Best Metrics for E-commerce

Stephen Brown, COO of LedgerGurus, shares critical financial metrics and challenges facing modern e-commerce businesses, from understanding true contribution margins to navigating complex cash conversion cycles. He breaks down the evolving landscape of e-commerce financing, warning against predatory merchant cash advances while highlighting emerging specialized lending solutions. The conversation provides valuable insights into how e-commerce companies can maintain profitability in an increasingly competitive market, with practical guidance on managing everything from inventory cycles to sales tax compliance.

Learn more about Peerview Data
https://www.peerviewdata.com

Connect with Stephen Brown
https://ledgergurus.com/about
https://www.linkedin.com/in/stebro

Connect with Glenn Dunlap
https://linkedin.com/in/glenn-dunlap

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• (00:00) - Welcome to Best Metrics
• (00:44) - Meet Stephen Brown, COO of LedgerGurus
• (02:46) - Understanding the E-commerce Landscape
• (08:03) - Key Financial Metrics for E-commerce
• (16:34) - Navigating the Cash Conversion Cycle
• (20:38) - Impact of Global Events on E-commerce
• (23:48) - Tariffs and the Future of Manufacturing
• (28:37) - Challenges in Traditional Lending
• (38:48) - Legal and IP Protection in E-commerce
• (43:39) - Complexities in E-commerce Accounting
• (52:35) - Future of E-commerce and Retail
• (54:52) - Conclusion and Contact Information

Creators & Guests

Host

Glenn Dunlap

Glenn Dunlap is the Co-Founder & CEO of Peerview Data

Guest

Stephen Brown

Chief Operating Officer of LedgerGurus

What is Best Metrics?

Welcome to Best Metrics, where we dive deep into how industry experts evaluate financial statements and the key metrics they use to help their clients improve. Each episode, host Glenn Dunlap sits down with leading professionals to discuss their analytical approaches, the insights they uncover, and practical advice you can apply to your own practice.

There may be errors in spelling, grammar, and accuracy in this machine-generated transcript.

PeerView Data: Welcome to the Best Metrix podcast. Each episode, we meet with industry experts to discuss how they evaluate financial statements, what metrics they commonly use, and how their clients have improved. We'll also gather suggestions of how you can incorporate the same insights and processes into your own practice. Thanks for listening and enjoy this episode.

Glenn Dunlap: Welcome to the Best Metrix podcast. Today [00:00:30] we're exploring the financial metrics for an industry that most of us interact with on a daily basis. The best metrics for e-commerce businesses. So challenges with this industry can range from high customer acquisition costs in a competitive market to challenges with shipping rates and inventory management. So here to shed some light on the subject of is is the CEO of ledger gurus, Stephen Brown. Stephen, welcome to the show.

Steven Brown: Thanks, Glenn.

Glenn Dunlap: Yeah, glad to have you here. So just a little bit of background on Stephen. Stephen comes to us with a decade of broad experience at ledger gurus. [00:01:00] He has developed and led teams across accounting, finance and it implemented the EOS system and established key partnerships. His background includes the conference speaking financial tech certifications and advising small businesses on strategic growth, cashflow planning and technology implementation. Before exploring the subject of e-commerce, let's highlight Ledger Guru, which is an accounting firm specializing in small to medium sized e-commerce businesses. They combine e-commerce, specialized accountants, processes and technology to provide a solution that matures and [00:01:30] advances the e-commerce businesses. So, Steven, I'd love to hear more about ledger gurus and have you share some some about what you guys are up to.

Steven Brown: Yeah, we just celebrated our 10th year in business.

Glenn Dunlap: Congratulations.

Steven Brown: My business partner is also my wife. Don't recommend that for many people.

Glenn Dunlap: That's right. Yeah that's right. I'm laughing. Honey, only because I love you know, it's.

Steven Brown: Better for most marriages that you don't work together. But she's the CPA. She had an idea about ten years ago, she was working as a CFO [00:02:00] for a construction company, went to a conference and was inspired to start an outsourced accounting business. Now everybody calls it CAS or client accounting services. And I got involved about two years in. I'm the dumb MBA. I have a technology an engineering bachelor's. That's right, a technology background and an MBA. So but I do a lot of our more higher level advising stuff because I'm looking at more of the big picture with our customers and our team.

Glenn Dunlap: Okay. So where are you located?

Steven Brown: We're a virtual firm, [00:02:30] but our headquarters is here in Utah. Greater salt Lake area.

Glenn Dunlap: Oh, is that right? Okay. Greater salt Lake. And then how many on your team?

Steven Brown: We got about 50 people across the company here in the US. And a couple foreign employees as well.

Glenn Dunlap: Okay, fantastic. So talk about e-commerce. What do you what? It's all in e-commerce or as you're thinking about that, I mean, who are you serving in that space.

Steven Brown: So we typically are serving Shopify sellers. So direct to consumer, they're usually people that have [00:03:00] come up with a really great idea. Sometimes they're Amazon sellers. They're kind of like related but different creatures, right? So the DTC, they've got an idea. They usually figure out the manufacturing have proprietary products. Amazon sellers oftentimes are reselling products and you obviously have other marketplaces. But for the most part, most people are either selling on Shopify or Amazon, oftentimes a mix of of the two and often secondary markets as well.

Glenn Dunlap: Yeah. So that that does sound like it has [00:03:30] quite a quite a bit of challenges. If you're going direct to consumer, that means you're you're designing, you know, creating a product, manufacturing it, storing it, shipping it. You've got the, the whole sort of soup to nuts there. Right.

Steven Brown: So yeah, typically what we see, um, there are people that do their own manufacturing, but there's a huge amount of outsourcing in this industry. So they'll they'll source to China heavily unless they have a product that's unique to a certain location. They're outsourcing fulfillment a lot of the times. And so they're a highly [00:04:00] leveraged business. And their their main capabilities usually are in the form of product design and marketing. And everything else goes to outsourced people like ourselves.

Glenn Dunlap: Okay. That's interesting. So do most of them stay pretty lean and mean in terms of the size of their their internal staff?

Steven Brown: You can get pretty big in these these spaces without having a huge staff. The things that will change, that is if you're doing any of your own manufacturing, if you're doing [00:04:30] any of your own fulfillment and have a warehouse. Um, but I've seen, you know, businesses 10 to 20 million with really small staffs.

Glenn Dunlap: Yeah, yeah, I could see how if you're like you said, if you're contracting out a lot of that stuff, then I could see how that would be the case where you're, um, able to keep that internal staff pretty small.

Steven Brown: Yeah, yeah, it's a highly leveraged industry. Um, and it allows them. You see, there's a lot of interesting nuances there. You see a lot of people that are perpetually [00:05:00] traveling, right? They're running their businesses while they travel from country to country. There's there's interesting nuances like that, or a lot of times they're just really passionate about a product. They start in the garage, the product takes off before they know it, they've got a full blown business and they're off to the races. Mm.

Glenn Dunlap: That's great. Uh, can you highlight any of the products or is this something you can, you can share or give us a sense of the just the types of products that you're working with?

Steven Brown: Oh, it's all over the place. We have a number of apparel brands. We have a [00:05:30] wallet and carry brand. We have, uh, Catholic products brand. We have, um, personal care. I mean, it's it's really e-commerce lends itself to almost anything, but there's certain product categories that are that are more successful than others. One of my favorites that I'm working with now is a golf apparel brand. So they have these really great golf shirts. Uh, shout out to Sunday swagger.

Glenn Dunlap: Um.

Steven Brown: Cool, cool, cool products like that, but that's one of the fun parts of that is we get to see really cool ideas and [00:06:00] that our customers come up with and take to market.

Glenn Dunlap: It's and it's a lot of it really fast. Do you see that? That's just sort of time to market. Do they because they're they're able to contract manufacturer and do a lot of this stuff. Are they able to go from concept to reality in a you spin it up pretty quick.

Steven Brown: Uh, yes and no. I mean, it depends on the product category, right? Like apparel, you can go pretty fast and you need to just because of trends. Um, and apparel lends itself really nicely to e-commerce because it's lightweight [00:06:30] and compact, so easy to ship. But some some products require more intensive manufacturing. And so it's really all over the place, right? You get some people that they can crank out product really quickly, especially if they have stateside capabilities. Um, others, they have to use more specialized manufacturing.

Glenn Dunlap: Interesting. Interesting. Well, it's, um, it seems like that that is a the internet for sure, for sure. But then also all the social networks have just made this, [00:07:00] you know, possible to reach people in ways that we never would have. You know, before it was ads in a newspaper, you know, or something like that would have been, you know, the main mode or TV or something. Radio. Now it's just, you know, we were carrying around this ability to reach people all the time. So it's just crazy.

Steven Brown: Well, it's really exciting too, because it allows people with great ideas to take products to market in ways they couldn't do, like you said before. And I think it's really great for consumers because [00:07:30] we have more choices, we have more options. And if somebody has a really great idea and they can get it manufactured, it ends up available to customers, and then oftentimes it'll progress from there into retail and wholesale relationships. And right, you'll see products that started out direct to consumer and now they're everywhere.

Glenn Dunlap: Yeah I mean it seems like then back in those days your only hope was to get into a big box store or something like that and have them carry and then and then and hope and pray that they put you in a good location and all those kinds of things. It's just [00:08:00] totally changed. It's just shifted the whole market. So yeah. All right. So let's talk about, um, let's jump into the financials a little bit here. So like when you're looking at, um, a new customer or somebody you're meeting with on a monthly basis and you're looking at their PNL and balance sheet, what are the things that you sort of hone in on as you're looking at their financials?

Steven Brown: So usually the first thing I'm looking at is their profitability and looking at some key income ratios. So obviously you're going to look at the bottom line net income your net profit margin. I'll also look at the net operating income [00:08:30] because usually interest payments is between. Or it should be between the net operating income and the net income. Um, but in terms of fundamental operating performance, there's a couple of key ratios that I look at. Obviously gross margin. I also look at their fulfillment ratio. So how much are they paying on fulfillment costs. And then the big one is advertising. How much are they spending on marketing and advertising, in particular those, you know, those key areas of spend can make or break [00:09:00] a business. If they have a really good. I consider them a little bit of an outlier, but I consider their contribution margin to be the the dollars left over after those variable sales costs. So I look at their cost of goods, their advertising spend. This was one that not everybody agrees on. But I would argue that it is a cost of sale. Their merchant fees, which tend to be small, and then the fulfillment costs. Okay, so I want to see a strong contribution margin. If they have a strong contribution [00:09:30] margin and a weak net operating income, they're probably spending too much on payroll and rent and other fixed costs.

Glenn Dunlap: Okay, so you said I didn't I didn't write all this down. But you're talking about your cost of the products, the sales and marketing costs, fulfillment costs, merchant fees. If I got all those right, you put all those above the line.

Steven Brown: Yes. Yes, all of those. I you know. So cost of good. The big the biggest mistake I see with a lot of brands is they want to shove all the variable costs into cost of goods sold and treat their gross margin more like a contribution margin, [00:10:00] when it really should just be the product landed product costs. So usually you're you'll see the the advertising spend should be in your expenses. The fulfillment should be in your expenses, the merchant fees should be there. But a lot of times we'll find them up in the cost of goods sold. Right?

Glenn Dunlap: Right. Okay. So but you're thinking, so tell me the difference between gross margin and contribution margin then.

Steven Brown: So gross margin is your, your the dollars that are left over after your cost of [00:10:30] of the product cost of goods sold, goods sold.

Glenn Dunlap: Okay.

Steven Brown: And the contribution margin would be the dollars left over after all of the variable costs of sale. So in addition to your cost of goods sold, I look at the cost of fulfillment. I look at the merchant fees, usually, you know, the payment processors and then the one that I might take a little heat on, but I would argue about is your advertising costs. I would argue that that is a variable sales cost and should be considered part part of cost of sale. What's left over is my contribution margin.

Glenn Dunlap: Gotcha. [00:11:00] So you're looking. Yeah. You're hoping to see some correlation between sales and marketing and sales. Yeah. And then okay so you're not but you're not structuring the financial statements to show, uh, gross margin and then contribution margin with those numbers above it. That's a sub subset or additional reporting that you're doing for them. Yeah. How do you do that?

Steven Brown: Not being the accountant. This is where I take an issue with the standard chart of accounts structure. It's like it'd be really great if there was like a contribution margin line in a standard profit and [00:11:30] loss, and you have to create it. So the best thing I usually do is I'll put all those cost of sale items up into a category at the very top of the expenses. Yeah, maybe, maybe, you know, put an underscore or something that'll put it up at the top and then put all of those expenses there. Then it's in one place and it's really easy to calculate the contribution margin. If not, it's not rocket science. You know, it's a little bit of math.

Glenn Dunlap: Supplemental reporting somewhere? Yeah, yeah. Footnoted or something. Okay. That makes sense. Um, yeah, that's all right. So a lot of. So let's go back [00:12:00] to you mentioned profitability. You're looking at net income, net operating income. Um, what do you tend to see. What do you what do you like to see in these areas. Do you have rules of thumb that you or I do? Industry standards. Yeah I.

Steven Brown: Do. What are you looking for? So I think I'm going to start with the net operating income, because a lot of these customers have to finance working capital. That's a whole nother conversation we can get into. But net. Net operating income I would say, you know, 10% is good. 20% is great. I don't see a [00:12:30] lot of people that generate 20%. But if you can do that, you're going to be a really attractive business. Um, when I look at those other key ratios, cost of goods sold is going to vary a ton. I usually want to see my gross margins be between at worst 40%, and I have seen occasionally gross margins as high as 80%. Now, the reason you have variability, there's a couple of key factors. If you are reselling product, you don't have the pricing power. And so you're going [00:13:00] to get a lot of pricing pressure. And usually what I'll see for resellers of product is a lower gross margin. Right. Because they just don't have pricing power. If you have your own brand and you really develop the brand and unique product, and again, the category can make a big difference. I have seen gross margins as high as like 80% at times, which is really awesome because you're going to need all those extra dollars for the other areas. So when you look at fulfillment fulfillment, I'm usually looking at around [00:13:30] 10 to 15% of revenue on your fulfillment costs. That would be everything from your pick, pack and ship and pick, pack and ship. If you're using a three PL, that would be, you know, all contained. If you're using your own warehouse. I would look at the expenses towards the warehouse and the labor and usually shoot for about 10 to 15%. Okay. The times I see it more than that, though, are if people have a big a bulky like a [00:14:00] large volume product or a heavy product, and at times you'll see that that cost of fulfillment go higher just because of the the attributes of storage and more importantly, shipping are more expensive.

Glenn Dunlap: Yeah. Right, right. That makes sense.

Steven Brown: The merchant fees I those are usually around 3% give or take some. Right. That's kind of just standard credit card fees. And then the big one the advertising fees. As a rule of thumb, you usually want them to be about [00:14:30] 20 to 35%. Is it kind of a healthy range. But that's been really hard the last couple of years with some changes that Facebook made a couple of years ago with iOS 14.5, it completely changed the cost of advertising. And so a lot of our customers and brands in general are struggling to have cost effective advertising. The way I look at it is there's kind of this, this flexible triangle within that contribution [00:15:00] margin. You know, when you look at your cost of goods sold, your fulfillment costs and your advertising, you can have one of those, that's not great, but it's really hard to have two of them that aren't great. If you have two of them that are bad, you're going to struggle to have a profitable business, but you can get away with one of them being less than ideal, but you're going to probably have to make it up in other areas or else.

Glenn Dunlap: Yeah, yeah, that makes sense. So if we have a 10 to 20% net operating income, what [00:15:30] do you what are you looking at on the just the bottom line. What's the target. What do you expect to see there.

Steven Brown: Well, a lot of it depends on how they're financing. Right. So that can get chewed up if you're having to do a lot of financing, which is very normal for a product based business. You you know, you could have a couple of points shaved off in terms of interest expense or if you're using really bad lending utilities facilities, it can be even worse higher. So I'd usually mark [00:16:00] off a couple points of in interest expense and other types of expense. You know, if they have equipment they might have some depreciation expenses. Yeah. Um, business owners always like to push a lot of like tax approved, but not necessarily business critical expenses. And I usually tell them to put put that down in the other expenses. But if they're running a tight ship, they're going to probably have a couple points in interest expense.

Glenn Dunlap: Okay. That makes sense. Is it are [00:16:30] they mostly financing inventory? Is that what the the financing would go towards.

Steven Brown: That's the biggest thing. So yeah let's talk about the balance sheet. So if I look at a balance sheet I'm looking at a couple key things. I want to look at their cash and often they don't have a lot of cash. Cash? We'll talk about that. With the inventory, I'm looking at inventory. I'm looking at accounts payable. Balance. And then I'm looking at loans. Those are the kind of the four key areas that I'm going to look for. With cash and inventory like these are product based businesses. [00:17:00] And it is really hard to manufacture a product and get it into your warehouse and sell it quickly. So when I was an MBA school, we learned about the cash conversion cycle and I was like, I don't ever want to learn about this again. You know, I remember calculating it and thinking, this thing's stupid. Like, who would ever use this? And fast forward now, I love guess what?

Glenn Dunlap: Yeah, I.

Steven Brown: Love the cash conversion cycle because it really tells a lot for me. So for those that [00:17:30] need a refresher, the cash conversion cycle is usually looking at days inventory outstanding. So that's how long it takes to how long your inventory is sitting before it's sold. Your days sales outstanding. So that's how quickly you collect cash and then your days payables outstanding. In a typical e-commerce business, the biggest component there is the days inventory outstanding. Um, let me talk about the other two and then I'll come back to that one. Okay. The days sales outstanding [00:18:00] is pretty quick because almost all payments are done via credit card, so you're usually looking at days before you receive the cash. The days payable outstanding is gives you a benefit on your cash conversion cycle. And so the longer the the the days payable outstanding the better you are because the equation is days inventory outstanding plus days sales outstanding, minus days payable outstanding. And what that comes up the the metric that's measuring is days. What is [00:18:30] the days between the time you put a dollar in to inventory before you get it out in the form of sales. So the challenge that a lot of e-commerce businesses have is in the days inventory outstanding. And that's because they're usually manufacturing offshore. And so they and they typically have to pay to start the manufacturing.

Steven Brown: And then it can take weeks to to create the product. And then you got to put it on a boat and it's got to make it over to the US. And [00:19:00] it's got to make its way across the US to wherever your warehouse is, and then you can start selling. Um, so when I was an MBA school, the case study that we did was Dell. They're like, Dell mastered the negative cash conversion cycle because they did. They set up a really good supply chain where they could take orders and then get paid, and then they would quickly manufacture the computer and ship it out. So they're getting paid before they had to spend any money on inventory. That is a luxury of really [00:19:30] big businesses that have really savvy supply chains for a typical e-commerce business. Even some of these big ones that you read about in the news. They don't have that sophistication. And so I often will see cash conversion cycles between 90 and 180 days and sometimes longer. And the way that I look at that is that is the time you're probably going to have to finance your inventory. And so if you can bring down that cash conversion cycle, it's really [00:20:00] awesome. But that days inventory outstanding. And really the composite cash conversion cycle is an indicator of how long you may need to finance inventory.

Glenn Dunlap: Sure. So yeah. So there's. And it probably cycles if you're looking at um, you know either different products, different suppliers. Um, I mean that that could be very across the board too, right? I mean, if depending on a lot of these one product companies or are they going to have a mix of products.

Steven Brown: Usually as these brands [00:20:30] get bigger, they'll have a mix. They may have multiple suppliers. If you're a reseller, you're almost always have multiple suppliers as you get bigger. So and then you have, you know, the last couple years have been wild for e-commerce. There was this tremendous boom with Covid. Everybody's sitting at home, they're buying stuff online. And so the industry just shot up. And then about 2022 it it cratered a little bit. I think everybody had bought about all the the widgets and things that they could buy. [00:21:00] And you you heard discussions of spending moving away from consumer products to experiences, because we hadn't been able to go on vacations and go to the movies. True. It's finally, I think, back into a good place, but it's been this really intense growth and then this slump, and we're kind of coming back in into some level of normalcy. But in the meantime, you had some really crazy things that happened, like the supply chain was a mess. Do you remember the the whole Port of Long [00:21:30] Beach issue where you had all those those ships out on the ocean? So that was a big problem. And then you had the you've got the issue with the Suez Canal Right now, with the the wars going on and the Houthi rebels that are shooting rockets at, at ships of, of flagged nations they don't like. And so there's been a lot of supply chain chaos. Another thing you see right now is Tamu and Cheyenne. They're taking up a ton of air freight. So everybody knows about those guys. Those are those cheap Chinese products that your wives and girlfriends are [00:22:00] probably buying stuff from, right. And, uh, but I've read recently, one of the things that's happened is they're just they're just dominating air freight. So air freight has gotten really expensive coming out of China. So there's been a lot of supply chain disruptions. So you have the supply chain disruptions. You've had advertising changes that have really increased the cost of advertising. And it's just a completely different market than it was a few years ago.

Glenn Dunlap: It's fascinating when you think about everything that goes into a product and you know, the, [00:22:30] you know, the impact that the global economy has on, you know, some, some little thing that you're wanting to buy and you're, you know, you think for for a few bucks and it's, it can be impacted by any of those global events that you just talked about. That's amazing.

Steven Brown: Absolutely.

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Glenn Dunlap: Not to take us down a politics road, but I'll take you down to politics now that we've had the. We're recording this a couple of days after the election, so now we know who's who's stepping in. There have been some quite a few discussions about tariffs. What are your, um, [00:24:00] you know, what are your customers thinking about? What are your clients looking at? Are they discussing that. And the concern that there will be tariffs coming in on products that are made overseas.

Steven Brown: Well, it won't be the first time. The first Trump administration. The tariffs were introduced and it was in large part not a huge issue with in the consumer product space. I think a lot of it depends on the category. I know that some of our customers back then were thinking, you know, there was a heavy tariffs on Chinese [00:24:30] manufactured products. Um, I know some that looked at alternate supply chains. Easier said than done. China is a manufacturing machine and it's it's it's really difficult. But I do think you'll see some impact in terms of additional cost of of product with those tariffs, depending on how they're targeted, depending on country of origin, depending on category. But it wasn't um, it wasn't a [00:25:00] huge issue from 2016 to 2020. But a lot of e-commerce has changed since 2020. So it could be one, you know, one more straw. That's just I don't know, maybe it'll be the straw that breaks the camel's back. But the market has changed from kind of an easy gold rush type of industry to now you got to be a lot more sophisticated. You really got to be a better operator, and you really got to look at good metrics and know how to work with the within the best operating parameters [00:25:30] to have a successful e-commerce business.

Glenn Dunlap: Do you think it will shift anything to manufacturing to bring it here in any way? I think, you know, that's one of the positives that they talk about with tariffs is they would it would encourage manufacturing to be, you know, brought back onshore here.

Steven Brown: I don't think you'll see a material shift. Um it didn't it didn't seem to make a big shift. You back in 2016 to 2020. Um I think you'll see some. It'll definitely be part [00:26:00] of the calculus, I think, for brands, but there's just not the onshore capabilities. Mhm. Um, so some we have some customers that do their own manufacturing and that won't change anything. But I think if you're managing manufacturing a widget today in China, you know, depending on how severe the tariffs are and what countries they're targeted. Um, there are you know, Vietnam is becoming a nice secondary market for manufacturing, [00:26:30] depending on the product category, but manufacturing is really hard. And so it's not going to just flip a switch. And you know tariffs aren't going to right. Recalibrate things. I think you'll see some recalibration. I think the bigger impact we saw was the supply chain bottlenecks during Covid. I think that had a bigger impact in terms of of people thinking about where they're manufacturing product. But in reality that's that's kind of a big company luxury. It's not as easy to do if you're small, [00:27:00] right?

Glenn Dunlap: Is it? Does do tariffs typically impact the higher dollar figures. You know, dollar, you know, higher priced items than some of the smaller stuff. I mean if you're going to move the needle eight, ten, 12, 15% on large dollar figure, you'll probably feel that more than you would on something that's coming out. That's a $10 product.

Steven Brown: Yeah. I mean, it's it's hard to say, you know, a lot of it. You're getting into, um, [00:27:30] price elasticity and how much a customer can absorb in terms of price versus, um, you know, alternative products. So I'm not sure, you know, if you think higher priced products, typically you're going to have a more tolerant consumer. I think the lower priced products, the challenge there. You've got a lot of competition. You know, the TMU and Shands have basically they've they've created this incredible cheap [00:28:00] at all argue kind of garbage supply chain of products. So if you're kind of in that lower end of the market, it's already really hard. Um, I don't think the tariffs might be that straw that breaks the camel's back, but I don't think you're you're dealing with other issues already if you're a low price product. Yeah.

Glenn Dunlap: Yeah. That makes sense. That makes sense. Um so we talked about cash inventory AP and loans. Let's go. Um, anything you want to say about, um, a lot of that was in the cash conversion cycle. [00:28:30] You covered the cash, inventory and AP. Um, if we're thinking about the loans, what are you looking at when you're looking at the balance sheet there?

Steven Brown: Well, I'm looking at the type of loans because this is a challenging industry for lending. What you find is traditional banks and credit unions don't like to lend to these businesses, because they're kind of going back to the beginning of our conversation. They're highly leveraged. They may not have an office. They they may not have equipment.

Glenn Dunlap: And if [00:29:00] you can't sell those products, then what are we going to do with them? Yeah.

Steven Brown: Banks like to lend against assets, hard assets like hard assets, warehouses, forklifts, things that they could that have easy secondary market value.

Glenn Dunlap: Right.

Steven Brown: Uh, banks don't care about your inventory. And so often, if you can get a line of credit, you're getting an unsecured line, um, with limits in terms of how big they are. And so that's one extreme. And I would encourage customers [00:29:30] to look at traditional lending facilities because they tend to be the best price, but they probably won't serve you as you grow. Although there is benefits to to building those relationships early because, you know, the more likely you you get those facilities and pay them back on time, the more likely you're going to be able to increase those. On the other extreme, you have the MCAS, the merchant cash advances. So that's Shopify, Amazon, [00:30:00] PayPal. And what they'll do is they'll it's almost this really needs to be better regulated. If you go into Shopify and I love Shopify, but I don't love Shopify Capital because I feel like it's exploitative. You'll go in and you'll be like, hey, you can get $80,000, you can get $200,000 tomorrow, and it's only going to cost 10%. But they're obscuring the true Apr right, with this fixed fee. So what they'll say is your fee is [00:30:30] going to be 10% of the loan. But depending on the payback period that could that loan could be 20% Apr, it could be 30%, could be 40%. And then what they'll do is they'll come back and, you know, you sell a widget, they'll take, you know, 17% off the top to pay back those loans until the loan is paid back.

Steven Brown: That's right. And it's been a huge trap in the industry because it's really easy to get. And they've got their calculus. They probably charging a lot because they don't do a lot of underwriting. Um, [00:31:00] and they but it's it's really it's, it almost feels like the mob. Right. They're like shaking you down. But it's false advertising because people don't know how to do interest math. I have to sit down and be like, hey, bring up a spreadsheet and put it in. Oh my gosh. Like, this is expensive. Um, but it's. And so I encourage brands to avoid those like the plague. Unless I won't say never. There's always the right situation for even high [00:31:30] interest loans. But I would say avoid those. And what you have in the middle is there are some e-commerce specific lenders who have have created, um, they're more expensive than like a traditional bank, but they're a lot less expensive than like a merchant cash advance. So settle is a company that we've started working with and really like they've got a working capital product, Mercury, who's known as kind of a one of the new online banks. [00:32:00] They've got an e-commerce specific loan program. You've got other others out there that fall into different categories way flier further that are very e-commerce specialized. You'll find sometimes some private lenders that will specialize in this, this area. But it's a really difficult place for these businesses because traditional lending just doesn't understand them and doesn't like to take risks on them.

Glenn Dunlap: Right? Yeah. So they get in a quandary there. So you're looking at the loans, seeing if they've got, you know, what [00:32:30] they have in loans, what types of loans, what are they paying for those things. Do you get involved with Recapitalizing. Their the debt. If the, if it's uh, they've got some of the merchant capital advances that they might be bankable or work them through that.

Steven Brown: Yeah. I mean that's that's always a good thing to do if you can is, um, I helped a customer recently. They, um, one of the ones that's kind of in the middle that I really like is the American Express business line of credit. It's it's, um, it was the old Kabbage product, and it's actually decent rates. [00:33:00] It's not as good as, like, a traditional bank line of credit, but it's it's better than a merchant cash advance. And I helped a, I helped a customer move from get off of their Amazon loan and onto one of those and just lower the cost of capital.

Glenn Dunlap: Well, I mean, the trick is you get the you get the immediate shot of cash on those deals, that you get the shot of cash, but they're going to take 17% of the example you gave. So if they're going to take 17%, if you look at your margins that we were talking about earlier, if 17% of that cash flow is gone out of that, then all of a sudden you're you're [00:33:30] back in a situation where you're really on a, on a treadmill that's getting steeper and faster and you're trying to work your way out of that. It can be it can be really tough and it.

Steven Brown: Can become a death spiral. And so I would say most for most business e-commerce businesses, DTC businesses, the merchant cash advances, advances are not a good thing.

Glenn Dunlap: Yeah. Yeah. Just the margins typically aren't there to support, you know, to cover that. So yeah that's interesting. I would agree with you on the regulatory side, because it seems like those offers [00:34:00] that you, you see a lot of times that are that are being promoted out there don't have any, uh, you know, Apr equivalent or something. Yeah. They're not.

Steven Brown: Transparent. Right. No. I mean, and the reality it is a little bit hard because depending on the payback period. Right. You know, if you're in a super growth two.

Glenn Dunlap: Months or two years.

Steven Brown: That, that that 10% fee may be a decent amount if you're just, you know, in a skyrocketing mode and you're going to sell through really quickly. But in most of the time [00:34:30] you're not, it's going to be bad.

Glenn Dunlap: Well, there's also there's no incentive for you to pay it faster than if you're in that really high growth mode. They're going to get their money back faster and it's a fixed fee. So you're going to yeah, you will have.

Steven Brown: You'll pay regardless of how long you have that they're going to they're going to get at least 10%, you know, whatever you do. Right. Or and that's just you know, the numbers will vary. But yeah, that's that's a number kind of a ballpark number that I'll, I'll see around for those fixed fee or those [00:35:00] merchant cash advance fixed fees.

Glenn Dunlap: Yeah. It's interesting. Um, is this a is this an area that, um, you know, when you're talking about banking, um, what comes to mind when we're talking about some of this stuff, when we're talking about, um, you know, margins and conversion cycles, those are always questions that, you know, the sharks on the Shark Tank are asking, you know, and it's a lot of those products, right, to show up on there. Yep. So is this an area where you see a lot of outside investors that get involved with these [00:35:30] products?

Steven Brown: Used to you used to see a ton like venture capital was in heavy. So think about like Warby Parker Allbirds right. Um.

Glenn Dunlap: But not now.

Steven Brown: It's cratered. Venture capital and e-commerce is completely cratered. And that's because, you know, venture capital wants to pursue really high returns. And this is not the economics of these businesses are not typically high margin businesses [00:36:00] like, say, like a software business. And so what we've seen in the last few years is that venture capital has almost evaporated, um, from the marketplace.

Glenn Dunlap: Is it because of the exit opportunities? Is that are the are the, you know, because you would say, you know, a lot of these products would typically Uh, get a get rolled up or brought into one of the major, uh, apparel goods or something like that, they would get brought in to that. Are they not acquiring the, [00:36:30] uh, you know, the outside innovative, you know, designers or product manufacturers, that kind of stuff now, or they were that might have been the off ramp, right? Yeah. So if you're if you're putting money in. Yeah. The expectation is, is that that's going to get bought by, you know, a much larger brand.

Steven Brown: Up until from about 2020 to 2022, the exit market was huge for almost every industry. If you think about it like the M&A was incredible, right. And and it was for these these businesses as well. But when cost of, you [00:37:00] know interest rates went up cost of capital goes up. Your risk profile you know changes these. The reality is these are not you're not going to have the same margins as you would say like a technology company. Right. Which has almost as you know, almost a zero gross margin or, excuse me, almost a zero cost of goods sold for like a typical SaaS company. Not actually zero, but very close. And, um, there's just a lot more. There's just a lot more risk. [00:37:30] And I think venture capitalists, they want, um, they're they're looking for higher outcomes. I think you'll see some of it come back. The other reason I don't see it as much is like, you know, how innovative can a shirt be, right? Yeah, right. You're really competing on brand and fashion. And I have seen some of our customers that were really hot, and then they're not as hot after a while, like, because there's a lot of trendiness there. Um, the other thing you see, you know, especially with [00:38:00] outsourced manufacturing, the probability that your that your factory is going to maybe try and rip you off is high right there. China is known for IP infringement. And even if you have trademarks on what you're what you're doing, they're going to do it. They're going to put it on Amazon. You're it's a really big challenge for this space is knockoffs. If you have success, you can guarantee you're going to start seeing knockoffs of your product or legitimate companies that will work around any sort of IP. [00:38:30] If you have any IP. Like I said, apparel. Kind of hard to have a patent on a shirt, right? There's only so much uniqueness about it. Some of those things. So that's the other thing that makes it harder from a valuation standpoint is there's not a lot of that unique value that you get, say like in a technology company.

Glenn Dunlap: So let's go back to the income statement for a second. Then what do you see on there for uh, you know, are you trying to do any legal, uh, you know, IP protection or anything, or is it just, you know, we're going to we're going [00:39:00] to try to sell and make it as, as fast as we can put it all in sales and marketing and, and, and just pray that nobody just rips us off immediately, that we make our money back on these designs or whatever. Uh, in the short term.

Steven Brown: Yeah. I mean, I think there's a couple things you got to think about from a legal perspective that relate back to to the, the value, um, especially for a direct to consumer brand is a big, big thing. And so making sure you have good copyright around your brand, if there is a patentable element [00:39:30] of your product, it's good to get those things will give you leverage in the marketplaces. So you can go to Amazon and say, hey, I've got an infringement on my IP. Um, and that's very helpful. I would highly recommend that because branded becomes a really it becomes a pricing, gives you pricing power. You know, the analogy I like to make is what's the difference between a pair of Nikes and say like a pair of Brooks, right. Like I like Brooks. I'm a runner, but [00:40:00] Nike has more brand power so they can charge more for those fancy running shoes that, for all intents and purposes, might be the same in terms of the the outcome. And so copyrighting your brand is probably one of the first things I would do if I was a direct to consumer business. And that. That gives you some leverage as you build. And brand is a lot more than the product. It's the experience. It's the communication. It's kind of, you know, Nike, you know, you you watch a commercial and you think [00:40:30] you're going to run faster and you're going to, you know, be stronger. And you know, they just they, they, they it brand is this weird thing that I think the financial brain has a hard time comprehending because it's like, how do you value a brand? But it's it's all the things that go into the not just the product, but the everything around the product and that experience. That communication can create greater value than the actual product itself.

Glenn Dunlap: Yeah, that makes sense. So it's and it's protecting those things are only as good as the amount [00:41:00] of money that you have to defend them too. So I mean there's an element of that. So you've got to there.

Steven Brown: Is some there is some simple, simple leverage you have with a lot. Like I said, there's there's usually capabilities within Amazon within some of these marketplaces to say, hey, I have a copyright and I have somebody who is advertising my product using my copyright. And you can do a takedown request. And and so that's not terribly expensive to do those type of things. So that's where it's like go get those copyrights. Because if you're [00:41:30] putting a lot of energy into this product and this brand, you want full control over the usage of that and make sure that the the imitators don't take advantage of your hard work.

Glenn Dunlap: That's interesting. I've heard that that's why a lot of these, uh, I assume that most of them are Chinese companies have names that are look like jumbled up groups of letters because they just don't worry, you know, it's not to them. It's not about the brand. They're, um, you know, trying to to get out there and get it out there quickly and making sure they're not stepping on [00:42:00] somebody's name already, but they just yeah, they're just knockoffs or doing things that way.

Steven Brown: These sellers are often have multiple Amazon Seller Central accounts at the same time. So if one gets taken down, they'll just push product through a different one. So it's a very Sophisticated kind of ecosystem. And you have to realize that you're, you know. And that's kind of the the ugly underbelly of Amazon. But then you get like. Like I said, on the low end, you've got more sophisticated operators like [00:42:30] Teemu and Shannon who have really driven the low end of the market, kind of in a legitimate, legitimate way. And it's just it's a lot more challenging than it was a few years ago. But I still am a very, you know, bullish on e-commerce. And because I think it provides creative, product oriented people to do amazing things and get their products to market. But you're entering a much more competitive market than it was a few years ago.

Glenn Dunlap: So, Steven, if I'm thinking about our listeners and thinking about, [00:43:00] you know, they're if they're starting to work with e-commerce companies or they've got a client that has come to them and is in this space, like, what's it? What do you do differently for an e-commerce company on a daily, weekly, monthly basis? You know, sort of for them that that you would say that is, you know, different than what you would see for a traditional retailer or some other, you know, some other industry.

Steven Brown: First off, I'd say you got to be a glutton for punishment. This is a this is a difficult industry. Yeah. Um, we liked [00:43:30] it because it mirrored. We're an all remote company. We're like, hey, these guys know how to use computers. That'll be great. But there's a ton of complexities in the accounting and financial operations of an e-commerce business. So first you have revenue accounting, which is really complicated. You've got to deal with, um, you've got to deal with like multiple streams of income and some of those, you know, oftentimes they'll have multiple sales channels. They'll have multiple payment processors. So the money flow is kind of complicated. [00:44:00] There are some tools out there that really help with this process. One we like is A2X. So that helps a lot with the revenue accounting. The next you have and I'm just kind of mentally going down the profit and loss the next you have is your cost of goods sold and inventory. This is a pain in the butt. Um, even amongst our peers who are e-commerce specialized. A lot of them will kind of run away from the inventory accounting because it's just hard, and it's hard because the customer has to do a lot of those operations [00:44:30] to be able to get good cost of goods sold. Um, so we've been working on this and continue to work on that, but that's a unique challenge. You know, you've got a product based business and sometimes they may even have manufacturing too. So add that curveball in there. Right. The next thing you got to look at I think that's unique to these this industry is sales tax, multi-state sales tax. When the Supreme Court came out with their Wayfair versus South Dakota decision in 2018, [00:45:00] I believe it was it changed the game.

Steven Brown: And so multi-state sales tax is a big issue. And it's only gotten worse since then. The states keep adding new taxes and new fees and you can't. You can no longer say, well, I'm not in your state, so you can't charge me. You know, and they're getting more aggressive. And so that's a problem that you may need to support. We ended up building our own in-house sales tax team. Uh, some of our peers in the industry have. [00:45:30] They'll, they'll partner with, you know, there are either companies like an Avalara or there's other sales tax only firms. Um, we made the decision. We liked none of the above back in that day, so we built up our own capabilities there. Um, so those are the big three, the revenue accounting, the, um, inventory and Cogs accounting and the sales tax accounting are really challenging. Now, steering back into your question, if I'm looking at this kind of an advisory level, cash [00:46:00] flow planning is really critical for these businesses. So when I look at a cadence, I'm usually looking annually building out a budget and a cash flow model. I'm usually looking at monthly doing financial reviews with them. I'm usually in between there. I'm usually doing major updates to the to the the budgets and the forecasts, either quarterly or preferably monthly. And then for those that are really, um, serious about their cash flow management, I'm usually meeting with [00:46:30] them weekly and we're going over a 13 week cash flow and just trying to figure out how to navigate all those, those challenging cash flow issues that these businesses have.

Glenn Dunlap: Yeah. That's great. That's really um, you mentioned A2X. Are there other do you have um, standard tech stack that you're working with or for most of your clients?

Steven Brown: Yeah, A2X is really good on the revenue accounting. We like Avalara and Sovos for the sales tax. There's a ton of inventory management solutions. [00:47:00] The one that we've the ones that we're playing with the most these days are Finale and Sin seven. Um, there's some other really interesting solutions. Shout out to settle. Settle has this interesting combination of working capital accounts payable, and they're starting to get into the inventory as well. So and there's there's others out there. Those are the ones that we like. Um, but there's alternatives in almost every category. And then obviously you have to have the tech stack, the financial tech stack for just all [00:47:30] the general business things, your payroll. Um, anything else you've got to do in your business that you're going to your general ledger, write all of those things you got to got to set up as well, right?

Glenn Dunlap: Hopefully ones that interact with Shopify and Stripe and PayPal and all the other things that they're using there to streamline those processes too. So yep. Yeah, that makes sense. What's, um, it's definitely an interconnected world, and I think there's some advantages to [00:48:00] that. And then it can present some real challenges at times too.

Steven Brown: Yeah. It's great. As a consumer, what we don't realize is how much complexity it is and how amazing it is that this complexity has been streamlined as an industry. So. You know, between like Shopify or Amazon, third party logistics companies, three pls. Like it's what allows these really innovative founders to set up an incredible. Business without having to go and hire an army of people.

Glenn Dunlap: So [00:48:30] you mentioned okay. Vcs are not not into the space at all. So that part is crashed very.

Steven Brown: Little right now. Yeah.

Glenn Dunlap: Uh, the the exit ramp to someplace, you know, to somebody larger making. Acquisitions is maybe not, you know, on the. So what's what's it look like? What's what are the prospects if you're thinking about this and starting this is that you're you're planning to start, uh, an e-commerce business. And this is a grow and hold, uh, kind [00:49:00] of approach that this is going to be a lifestyle business or grow it so that you build a brand that then the brand itself becomes something that is acquired, that gets acquired. I mean, what's what's the end game for most of your most of your customers or clients?

Steven Brown: Yeah. I mean there's going to be acquisitions for good businesses, right? The market's been down, but it'll come back. You know as interest rates go down I think you'll see the M&A market get better. What we've seen is the best brands have been people that have had a passion for a problem [00:49:30] that they're like, this product needs to exist and they will it into existence. I think the days of I'm going to go gold rush on e-commerce, it's going to be a lot harder. There's a lot more pressure, but I think the best players, they're going to want to build a business because they they feel a need to solve this problem. They're just going to do it. And if you have a really great product and you build a good business and you can make it a profitable business, there's going to be an opportunity to sell that business. It might not be as good [00:50:00] as it was in 2021 and 2022, but there's always an M&A market. The M&A markets go in cycles and we're kind of at a down cycle. But that'll change.

Glenn Dunlap: Yeah. Yeah. So if you're is this a business you would encourage people to start today.

Steven Brown: Mhm. I would say if you've got a passion for a product for sure if you're looking to make an easy dollar. No don't do it. It's hard.

Glenn Dunlap: And so this I'm going to be outside [00:50:30] the wake here on a question for me. I'm too old to really realize to know what this is. But you know what is what are the trends from an influencer standpoint in this space? Is this something because I've heard I've heard that that's down. It's not a thing that's as popular as it was. But maybe that's not true.

Steven Brown: It's changed a lot. And this is where TikTok shop is really amazing. So the influencer market was really interesting because they'd be like, hey, I've got a million followers and I want to promote your product. And they'd come up with these fees. But there was no like performance correlation [00:51:00] and TikTok shop. One of the amazing things about TikTok shop is they've changed the game around influencers. So what they've done is they have they've created attribution within the product. So somebody who is promoting the product can get direct. It's like affiliate marketing. Um, they've they've put that into the entire system of TikTok shop. So it's a lot easier to give more like affiliate fees. And I think this is the future of influencer marketing.

Glenn Dunlap: Okay.

Steven Brown: Doesn't, you know, you'll see [00:51:30] it more and more. I expect it in in Facebook and Instagram and YouTube. Is this more of a like an affiliate marketing style attribution? Instead of this I have a big audience. Therefore pay me a lot of money to to schlep your product.

Glenn Dunlap: It's and they may or may not have had the influence, but this way if they've got it on a tick tock shop, if they're driving people to the shop and they're purchasing, then there's a direct correlation there.

Steven Brown: Yeah, this is the future, in my opinion. I think it's good for the industry. And I think for the influencers, those who are really [00:52:00] effective at promoting product, you know, they'll they'll have a good outcome. And those of them who are just pushing product but didn't actually move the needle, that's going to change their outcomes as well.

Glenn Dunlap: Yeah. Well, this is interesting. Like we said in the open, this is something that we all, you know, we're we're purchasing these things. We interact with these things. Or you know, this is something that we we see whether we're shopping on on Amazon or we're hitting social stuff or whatever it is, wherever we are. This is, you know, e-commerce [00:52:30] is such a big part of, of our lives these days. So it's very interesting, very interesting.

Steven Brown: It's only going to get bigger. Um, I saw a statistic that e-commerce is only it's less than 20% of retail right now. Of all retail sales, I think it's like around 16 to 18% in the US. And there are those that think it could be as high as 80% at some point. Wow. So there's going to still be a lot of growth in e-commerce.

Glenn Dunlap: Wow. So flips flips the model then. [00:53:00] So what they're thinking is that there's you know potentially could.

Steven Brown: Well, I think you're going to see it. I think you're going to see it become, you know, what is e-commerce like. And the conversation that we're having is is it a consumer products business or an e-commerce business? E-commerce is increasingly just one channel. But, you know, brick and mortar retail. How many of them spun up a Shopify store during Covid?

Glenn Dunlap: Right. Right.

Steven Brown: So I think the future of retail is very blurry, right. You'll you'll [00:53:30] buy online, you'll pick it up in a store or it'll get delivered to your house. You know, you might go to a store, try some, you know, look at something and then order from the store and it gets, you know, it's the future of retail is is is changing. And it's going to be really interesting and exciting to see how it goes.

Glenn Dunlap: Well, as a consumer, it really is great because it puts a lot of control back into our hands. Like you said earlier, that there are products that now that you could get that you just wouldn't be able to, you know, wouldn't be able to get because either people, the innovative people wouldn't be able to get [00:54:00] it in a place that we'd be able to see it and buy it or we'd never, you know, we wouldn't be able to to find it.

Steven Brown: Just making it easier. Like my, my, one of my e-commerce stories is I hate how fragile appliances are and I refuse. I refuse to replace my my dryer every three years. And so I've kind of become a dryer repairman with my engineering background. And I've got a store that I go to every time for my parts, like I figure out how to troubleshoot it, and I order and I get my parts and it's awesome. I don't have to go hunt around. [00:54:30] You know, these are very specialty stores that only repairmen would probably know where they are even found. I just buy it all online.

Glenn Dunlap: That's right. Well, and YouTube is also great for that too, because then you you know, you can.

Steven Brown: It teaches you how to fix it, how to troubleshoot. So. Right. Yeah. You know YouTube YouTube.

Glenn Dunlap: Did this bank of lights on me. Yeah yeah yeah yeah. No that's great. Well, Stephen, if somebody wants to get Ahold of you and your firm, how would they do that?

Steven Brown: Probably the best way to contact us is at our website. Ledger Dot [00:55:00] com. That's l e d g e r g u r u s.com. It's a mouthful. Um, you can also find us, uh, we have a YouTube channel that's fairly popular where we just dive into concepts on e-commerce accounting, and we have a newsletter as well. So we are big fans of content and giving back to the community and hopefully helping people be better, whether they're working with us or not.

Glenn Dunlap: Yeah, fantastic. Well, and thanks for providing [00:55:30] the content today. This was a great conversation. I really enjoyed it and hopefully our listeners did as well. And thanks. Thanks to Stephen for joining us today. And thanks to you for making it to the end of the podcast. And we, you know, hope you have a great day and enjoy, uh, this opportunity to take the, you know, the things you're learning today and apply it to the clients that you're serving. So have a great day.