We Tried Profit First. Here’s What ACTUALLY Happened

So the people have spoken, Preston. Some of the team members said, hey, you guys should do an episode on Profit First, because they know that we've been doing it over at Solé. I was like, yeah, let's do it. Long overdue.

0:29 Stephen Brown

Let's see, where should we start? Let's talk about a little bit of the history of the business, about the business in March of 2022, and maybe talk about your strategy back then. How did you go about running the business for the first, what was it, nine months?

0:46 Preston Alder

Yeah. So we purchased the business and I guess I knew a lot less than I thought. Or I thought I knew more when we started.

I'd been advising ecommerce businesses, so we thought, oh, it's going to be transferable. And some things were. And I'd worked in the VC space a little bit, and so I had worked with some ecommerce brands and kind of done a couple of little things on my own.

1:16 Preston Alder

So anyways, I thought I knew what I was doing. And my strategy when we bought the business was basically a growth strategy that included a lot of spend.

And yeah, I think looking back, you could correct me if I'm wrong, but I remember you were a little bit hesitant with the strategy, but we decided to move forward with the growth strategy, and it didn't work. First nine months was not a success.

1:43 Preston Alder

We also changed a few things with the branding that we thought would help us expand our audience and whatnot.

And yeah, I think we were wrong with the plan, or I didn't execute it well, right? I didn't know the ins and outs of everything that I was doing. So yeah, that's what I remember.

2:07 Stephen Brown

[unclear] very small brand and I was wanting growth too, because valuations were really high. So we weren't able to get a seven figure brand, or we didn't want to take a risk on a seven figure brand.

Our other partner, Brittany, who's my partner and wife here at LedgerGurus, we wanted something to tinker with and you wanted something entrepreneurial. So it was kind of a win-win. So we went on a search, but it was a smaller revenue brand. And we're like, yeah, pump it up, let's go.

2:38 Stephen Brown

And so if I remember right, you were creative, you had tons of creative and you had agencies and you had, I mean, what are all the things you were spending?

2:48 Preston Alder

It was a lot of stuff. Yeah, a lot on creative, a couple of agencies, high ad spend.

2:56 Stephen Brown

High ad spend. You did a lot of good things too though. I mean, you really dialed in the email marketing, the SMS, conversion. But the ad spend was just like go, let's just do lots of everything.

And what we found after a couple months is like, oh crap dude, this thing's burning money. We weren't paying you a salary.

3:16 Preston Alder

This was after the iOS update, right? So I think that was coming into play around a year later.

3:22 Stephen Brown

We hadn't fully, we knew, I think we had a sense that it was going to be hard, but I don't think we realized how bad that change had been.

3:29 Preston Alder

Yeah. And I think we had seen that their ad performance was dropping, and they hadn't been updating creative, right? The former owners were using a lot of old creative that had worked previously. So it was like, ah, if we work on the creative, some of the branding, that should kind of right the ship on the ads.

3:49 Stephen Brown

Yep. Throw money at it. So that's what we did for about, it was about nine months of just throwing money at it.

And we weren't paying you a salary. We didn't have the cash flow to pay you a salary. And we were actually having to funnel money into the business within a few months. Like more money, more money.

4:06 Stephen Brown

And I can't remember what it was, but I remember by the end of the year, I was like, dang. And Brittany, our other partner, and myself were like, oh crap, dude, if we can't get this thing going, Preston's going to get frustrated.

4:18 Reading Profit First

Stephen Brown

And it's about that time that I got off my high horse and read Profit First.

I'd heard of Profit First. It's kind of popular in the accounting community. It's very divisive though. I don't know what your experience with it was, but I'd see two camps. I'd see people think this is the way. And I'd see people that are like, that's the stupidest thing in the world. And I was kind of like that. I was like, that sounds really dumb. It sounds like the envelopes method for people who don't know how to run a business.

4:45 Stephen Brown

And I never read the book. And then I did. And I was like, you know what, that was a dumb attitude. There's actually a lot of, I was actually practicing elements of Profit First at LedgerGurus to great success.

And then I think I gave you the book and said, you've got to read this. And then we decided, yeah, let's go for it.

5:07 Stephen Brown

And the principles, just kind of paint the background of the principles. In fact, I have some show and tell here. I just did a presentation on this. Let me see if I can.

5:15 Preston Alder

And as you pull that up, you mentioned the two camps. I think after our audience has an understanding of the principles, and we can kind of talk about how we implemented it, I think a lot of it depends on your goals as a business owner and the future of the business, right? And this aligns really well with certain types of owners and their goals, certain types of goals and games.

5:49 Stephen Brown

So, yeah. So here's some visuals for people that are watching on YouTube. And this was me dumbing it down.

Now, first thing I'd say is go get the book. It's a freaking easy read. It takes like a week to read it if you're really focused.

5:58 Stephen Brown

So the concept was pay yourself first, allocate revenue into accounts, operate the business on limits.

And the idea, the formula he uses, it's kind of cheesy, but he's like, everybody thinks profit is sales minus expenses equals profit. But they reverse it. They say, let's take sales, we have a profit target, and then we operate off the expenses.

6:24 Stephen Brown

In a lot of ways it's kind of like the envelope method, is how I would, it's like the envelope method for business.

But the principle is, don't operate and then say, okay, what's my profit? It's have a goal and then resource limit yourself, which is what we did.

6:43 Stephen Brown

We basically said, okay, and there's a whole methodology for what you think your target should be. And we went through that. And then I think we came to the conclusion, okay, here's a reasonable target.

And I think we'd been doing budgeting already, but we said, okay, so we backed into it. Here's our profit target. This is what you've got to operate in.

7:07 Stephen Brown

And I think we just cut all sorts of stuff. Mostly in marketing, right? All the agencies, all the creatives, we had plenty of creative.

And I think, it was still a small business. So Brittany and I just told you, we're like, dude, you're a marketing guy. Go figure it out. Like we're not big enough to get, you know, A plus agencies.

7:26 Stephen Brown

So this is [unclear] to learn. And interestingly enough, since that time, I've seen some people, probably the most notably Taylor Holliday from CTC, actually say, if you're under, I think he already said it was like a million or 2 million in revenue, you should be doing your own ads.

Because you're going to get the B team at an agency, or you're going to get an agency that's split across a million of those customers because you're not generating a lot of revenue for them. And we actually had some bad experiences with agencies, right? Didn't we get our Facebook ad account blocked and we had to restart?

8:08 Preston Alder

Yeah, we had an issue there with an agency. Yeah, that ended up, yeah, that was a mess.

8:15 Stephen Brown

No offense to the agencies serving smaller customers, but the economics are really hard for them.

And so you just rolled up your sleeves and started figuring it out and said, hey, here's my resource constraint. I am the ad manager. I'm trying to think what they call it. There's a term in the agency world, the guy who's running the ads.

8:37 Preston Alder

The media buyer.

8:39 Stephen Brown

Yeah. You became the media buyer. You leveraged the creative. You also did a lot of creative, and you just tried to resource constrain the marketing side of things.

8:46 Bringing ads in house

Stephen Brown

How hard was that to do?

8:50 Preston Alder

It was fun for me. I'm someone who enjoys just kind of learning and new things and really diving in. So I mean, it was a lot of time, and it stretched me, but it was also a lot of fun.

And like you mentioned, I think around that time when we kind of got into Profit First, I'd heard multiple people say if you're a smaller brand it doesn't make sense to outsource your ads. And honestly, when you think about it, there's such a big fixed fee with an agency. Their performance on ads has to be so much better than yours just to have that fixed fee make sense.

9:30 Preston Alder

And then there's a disconnect between the agency and the brand. Usually they don't quite fully understand your audience and your branding.

So once I dug in, and I'm the one doing the email marketing and the SMS, and I was doing customer service at the time, so I was hearing what customers were saying. I knew what was connecting with them in our messaging, right? Through our emails, like which emails were performing the best. And there, without an agency that I had to go to and kind of explain these things, I just kind of knew what was working.

10:07 Preston Alder

And so once I started applying that into the ads and diving in and working on ad account structure and all these things at the time, yeah, big learning curve. But I think it was within, I don't know what it was, maybe six, eight months when we started to see a huge boost in ad performance.

10:31 Stephen Brown

Yeah. It was three months.

10:38 Preston Alder

It took us a couple of months to get it started and to start kind of figuring it out.

10:40 Stephen Brown

I think within three months of us executing that strategy, we were able to start paying you a payroll. We started actually being a profitable business.

Yeah, and it worked because you had the skill set. We were able to cut back and you had the skill set.

11:05 Stephen Brown

You know, if you're a bigger brand, I'll tell you where I see waste. Not as much in the last couple of years, because I think the industry's been so hard that people have gotten better. But like the vanity office, the lifestyle business, too much payroll.

I think marketing is often one of the killer things. You know, there are kind of three legs of the stool within any ecommerce business. There's your cost of goods sold, hard to change, and we're all feeling it with tariffs, we'll talk about that later. There's your fulfillment costs. Those tend to be fixed as a percentage of sale, also somewhat hard to change, not impossible. And then there's marketing, which I think is really variable.

11:47 Stephen Brown

You've got to spend it if you're an online seller. You can be really lean and mean with the others, but the one that I think you've got to get dialed in, or you're always wrestling with, and at least we've always been wrestling with, is the marketing spend. That's been kind of the path to profitability at this point.

But as you get bigger, I think the temptation is like, I want to hire more people. Let's go get an office. I'll start bringing lunch into the office.

12:13 Stephen Brown

But marketing, I think, in a consumer products brand, I mean, if you had $10 million, could you spend $10 million on marketing?

12:20 Preston Alder

No problem. Yeah, I mean, there are a million ways. You think about every channel you could spend on, every ad platform, every influencer. It's so easy to spend money on marketing in consumer, if you're not careful.

12:38 Stephen Brown

And I don't think we were ignorant. I don't think you were spending frivolously. We were just new in the business. We're like, let's pump this up, energize the marketing. And it didn't work right out the gate. And so we had to retrench.

12:55 Preston Alder

And as the one operating the business day to day, having that constraint of, okay, this is about how much revenue we've been bringing in a month, set aside our profits, this is how much I have to figure out, basically marketing. Like you said, fulfillment and the other expenses we kind of knew. So it was like, hey, here's how much I have to spend each month.

13:17 Preston Alder

And for me, it was like, okay, how can I get the most out of this? And that change in mindset, you get rid of the vanity spend, like you mentioned, number one. And then number two, it's like, I just had to figure out how to get the performance at better levels within that spend, right?

So just that constraint really, I guess it focused my energy, and it did something with my mindset from a day to day that I think was a huge difference maker.

13:53 Stephen Brown

I think that's a good point. I think Profit First is as much a mindset as it is a practice. It's about resource constraint and staying within those constraints, which is hard.

I think it's relatively easy in a lot of areas, but in an ecommerce consumer products business, I think marketing is the hardest one, because ad campaigns are not predictable, right? Some work, some don't. But it requires you to focus, focus, focus.

14:23 The accounts, and our adaptations

Stephen Brown

Let's talk a little bit more about some of the logistics and what we did. I'll go back to my visual here for those that are watching on YouTube.

Profit First talks about allocating into five accounts. There are actually a couple more accounts. So basically you take the money from your income and you need to distribute it into the other four accounts. So there's a profit account, an owner pay account, a tax account, and an operating expense account. And the idea is that you have fixed percentages on these.

14:51 Stephen Brown

And we used our financials. This is something we leveraged, the financials that we're producing as part of LedgerGurus, to say, okay, what makes sense? And then I'll talk a little bit about some of the adaptations we did. And then you live within those constraints.

15:36 Stephen Brown

Let me talk about the adaptations. Two adaptations that we did. And this is where some people get critical of Profit First, because it's really easy to go wild and be like, I'm going to have 20 accounts. I'm just going to have 20 envelopes, 20 buckets.

We added two. We added an inventory and fulfillment account. And essentially we're taking the value of the cost of goods sold and allocating that into, plus actually we added a little bit more, it gives us some growth, some juice for growth. We'll talk about some limitations of this model. And then we added a sales tax account that we carve out every month as revenue is coming in.

16:17 Stephen Brown

Those are some of the adaptations that we added. And for the most part, it worked. We'll talk about some of the issues that we've learned over these last couple of years, but it's worked pretty well, right?

So for you, we had money to buy inventory. We always had money to pay for sales tax. We had money to pay taxes at the end of the year. You were getting a payroll. We had a profit as an owners group.

16:49 Stephen Brown

And then you had this OpEx bucket, which in a larger company could be your payroll, that's your software, that's your everything. That's what you had to live within, right, that resource constraint.

17:07 Stephen Brown

Let me ask you this. Were there any hesitations that you had when we decided to go into Profit First?

17:16 Growth versus profit

Preston Alder

Yeah, I think the biggest hesitation is, okay, if we're focused on profits, we're not going to be able to grow. Or there could be this opportunity of more growth that we're not tapping into, that turns into bigger profits later, right? That's kind of the mindset that people have, it's either growth versus profit.

17:42 Stephen Brown

I blame tech companies on that. All the cool companies these days are tech, and that's their strategy. They will go 10 years, 20 years without a profit and just grow, grow, grow the business and then convert it.

But honestly, I think it's a false narrative. Because number one, a lot of those companies never achieve profitability. They go out of business, or they get bought and then they get forced to be profitable. Number two, it's a very unique industry that has high upfront investment costs.

18:02 Stephen Brown

Most businesses just don't have that luxury. And I think one of the best things that could happen in the business world is to erase the mindset that we're all tech companies, and kind of say, no, we are a services company, we are a product-based business, and operate accordingly.

18:34 Preston Alder

Yeah. And if you're always betting on the future, there are so many factors, I feel like, in business. You know, the economy, consumer spend, all these different things going on.

You could bet on the future that you're going to build your customer base now and achieve all these profits later. But something happens within that timeframe. Things are always changing. Tariffs, right? There are all these factors that could significantly impact your customer behavior and change what your customer base and revenue now turns into later.

19:13 Preston Alder

And so you can't bank on the profits later.

19:23 Preston Alder

And I was just going to say, I think what we found pretty quickly was, once we started focusing on profit first, because it stretched me, the operator, ultimately it actually helped us grow more, because we became more effective with our ad spend, which was the key component for the business. So we were able to start achieving the growth that we wanted, right?

19:52 Stephen Brown

Yep. And we had growth and profits.

I mean, Mike Michalowicz, the author of Profit First, talked about that. He was doing service businesses. He was poor. You know, he talks about how he was always poor, always rubbing two pennies together.

And literally we were in the same boat. Nobody's getting paid. You're not getting paid anything. You're in the business the entire, you know, 100%. We're in the business marginally as owners. I'm helping as the CFO and kind of strategic partner, Brittany comes in and does special projects, but nobody's getting paid.

20:19 Stephen Brown

The opposite, we're putting money into the business, more money in, more money in. Like, this sucks.

I don't know, I mean, what was the psychological shift of actually starting to get paid for your work, for owning a business?

20:38 Preston Alder

Yeah, it felt good. Before that it was tiring. I mean, it's hard to go to work every day after a certain amount of time if you're not getting paid, right?

20:53 Stephen Brown

And we kind of did that at LedgerGurus. For the first two years of our history, Brittany was doing it solo, super small. She never took any money out of the business, just kept plowing it back in.

And then I came on board two years in and we paid ourselves jack nothing, but we had like a two year ramp. So within two years, we were no longer taking money out of our savings to make it go.

21:23 Stephen Brown

And we did that skill strategy. It was very deliberate. We were running at break even, but we weren't paying ourselves nearly enough. It was like two years of ramping our pay up. And then after that two years, we kind of shifted to a profit mindset.

So you can take that growth strategy to a point, but I think the problem is when you're not making profits and you're not taking anything out of the business, you're not paying yourself. And a lot of small business owners do that in the beginning.

21:52 Stephen Brown

When I left my job in 2016, I was in tech. I was making more in my job than all of the revenues of LedgerGurus. We paid ourselves just, I think it was like just above minimum wage. But every couple months we'd raise our pay, raise our pay. Okay, the business can, okay, we can pay ourselves more, which is good.

But when you get nothing, dude, it's, even when you're getting a little bit above nothing, it's hard when you're getting nothing.

22:24 Stephen Brown

Yeah, that's like, what am I doing? I'm a slave to this cash burning machine.

And I think the problem with Solé Toscana was not only were we not getting paid, but the value of the business was starting to decrease. And so it's like, we're never going to get paid. And this is a problem. So I think combined, we're not growing the business, we're not getting my operating money out of it.

22:49 Stephen Brown

So I think that's one of the big things. One of the things I like about Profit First is the idea of, you should be getting paid.

When I meet with a new customer and they want to consult with me kind of as a CFO or advisor, one of the first things I look at is how much are you paying yourself. And if they're not, I'm like, we've got to fix that. Like even if it's a modest amount, you've got to be paying yourself, and you need to have a plan to get to a place where you're sustaining yourself.

23:12 Stephen Brown

And ideally you should be making, over time, it took Brittany and I about five years. Then it started tipping over. It's like, okay, now this is better than what I was doing before.

And that should be the goal. Your business should be to a point where, financially, I'm doing better than I would if I was going to go work for the man. If I'm working as hard as I am in both places. Which oftentimes with a small business you're working harder than a big business. It's always on your mind. I don't know. Do you feel the same?

23:47 Preston Alder

Yeah, I mean, I've kind of been in entrepreneurial situations since graduating college, so I don't have quite the experience you do of the two sides. But I guess it's just kind of been a part of my work.

But yeah, I mean, when you have interest in the business, you're thinking about it more, you're, I guess, worried about the future more. There's just more at stake.

24:27 Stephen Brown

And business can be fun. And it's a lot more fun when you're solving these hard problems and getting paid to do so.

Now let's talk about, again, I don't want to get into too many of the dynamics. It's like, go read the book.

26:58 Where Profit First breaks for product businesses

Stephen Brown

One of the things that I want to talk about, well, these frameworks, there are a bunch of frameworks. I've always liked frameworks, but I've always found that there are some issues.

So we added some adaptations, which he kind of says you can do, you know, added extra accounts. Some people go hog wild, they have like 20 accounts, which seems crazy.

25:23 Stephen Brown

But one of the things that I feel like Profit First doesn't comprehend is the cash flow issues of a product based business.

Let me clarify. This is where I diverge with the author. He's like, don't use credit cards, never take debt. And I'm like, yeah, number one, I think it's unrealistic to say don't use credit cards with a modern business, especially if you're using software. Like what am I going to do, send a check to Shopify, right? Can you even pay Shopify with a bank account? Maybe. I don't know.

26:07 Stephen Brown

Oh yeah, I guess you could, I guess you use debit cards. Which I'm going to take a quick side note. Debit cards are a terrible tool. People don't understand the risks around debit cards. You don't have the same chargeback protection with a debit card that you do with a credit card.

So for one, don't use debit cards. Use it at the ATM and that's it. And even then I'd be very careful, because when those numbers get stolen, there are fewer protections around a debit card than there are with a credit card.

26:30 Stephen Brown

So number one, I think that's dumb. It's not realistic.

His point, and I've heard Dave Ramsey, Dave Ramsey is another get rid of your credit cards type of mindset, is you spend mindlessly, right? When you're not thoughtful about your spending, versus like, look at my bank account, I've got money, therefore I can spend. But I just think that's short-sighted.

26:49 Stephen Brown

But then there are these cash flow issues. Let me bring up another visual and we can talk about this. Because this is something that you and I talk about.

One of the things we've learned with allocating money towards inventory, if you're growing in an inventory based business, you can't allocate enough, right? Because you're selling, say, 10 widgets today, but you're needing to buy 12 or 20 widgets for that future sale.

27:31 Stephen Brown

And so you're never able to allocate. There's a point where you can grow faster than your ability to allocate towards inventory.

We've decided to take debt, smart debt. Don't do MCAs, don't do those really bad loans. We've been able to use some more strategic loans, but we use debt as a way to finance the inventory beyond what our sales are able to produce.

28:06 Stephen Brown

Let's talk about inventory allocation. What are some of your thoughts, Preston?

28:12 Preston Alder

Yeah, I think a way to think about it, we kind of struggled with this at the beginning, but it's like, hey, if you're doing a million in annual sales, your COGS is 30%, or let's say 20%. You're setting aside 20% for COGS to buy your next inventory. We are growing at 30%. Then the next 12 months, you're going to have to somehow come up with 30% more in COGS to pay for that.

So if you're growing even 20 to 30%, nothing crazy, it's a big cash flow number when you have to pay for inventory that you're going to sell the next six months, 12 months for growth.

28:51 Stephen Brown

Yep. And if you're wildly profitable, you could in theory fund that growth with off-loading cash from profits. But there is a point where mathematically you cannot. You're not generating enough profits to fund growth.

29:05 Preston Alder

And putting profits in that situation is going to stunt, well, it won't stunt growth, but if you're putting aside that much of your profits towards future inventory, and you could be using that in your OpEx, yeah, that's where you get into the growth versus profit stuff that I think matters.

29:32 Stephen Brown

Yeah. And our solution was, we've looked at the profitability, we look at the cost of capital, and we say, does that fit within our profit model? And this is where I'll talk a little bit more about how we've taken a more sophisticated approach, but we say, are we comfortable with the impact on profitability of financing?

And if the answer is yes, we're like, cool. We'll fund this. We'll fund our inventory purchases so that we can have growth, which we've had.

29:57 Stephen Brown

I mean, I think we're going to end the year probably, you know better than I do, what, tripled the business since we bought it?

30:05 Preston Alder

Yeah, close. Close, yeah.

30:08 Stephen Brown

Yeah, probably. So in about just under four years we'll have tripled the business.

Now it's small, but I'll tell you what, if you've been operating these last couple years in ecommerce, man, we didn't know what we were up against. Not only was it hard, but I think the industry has been really hard. We came off the peak moment. That's when we kind of bought it. It was like, it's still rolling, it's a good industry, we can make some money. Which you can, but to your point, let's see what we had. Tariffs, inflation, obviously marketing degradation, there was the wonkiness that everybody was talking about a year ago of Meta's algorithm. So marketing's continuing to be challenging. It's been a hard couple years in ecommerce.

30:58 Preston Alder

Yeah. And yeah, we bought it at the peak in 2022, kind of after COVID. And I think the business dropped that first year. It's probably about tripled since that drop. So the last three years, in revenue.

31:16 Stephen Brown

So while we're spending money, we're seeing revenues not perform. We're like, man, we suck.

31:18 Preston Alder

Yeah, and there was that. Yeah, there was the iOS effect at that time. And then there have been some algorithm updates and whatnot.

31:24 Stephen Brown

I should have gone back in a time machine and bought this in 2018. We'd be rich by now. Buy in 2018, sell it in spring of 2022. And then, I don't know, what's cool now, crypto?

31:40 Preston Alder

Yeah. But I think there's also some optimism right now around ecommerce with AI. And so, you know, if we can get, we've gotten through some tough times and now have some solid growth.

I think companies who are able to do that, at least Taylor at CTC has talked about kind of this tale of two stories, where bigger ecommerce brands have been able to survive and smaller ones haven't. And I think the smaller ones who can get through it, yeah, I think there will be some good times ahead, but we'll see.

32:14 Stephen Brown

Let's talk about one other learning that we've had around cash flow, and that's OpEx. I think you and I have talked a lot about it this year.

We've done this fixed allocation, and then we started visualizing how much we're allocating, what we were forecasting spend to be, OpEx as a spend. And one of the things that we've realized is, you know, those costs are kind of fixed throughout the year. But if you're allocating a percentage of sales, which is what Profit First does, a fixed percentage of sales throughout the year, you're going to have seasons where that allocation is not enough.

32:50 Stephen Brown

But it evens out in the end. And unfortunately, in a consumer products business, that evening out usually comes at the end of the year. And the beginning of the year is horrible, because everybody's spent their brains out. We go from feeling rich to, crap, what happened in January?

And it's just a reality. January usually sucks for most brands. Unless you're a winter sports brand that has somehow got momentum beyond that holiday season. I think January is just a hard month.

33:23 Stephen Brown

And so one of the things that we've realized is that allocation is insufficient for what we need. And what we're talking about now is, we've got to build up some working capital. Rather than using debt, we could use debt, but we're thinking more along the lines of, we need to build up a little bit of a pool so that in those lean months where the allocation isn't enough, we've got somewhere to draw that money from, and then the pool replenishes at the end of the year.

Thoughts on that? We've been talking about that a lot lately.

33:58 Preston Alder

Yeah, one thought from an operating perspective and media buying. Those who are in media buying and running ad accounts, like, okay, you could just say, oh, reduce ad spend those months, right? So that your allocation covers your OpEx.

The problem is in media buying, I mean, you can reduce ad spend a little bit, but you need to keep the momentum going. So you kind of have to keep up your ad spend, right? And you're acquiring new customers who at the end of the year, usually BFCM, that's where you kind of bring in all your new customers all year, come back and buy. And so you kind of rake in all the revenue at the end of the year.

34:47 Preston Alder

So it's not easy. Like you said, you can't just decrease your OpEx those months. You can a little bit, but you have to keep those variable costs going.

Because at the beginning that's what I was thinking. I was like, in those months we could just spend less, right? Spend less in our ads account, which is a huge expense. But it just doesn't work.

35:07 Stephen Brown

Sometimes you're doing list building, you're doing top of funnel stuff that you're going to convert later during those peak buying seasons.

35:20 Preston Alder

If your performance is good on your ad spend, yeah, you need to buy up those customers or else you're not going to achieve the revenue that you want in November, December.

35:30 Stephen Brown

And we're a consumable product. So for us, a customer is, we expect that if they like the product, they will come back and they'll buy more. I've had some customers where it's kind of a once in a lifetime, maybe once every 10 years type of a purchase. That is really hard in ecommerce.

In fact, I think one of the things I've learned is I would always lean towards things where there's repeat purchase over things that are maybe high, high dollar one time spend. Because then your entire success is contingent on that first order profitability, which is scary.

36:10 Stephen Brown

So one of the things I think you and I found, and I've started watching this more closely with all our broader portfolio of customers at LedgerGurus, most consumer products companies have high sales in the holidays, so November, December. Usually January and October suck.

And my thesis, and you tell me what you think, is January people have spent everything they can spend, and now they're going on, what do they call it, that thing they do in January, like no spend January, or there are these trends. And then October, a lot of times, they're saving up for the holidays.

36:53 Preston Alder

Yeah, I agree. I think we've seen that to some degree. Especially with like our new customer acquisition has still been okay in January and October, but our current customer base just doesn't spend as much in those months. They've stocked up, they spent during the holidays, they're waiting for the BFCM deals, right? They know that we do them every year.

37:23 Stephen Brown

Yeah, consumers are smarter than we give them credit for. I mean, think about it. If you're going to buy something and it's close to the holidays, you're like, I'm just going to wait. I'm going to get a good deal. Let's see what the deals are.

People are smart. They're spending money. They're going to look for those trends and they're going to start to learn. If they're a repeat customer, they're going to learn your patterns and maybe wait till you have your sale that you do every year.

37:50 Stephen Brown

And those are things you have to be realistic with as you're coming back to Profit First. This is where I think I take issue with this model. I don't think it's reflective of some of these nuances of different industries.

He, the author Mike, was in services. LedgerGurus is in services. Let me tell you, services shouldn't have any cash flow issues. We don't. And if you do, you're doing something wrong.

38:13 Stephen Brown

But product-based businesses, like you and I have looked at this. We're importing from Italy, and from the time we start an order to the time that it's in the warehouse can be at times four months, right? Is that kind of the longest stretch we've seen?

38:30 Preston Alder

Yeah, sometimes even longer before you start selling it. I think that's what we've seen, like five months.

38:34 Stephen Brown

Yeah. And then you still have to sell it. So you've got to put money in.

You know, I talk about the cash conversion cycle with customers, and for those that have done that in accounting class and wanted to forget it, it's actually really meaningful in a consumer products business, because these are dollars that I've got to put to work for a period of time.

38:54 Stephen Brown

And we don't have the supply chains of a Dell, of a Costco, of these big companies that can get product really quickly, have really good terms with their manufacturers. No, we had to put money in. We have to wait for it to manufacture. We have to wait for it to cross the ocean on the boat, get on a truck, get to the warehouse, and then we can sell it.

So that's money that has to come from somewhere. And unfortunately, I feel like Profit First is idealistic around these kinds of concepts. They don't really treat them.

39:25 Stephen Brown

So my adaptation is, there's going to be a cost to finance this product. We either have to slow down growth extremely and have enough profitability to fund modest growth, or we have to finance this inventory. And our adaptation is to say, what's the cost of capital? And does this fit into our profit model? And are we comfortable doing that? And if the answer is yes, then we've done it.

39:55 Preston Alder

Yeah. And I think we do have some limitations in our supply chain, but what can you do to decrease the cash conversion cycle? I think that's really important, because that's going to decrease your cost of capital, especially as you're growing.

And yeah, we did a couple of things upfront that I think helped with that. We got some terms changed with our supplier. But there's only so much you can do.

40:31 Stephen Brown

Well, some other things that we've done that are beyond this is where it's like, okay, any accountant that's listening, you know, celebrate. We've tried to leverage, Mike Michalowicz, he kind of poo-poos accountants to a certain degree. We've tried to leverage the best of both worlds. He'll say Profit First is a cash management system, which it is, but we use our accounting to inform us.

40:54 Analytics, forecasting, and tariffs

Stephen Brown

So some additional keys to success that we've applied is analytics. You're using Triple Whale, I've been using a business intelligence platform, and we are looking at data around the profit and loss, the balance sheet allocations. You're looking at marketing data. We're looking at it all to inform us what the allocations can be.

And that's been something we look at almost every week. We're looking at some data every week. I would say maybe not all the data, but some data we're looking at every week and kind of using it to inform our decisions.

41:28 Stephen Brown

Maybe let's talk about analytics for a minute, because I know that's kind of hot in business in general and stuff that's got hot in ecommerce, but how has that changed your approach to running the business?

41:38 Preston Alder

Yeah, I mean, I'm looking at them daily on the marketing side, but having the Profit First mindset, I'm seeing how they fit into our financials.

And I know when we're getting off track in one week. I can tell based on ad performance and the metrics that I'm looking at, like, hey, we're getting off on our OpEx and this isn't sustainable based on our forecast, right? We have a forecast. If I'm not sticking to what's happening in that forecast, there are going to be cash flow issues.

42:10 Stephen Brown

So let's talk about that. That's kind of the second tool that we've used. And again, I feel like it's complementary to Profit First. I've always been a big fan of budgeting and forecasting.

And so we do an annual budget. We look at, here's our strategy, what do we think the profit outcome is going to be? And we review and typically adjust monthly.

42:40 Stephen Brown

That helps us. Here's the ideal. The problem I see with Profit First is like, you should be making 10%, whatever. You should be paying yourself X percentage of, I think he calls it real revenue, which is more or less gross margin. You should be paying yourself this much. That's great.

Then there's reality. It's like, maybe I am struggling as a business owner to execute that ideal standard. I should be shooting for it.

43:09 Stephen Brown

We use the budget to say, this is what we think we can actually do. And we're regularly saying, what are the levers we can pull? But there are times, like now, where it's like, instead of trying to push profits up, we're trying to preserve, because freaking tariffs are coming in and chewing away at our profits.

So we use that budget forecast, which is a combination of a revenue and a marketing forecast, an inventory purchase plan, an expense model, all integrated to say what do we think our profits are going to be.

43:46 Stephen Brown

And I think we've been pretty accurate over the years. And when we're not, we learn from it. Like, where were we off, right? And I think that has informed our strategic decision making.

43:52 Preston Alder

Yeah, we've gotten closer and closer over time. And yeah, if I'm trying to decide whether to invest in something in marketing, or like these tariffs come up, it's easy to plug it into the forecast and the budget and see the impact and then make a decision on what to do.

44:13 Stephen Brown

And this is like traditional finance. This is how big businesses operate. This is kind of the world I came from. So it's that kind of stuff that just makes sense.

It's expensive, either to pay with money or time. And if you don't have the skill set, you have to definitely pay somebody to do it. But I think it's been really instructive for us.

44:44 Preston Alder

I started to use, so Triple Whale has an AI agent now that you can use. And Triple Whale, if people don't know what it is, it's connected to everything that I do. So our sales, it's connected to Shopify, all our marketing tools. So it has all this data.

And I can now talk to Triple Whale and have Triple Whale forecast out our revenue for the next 12 months based on all the new customers we have coming in, ad performance, looking at year over year data. I mean, it has all the data you need to come up with a forecast, and I can give it more context on what we're doing and plans.

45:26 Preston Alder

And it was amazing. We'd been working on a budget, Stephen, and a forecast for a long time and put tons of hours into it, into the spreadsheet. And I worked with Triple Whale for like five minutes. And it gave me almost, it gave me spot on our forecast for the next 12, or through the end of the year. And it was almost exactly what we had been forecasting and what we had achieved. So anyway, in like five minutes.

45:55 Stephen Brown

Yeah, Triple Whale is not a sponsor, but they probably should be because we're giving them a shout out here.

46:00 Preston Alder

I think it's just the power of AI with all the data you have as an ecommerce brand. Combine that with AI and feed it. And I mean, it can do a lot of this for you.

46:13 Stephen Brown

So let me talk about the last leg of the stool that we do that's not Profit First, but I think integrates nicely, is we have a cash flow forecast.

We use an annual forecast to understand what we think we're going to need to finance. How much working capital do we need, how much of a line of credit or some facility do we need? And again, we use it purely for inventory. And then we have a 13 week that gives us more of a tactical view of when we need to draw on that line or lines of credit.

46:42 Stephen Brown

And I think that, integrated with the allocation model, it's been pretty successful.

And lately it's been hard, man. We've been talking about tariffs every freaking week since, I guess the inauguration, or I don't know, maybe a little after once it was like, oh, he's serious about tariffs. I think we were all just kind of like, let's see what he does. I'm glad we're not importing from China. And then when he had his little Liberation Day announcement, we're like, damn it. Like we're screwed. We're going to have to figure this out.

47:16 Stephen Brown

And then maybe let's talk about how we've leveraged our tools and Profit First. Profit First kind of looks at things like a zero sum game, which it is, right? Like you only have a hundred percent of sales. You can't get 101%. It's a hundred percent of sales.

And so if your cost of goods go up and you want to maintain a profit level, you've got to find ways to drop costs, increase revenue to further dilute those costs of goods.

I mean, how have you been thinking about the impact of tariffs in light of profitability and Profit First?

47:57 Preston Alder

Yeah. So I think because we had all the Profit First and these forecasts and everything in place, at one point you made a tariff calculator where you were able to say, okay, here's the tariff percentage on our COGS, and what does that do to our bottom line? So that was really nice.

And so we were able to take that and say, okay, this is going to be our impact on the bottom line. We also just put it into our last 12 months. Hey, if we would have been charged 10% tariffs on our landed cost of goods, or I guess it's not landed cost, on just the product costs, this is the impact it had on our profit.

48:36 Preston Alder

So we did that first. And then we were able to look at our forecast and know the impact that it would have. And then we went through different strategies and plans to adjust for that.

And yeah, I mean, for us, we were able to cut a little bit of costs, which we did the last few weeks. And then we've been running price testing to see if we can increase prices and what kind of impact that would have on our revenue. And we looked at elasticity.

49:06 Preston Alder

So for us, it's been a combination of looking at what costs we can cut and changing prices. And then because we have all these models in place, it was easy to plug in and see the impact.

Yeah, I don't know if you want to build off that, Stephen.

49:29 Stephen Brown

And I think you did a good job. You know, we're using the data, we're using a profit mindset. And it's not easy. I mean, we're like, crap, where are we going to, you know.

We have a low cost of goods sold product. I shudder to think of somebody who's got like a 40%, 50%, even 60% cost of goods sold business as a percentage of revenue. Those tariffs add up a lot higher than for a smaller cost of goods sold business like ours.

49:59 Stephen Brown

And some of that's just the market we're in. Some people, if you're reselling, usually have higher cost of goods sold, because you're competing against other people that are selling the exact same thing. And so it's a more difficult challenge to navigate.

But I think we've used this profit mindset, this information decision making approach we have, to navigate things. And I think it's done pretty well.

50:31 Stephen Brown

All right, I want to just bring this thing home. Couple of things.

Some people think that Profit First doesn't scale. I'm going to give you my thoughts, I want to get your thoughts. I know we've scaled it somewhat, like a multimillion dollar business, $10 million business.

I think principles of Profit First can scale. I'm not sure, you know, we've never really talked about when do we deviate from this approach.

50:54 Stephen Brown

But I think a lot of principles would scale. For example, I realized when I read the book that I was using this tax allocation strategy within LedgerGurus. And let me tell you, I have never been short of funds for taxes. We put that money aside. That is in a dedicated account that is for taxes.

If it gets too, I'm conservative. When it gets too big, say I have a good tax strategy, I might take some extra money out and put it to work somewhere else, or take it out as an owner. But that is a principle that I think is really, really valuable.

51:36 Stephen Brown

There are certain funds that are earmarked for things. You should do that.

I think this profit mindset, it might be different in a bigger company. You have all these finance teams, they're generating budgets, there are controllers and financial controls. So you can only spend so much, and they're constantly measuring and monitoring and saying, okay, we've got to cut budgets, you've got to cut spend. It's not the same model, but it's the same mindset. And I think two sides of the same coin.

52:08 Stephen Brown

What are your thoughts? Do you think Profit First could scale?

52:12 Preston Alder

Yeah, I agree that there are principles that would scale. And I don't know how to do this at scale, but the resource constraint. You were saying you can put things in place in a larger business to kind of have this resource constraint. But there's this, for me personally, I don't know how you do this at an employee level, but just getting the most out of someone or your spend, there's this resource constraint mindset that I have that has just improved productivity.

52:45 Preston Alder

So yeah, I don't know exactly how that translates at scale, but I think if you have it built into your culture somehow, I don't know exactly how to do that, but it's an important thing.

52:55 Stephen Brown

I mean, I can tell you how resource constraint works in big companies. Finance comes in and says, this is your budget. And then when things aren't going well, they say, your budget got cut. You need to cut your budget, cut your spend.

53:08 Preston Alder

But if you're okay, they're giving me this budget, but because I have interest in the business, I want to get the most out of that budget. Like there's got to be some reward for efficiency, like that employee doing the best they can with the budget they have. I don't know.

53:28 Stephen Brown

It's translating basically to having outcome expectations, which I think the bigger you get, it's harder to do. Because I think you get these big businesses and these people are like, what do they do? I'm the program manager over XYZ. There's no direct correlation with revenue in some of these roles, which is why I think you see these big companies are just like, financial impact, 10,000 employees gone. And it's ruthless, it's heartless, but it's because there's a cultural disconnect.

54:03 Stephen Brown

So I think Profit First is definitely oriented towards smaller businesses, but the principles can scale. And I think the challenge is, how do you scale it beyond an owner to a bigger team, to where they have this mindset of resource constraint? And how do you figure out how to incentivize them to have reward? And that's probably a whole different conversation, a whole different podcast.

We're trying to figure that out at LedgerGurus right now. We're a bigger company. We have 50 employees. And how do we create that same sense of, how do I create production with my resources? That is the journey that we're on. But I think if you can do that, you're going to have success. And I think it's a different approach. It's not quite this same thing, but there are underlying concepts that work.

54:51 Stephen Brown

All right, well, we're fans of Profit First. We think if you're a smaller business, and by smaller, I'd hate to put a number on it, but I'd say even 10, $20 million of revenue, I could see how you should at least consider some of the concepts.

55:10 Preston Alder

I think a lot of it depends on the team and industry. Some of the applicability scales easier.

55:15 Stephen Brown

But if you're struggling with profits, I would say you should look into it. You should think about some of these concepts. They make a lot of sense. They change businesses.

All right, Preston, thank you for joining us today. Again, we're going to have to have you back again. You're always fun to talk to. And if you've enjoyed this episode, send us some feedback.

55:43 Preston Alder

Thanks for having me. Thanks, Stephen.