The Importance of Accurate Accounting for e-Commerce Businesses

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Here’s a glimpse of what you’ll learn:

  • What inspired Scott Scharf to start his accounting firm, Catching Clouds?
  • Scott’s expert tips on how to optimize cash flow during a crisis
  • FBA versus FBM orders from an accounting perspective and why e-commerce brands should invest in proper accounting
  • Changes to make to your accounting as you increase your e-commerce sales—and how to account for SKUs
  • How brands are adapting to the challenges and opportunities presented by the COVID-19 pandemic
  • The types of accounting issues that Scott helps his clients resolve
  • Scott’s advice to brands looking to sell their e-commerce businesses
  • The moment Scott realized he was good at helping e-commerce brands with their finances
  • Scott shares his strategies for building a successful Amazon business and effectively handling day-to-day operations

In this episode…

For any type of business, there are many disadvantages to a lack of good accounting records. For example, while your business may be growing and making sales every month, you may struggle to receive credit if your finances are not in order.

This is especially true for e-commerce businesses. For a number of years, banks have been reluctant to offer lines of credit to e-commerce sellers. However, as the e-commerce sector continues to grow in 2021 and beyond, these practices are changing—as long as you have good and accurate financial records. So, what are some tried-and-true strategies for improving your e-commerce accounting in the new year?

Scott Scharf, the Co-founder of Catching Clouds, joins host James Thomson in this episode of the Buy Box Experts podcast to talk about the importance of accurate accounting for e-commerce brands. Scott discusses FBA versus FBM orders from an accounting perspective, the need for proper e-commerce accounting systems, and how the COVID-19 pandemic has created new opportunities for Amazon business owners. Stay tuned.

Resources Mentioned in this episode

Sponsor for this episode…

Buy Box Experts applies decades of e-commerce experience to successfully manage their clients’ marketplace accounts. The Buy Box account managers specialize in combining an understanding of their clients’ business fundamentals and their in-depth expertise in the Amazon Marketplace.

The team works with marketplace technicians using a system of processes, proprietary software, and extensive channel experience to ensure your Amazon presence captures the opportunity in the marketplace–not only producing greater revenue and profits but also reducing or eliminating your business’ workload.

Buy Box Experts prides itself on being one of the few agencies with an SMB (small to medium-sized business) division and an Enterprise division. Buy Box does not commingle clients among divisions as each has unique needs and requirements for proper account management.

Learn more about Buy Box Experts at BuyBoxExperts.com.

Episode Transcript

Intro 0:09

Welcome to the Buy Box Experts Podcast where we bring to light the unique opportunities brands face in today’s e-commerce world.

James Thomson 0:18

I am James Thomson, one of the hosts of the Buy Box Experts Podcast. I’m a partner with Buy Box Experts and the former business head of the selling on Amazon team at Amazon, as well as the first account manager for the Fulfillment by Amazon program. Today’s episode is brought to you by Buy Box Experts. Buy Box Experts takes ambitious brands and makes them unbeatable. When you hire Buy Box Experts, you receive the strategy optimization and marketing performance you need to succeed on Amazon. Buy Box Experts is the only agency to combine executive level advisory services with expert performance management and execution of your Amazon channel strategy. Go to buyboxexperts.com to learn more. Before we get started with our guests today, I’d like to do a big shout out to the team of Disruptive Advertising. For your off Amazon advertising, Disruptive Advertising offers the highest level of service in the digital marketing industry, focusing on driving traffic, converting traffic and enterprise analytics. Disruptive helps their clients increase their bottom line month to month. Check out disruptiveadvertising.com to learn more. Today, our guest is Scott Scharf, Co-founder and Chief e-Commerce Geek at Catching Clouds, an accounting firm that specializes in accounting services for e-commerce companies. Catching Clouds specializes in helping multi channel e-commerce sellers grow their businesses by providing current accurate and actionable financial information. Scott’s firm provides virtual controller and bookkeeper services combined with the accounting cloud tools, design and management necessary to be its customers complete accounting department. Today, Scott shares his expertise on how accurate accounting helps brands to make better decisions. Welcome, Scott, thank you for joining us today on the Buy Box Experts Podcast.

Scott Scharf 2:04

Thanks, James. Good to see you.

James Thomson 2:06

So prior to running your own firm, you worked at a variety of different types of companies. And you’ve been quick to point out how companies can become inefficient and tedious to work for hence your jump into setting up your own firm with your wife, Patti, tell me more about the entrepreneurial Caesar that led you to start your own firm.

Scott Scharf 2:25

Yeah, so I mean, I started small and worked for a small I’m a long time 30 plus year geek. So I’ve had multiple different chunks to my career, I had no idea I’d end up owning any accounting practice. You know, I knew I married an accountant. Okay, so I knew that. But I it’s you know, really a lot of it was I ended up working for a bigger company than a bigger company, then the company I was working for I was purchased by a global multinational. And so I went, you know, and then I became a global subject matter expert, and I was always in the entrepreneurial groups. The leading are the emerging technology groups, I was always in those. But those large companies were so inefficient, okay, they were just, the management teams would move in and out once or twice a year and try to change everything and didn’t know anything about the business. And I know you’ve worked for a big company, too. So it was it was, it was frustrating to know and for me, and I was so happy to come back to having my own company with with my partner and wife, and really have a more direct impact when you’re dealing with an entrepreneur, okay, which I’m an entrepreneur and their peers, they want to get stuff done, okay? They just want to get stuff done. They’re open to new ideas. And they either say yes or no, for the most part, too. Yeah, I’ll do that. No, I won’t. And you know, and you can move on, and you make things happen. And so it’s just so much nicer. I love our clients really interacting with them, I really consider him peers and friends in some cases, because they just they’re, they’ve got the right attitude they want to build, they take risks, they risk capital, whether it’s their kids college fund, or their investments to focus in on this crazy world that is e-commerce, they know. Um, and they’re just really interesting people. And they’re passionate about being, you know, experts, either being entrepreneurs and running business, or running a warehouse or social media or product design, or all the different aspects, all of them or just a few of this, and it’s just fun.

James Thomson 4:30

So, as an entrepreneur, you get to be much more involved in publishing original thought. One of the topics you published on recently is how to optimize cash flow during a crisis. For many brands. COVID has created challenges around cash flow. I’d love to get your thoughts on what recommendations you have for brands dealing with shifting customer demand, potentially unused overhead labor challenges and all the likes caused by COVID.

Scott Scharf 4:58

Yeah, well, I mean, the biggest change Challenge, but our clients and all the sellers I’m talking to is they’re up 100 200 300 400% or more, you know, in sales, which is great, and everybody wants to keep up with that growth, since we’ve kind of popped the ceiling on, you know, where e-commerce was of total retail. And now it’s just accelerating like crazy. So the challenge that one of the challenge for the people that don’t have accurate financials is you can’t take those to the bank, I’ve talked to so many sellers, that are like, Look, I have enough sales to justify, you know, a million dollar line of credit, or 200,000, or 10 times more than they ever had before. Yeah, they don’t have a balance sheet that balances or a profit and loss statement they can take to a bank to get a large line of credit, okay? To be able to keep up with those things. So they have cash flow to actually spend otherwise, it’s you can run out of inventory, then you get paid for it, you sell, then you get the money for it, then you can buy new inventory, and then you’re back out and there’s just a versus having enough cash to keep track of all of those things. So that’s the first challenge is just not having enough capital to support the cash flow of a growing e-commerce business. The next step,

James Thomson 6:14

just a quick aside, you said something very interesting. You said going to the bank 10 years ago, banks wouldn’t lend money to e-commerce sellers. Are you starting to see banks becoming more open to companies that are primarily FBA businesses?

Scott Scharf 6:30

Thanks. Thanks for the pain, okay, then you’re right, they wouldn’t even talk to e-commerce businesses, they’ll talk to them now. And you have to have been in business for at least a couple years. And you really have to jump through a bunch of hoops. But it really does work out once you get if you have that right banking relationship, the bank is kind of the first best cheapest place to get funds. Okay, for general ongoing operating funds. Now, you can’t there’s a ton of opportunities around SBA loans. And that would be the kind of the next level if you can go and apply for one of those as a small business, because then that can be very cheap money on good long term turns. And then once you’ve got that you’ve got short term things like, you know, brax, and clearbank, and a bunch of these other shorter term pieces, but you have to watch out when you need all that capital, you’re either tapping into your own funds, or friends or family or other investors or giving up equity. Or you’re going to online loan shark. I mean, when you do the math on some of the capital loans from the marketplaces, or the shopping carts, or the various companies that pop up saying, hey, we’ll lend you half a million dollars. And then you realize you have to pay 50 grand a day to pay it off, you know. So it’s just interesting.

James Thomson 7:48

Sorry, I cut you off. And you’re talking about some of these cash flow challenges around COVID. Yeah.

Scott Scharf 7:52

So the first thing you can’t know what your free cash flow is, if your bookkeeping is not up to date, okay, so you can build a cash flow only projection that shows, here’s the income, here’s my Amazon income every two weeks, here’s my Shopify income every day. And you know, pull that, you know, Amazon income using Payability or Payoneer, or other tools. But but the, you know, if you don’t have at least a spreadsheet that says, These are my expenses, this is where I have payroll, this is where these are my regular monthly warehouse, shipping, you know, whatever expenses, so you know how much free cash flow because the goal is to end up with a spreadsheet that looks out short term to 468 weeks, that will let you know how much available cash you have to pay for inventory, marketing, okay, investing in the business, new products, other things that you’re doing. And then, and then, you know, if you choose to money out for the business, you know, for the owner, so it’s breaking it down to those things, and then figuring out, the next step is what is the mix of those things? You know, we’ve seen a lot of a lot of sellers that just have run away advertising. And one of the great ways to preserve your cash flow is just to get really, really picky about that and invest the least amount of money in marketing that gets you the results that you want. And make sure you don’t know, you have exclusive coupons so people can double up your coupons and make sure that you are really tracking and you don’t have any settings that let you have a runaway marketing expense that just chews up all your profitability or more.

James Thomson 9:33

So let me ask you in Q4, we’re already seeing rather significant bottlenecks in Amazon’s ability to handle FBA inbound shipments, as well as getting shipments out the door to customers on time, that may drive sellers to invest in systems that support merchant fulfilled orders. From an accounting perspective. What do you think about FBA orders versus versus merchant fulfilled orders? And what should sellers Be prepared to do in their accounting numbers to deal with that The differences between these two fulfillment options.

Scott Scharf 10:03

They’re from an accounting perspective there doesn’t, there isn’t that much of an impact for FBA versus FBM. sellers. And we have a combination of clients that are doing both and we have clients doing seller fulfilled prime. And looking at it, it’s really more from an accounting perspective, the main thing is being able to at least monthly review your costs, so you understand the impacts of making these things. So you can adjust your pricing. Because if you haven’t set your pricing high enough, you understand your landed costs, the buy costs, plus all the costs to ship it, whether it’s an FBM, or FBA, you could be selling your product at a loss and not realize it, then, then it’s just a matter I talk about, you know, businesses being resilient, both in their accounting as a business, their supply chain, and then their fulfillment. So in their fulfillment, you want to mix that up between fbm, whether it’s your own warehouse, or a 3Pl. And then you want to make sure you have metrics to allow you to measure the success and the cost of those things. Even if it’s a reality that you have to if you can’t, you know, get your products into Amazon or get them out of Amazon, you need to do something else. And so many sellers are doing that they all learned that this spring, when you know, all of a sudden, you know, 99% of some businesses inventory was all locked up, right?

James Thomson 11:24

So it seems like common sense to say the firm’s should know how much money they’re making. But in my time working with Amazon sellers, I am just amazed how many don’t have accurate or timely numbers to track their financial performance. Without scaring sellers? How do you encourage prospective clients to make the investment in proper accounting? And what does such accounting do to help improve their ability to make even more money? Cool?

Scott Scharf 11:50

That’s a great question. So I mean, most sellers did not go into business, okay to do accounting, or pay sales taxes, or manage people or whatever else, they have a bigger ‘why’. Okay, and we’ve looked at cod now. And you probably used to. Look, I’ve probably looked at 2000 sellers’ books over the last nine years. Okay, so we’ve had a good smattering, and we’re only working with a small percentage of those. So the biggest thing that we care about is being able to make those great decisions. Okay, so there are great real time tools that will tell you profitability, per SKU profitability, per order, the velocity of sales of your different products, and all those different things that are great real time tools, okay. And they can provide really good information. But there’s a big difference between that and double entry accounting, where all the accounting is done, right, every transaction there, it’s coded properly. And then the books are reconciled, where that means you can have data flowing into your accounting all day long. But if you don’t compare it to a bank statement, or a merchant provider statement, like Shopify payments, or PayPal, or whatever, you could think you have a million dollars, and the bank thinks you have 50,000 in the bank unless you catch it and can prove it. But the real value is the ability to make great decisions, the ability on a either daily, weekly, or monthly basis to be able to look at your financials, and understand when you make a decision on lightning sale or something else. What was the impact on your financial situation so you can decide that was a good thing. And after everything shake has shaken out. That was a good decision, or, or not. And you can adjust, you know, accordingly. And another nice thing in this world is that accounting if done, right, every bank account every transaction, you have somebody that makes sure that the balance sheet balances, it’s the truth, it’s actual truth that you can take, you can use to make decisions you can take to the bank, you can take it to investors, you can use it to sell your your business if you’re burnt out. So the real value is that gut check. So we meet with our clients monthly. And to me, it’s the most critical thing. Yes, we do all the background work and everything else in the background. When we talk to our clients, and they go, Wait, I thought I made $200,000 on Shopify, and then we go No, you made, you know, 150 because the Shopify dashboard showing you voided orders that you never got paid for. And the whole point is to just to just that gut feeling. And you know, when we first start off with sellers, it’s off by like 20, or 30%, what they think and what their real time numbers are, and the accounting number, then we can refine their costs and other strategies, they get to the point where it’s 5%, higher, 5% lower. So they know when they look at the real time tools, they go, Oh, I add 5% I’m doing 5% better, I’m always doing five or 10% worse. And then you can do that and then you just adjust your gut and, and that’s how we have a client that I just saw a report from last year we identified a number of issues and their internal profitability is up 1,000%. Now, some of that was but some of it was us providing financials and pointing out the issues on shipping costs and other stuff, and how much they were spending on marketing. And then they just made the hard decisions and stuck to them. You know, they cut back on marketing spend, they, you know, they optimize their seller fulfilled prime and did other stuff that really optimize it, but they wouldn’t have known where to focus without accurate financial. So there’s just a ton of value, you can sleep better at night, if your spouse’s involved you can tell them when they ask you, are you making any money I’m working, but yes, are you making any money? Being able to answer those questions are pretty critical if you know, if you are magically, how stressed would it be if you’re magically teleported on the shark tank? Okay? Because you don’t know those numbers, you really couldn’t answer those questions. And that’s really the key value of you know, having accurate financials, it makes you a better long term business.

James Thomson 15:51

So one of the one of the shifts that I’ve seen recently is that, you know, a number of our clients are well described, as you know, national brands or brands that already started in physical retail, and now they’re coming online, they’ve already got an accounting department, with accounting purposes. Oh, great, you had an Amazon. And yet, what I’m seeing over and over again, is that the typical accounting organization is having to learn a bunch of new stuff to be able to tackle the eccentricities of what happens with e-commerce accounting. So talk to me about the kinds of changes in perspective that an organization needs to take on in order to incorporate some of the uniqueness of what happens in e-commerce.

Scott Scharf 16:33

Yeah, so I mean, first, they have to understand the fundamentals and all the terminology of the value for us, for anybody talking with you or me, we already know short term, long term storage fees, removals disposals, FBA reimbursements, which is still a magical mystical thing that happens, we write down the numbers. So for those accounting departments, you have to take the time to learn, you know, what’s going on and actually ask questions. The next piece is what’s critical. And what we focus on is you have to understand the data. Okay, where is the data? What data is available? What data can I download? What data can I use with apps, that if you’re not willing to grapple the data, you’ll never get a handle on it to understand whether you use the Amazon transaction report or the sales tax report? Or just the settlement report? Or which of the inventory reports can you trust at what times of the month, I mean, if you haven’t figured out those key things, and then some of the accounting we talked about, we do, what we do is accounting, we do gap, like generally accepted accounting principles. And so the ideas, but the biggest thing is to, if they’re a larger company, they might have any RP like NetSuite and might pull in every transaction, okay, not only into their operations, and cloud inventory tracking, but also into the accounting. And they really have to understand that I’ve talked to dozens and dozens of sellers on NetSuite that can never reconcile what’s going on in Amazon. Because not all of the financial data flows through orders, it flows through orders and the settlement statement. And they have to understand how those things come together and how to reconcile and adjust for those. You know, we’ve been using the same tool A2X Accounting for six years now to post Amazon. And now working with them, we have Shopify, Walmart, and eBay, in which it takes all that data, aggregates it in an accounting way and posts it following a cruel method. So it splits the image, you know, the income, and then you can align your cost of goods sold. But really, it’s income posting, cost of goods sold, and sales tax are the three critical things that you have to understand as an accounting department, that if you can post your income, preferably in a summary fashion is what we recommend, especially for smaller sellers, then being able to understand the costs and what cost of goods sold and the timing of orders. And then being able to track that same order data to make sure that you know, you’re collecting sales tax properly and filing it properly. Those are the key components.

James Thomson 19:00

So you talked about some of these accounting essentials that you need to be aware of, if you’re doing e-commerce, one of the one of the issues that I run into with our clients is this whole concept of how do you do SKU rationalization? How do you do p&l at the SKU level, so that you can make sense of the fact that oops, a bunch of the stuff I sell, I don’t make any money on Amazon because of various types of fees? How do you if you’re a brand that’s never done SKU level analysis? What does that transition look like when you go from, hey, I have finally had an accountant who does my full books down to have an accountant who does my full books and tells me how to look at individual SKUs from a profitability perspective.

Scott Scharf 19:42

Yeah, so I mean, typically, that’s a virtual CFO level versus the day to day, bookkeeping, accounting and controller level work. So that is typically a more advanced piece. Since we work with Xero and many sellers are on Xero or QuickBooks Online, which can’t support every transaction you Already got summary data, you can’t do that analysis that SKU analysis inside your financials, you can with NetSuite or higher end DRP. But it takes a lot of work to get there. Yep. So we first look at a combination of dashboards and tools, things like inventory dash planner, and others that will do that automatically aggregate that together and get you better real time. So all you have to do is upload your costs, and it gives you analytics on the velocity of sales, profitability per SKU, because you can have SKUs people don’t realize they can have a SKU that has a lower profitability, it’s not your higher profit SKU, but it sells 10 times more than anything else, and it’s making 80% of your money. Once you know that, you can focus on that and know where to cut it back. So it’s a combination of either leveraging the tools and really getting familiar with the data, hiring virtual assistants to pull it together so that the owners are doing that, yes, or hiring a virtual CFO, which you know, we can provide or a ton of others that will do that analysis. But I always want to flip that CFO view on its head where they’re not spending 80 or 90% of their time being spreadsheet monkeys or analyzing data. There, we flip it over where they’re spending 20% of their time analyzing the data, finding the insights, and the next 80%, providing feedback and advisory services and consulting to the entrepreneurs or their operations teams to make that move forward.

James Thomson 21:26

Thank you, Scott. So I want to shift gears here a little bit, I want to talk about some of the shifting consumer preferences that have happened since we went into lockdown. Consumers are changing the way they allocate various parts of their wallet and moving disproportionate dollars to online. Talk to me about some of the short term changes that you’ve seen with your firm’s clients around things they’ve had to do to deal with some of these changing consumer preferences. You talked earlier about rapid growth of sales for some of them. But what does that mean? The implications to the business that you end up having to help coach them on?

Scott Scharf 22:01

Yeah, I mean, well, it’s first looking at cash flow. So they understand how much cash they have to invest in either new supply chains, new partners, new products, or just looking at resiliency on your supply chain. I mean, most people realize they need not only a China supplier, but Vietnam, India, US, whatever. So you’ve got that piece to make sure that it’s there. And then the kind of the next thing is you’ve got to stop and the owner no matter what has to pull themselves out and work on the business, not in the business. So they might have roles in the business. But if you don’t have somebody stepping outside and looking at what’s going on and questioning things, and challenging things, that’s, that’s to me, one of the biggest challenges, they get consumed with fulfillment for three weeks and then pop up. And then they didn’t do any purchasing, and then they ran out of products. So a lot of it is just focus and keep mine I’ve, I’ve got entrepreneurial add just like most of our clients, like I’ve got an attention span this long, which is why I married an accountant who takes care of other stuff. But you want to make sure that you’re looking at those things, and that you’re checking your cash flow. Really, if you’re doing rapid global growth, you should be looking at it weekly, okay, sometimes daily. But really, you need to be looking at it weekly to understand, Do I have enough cash to keep things going for the next week, two weeks, four weeks really becomes one of the critical things that they need to look at. Because otherwise you run out of capital, you can’t buy more inventory or you know, things moved around. The other impacts have been if they didn’t think about their businesses and growth, we’ve had our clients hire more people this year than we’ve seen most of our clients run pretty lean. Yeah, most of them have increased their virtual assistants and have increased their staff in the US whether they have a warehouse or not, but they have a warehouse, all of them had to go into multi shifts. I mean, they they had to have split shifts and gap them up and group this group of 10 together on this side of the warehouse, and they had to have another group that worked together and could be closer to each other like new things people didn’t even you know, consider that you don’t only have to understand your products and your business from a perspective of Chinese competitors or competition or, you know, seasonality. But now you have to, you have to understand how you run your business and how your products work in a pandemic in the lockdown situation.

James Thomson 24:23

What are some of the unresolved issues that you’re still working to solve for your clients? What makes those issues harder to solve than other types of issues?

Scott Scharf 24:33

Yeah, I mean, some of the same ones that have been trying to solve for a while but it just has so much data one is FBA reimbursements. So we can post them positive or negative and track FBA reimbursements from an income perspective, but the part that we don’t have is Amazon doesn’t always and very rarely provides a SKU that relates to the FDA reimbursement. So you can’t move the cost of goods sold appropriately and it can be 10s of 1000s of dollars for some sellers. Which means we have 10s of 1000s of dollars of inventory, which throws off your inventory numbers. That’s one of the key ones that I’m focusing on. I’d like a better more automated solution around removals and disposals. So it’s one of those reports that if you run it every five minutes or every other day, it changes. Okay? Like if you’re kicking off removals or disposals and so we just run it on the 10th of the month to look at the prior month, just so it’s consistent, because it’s here. And I would like more data around there. What are some of the other things that we’re working on? Yeah, it’s, it really, it’s, you know, finding more KPIs, contribution margin and other things that we’re already providing. And really looking at those things that provide meaningful information. So I’m always digging for more of those, where can I look at the data and provide more insights, either automatically, or see where those pop out in the financials so that we can say, oh, when this happens, we need to go look at vendor deposits, or inventory deposits or inbound inventory or inventory disappearing into unsellable at Amazon that sellers aren’t paying attention to it. It’s a combination of those same things.

James Thomson 26:17

Are there unexpected opportunities that COVID has created for your business or for your clients? businesses?

Scott Scharf 26:25

Yeah, for us, it went from me talking to a fair number of sellers that are like, yeah, accounting and bookkeeping. Yeah, I do it once a weekend. And it’s not that important. But it turned out that having detailed accurate financials, when things are good, and normal is pretty important. But when it’s crazy, it’s critical. Okay, so I am talking to more sellers than I ever have, who were like, yeah, now this is important, you know. And so, so like, because they can’t go to the bank to get more money, or they want to sell, but no one will talk to them. Because all I can say is look at these sales, but we’re like, we don’t know how profitable you are. So why would we buy your business, you know, I mean, they might buy the brand and care about the brand and the product, and you can sell it for that or your social media following if it’s big enough. But one of the critical components is not only a focus brand, not only a solid social media and marketing strategy, but accurate financials. And so people are starting to realize that it is a critical tool, of the many, they’ve got real time tools. But it’s really such a great double check that they’re starting to realize, look, this is the value. And if I want to keep doing this e-commerce thing, not only now while it’s crazy and growing, but for the long term, I need to have accurate financials and be a real business can’t be a hobby.

James Thomson 27:42

So you talked about people potentially wanting to sell their businesses in the last eight months, a huge increase among investors to buy FBA businesses, private label brands on Amazon are becoming a hot commodity. What guidance would you provide to these firms as they think about the journey to getting ready to sell their business to an investor?

Scott Scharf 28:01

Yeah, so start now, even if you’re not planning on selling for two or three years, okay, work on your financials, make sure your business is as structured and efficient. So all the great decisions to make you profit out of the business are the same. So those same decisions are there. And then talk to a broker now talk to a broker now talk to them once a year, every six months, so that you understand what those buyers are looking at, and that you can make some adjustments, not major ones, but minor ones to what you’re doing so that you understand I’m a big believer in having a hit by a bus and doing anything possible to deal with Murphy, having insurance and the other pieces. But that same hit by a bus if something happened to me, I got sick, which lots of people are getting sick this year. What would I do? How do I preserve all this time and effort and equity and capital that I’ve thrown into this business? How do I make sure that that something positive happens with that if something happens to you that you could sell the business and that you’ve already got a plan and at least a business card for your founder, your partners or your spouse or whoever to sell your viable business versus it just imploding when you’re not there. So it’s it’s more planning those things and taking that step back of really evaluating where you are working on you’re hit by a bus, but go talk to a broker and understand if that makes

James Thomson 29:21

a priority? How long does it take to get your numbers in order and start doing some of these little course corrections? You talked about, you know, 18, 24 months? Realistically, if that is gonna apply to most companies that well, that’s been taken accounting as a, I’m sure it’s got.

Scott Scharf 29:38

Sorry, me too. Sorry. So that’s kind of how long your timeline for selling is. So in general, if we’re experts, we onboard multiple clients. Every month, we hold our accounting data and clean all the time I talked to somebody, it’s about 90 days. So our onboarding is about a month but there’s a decision and back and forth and whatever else. So our onboarding takes About four weeks to clean up a year on multiple camping. And we rerun it all from scratch, almost nobody systems are clean enough for us to use their existing zero file or and we don’t use QBO, we convert people off QBO. So you’re looking at it, it’s probably, if you’re outsourcing it probably a 90 day project, if you decide to do it internally, it’s probably a six month project until you have all the processes and learn the basics to the point where you’re like, Oh, this is really working. You know, in an outsourced model and provide outsourced services, there’s kind of a peak right at the beginning for the first week or two for the owners, and then they get a ton of time back. And then after whatever timeframe now make it clear, they’re 100% responsible for the success of an outsourcing relationship, or converting your accounting or working with, you know, firebox experts or whoever else, that they have to stay plugged in as the owner project lead, overseeing what’s going on, but they sure don’t have to do all the work, they don’t have to become an accounting expert then have to learn zero or QBO. There are people who can hire whether it’s companies like ours, or virtual assistants, or hire local staff, if you want somebody that you can, you know, see in person which doesn’t happen which is less of a key thing today. Those are really the key things to work on.

James Thomson 31:19

It’s fun listening to talk about the stuff, Scott because it rolls right off your tongue. I mean, you’ve seen you’ve seen these stories play out over and over and over again. Tell me a little bit about was there a turning point for you when you realized I’m good at working with brands and helping them think through? Not just the accounting portion? But what to make of the numbers and how to help them think about growth? By leveraging the data? Was it there? Was there a moment where you said, Yeah, you know, I have a business, but I think I think this was fun. I think I’m gonna keep doing this.

Scott Scharf 31:53

Yeah. So I mean, you can’t be as lucky as I am and marry an accountant. So I knew some about accounting, I had looked at financials I had been responsible for, you know, the EBIT up for different things that I had done and whatever else over time, but there’s a really big difference in the fact that we run our business. So you know, Patty’s, our CEO, and CFO and presents me the financials, not only for our business, but also personally in Xero. And the same thing. That our first client in January of 2012, was an Amazon seller. Okay. And so, if we looked and I went, Wow, this is really complex. There’s a lot of data, it’s dynamically changing. Now, I still think and I don’t know what your number is, but I think it’s at least 10 or 20 times harder to sell on Amazon than it was way back then. You know, for the people that caught on and realize they could do it, you know, they really did really well, for a number of years, they’re sure, they’ll do well on it now. And so we looked at it. And at the beginning, we took on a few clients, that local Chamber of Commerce and other stuff, but we always knew we’d pick a niche. And when we decided to be 100%, about a year and a half in 100%, e-commerce, it just freed us up to focus, like, Look, this is what we do. These are the sellers, we talked to enough to talk to a restaurant or a nonprofit or anybody else is that focus. And then the big learning piece for me is you just do the same thing, no matter whether it’s boring or not. It’s you having the same conversation, you did your presentation at the beginning of this and you say that all the time. And that’s the exact same thing you’ve probably said for years. And that’s where the real value is. And then it turns out that you can start to get those benefits where it’s easier on you, it’s easier to remember you can be more focused on your marketing, your communication, and the value you provide. And then you have less to deal with as an entrepreneur and you can, you know, take a break and read a book and know that you don’t have 5 million things to do, just 2 million because you’re an entrepreneur. So I mean that it was really that focusing on the niche and there’s riches in the niches Same thing for e-commerce sellers, you know, trying to do the scattered shotgun approach on 20 different categories of products and whatever else is distracting the more you narrow things down even though it’s scary for most people, the better off you’ll be.

James Thomson 34:10

Let me let me wrap up our conversation by asking you a very open ended question. What advice gathered from all of your experience working with all the types of e-commerce brands you work with? What advice would you give to an online brand that’s looking to build a successful Amazon business?

Scott Scharf 34:33

Try not to repeat what I’ve already said. He

James Thomson 34:36

talked he talked extensively about know your cash flow,

Scott Scharf 34:38

I get that I mean it. So you got to focus on bills working on your business and yourself as an entrepreneur. So I’m a huge Simon Sinek fan. I’ve got The Infinite Game and you know, Leaders Eat Last and a bunch of other stuff that you have to make the time to focus on becoming a better leader, a better entrepreneur. newer and better understanding your business, Patti and I’ve been doing there’s a great book called Traction that’s part of EOS entrepreneurial operating system. So what I would say is most sellers haven’t run a business, or they worked in finance for a big company. But a bunch of other people did all the finance and accounting and bookkeeping. For they haven’t built and sold three or four businesses and gone through it, some of some e-commerce sellers are and they’ve done this over and over, and they’ve done the startup thing, but most haven’t. And things like the entrepreneurial operating system provides a structure to provide focus for somebody with the ideas and popping all over to really be able to focus on the business. And so we’re actually tuning up how we’re using EOS internally, to make us more efficient. And so that’s really, it’s that it’s making sure you don’t get like I said before sucked into the doing the work in the business, you have to make it because that’s the only way to make sure that the business is going where you want it to and you don’t open your eyes six months later and go, Oh, Hmm, what happened when we were selling whatever. And now we’re selling a completely different product, how that happened over the last six months, and it could be you pivoted because of COVID, you had products that didn’t sell in a lockdown. And now you do. But if you’re not paying attention, and that’s probably the biggest thing, it’s just really hard to take a step back and get perspective.

James Thomson 36:25

Let me push back just a little bit here. Having been a small business owner selling products on Amazon, one of the things that benefitted me the most was to actually get my hands dirty and understand all the day to day stuff. And once you’re in the dirt, and you’re dealing with all this stuff, how do you extract yourself so that you can work on the business, because the reality is, even if I hire somebody do this and that on terms of the day to day stuff I need, I need to continue to have some pulse of what’s happening day to day to be able to then extrapolate and look at the big picture.

Scott Scharf 37:00

That’s a great point. So I do think every seller, no matter what you like or dislike should wear every hat in the business, packaging, shipping accounting, bookkeeping, like you need to wear every hat long enough, even if you hate it, or you don’t have the skills for it, to have an understanding of what’s going on. And when I say pulling that out, you might only need it if you’re really efficient 5% of your time to work on the business. And you can spend the rest working in the business because what happens is most sellers and most entrepreneurs and hiring people to do the stuff they don’t like like accounting and sales tax, and maybe operations or shipping or whatever else. And then if they don’t like marketing, they hire a marketing company or a marketing person. And then they gravitate. The promise is when they spend 100% of their time doing that thing, whether it’s product design, or purchasing or you know, running their Amazon store or whatever else. But in general, I would say you probably need to stand if you’re not spending any time, you need to figure out how to get a third of your time available to work on the business, okay, and then then you can spend the rest of your time doing all those things where you have to jump in and help and you have a huge order and everybody all hands on deck, that’s great. And then as you get more efficient with your time, you can get that down to a quarter or 20%, or somewhere between five and 10% of the time has to be worked on the business. Or if you’re really efficient about hiring those outsourcers and you have ways to monitor what they’re doing, whether it’s an internal staff person or an app external efficiently, then you get more and more time and you can spend less time working in the business. And then you can just pick and choose and go this week, I’m going to do marketing. And you know, next month I’m going to do product design or design a product. But if you don’t block out and lock out that time to go for a walk and think and everything else, you can’t do it but it’s really hard to make that shift to go Wait, I don’t have a third of my time, that would be even less sleep. You know, start with 5% and then add another five and then another five and go look every morning from six to seven after my workout. I only work on the business and plans and then you throw yourself into the rest of the business but you have to make those calls. 

James Thomson 39:11

Scott, I want to thank you for joining us today on our podcast. For those listeners interested in learning more about Scott’s organization, please visit catchingclouds.net. Thank you and we’ll see you again on the next podcast. And now to finish today’s podcast, I’d like to share some final thoughts. For third party sellers to be successful on Amazon, a critical level will be soliciting feedback from customers. We at Buy Box Experts are really big fans of the team at eComEngine and it’s tools that help Amazon sellers to simplify the process of messaging customers of Amazon orders. To learn more go to ecomengine.com. And with that, I want to thank you for listening today and I look forward to joining you next time on the Buy Box Experts Podcast.

Outro 39:55

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Meet the Speakers

Scott Scharf

Co-founder and Chief e-Commerce Geek at Catching Cloud

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