBooks, is go down to your reports. This is where we're going to live, and we're going to spend most of our time in the profit and loss statement, although I may show you a few other things. If it's not a favorite, it should be. Now, there are a lot of other things you can do, you can slice and dice it, but we're going to use the main built-in default profit and loss report. And I'm actually going to go back to July, because we are still waiting on one more bill from our 3PL to close out that month.

16:01

So here I have my profit and loss statement for Sole Toscana in July. It is done. And I have, Leslie, I see you have your hand raised. If you have a question, probably the best way to do that would just be put a question in the question and answer manager. And Kelley just informed me I sent you all the wrong link. Let me try this again. So in the chat, the playlist of all those explanations. There you go.

All right, so you can see that the way we have this structured, we have, this is our gross sales. Chat is disabled, oh, I'm sorry, Leslie. Okay, well, go ahead and ask your question here in the question and answer manager, Leslie.

16:59

So you can see that my total income is essentially, I like to call this sometimes net revenue. So it's my income after my gross sales, minus my discounts, minus my returns, plus my shipping income. So what I should really say is net product sales. Not everybody does it this way. We try to do this at LedgerGurus so that you can get a better sense of what happened, right? How much did you have to discount to sell that revenue?

17:35

Then I get into my product COGS. Now again, this is an explanation in accrual accounting that I'm not going to get to. We do landed product COGS. There's a lot of fancy accounting calculations that goes into this, we create a journal entry. Some other things that could go in here as one-time things that are really hard to, I'm going to use accounting terms, amortize or accrue, or very simply, spread out over time.

Then I get into my expenses. Now, you can see what I don't have here. All right, clearly we have to communicate to our own team, there's something we forgot to communicate to them. I don't have my fulfillment costs in here. But what we do do is we put in a cost of sales group, and I put all of those variable fees in there related to the sale. A lot of people like to put their variable sales cost in cost of goods sold, and again, that's not a best practice. So if you want to see those, just put them together in a section under your expenses. If you're working with us and you want to do this today, work with your accounting team. It's really just moving some accounts around where they live.

18:53

And then I get into all of the operating expenses. So my legal and professional fees, some of my marketing overhead, software, payroll, sales tax expenses. Other income, made a little bit of interest, hurrah. I've got some amortization expenses, some exchange gain or loss, again, these are more accounting treatments and whatnot. And then I get down to my net income.

19:24

Now, I'm going to show you real quick, I told you I was going to do this. We wrapped up our taxes for this business a couple weeks ago, did an extension. And we had a net operating income of $28,000 on an income of $365,000. So we were really happy, because the year before we lost money, sucked. But then we had this beautiful tax treatment, which is amortization expense. We amortized goodwill, again, I'm not going to explain all these accounting concepts either, but it is a non-cash thing that basically we said we lost money for the year on an accrual basis, and I don't have to pay taxes for this business. It was lovely. On a cash basis, I actually made money. I'll show you this in workshop three how that works, because I really have to get into the cash flow statement to show you how that actually worked.

20:21

But you can see the way we had it structured, we generated an operating income, thanks to fancy tax treatment of acquired assets I was able to put some additional expenses towards this from the balance sheet, and show a loss. So it's awesome. Yay accounting, and more yay tax code.

Okay, so that is the basic run through of a real world profit and loss. Now let's talk about some next steps, which is how I analyze that profit and loss.

21:09

First, I want to do a little side detour and give you some insights. Your Shopify reports are not your income. We talked about this in workshop part one. And excuse my voice a little bit, I'm recovering from COVID. I got it last weekend and it rocked my world, and I'm fortunately well enough to do this. I am going to grab a cough drop real quick though, because I'm feeling it. One second. All right, I'm back. I should have had this at the beck and call. I was flat on my back from Friday to Sunday, so I'm very glad to be back in the land of the living.

21:55

Shopify does not understand accounting. We get this question a lot. Why does the income in my QuickBooks not match my income in Shopify? That's because they don't calculate it right. There's a couple other things that they don't do right, excuse me. The biggest thing they do wrong, though, is they include money collected from taxes as sales. It's not sales. This actually goes to your balance sheet. There's usually a couple other things that we will do around timing that will adjust this, but if I were to just simply make one correction here, your actual income would be total sales minus taxes. So just a little side note, because this question comes up all the time.

22:55 The six income ratios that matter

All right, when I'm analyzing a profit and loss, I am looking at a couple key things, and one of the most important things I'm looking at are some key ratios. These are income ratios. Now, some of them you've heard of. Your gross margin is simply your income minus your COGS, or really what I should put in there is your gross profit, divided by income. Your net operating margin is just your net operating income divided by income. Net profit margin, net income divided by income. These are all very easy to find, and I'll show you where they're at.

23:26

There's some other things that I really like to look at, though, for a consumer products business. I like to look at the fulfillment ratio. What percentage of income did I spend on fulfillment related expenses? So that's your 3PL, or if you have your warehouse, that's your warehouse related pick, pack and ship, and your shipping costs. I like to look at my advertising ratio, what percentage of advertising spend divided by income. And I like to look at my contribution margin. The contribution margin is my income minus my sales expenses, divided by income. So this is the dollars, what percentage of my dollar was left over after the sale. Because there's just all these expenses, my cost of goods sold, my fulfillment cost, my advertising cost, my merchant account fees, they're going to be there with almost every sale.

24:23

Let's take a look at this. We're going to go back into QuickBooks, follow along. All right, so I'm going to go back where we left off. And what I'm going to do, the easiest way to do this is, you've got this compare other period, and basically you're just going to do percentage of income. This is the very best thing you could do when you're running a profit and loss analysis. It is going to divide every line by the total income line. Not by the stuff that we put up here above, but by the net revenue or total income line.

25:10

And so what you're going to get is your cost of goods sold as a percentage of revenue. You're going to get your gross margin, this right here is your gross margin. I'll bounce down, I'm going to get my net operating margin. So this is what was the cash that the business generated. What was my profit margin? Again, because of lovely tax treatment, I'm looking at this as a loss business. Ideally, as a business owner, this is a good thing. If you have a positive net operating income and a negative net income, you're doing it right. You're using tax treatment, accounting, legal tax treatment, to show a loss, but your business actually generates profits.

26:00

Leslie just asked me for the ratios. Okay, again, here are the key ratios. We've looked at three of them. We've looked at the gross margin, the net operating margin, and the net profit margin. Those are going to be in the same place for all of you. Now, these next three will depend on how your chart of accounts is set up, which is how your profit and loss is structured. So my fulfillment ratio is right here. So last year, on average, or for the whole year, we spent about 14.5% on pick, pack, ship, storage, to the customer, that's all the outbound stuff. We spent about 36% of a sale on advertising. And then we had some other, these variable costs, right, that was our cost of sales.

27:09 Visualizing the data with dashboards

Now, I'm going to show you something that's even more enjoyable to look at. Early on after buying this business, just like I'd done here at LedgerGurus, I started building a dashboard. It took me almost two years before my partner here was like, what we really realized is we used this to, well, I'll come back to the story. So what I'm doing here is I'm using a tool called Grow, and I'm taking the data that I just showed you in QuickBooks and visualizing it in this business intelligence tool, also called a reporting tool, an analytics tool. Much, much more pleasant way, interesting way, to look at it.

27:59

I have here, I'm going to show you five of six key metrics that I use. So we have our income, that's graphed, because everybody likes to look at income. I also have my last year income and how we did to the previous year. Whoop, we did a lot of good. Have this year, we're doing not quite as good, but still, considering the state of the market, we're very happy. And then I just dive into income ratios. So I have my COGS as a percentage of income ratio. One of the things that I've done, and I'm not going to do it in this webinar, but I can talk on it briefly, what you should be spending on your cost of goods sold in general, after years of research, I would say you should be spending between 20 and 60%, with really it should be more like 20 to 30%, but you can run a business spending as much as 60% on your cost of goods sold.

28:56

I have my advertising income. This is where we have been spending most of our energy in trying to improve this business. And I think a lot of you out there who either own or operate brands are probably feeling the same pain. This was our pain in 2022. Marketing was broken, and we're like, oh my gosh. So we spent much of our first year figuring out and then improving it last year, but it's still the weak point. Now, best practices in a consumer products business are that you should be spending between 20 and 33% of your sale on advertising. So I like looking at this because I can see my trend by month over time. I also have year over year, I also have my year and previous year summarized.

29:47

I also have my fulfillment income by month. So these reports, there's a lot that goes into, I'm going to talk about these concepts individually, as we get used to them, we're able to digest them. So we see the trends. There's a little bit of fluctuation, there are reasons. You know, storage costs are not perfectly variable. We also learned over the last two years that our 3PL is not very good at billing the activity that happens in December in December, but actually a lot of that gets carried over into January, and so we see this little January spike that's really reflective of a lower December spend. In general, I'd say your spending on fulfillment related cost should be between 10 and 15%. You can see here that we don't have August in, so this number is not perfectly correct, but we are well within that healthy range. And we actually did some changes last year to drive those costs down, so you can see the trend went down over last year. We raised our minimum free shipping costs, which drove down the overall fulfillment costs.

31:03

And then finally, my net profit margin. So I have this visualized. Now, I have a bigger dashboard. Would you like to see it? If you would, give me a thumbs up. Anyhow, I've got a bigger dashboard. All right, I got one person. Do I have two? Okay, two, that's good. Got quorum.

31:39

All right, so for those of you that are current customers, this is what we are currently building, there's also one more metric at the bottom, and we will be incorporating into our engagements at no additional cost. We'll also have this higher level dashboard that comes. It's not just about the dashboard, it's about the conversation that goes with that, that I use with my operating partner. I have over 20 metrics in here. I've got lots of things sliced and diced. I've got my budget targets, so we can see how we did against budget. So you can see I have a lot of ratios that we are measuring, but they're almost all income ratios. All they are is basically reflections of the report that I've done here. But it's a lot easier to read it when you're visualizing some of this data.

32:29

You can see in QuickBooks, if you've never clicked on this performance center, I'd encourage you to do it now. This is a good, cheap, easy way to start visualizing what's going on. A couple things that I would recommend you change is, as you look at stuff, look at this year to last month. Accounting processes are not done until usually the beginning of the next month, and so when you look at something like this, you'll usually see issues when you're not looking at that. So you can see I also have similar visualized data, I don't have all the same things that I have in the other one, that show me my income and my revenue, current versus previous year. I've got my gross profit, I've got my expenses, I've got my net profit. And then these down here are balance sheet related metrics, which I'm going to get into in part three.

33:51

So it's a nice way to visualize the data. And again, the value of visualized data is it's easier to interpret. I'll come back to the story I started. Doing this with my partner, I'll go back to my basic dashboard for Sole Toscana, which is a template which we're using to build for our customers. I did this for almost two years, and what I found is we spent a lot less time in QuickBooks. We spent a lot more time interpreting the data that was coming out of the QuickBooks in this visualized format. He said to me at the beginning of the year, he's like, this is really awesome, I love looking at it this way. Do you do this with all the customers? And I was like, no. That's a really great idea. And so we've started on the journey of building out these dashboards.

34:39

Vince, performance center, I'm not sure. This is QuickBooks Plus, so if you're not seeing it, my guess is you're probably on QuickBooks Essentials. Good question. And the reason I like visualizing this financial data is you see little, like I've shown you, the stories that are hard to read when you're just looking at a table of numbers. Could I look at this in QuickBooks? Yeah, let me show you how I would visualize, what that report would look like in QuickBooks. So I'm going to take last year's data, and I'm going to go display by month, and I'm going to do the percentage of income.

35:38

Mark, we do not have performance center. Okay, I'll have to look into that, Mark. Maybe it's just a QuickBooks Advanced. Huh, that is really interesting, I thought performance center was in everybody's version of QuickBooks. Or maybe it's just an accountant tool. Hm, I will double check on that.

36:03

So, you know, here's my question that I would ask for you. Would you rather look at this, or this? Right? It's a lot easier to see what's going on when you visualize that financial data. Now, this can actually easily be turned into a graph in Excel, if you're good at Excel. But what we've learned, and it only took us quite a while to realize this, is the visualized data is a much better way to consume financial data.

36:42

I will find out how performance center is accessed, and why I can see it and some of you can't, and we'll send a follow-up email. It may be, now I'll give you a little secret, what you are seeing with me is, as an accountant, I have extra tools. For some reason, I thought the performance center was available to everybody. It appears that might not be the case.

37:14

Oh, is Grow a public, no. It's a very expensive business intelligence tool, which is why we're going to extend this to our customers. It costs about $1,800 a month. But what we're going to do is create dedicated dashboards for our customers using our Grow instance, that is only their data on their dashboard, and let them see it. There are a lot of reporting tools out there. QuickBooks ecosystem has a bunch of reporting tools. I have a business intelligence background, and so I went this route because I can do really customized things with my data. So the things that we're going to be giving away, I have personally developed and built, and trained my team on how to create these dashboards using what I've developed for the team. We will also, when we are launching this, be offering customized options to our customers. If they want the advanced dashboard, they'll have the option to see that as well. So visualized data is better, but you can do and get the same things out of this data as well.

38:40

All right, moving on. So now I've done my analysis on kind of the performance. All right, Mark, thank you for the research. The performance center feature is only visible to admin users using the QuickBooks Online Advanced subscription. I really appreciate that. That surprises me a little bit. So that's Intuit trying to get more of our money. Sorry.

39:05

So I like to look at the ratios. Why? The ratios tell me, did I perform within a good boundary? What is a good boundary? Again, hopefully one of the takeaways you'll have is, some of these things, I'm going to be publishing some blogs and some videos that talk about what good performance are on some of these key ratios. There's one ratio I don't have here, actually I do have it here, what is a good net income? I'd say at least 10%. So you can see in this business we have some work, even at the net operating income, we're not there. Good, honestly, is you have some profit. Better is you're at 10%. Great is 20%. If you're at 20%, as a consumer products business, you are killing it. I don't see a lot of 20% net income consumer product businesses.

40:02 Comparing periods, budgets, and final questions

Now, beside analyzing the performance of the business, I also want to look at things against the current period. So profit and loss, I'm looking at data in a period in time. Typically I like to look at things year-over-year. Sometimes I like to look at things month over month. And if you're doing budgeting, which I would strongly encourage, I want to see how I did against my budget. Because if I'm doing budgeting right, let me have a little sidebar on budgeting. Budgeting wrong is, I go through and I spend a whole lot of time or money creating a budget, and then I never look at it. Within my businesses, we look at our budget every single month. We analyze how we did against the budget. It's not cheap, it takes time, it takes money. But if I want to drive an outcome, I need to project an outcome, I need to execute, I need to validate. If you are budgeting, I would say this is the most important thing to do. Versus, next most important would be analyzing year over year and month over month. But you have to be prepared to not just budget, but run your business against that budget.

41:06

Let's show you how that's done. So first we're going to do this in QuickBooks. Let's take July, actually, let's take August. My August isn't quite done, but I'll do that. No, let's do, sorry, I'm vacillating. Let's go to July, because I don't have all my bills in here, so it's not fully closed. I'm going to run my report. If I wanted to see how I did year-over-year, it's really easy. I'm going to compare to previous year, and I like to do the percent change. Now, the dollar's nice, but the percent really gives me the answers.

42:00

So in July, 2024 versus 2023, I grew 27%, and my gross profit only grew 25%. That's cool. Our gross margins was down some. My net operating income, but my expenses grew. Oh boy, I'm in trouble, right? Well, the big difference for me, we weren't generating enough income in our business to pay our partner until last year.

42:48

Better view of this, let me show you last year, this is going to be more illustrative. In 2023, we bought this business in March 2022, so this isn't even comparing a full year's data, but we grew the revenue 72%. It was probably roughly flat if we included the data from the previous owner's performance. But what was really, really valuable is we went from a loss to growing that business, a positive income. So we exploded the net income.

43:29

So I like to look at year-over-year improvements. There's different ways to visualize that. I'll go into the tool that we use and just kind of show you. Again, you can do this in a spreadsheet if you wanted to. But with these ratios, I like to see, I usually will put two trend lines in, I'll put last year and this year, and I will usually look at my annual summary, how did I do through last year. So like our fulfillment costs, that's probably not a good one. Our advertising, 40%, but we still did better than last year through last month. And if I wanted to look at it in a monthly basis, we made a lot of changes at the beginning of the year and drove down our advertising costs, and you can see we're now in this battle of how do we even improve it further. It's proving to be much more difficult.

44:32

So that year-over-year performance, looking at every level. How did I do on my revenue, how did I do on my income? Now, this one is not a good one, let me go to my big boy dashboard. If I'm looking at profitability, because of the tax treatment which we did last year, we don't look at our net income as much as we do our net operating income, which is the profits before tax treatment. And I look at it two ways. So I look at my dollars, hey, am I generating more or less dollars? And then I also look at it as a ratio, profit margin. So we'll see, like, made some improvements, made some improvements, now we're chasing, we're struggling. Last year we had some things, advertising has broken in the last year, I think some of you probably felt that.

45:33

Month over month, you can also do the same thing. So if I were to say, look at last month, which isn't completed yet, and just do it previous period. There can be some benefits here. Let me tell you where it's beneficial and where it's not. The benefit is doing this usually around my fixed costs. Other than that, I don't feel like it's terribly beneficial. So my fixed costs I want to look at are like, you know, are we paying more or less in payroll? What's our software subscriptions? Some of this gets skewed. I don't love doing this month to month, because sometimes you have subscriptions that hit different times. It might be better if you were to wrap this up into like a quarter view of data. And then the budget, I'm not getting into the budget, but this is a whole section of budgets. There is ability, if you create a budget, input the budget into QuickBooks, where you can analyze the budget against previous period.

46:43

All right, I got a good question from Vince. When do you do this analysis, monthly at end of the month? When do you target to review this so you can refine budget, make decisions? What's your review rhythm, discipline? I usually, we'll start reviewing this data as it comes in. The nice thing about income ratios is, once your income is posted, most of these ratios will show up. The things that usually take a little bit longer to account for are like your cost of goods sold, that's one of the more difficult accounting treatments. But usually a lot of your expenses are captured as the month goes on. So as soon as I get my income posted, I can usually see my ratios.

47:27

Now, a good example within this business, my 3PL, which I'm not complaining, bills us very slowly, asks us to pay very slowly. So we don't usually know what our ultimate profitability is until oftentimes the end of the last month. So it's kind of like, we analyze it as we go, and we do the full analysis once it's done. But in this case, I have really great payment terms, and so I'm not complaining when they bill us slowly, because I'll take the cash flow.

48:00

So I will analyze it monthly. We will usually revise our budgets monthly. Usually the revenue, you know that pretty quickly, you can run some of those reports in Shopify and calculate how you did. Or if you're multi-channel, that's quick to correlate and say, hey, what did we budget against, what did we do? One of our challenges this year with this particular business is we haven't been hitting our targets, not even close. So as the year's gone on, we've had to down revise our targets, and we'll do that. We'll say, what does that do to cash flow, what does that do to profitability, and rinse and repeat.

48:45

My partner uses a tool called Triple Whale to run, because a lot of the movement and the performance of a consumer products business is based on your marketing spend. So he'll use that to determine how he's operating against the budget. And he has a marketing budget and a target sales outcome, and usually that makes or breaks us. A larger business with a lot of operating expenses, those are somewhat predictable. As I put controls into bigger businesses that have a lot of operating expenses, discretionary expenses, we're going to be looking at hiring plan against budget, we're going to be looking at discretionary spending. There's tools like Divvy and Ramp and Brex, and you can even put that on your corporate cards to control the discretionary spending and whatnot. And that's how I'm kind of using that third part of that cycle.

49:42

Another question. For customers that struggle providing inventory information and don't have an inventory management system, what's my strategy for good COGS? Well, if I'm talking to them and their COGS looks like crap, I'm going to be like, this, you know, garbage in, garbage out. This is what good cost of goods sold typically looks like. We have this little spike, this is a debate between the partner group, of we have to buy boxes, we can't track them, they're not SKU'd. So these are the product boxes that we consider part of the product. When we do that, it's a one-time expenditure that kind of spikes it. It annoys us, we've talked about it, we've decided the cost of accounting is not worth it.

50:29

When I see really up and down COGS or gross profit margins, it's usually because we're not putting enough energy into the COGS accounting. And that's just a business decision you have to decide, if it's worth it to you as a business owner, if it's worth it to put the investments in accounting to do it right. If you're not, then just know that the spikes and the valleys are an equation of how much you're putting into that. We have decided to not put more energy slash cost into accounting for these one-time expenditures that are hard to accrue, and we're okay with it. What I'm really concerned about is that longer view, you know, some of that gets absorbed into an annualized view and we can kind of see how we're doing.

51:17

All right, so wrapping things up, and then I want to take any additional questions. This is part of a three-phase process that I use. If you can do nothing more than learn how to read your profit and loss better, you're going to be better off. If your question is like, okay, I understand what my business is doing, now what do I do next? Again, I would go back to what I told you. Start budgeting, start measuring what you're doing on a daily basis. Budgeting is not a cheap process. I would say at minimum, if I was working with a customer, plan on about $2,000 a month. It's not an exercise I can do in a vacuum. This is done with a partner. I have to say, what's your marketing plan, what's your hiring plan, what's your strategy? If you relegate budgeting, or delegate budgeting, to the accounting finance team, it's just a work of fiction. When it's done collaboratively, it's awesome. And then you have to decide, what are the daily things that I'm measuring? Most likely, in a consumer products business, you're going to be measuring your marketing performance. That is the make or break in those businesses.

52:40

Another question. No, Sole Toscana does not manufacture its products. We buy from a manufacturer. For customers that produce their own products, how will that model impact the profit and loss report? It shouldn't, right? If you're manufacturing in-house, or if you are fulfilling in-house, for example, let me go back to the basic dashboard because it's a little bit easier to read. If somebody comes to me and they've got really high fulfillment costs and they're fulfilling in house, I'd be like, let's talk about that. Is that really the best use of your resources? Manufacturing in-house, you know, that's a decision you have to decide upon, but the measurements wouldn't change depending on where you're doing that activity. These are industry best practices. When I publish my blogs, which are coming out soon, I'm going to show you reference points that correlate to this data. So whether you're doing in-house or outsourced, good cost of goods sold is good cost of goods sold. Good fulfillment ratio is good fulfillment ratio. Good advertising ratio is a good advertising ratio. It doesn't really change. Now, it might change by industry, and I can tell you for a consumer products business, these things, there's multiple sources I can point to and say these are general best practices. The reality is an individual business is going to vary based on their product, based on what they're selling, where they're selling, how they're selling, but they should ideally be between that range.

54:27

All right, part three, we're going to dive into the balance sheet, cash flow statements. It's going to be in a couple of weeks. Again, if you need help, we're going to have help. I'd love to take questions, and I'd love to get your feedback so I can measure, did I improve your understanding of a profit and loss? So hit me up with your questions, please, and tell me how your comfort level is in reading a profit and loss statement, so I can understand if I helped you progress or not. What questions do you have, other than the ones you've already asked?

55:16

All right, if you have no other questions, I'm going to drop a few items in the chat. Thank you, Sarah, for the feedback, that was very helpful. I will stick around for a few minutes to answer any questions you might have. Love to have you register for part three, love to work with you if you're interested in working with us, working with me.

55:41

Any other questions? One question, date again for part three. Part three is going to be October 16th. All of these are going to be recorded as well.

56:05

One question would be like, hey, I don't have the money to do visualized reporting. You can do it in Excel. Google can teach you how to visualize that data, but you could easily take that and visualize it in Excel if you wanted to. You don't need a third party tool to visualize your financial data.

56:32

Do I offer 30 minute consultations? We end up doing a lot of consultation as part of our sales process. We will work with customers to understand that. Yeah, so, Leslie, if you meet with my growth team, essentially we are consulting with them. If you want to work with me as an advisor, like as a CFO, or ongoing advice, I will give an hour free to anybody. So short answer is yes.

57:16

Leticia, thank you for the feedback. We'll talk more about budgeting and analytics properly once we wrap up this workshop. And yes, we'll work with most CPG customers. The reality is most CPG customers are selling online too, but if they're not, we could still support them. And Mark, yes, good to have you here. I'm going to be telling the team, you can work with them as well, get those expenses out of your COGS and get a better sense of your gross margins. Great questions. Thanks for everyone who's hanging around. Keep the questions coming, I will stay on here as long as you want to ask me questions.

58:12

Let me tell you, as a side note, I've looked at so many profit and losses now that I can literally jump into a profit and loss, and Leslie, to your question, I can look at, if your data is clean, within about 5 to 10 minutes I can tell you where your business has issues. As you can see, I'll just go back to my example here. The issue that we are working on, and we're not the only one, is advertising. The advertising efficiency is really, really hard. I've got other customers, I've dropped in, I see, oh, they've got really expensive cost of goods sold. Let's talk about that, what's going on? Usually if you're over 30% of cost of goods sold, you're going to have some problems in ecommerce, because you need money left over, you need a big gross margin, to be able to spend on advertising and fulfillment. The only way that doesn't work is, I see it oftentimes with resellers, where it's less important that they spend in advertising as much as they optimize on the platform that they are selling at. But if you don't have a strong gross margin, it's really hard to generate profits.

59:30

These three things, I would say you can have one of them that are less than ideal. If you have two, you're probably going to struggle to succeed as a consumer products business. And if you have three that are doing really well, you're in a great position. The other thing I see is people have a great contribution margin, and I forgot to follow through on that, contribution margin would be what's left over after your COGS, your advertising, your fulfillment, your merchant fees, and then they'll have bad profits. And it's because they're spending too much on payroll, on software, on the operating expenses. They're just spending too much. So if you have a strong contribution margin, I can usually say, we can make your business profitable. It's not going to be easy, it might not be fun, you're going to feel like I'm mom, you know, putting you in the doghouse, I'm not wasting your money on stupid things. But you can get a profitable business if you have a strong contribution margin but a weak operating margin. That's the easiest business to fix, in my experience.

1:00:43

Do I feel like breaking out advertising per platform is necessary to measure? I think as you get bigger, yes, Uyi. It's very helpful to look at advertising by platform. We don't do it in this business yet, but if I'm spending 100K, it's very helpful to see where I'm spending. There's additional measurements that I would want to do. Rosie, awesome, look forward to hearing from you, my team can take care of you with sales tax. Do we do a lot of sales tax? Yeah.

1:01:13

So the question is, how many accounts should I have in my profit and loss? My answer would be, as many as you can get meaningful data out of. What is meaningful or material data? I would usually say, if it's about 1% of your spend, that it probably merits its own category. And you have to qualify that. Most of our categories, I'm going to see, we've got these other business expenses, it's kind of a place to shove it. You can see in our profit and loss, hold on, that's the wrong thing, I want to do a percentage of income. General rule of thumb, we actually have a fair amount that's small. We're probably over accounting in some cases here, it's a really easy thing to do. But I would break categories down as they get big. So we could argue right now, we should probably have advertising, we should probably have Google, and we should probably have Meta, those are the two that we spend most of our ad dollars on for this particular business. But really, I would say you measure what you're going to take action against, or you need understanding for. Great questions.

1:02:38

Any other questions? We're about four minutes overtime. If there's any other questions, I'm happy to take them. Okay. I hope, I'm going to go back and I'm going to analyze, did your comfort level in reading a profit and loss improve? Like I said, I doubt if you're at a three I got you at a 10, but if I got you from a three to a four, I feel happy about things. Thank you. Hope to see you in a few weeks on October 16th. I hope, if you like what you're hearing from me or seeing on our YouTube channel or our blogs, we'd love to work with you. I think we're nice people, I think we're pretty smart. We want to help you make your business better, and we feel like we can do that with the accounting and finance work that we do. So until next time, we'll see you later.