The Ecommerce KPIs That Actually Matter

I am today your host. I'm Stephen Brown. I am the COO and co-owner of LedgerGurus. I'm also CFO and co-owner of a DTC brand, Solé Toscana. I am also an adviser and fractional CFO, and have done a lot of other things.

0:18 Stephen Brown

With me I have my co-presenter and co-host Lauren. Lauren is our Director of Service Delivery. She's also running our income tax practice. She led and built our sales tax practice before that. She's also owned a small business and has a lot of credentials too.

0:43 Stephen Brown

If you want to get some additional insights on today's webinar, we just had a podcast, The Ecommerce Finance Podcast. You can find it on all the podcast channels, also on YouTube. There's a great conversation that goes along with what we're going to talk about today.

0:55 Stephen Brown

Now, I have a treat for you today. This is the end of our slides. We are going to actually look at metrics and talk about metrics, and Lauren is going to ask me questions.

1:09 Stephen Brown

What we're going to focus on are the metrics that we look at with our customers, and why. So what they tell us.

And I want to start with this. This is something that we give to our recurring monthly accounting customers, a basic sample dashboard. And in this there are six metrics.

1:32 Stephen Brown

And Lauren, you can just ask me all the questions you can. If you have a question in the audience, put it in the chat, put it in the Q&A manager.

1:44 Revenue and cost of goods sold

Lauren Maillard

How did you get to these six metrics?

1:47 Stephen Brown

Good question. I think these are the most foundational metrics that tell me the health of a business. It's not the complete health, but it's a great starting point.

1:56 Stephen Brown

So let me go through these. The first one is revenue.

Now, most customers have a pretty good bearing on revenue. They don't always measure revenue accurately. A lot of times with ecommerce there are issues of only measuring payouts, and not actually revenue, and not revenue when it occurred. When customers work with us, we try and get the full net revenue timing accurate.

2:18 Stephen Brown

The big things I want to look at here, and this is sample data, it's derivative of a real business. This is derived from the business I own, but it's not actually the data. I've done a little bit of manipulation, so the numbers aren't actually what you're seeing.

2:35 Stephen Brown

But the big thing I look for is, what are the seasonal elements of a business? And usually what I'll find in most DTC brands is there's the year end. That's usually the biggest one. And then there are usually some peaks and valleys throughout the year.

2:52 Stephen Brown

That's super helpful when you start talking about cash flow, but it just gives me a good sense of what the revenue of the business is. And the customer usually knows this as well.

3:02 Stephen Brown

Within these we are looking at year over year, so I like to see how did the months compare. And it allows us to have that conversation, what happened.

3:14 Stephen Brown

When you visualise data it's a lot easier to understand what happened. Where if I looked at these in a table, my mind has to interpret things and interpret the differences. But when I look at these side by side I can say, oh, there's a big jump. Why was that?

3:32 Stephen Brown

So I'm not going to spend too much time on revenue, but there's a lot to talk about from a financial standpoint, and to be constantly asking.

Really the rest of the metrics that come from the income statement are helping me understand my profitability. And in an ecommerce business there are three things that tell it.

3:51 Stephen Brown

The first is your cost of goods sold. The cost of goods sold is rarely measured accurately.

When I look at customers, they like to lump a lot of additional costs in here. The way that we measure cost of goods sold is more aligned with generally accepted accounting practices, which is what a lot of investors and banks are going to look at.

4:13 Stephen Brown

They're going to be looking at landed product costs. So that would include the cost of the product, the cost of importing the product, tariffs and duties, all of the fees that go into the product. A lot of customers are putting other costs like outbound fulfilment costs, merchant fees. We don't do that here.

4:36 Stephen Brown

And then you can see again that I've graphed this. What I've done here, instead of representing the dollar amount, I look at this as a percentage of income, because it cuts through the noise. And the percentage of income tells me a whole lot.

4:48 Lauren Maillard

So Stephen, by doing that, by normalising and going to a percentage of income, we're able to look at the benchmarks. How did you determine what the good benchmarks are, and what the minimum benchmarks are?

5:05 Stephen Brown

I spent years researching, listening to podcasts, talking to people. There's not really a place I came to, but I started to hear the same numbers over and over and over again.

5:23 Stephen Brown

So 60% is like the ceiling. If you're paying more than 60% on your cost of goods sold, you're going to run into problems. Investors aren't going to fund you. You're not going to have enough margin to run the business.

5:38 Stephen Brown

Typically 60%, if I see something that high, it's more commonly with somebody who's got a marketplace. They're reselling. They go out and they source product, but they're one of many people that sell that product, and they have pricing limitations. It's hard to push the price very high.

6:00 Stephen Brown

And so usually when I see somebody that's up around the 60% mark, I'm like, oh, they're a reseller. And there are downstream implications I'll get into in the other metrics.

6:07 Stephen Brown

If you are a direct to consumer business, you have your own brand. Your product is somewhat unique. Doesn't mean that there are not alternatives, but you own that. You control that branded product. Maybe there are some unique qualities. If nothing else, there's a name on the label, that often gives you the lower cost of goods sold because you have pricing power. You have the ability to uniquely control where it's sold.

6:39 Stephen Brown

Now, you need that margin. You're going to need those lower costs, because down below in the other expenses you're going to need that money for marketing. And so there's a wide range on this particular benchmark, because there are various business models out there.

7:00 Lauren Maillard

I was going to say, and we've seen customers who are successful from the 20% to the 60% at LedgerGurus.

7:05 Stephen Brown

Yeah. You can be successful. The variance really represents different business models. DTC, I own the brand, I own the product, versus I'm reselling somebody else's brand.

7:24 Stephen Brown

Now if I'm DTC I want to be around 20 to 30. If I'm reselling, I want it to be as low as possible, as far below 60 as possible. If I'm above 60, it's going to be really hard to make a viable business.

7:38 Lauren Maillard

So Stephen, when you're looking at this chart and you're noticing there's something going on around December, how is that going to affect decisions that you're making?

7:48 Stephen Brown

Well, let me tell you what that something is. Usually that something is an inventory adjustment.

7:57 Stephen Brown

So a couple of things that were good is the inventory adjustment went down year over year. So it's getting better.

Why is there an adjustment? You go do a count. You're like, oh crap. Inventory got spoiled, got damaged, we didn't capture it during the year. We need to do a better job month to month capturing those processes.

8:09 Stephen Brown

The little spikes tell a story. When I see a spike at year end, I'm like, all right, so you had an inventory adjustment. Or sometimes it's at the beginning of the year. It really depends.

8:29 Stephen Brown

Other spikes, tariffs kicked in in the middle of the year. We started seeing some issues there.

8:40 Stephen Brown

One of the issues I know with this sample data was timing of sales. We didn't perfectly accrue things with Black Friday, Cyber Monday. The last two years, Black Friday and Cyber Monday crossed over into December. And so that can be fixed with accounting if you're willing to pay a lot more money.

8:59 Stephen Brown

You don't have to though, because you can take a mental note. Hey, there was a little bit of a timing issue that we didn't capture in the accounting.

9:10 Stephen Brown

Generally what I want to see is COGS as a percentage of income to be fairly flat. If it's not, I want to understand the story. And the story here is inventory adjustments, tariffs.

9:24 Stephen Brown

I don't have to know the business, but I can usually see these things and immediately say, oh, I bet you guys did an inventory adjustment. Or if I know the macroeconomics, I can be like, oh, tariffs hit you, that sucks.

9:36 Stephen Brown

I see this and I say, go talk to your accountant about making sure that you have a smaller inventory adjustment next year. If I see stuff bouncing around a lot, I'm like, okay, your inventory operations are not dialled in.

9:48 Advertising and fulfilment

Stephen Brown

So the next one, and we'll just keep going for sake of time, I like to look at advertising.

Now, advertising tends to bounce around a lot more, because there are times of the year where you get a lot more efficiency for your investment. And the other challenge is sometimes you're doing top of the funnel advertising. And so year end oftentimes is a great place to harvest.

10:18 Stephen Brown

This particular business, which is my business, we're really growing the base. So we're running hot.

10:28 Stephen Brown

The benchmarks I have here, between 20% and 33%, are really more DTC benchmarks. I should probably put in another benchmark.

10:42 Stephen Brown

If you are a reseller and you have the high cost of goods sold, you most definitely need to be around this dark green line or below it. And how do I gather sales? Well, a lot of times you're getting keywords, you're doing SEO, you're doing content marketing, whatever it is. You're doing non-advertising related marketing for customer acquisition, because you have to. You don't have any dollars left over after cost of goods sold.

11:07 Stephen Brown

And so there's usually a direct relationship between cost of goods sold and advertising.

If I'm a DTC brand, awesome. I can usually charge a premium. Now, I have to go tell customers about my amazing product. And how do I do that? I do that in advertising. So there's this direct relationship, and usually you want to be between those lines.

11:24 Stephen Brown

Can you succeed if you're above or below? Absolutely. In the case of a reseller, you probably need to be below the 20% line. Because let's say you're at 60% COGS and I have 20% on advertising, I have nothing left over for everything else.

11:44 Stephen Brown

The next one I get into is a little bit tighter of a benchmark, and that's my fulfilment. What am I spending on fulfilment?

11:55 Stephen Brown

Let me define that. Outbound shipping, storage, pick pack fees, all the things that go from keeping the cost of storing it in the warehouse to picking and packing and shipping it to the customer.

12:22 Stephen Brown

The general benchmark I see is about 10 to 15%.

When it goes above that number, it's usually because you have a bulky or heavy product, or you just have a crappy 3PL. When I see somebody and I'm like, okay, tell me about your product, and they're like, well, it's lightweight, or it's heavy.

12:46 Stephen Brown

Or there's one other story that I see when you're above 15%. You're giving away too much free shipping.

12:58 Stephen Brown

Everybody thinks Amazon gives free shipping away, so should I. And my answer is no, you shouldn't. You're not Amazon. You haven't spent billions of dollars over decades building up this super efficient infrastructure. It's not realistic.

13:13 Stephen Brown

And there's this interesting push pull between customers, because the lack of free shipping can create a barrier, but that can be overcome. So usually I recommend free shipping thresholds. Hook them in, get them to pay for it.

13:32 Stephen Brown

Or if it's a 3PL issue, I'm like, go shop around. Where's your 3PL? A lot of people on the West Coast, they're like, my 3PL is in California. That's the worst place to put a 3PL.

13:44 Stephen Brown

And let me tell you why. Expensive labour, oftentimes expensive real estate, and expensive shipping. The bulk of your population in the US is east of the Mississippi. The challenge is you do have this big population strip on the West Coast.

14:07 Stephen Brown

But usually the middle of the country is better. If you're going to go west, put it in Salt Lake. If you're going to go east, the Midwest is great. Ohio, whatever.

Anyhow, I'm getting off into a tangent, because these are the conversations I have with my customers. Ask me some questions, Lauren.

14:26 Lauren Maillard

17% in December. What was that about? Was that free shipping?

14:30 Stephen Brown

No. Again, this was the issue of Black Friday, Cyber Monday. So you saw a dip in November and a peak in December.

14:38 Stephen Brown

What did that reflect? That actually reflected the bill from my 3PL.

Could I have accounted for the fact that there were orders made in November that were shipped in December? I could have. We chose not to because of the cost of doing that accounting. We're like, hey, I know what happened there, I can normalise it in my brain.

14:57 Stephen Brown

That's why I also look at annualised averages. There's going to be some fluctuation, even in the best of these metrics. And that's where looking at longer time frames, like one-year time frames, normalises the peaks and valleys and helps me understand what's going on on a trend basis.

15:27 Lauren Maillard

Are you netting shipping income with fulfilment cost?

15:33 Stephen Brown

It depends on the customer. That really comes down to tracking.

No, typically I don't. I do this against total income. I look at this against total income.

15:47 Stephen Brown

So think about that. Shipping income is going to, I'm getting into math now, so sorry if we get into too much math, but you're increasing the denominator, the one on the bottom, which is your income. So I'm making that income number bigger, which makes the ratio smaller. So typically I don't net that. I just look at all income.

16:14 Net profit margin and cash

Stephen Brown

And then all of this comes into the net profit margin.

16:23 Stephen Brown

Part of the issue here, there was a loss. Why was there a loss? There was some tax treatment in here that doesn't get reflected.

16:35 Stephen Brown

If I see a business and they have low cost of goods sold, low advertising, low fulfilment, and no profits, I'm like, well, there are usually a couple of culprits. You're either paying way too much interest, you have way too much payroll, or you've got way too much lifestyle going on in the business.

16:53 Stephen Brown

And lifestyle would be like, you're paying too much on rent, you're travelling, you're eating out too much. Usually it's payroll. I see that being the most common culprit.

17:06 Stephen Brown

But if somebody is doing well on the lower end of these benchmarks and they're not achieving a good profitable outcome, there's a problem.

17:18 Stephen Brown

Now, that gets us into the more advanced metrics. But there's one more metric I usually do on a basic dashboard, which is cash. Cash is king in this thing. So I like to keep track of cash.

17:30 Stephen Brown

Again, this is not the real cash balance my other business had. I wish it was. I've done some manipulations to this data. But I want to see what cash balances are and what those fluctuations are.

17:40 Stephen Brown

It could be interesting to correlate this to your sales and see, hey, do I see similar peaks and valleys with sales?

17:47 Stephen Brown

Within these six metrics, I can immediately tell how healthy a business is, and why they're not. And if they're not profitable and they're doing well here, I usually know where to go to figure that out.

18:06 Payroll, interest, and lifestyle

Stephen Brown

And that's where, when we get into, we have some customers we work with where we expand the amount of data, when they're ready and they want the data and they want to go nerd out with me really hard.

18:19 Stephen Brown

I'll usually be like, let's peel back the layers of profitability. And again, it's just more ratios.

18:24 Stephen Brown

So the big one I would go to is, I'm going to look at your payroll.

If I looked at that basic dashboard and I saw you weren't profitable, but you had good numbers on those key three metrics, good COGS, good advertising, good fulfilment, I'd be like, let's go check out your payroll.

18:42 Stephen Brown

Generally, 10 to 15% is what you want to be spending on a DTC brand.

Now, where it gets tricky is if you're doing your own fulfilment, your own manufacturing. You really should probably be applying some of that payroll labour to those cost areas. But non-fulfilment, non-manufacturing labour, 10 to 15%.

19:09 Stephen Brown

This is really hard to achieve when you're small. Because if you think about it, the game of retail is volume. The same effort it takes to create one graphic, let's take like a photo, the photo you have on a SKU, that SKU could sell a million dollars, a hundred thousand dollars, ten million dollars.

19:34 Stephen Brown

So you start to get economies of scale as you get bigger. And if you're smaller and your payroll costs are high, it's hard. But you really should be driving down to about 10 to 15% of non-fulfilment, non-manufacturing labour as payroll.

19:56 Stephen Brown

Again, I don't have rent in here. Sometimes I'll add that in.

20:02 Stephen Brown

The other smoking gun that I see is often interest expense. Not very often, more often it's payroll.

20:17 Stephen Brown

And I'm getting a little bit wonky here, bps stands for basis points. It's basically taking a percentage and times-ing it by a hundred, because interest tends to be really small. So the finance nerds came up with this thing called basis points, or bips. And so I do that because it visualises better.

20:35 Stephen Brown

Where do I see problems with interest expense? Somebody went out, they got a huge SBA loan to start the business. They were going to go and kill it, and they got a multimillion dollar loan, and the sales never materialised. And they're servicing that debt. I've seen debt services that can cost 10% of income, and they're just being dragged down by debt.

20:56 Stephen Brown

Now, the good thing is if you can grow the business, that debt is typically a fixed number, and so the percentage will go down as sales go up.

21:07 Stephen Brown

But usually when somebody's not profitable, they're good in all the areas, okay, they're good on those key three, and then I go and they're good on their payroll. Then the next place I go to is their interest. And I say, how much are they spending on interest? That can be a huge drag on a business, and there are not a lot of easy answers.

21:24 Stephen Brown

If I go through those two and they're still struggling, I'll be like, all right, let's look at your lifestyle. Let's look at your rent. Let's look at how much you're spending on travel. How much are you spending on food?

21:36 Stephen Brown

A couple of years ago this was a big issue. I'd see people and they're just bougie offices and they're spending a ton of money on travel. I think with all the profit pressure that we've had over the last years, I think people are being a lot more lean and mean.

21:52 Stephen Brown

But if those five key metrics are good, then I go to lifestyle. And if it's not in there, it's something weird.

22:06 Gross and contribution margin

Stephen Brown

The other thing that I will introduce is this concept of contribution margin.

There are two margins I bring into this conversation. One is the gross margin. Think of this as the inverse of your cost of goods sold. So your gross margin is your dollars after cost of goods sold.

22:32 Stephen Brown

The contribution margin would be the dollars, or the percentage of dollars, after sales costs. The things that I would include there are, so you take your gross margin, you'd subtract your fulfilment cost, you would subtract your merchant fees, and then I also like to include ad spend in there.

22:51 Stephen Brown

And so what this tells me is, every time I have a dollar, 80 cents goes out the door to cost of goods sold, fulfilment, merchant fees, and advertising.

23:04 Stephen Brown

This is not a great contribution margin. We're working on it. We got better.

The best contribution margins I see are about 40%. I don't typically see them with advertising, 40%.

23:23 Stephen Brown

Sergio has a question. What is the benchmark on S&F as a percentage of net sales?

23:37 Stephen Brown

I'm not sure what S&F is, Sergio, if you could clarify that. The benchmark I had was 10 to 15%.

23:48 Stephen Brown

Okay. Yeah, Sergio has got some good things about fulfilment. Let me talk about that. So shipping and fulfilment.

24:05 Stephen Brown

What are the product categories? It varies on the books. Usually if you're using a 3PL, it's going to be one invoice.

If you're doing your own in-house fulfilment, you're going to want to look at your warehouse rent. You're going to look at your shipping costs. You really should be looking at the labour related to fulfilment, your packaging, all that stuff. So the nice thing about a 3PL is a lot of this stuff just comes in on one invoice.

24:31 Stephen Brown

Shipping cost trends. Well, shipping costs go up almost every year. Here's the thing. There are a couple of people that are really good at raising prices. The shippers are. Now, as I watch these things and I start to see them creeping up, how do I respond?

24:50 Stephen Brown

Well, typically you've got to raise prices. There are some levers that you can pull to tweak things. You can work with your 3PL, you can work on your packaging. But if shipping costs are going up, and they will, and your prices aren't going up, then they're eating into your margin.

25:17 Stephen Brown

And so part of the reason I like to watch these as a ratio on an annualised basis is, what's going on? Do we need to raise prices? How much? Where's our margin getting clobbered?

25:23 Stephen Brown

For a long time, cost of goods sold wasn't a big issue. And then tariffs and a lot of other issues. So a lot of those things you can address, there are different levers you can pull.

25:41 Lauren Maillard

Stephen, does Amazon FBA also increase every year like that?

25:45 Stephen Brown

Oh, yeah. So here's the thing. Everybody else is raising prices. Why aren't you?

And part of the reason to track these key measurements is to understand where potential price increases are going. And I like to look at those longer term averages, because that will kind of cut through some of the variable noise.

26:12 Stephen Brown

You've got another Sergio question. What would be the contribution benchmark before ad spend?

26:19 Stephen Brown

Oh, you know, I haven't put benchmarks in for contribution margin, Sergio. That's a great question. You can do the math though.

26:36 Stephen Brown

The very best potential contribution margin that I could see within my benchmark, if I were to include before advertising, would be 20% COGS. I rarely see more than that.

26:58 Stephen Brown

Minus 10. 67, 67. [unclear], that's got to be my kids.

27:04 Stephen Brown

So that's before advertising. Advertising, and what I'm describing is more of a DTC brand. Let's say I can pull off 20%. So that's a 47% contribution margin with advertising.

27:16 Stephen Brown

How often do I see that? Almost never. But I have seen some 40% contribution margins.

27:27 Stephen Brown

Here's the thing I would think about. There are a couple of margins. Your profit margin is never going to be greater than your net operating margin, which is never going to be greater than your contribution margin, which is never going to be greater than your gross margin.

27:39 Stephen Brown

And so each step down the ladder. So I'm like, hey, I want a 20% profit margin. Well, if I can have no payroll and no software expenses and no rent. So you can see, I've got to get that up.

28:03 Stephen Brown

The profit margin that I think is healthy is between 10 and 20%.

28:09 Stephen Brown

And again, there's some data in here, because I'm using my business. We had some tax treatments which are awesome. Actually, if you can have a zero profit margin and a high operating margin, that's the best place to be, because it means you generated cash and you wiped out any of your tax liability. But that's a whole different webinar.

28:33 Stephen Brown

But 10 to 20% is a great place to be if you can get there. I have seen brands that can do that. It's hard work, but to me that is the goal, 10 to 20%.

28:45 Lauren Maillard

Now Stephen, we've talked about the benchmarks and we're looking at one company. I know that you're working on something to kind of give our clients greater insight into how other people are doing. Because you know how I'm doing, I kind of want to know how my neighbour next door is doing.

29:04 Stephen Brown

We will probably talk about that in May. We're working on a benchmark. That's a good teaser, but come back in May. The May webinar, we'll probably be going over that. So we'll have that out here in a month or two and then we'll talk about that.

29:22 Balance sheet metrics

Stephen Brown

I spent a lot of time on the income statement. The other things I like to get into are balance sheet metrics.

29:29 Stephen Brown

I would usually look at inventory values in my basic dashboard, but the reason I didn't put it in there is because a lot of times it's garbage. People aren't doing good inventory management, so we might as well not even talk about it, because your data is garbage.

29:40 Stephen Brown

But it's really important, because people will be like, oh, I generated all this profit, where did it go? Let's go look. Okay, you don't have any cash. Let's look at, oh, it's all in inventory. So I like to keep an eye on inventory balances.

29:58 Stephen Brown

There are some other financial ratios that I looked at. There's a liquidity ratio. I'm not going to go into that today. There's an asset to debt ratio that's helpful, but I'm not going to go into that today.

30:08 Stephen Brown

We'll finish up around cash conversion cycle. Well, I'll finish up on one other place, and we're going a little bit over time. So hang in. We'll go a little bit over time if you want to go. If not, this will be on the YouTube channel, you can watch the recording later.

30:19 Stephen Brown

Cash conversion cycle is one of the most important metrics in these businesses, and it's a really hard metric to understand because it's really hard to calculate.

30:31 Stephen Brown

It requires data from your balance sheet as well as your income statement. So it's looking at COGS, it's looking at inventory balances, it's looking at accounts receivable, it's looking at sales, it's looking at accounts payable.

30:45 Stephen Brown

And what it is is a number in days. And what does that tell me? It tells me how many days it takes to put a dollar into my machine that is my business, and have it come out back into my pocket, hopefully having multiplied along the journey.

31:07 Stephen Brown

Where does that dollar get locked up? Well, there are three components of this cycle.

There's days inventory outstanding, and that's usually the bulk of this number for most sellers. The days inventory outstanding represents the time from which you put dollars into buying inventory until it comes out in the form of a cost of goods sold, or a sale.

31:30 Stephen Brown

So that would include the time starting the manufacturing, manufacturing, finishing manufacturing, moving that product, getting the product to your warehouse, sitting on the warehouse shelf until it is pick packed and shipped.

31:49 Stephen Brown

Now there are different benchmarks here. This business, which is my business, there's some derivation, but this is the real number.

31:55 Stephen Brown

Yes, we have supply chain issues. Our manufacturer is so freaking slow, it drives us crazy. And so so many of these days are between manufacturing and getting into the warehouse.

32:06 Stephen Brown

So we are above what we consider a peak season inventory max. Usually you would want to see some movement, and there is some movement here, but you would want it to be low when you get to the lower times of the year, like right now. Okay, can we get those inventory balances down?

32:23 Stephen Brown

If you're really, really good, get it down to 30 days. Getting below 30 days is kind of a little bit tricky, because you might stock out.

32:36 Stephen Brown

And so there's going to be some fluctuation. There are different levels where you're going to need to start building up that inventory balance as you are going into your peaks, and then hopefully you bring them down.

32:51 Stephen Brown

For our business, we have a primary supplier, and they are very difficult to get stuff moved, because we're small. They just don't process our orders quickly, and it's really painful.

33:07 Stephen Brown

But this is a really important number. And the other components that go into this, and again, this could be a whole other webinar, are days sales outstanding and days payable outstanding.

33:18 Stephen Brown

But when I look at this number, I think, this represents how much I'm financing the cycle of my business. Either I'm financing out of profits, debt, or investment. And so this is a big metric that I like to look at.

33:43 Stephen Brown

The last one I like to look at is the cash flow. How is cash flowing over a time period? And this is looking across all vehicles, sales, investments, debt. But where are my peaks and valleys, and how did I do in terms of cash flow?

33:54 Stephen Brown

So there's a lot more. If you feel a bit overwhelmed with these last few, what I would say is go back to this basic dashboard.

34:08 Stephen Brown

What's going on? Revenue, my three key performance metrics, COGS, advertising, fulfilment. Does that translate to profits, and how's my cash? And then expand from there.

34:20 Stephen Brown

Lauren, what wrap-up questions do you have? And Sergio, thanks for the questions. If anybody else has some questions, hit me. Now would be a good time to ask them.

34:31 Lauren Maillard

So all of our clients have access to this basic dashboard, and their manager should be talking with them about it on a monthly basis.

34:45 Lauren Maillard

What do you suggest that our clients do if they've got other questions, or if they're interested in having some more advanced metrics?

34:51 Stephen Brown

This is a good starting place, and this is why we baked it into our monthly accounting engagements. And I've been working with my team, training, where I've got them in the dojo every month going through this data.

35:03 Stephen Brown

My thought is, learn what the data is telling you. Ask the questions. Look at the peaks and valleys. Ask the questions. Be able to answer the questions yourself, or have your accountant answer those questions.

35:23 Stephen Brown

At some point the data is not enough. At some point this expanded data is not enough. You keep going down the rabbit hole. It's like the Matrix. I'm kind of like that dude on the Matrix, I just see the numbers going across the screen and I can see what's happening. It is easier to look at the data this way. So there are different layers of data.

35:43 Stephen Brown

Usually the story behind this more detailed data is in my operational systems. I'm going to start going in and saying, let's tear apart sales data. Let's tear apart inventory. Let's look at sales by channel. Let's look at sales by SKU.

36:00 Stephen Brown

I'll give you an example. Me and my partner, since this is actual data, we saw our data creeping up the latter part of the year, and we're like, why is our fulfilment cost going up? Well, we saw there were some volume effects that we weren't experiencing. And so we're going to watch that.

36:20 Stephen Brown

We did a price increase last year. We did a shipping analysis. I've done this with customers. What should the free shipping threshold be? A lot of that's price testing.

36:33 Stephen Brown

And so these financial metrics act as a compass for where I should go next. They are not the endgame. They are the starting point. And they tell me where I need to work on the business.

36:44 Stephen Brown

The answer of how to work on it often is going into the operational data, getting into the product data, the channel data, really wrestling with it, really understanding it, and then tackling it, going after it, saying, what are we going to do? How are we going to move this needle?

36:56 Stephen Brown

You can see we grew our contribution margin 15%. Woohoo, good for us. You can also see that we've had some inventory management issues. This is something we want to tighten up. We've had some year end adjustments we don't like.

37:10 Stephen Brown

What do we need to figure out? There's a lot going on there. There are damages. There's lost inventory. Do I need to be working more closely with my 3PL, holding them accountable, working on my contract?

37:28 Stephen Brown

And so each one of these is a cornucopia of things I can tackle. But they act as this incredible compass, guide, map to where I can go to be more profitable and drive more cash flow.

37:41 Lauren Maillard

So I know that we've already gone over and everything, but when you're looking at KPIs, are you coming in saying, hey, this is my strategy, let's look at the KPIs? Or are you saying, let's look at the KPIs and have the KPIs drive strategy?

37:56 Stephen Brown

KPIs inform strategy. I don't know that they drive it. They inform it. They tell you where you're at. Benchmarks tell you where you could be.

38:09 Stephen Brown

But benchmarks are just that. They're benchmarks across a composite of data. Every business is unique.

38:15 Stephen Brown

And usually when I go in and work with a customer, so customers can pay a little bit more to work with me on an ongoing basis, not a lot but a little bit more, I'm trying to understand, why are you not performing against the benchmark? Could we have moved that benchmark, or could we move the improvement of your performance closer to the benchmark?

38:38 Stephen Brown

Some of these benchmarks are hard to change. Changing cost of goods sold, you're talking about supply chain issues. You're talking about tariffs. You're talking about import things. That's product and supply chain engineering.

38:49 Stephen Brown

Advertising, that's movable. Easier said than done though. You've got to get the right strategy that can move quickly, if you have the right people and the right capabilities.

39:06 Stephen Brown

Fulfilment, that can take months to move. Moving a 3PL, done right, that can take a couple of months to do.

39:14 Stephen Brown

So they act as guides of where I can work on my business to drive a more profitable outcome.

39:19 Stephen Brown

Sometimes the answer is sell more. A smaller seller, I'll go in and be like, yeah, some of these things are good. A lot of times the payroll is too high, because they need to pay themselves to live. It's like, sell more. Easier said than done, but you've got to dilute those things.

39:43 Stephen Brown

So they inform strategy.

One of the things I will often do at even higher levels, and again, we talked about this last fall with some customer only webinars, is I'll start layering in targets. What's my revenue plan? What's my profit plan? How did I perform against that? And why did I miss?

40:03 Stephen Brown

I literally met with my business partner yesterday. This is not our dashboard, but we were going over the revenue plan for January. How we did, how we're tracking towards February, what we missed in our planning, what does that mean for the future months, what does that mean for our profits, how are we going to adjust?

40:20 Stephen Brown

And that's kind of the next level, is starting to say, okay, this is where I'm at now. I want to build a plan. I've got a plan. These are the things we're going to do. I'm going to translate that into a budget and a forecast. The forecast tells me XYZ. Now I'm going to see how I did against XYZ. Did I hit, did I miss? Why? What did I do?

40:42 Stephen Brown

And it gets you better at your execution. You start to learn.

One of the things that we hit really well in January, this is not January's data, but I'll just use this as a visualisation. In this business that I own, Solé Toscana, we did really good in January against our plan. Part of that is we took our year end sale and we let it bleed into the new year.

41:08 Stephen Brown

But we think we cannibalised February sales. So our February sales are lagging, and we're like, we think we might have exhausted the customer base a little bit. We've got to wait for it to recover.

41:20 Stephen Brown

Sergio had a good question. What is this tool?

There are a million tools. This is a business intelligence tool I use called Grow. Part of the reason I use a BI tool is I've got a background in business intelligence, or BI, so I can do these things.

41:36 Stephen Brown

If you don't know how to do BI, don't go buy a BI tool. There are reporting tools that can get you most of the way there. But I use a BI tool because I can do really granular custom reporting. Power BI, Tableau, those are all others.

41:54 Lauren Maillard

What's the difference between a BI tool and a reporting tool?

42:01 Stephen Brown

A reporting tool usually will only do certain types of reporting. So there are a lot of QuickBooks or Xero reporting tools, and they'll have a lot of out of the box reports, and sometimes they'll allow you to do some level of customisation.

42:20 Stephen Brown

A BI tool will allow you to do intense levels of customisation. It'll allow you to do combined data sets.

42:25 Stephen Brown

In these examples I'm not combining data sets, these are just the financial ones. But here at LedgerGurus we have all sorts of operational dashboards coming from all sorts of operational systems. Sometimes we're combining data from systems, and we kind of know when we do X, Y and Z operationally, it usually translates to a certain financial outcome.

42:54 Stephen Brown

So usually a BI tool allows you to report data across a wider swath of systems.

43:08 Stephen Brown

Sergio gets the gold star for the most questions asked. Thank you.

43:14 Stephen Brown

So I'm a big believer in data. Thanks to those of you that stuck around to the bitter end. We went a little bit over time.

43:21 Stephen Brown

If there are one or two takeaways I would say here, it's, don't just get financial reports. Don't relegate the interpretation of this data to your accountant, or assume that, hey, they've got the reports, I'm good.

43:37 Stephen Brown

Use the data. I've tried to explain this. Again, go back to the podcast that we talked about. I went into great depth about how to use metrics as you mature as a business, and I teased on that today.

43:51 Stephen Brown

But I want customers using that data to make better decisions and achieve better outcomes. And I know it can be done. I own two businesses, and the success, I can tell you, I want to say it's all based on good understanding, good financial data, but that data has really informed us.

44:10 Stephen Brown

I mean, Lauren, you've been a part of that. Would you say the financial and operational data that we use has been key to helping us improve things?

44:22 Lauren Maillard

Yeah, absolutely. The two KPIs that we have focused on a lot in the last year have been client turnover and employee turnover. So those are two huge costs for us.

44:35 Lauren Maillard

And we've looked at them. We've focused on them. We've talked about how to improve those two metrics. And just by improving those two metrics as a company, we've done so much better over the last year. Because we've had that consistent strategy of, these are things that are important that will drive to better outcomes.

44:53 Lauren Maillard

So it's been really great as we've continued to evolve in how we use our own internal metrics.

45:06 Stephen Brown

So we went a little bit long today. I hope you guys have benefited from the more in-depth discussion. I could probably talk for five hours on metrics, I'm so passionate about it.

45:13 Stephen Brown

Next month we're going to be talking about growth limitations. And this piggybacks a little bit off what we talked about today, understanding how fast you can grow based on the fundamentals of your business, and how to tackle that.

45:34 Stephen Brown

Actually I think we moved that to the 19th. If you go to the LedgerGurus website, let me drop that in here, I'm going to drop it in the chat, you can register now if you'd like to.

45:49 Stephen Brown

And we'll try to stick to 30 minutes, but sometimes we have exciting things and we go a little bit over time.

Thank you to those of you that stuck around. We'll see you next month.

45:59 Lauren Maillard

Thanks, Stephen.