5 Reasons Profit Lies Hidden in Inventory (Why Profitable Brands Still Feel Cash-Poor)

0:14 Karlie

Awesome. Thanks, Kelley. Yes, I'm Karlie with LedgerGurus. I'm going to introduce myself. I kind of have a unique background. I have started and run businesses myself. I've spent a lot of time in education teaching accounting, business, entrepreneurship, technology, and I really love helping people understand how business works. Not just the numbers, but actually business itself.

0:31 Karlie

Over the last couple years, I've been working with LedgerGurus and been specializing in inventory, accounting, and operations. And what I've found is that the inventory issues aren't really accounting problems, but they're really operational problems that show up in the financials.

So what we love to do is help businesses connect those dots so they can look at their day-to-day operations down into the numbers, so we can actually get a good gross margin that helps them make better business decisions.

So I'm really excited to be here with Madison today. We have worked on lots of projects together and with lots of clients. We have a lot to talk about and lots to share.

1:23 Madison Kishen

Thank you, Karlie, and yes, equally as excited to be here with you as well.

A little bit of background about me. So Madison Kishen over here, partner manager at Finale. I started at Finale about, I guess it's coming up on six years ago now. Started in the customer relationships area and moved into partnerships. Something about relationship building and working with our partners to find the best solutions for our clients is something that really resonates with me. And like Karlie said, helping people is kind of the core of what we do here. So working with Karlie and our clients and our projects has been really exciting and rewarding. And I'm excited to get into the nitty-gritty today and share with you what we've learned.

2:07 Karlie

So I'm going to introduce LedgerGurus a little bit. LedgerGurus was founded in 2014 with a goal of helping people build good accurate financials so they could run their business. And we specialize in ecommerce accounting, around sales tax, revenue recognition. We have lots of advisory services, but what we're going to talk about most today is our expertise in inventory and COGS, and how we help businesses determine what they actually don't know about inventory.

2:38 Karlie

So we work through them. We talk about their pain points together. We work through their processes, their operations, their tech stack. We go from purchasing all the way through fulfillment and make sure that's flowing clean down into the financials. Because at the end of the day, inventory doesn't start in accounting, it starts in operations. And if that foundation's off, so are the numbers.

3:03 Karlie

So we want to bridge that gap between accounting and operations, and make sure what's reflected on the balance sheet as inventory is right, and that your COGS is being expensed correctly, calculated correctly, and recognized right, so that you have margins that actually mean something and that you can trust.

So we do also like to partner with software and technology that our clients are using, so we can understand how it works, we can support them and help them better, make sure we're getting those good numbers. So again, why we partner with Finale, one of our favorite softwares that we use, a lot of clients use, and so we like to make sure we can support them in that.

3:54 Madison Kishen

Awesome. And a little bit about the Finale side. So Finale started in 2010. We are a cloud-based inventory management solution. We provide real-time inventory tracking across multiple channels, multiple locations, for high growth ecom sellers. We have a seamless integration with QuickBooks, and it is a direct integration keeping operations and financials in check, giving you one centralized solution to look at your inventory, operations, accounting, all of it.

4:23 Madison Kishen

So I'm going to go over the agenda for today. We are going to start with the five top reasons why profit gets hidden in inventory. I'm excited to go over these reasons together. And then we're going to give you a three-step fix that can help you if you find yourself not understanding your profit and what's going on with it. And then we're going to discuss how inventory flows through the financials, so we understand that piece, and the tools you can use to become more efficient either in your operations or in the accounting. And we'll have a good Q&A after that.

5:03 Why profitable brands feel cash poor

Madison Kishen

Awesome. So I will be kicking it off here. So something we hear from founders all the time is, we're profitable, but why does it still feel tight?

So sales are growing, orders are coming in, the P&L says business is profitable, but cash might still feel tight, margins still seem inconsistent, numbers don't always line up with what's happening operationally. And most of the time the issue isn't sales, it's inventory.

5:30 Madison Kishen

Unfortunately, as brands grow, inventory becomes more complicated. You add more SKUs, more sales channels, more warehouses, more suppliers, and then all of a sudden inventory isn't just a list of products anymore. It's a whole system that's connecting purchasing, operations, and accounting.

So the tricky part is that every operational decision has a financial impact, whether you realize it or not. Receiving inventory affects your asset value. Shipping inventory triggers COGS. Freight and duties change your product margins. But these connections often happen behind the scenes. So today we're going to walk through five common places where profit gets hidden inside inventory, and how businesses can start uncovering it.

6:17 Margin swings and landed cost

Karlie

And we're going to start with the first question. So the first reason, and before we go into that reason, I'd like to ask you all a question, and maybe raise your hand in the chat. How many of you have seen your margin swing from month to month and you couldn't fully explain why?

6:35 Karlie

So you look at your margin swinging all over the place. I think a lot of people feel this sometimes, and that is a really big red flag. And a lot of the time our mind will automatically go to the sales side, and we start thinking, oh, is it discounts, is it our ad spend, is it something seasonal? Where in reality that might be, and probably is, something to do with inventory timing or changes in costs.

And I know that Madison can speak to that a lot better than me. But what happens to inventory that causes that margin to swing?

7:08 Madison Kishen

Madison, I mean, a lot of things. Maybe it's, same product, prices change, duties increase, tariffs change, your manufacturer cost changes. A lot of different things that, if your product costs aren't being updated consistently or inventory adjustments are being recorded, your margins start to drift. And I feel like that's usually that first signal that your inventory data and your financial data are starting to disconnect.

7:44 Madison Kishen

And that usually happens when you aren't tracking that inventory movement cleanly. So maybe you're selling inventory before it's actually sold, creating negative stock. Or like I said, maybe freight costs or landed costs get added later, which change your product costs after sales have already happened. Or another common thing is, adjustments get entered manually at the end of the month to reconcile the numbers.

But from the financial side, margins suddenly start to move, and from the operations side the business might feel like nothing's really changed. But that disconnect between what's physically happening with inventory and what's happening in the financials is usually the signal that something deeper needs attention.

8:24 Karlie

Yeah. Especially if it's the same products, the same pricing, you have the same supplier, nothing's changed. Well, then you probably should dive into your inventory a little bit.

8:38 Karlie

And reason number two, when your landed costs get overlooked. So I do have another question for the audience here, just as a little show of hands. When you think about your product costs, are you including everything that it took to get your product to your warehouse?

8:57 Karlie

I think for a lot of people this can be such a big thing that people miss, or it can just be hard to do. And when we think about coming up with that product cost, it's easy to say, well, I bought it from the vendor for 10 bucks, so that's how much it costs, right?

But we have to consider everything that it took, the expense that you put out to bring that product to your warehouse and get it ready to sell. That's why it's the cost of goods sold.

9:22 Karlie

A lot of people forget all those extra things, from freight, duties, tariffs, insurance, packaging. And when you bring all that in, it changes the cost of that product, which can affect so many things. Most people do their pricing off of the cost, or our COGS is based on that cost.

And so I love this. It says 60% margins on paper, actually 48% in reality, because there's that phantom profit, because of all those costs that weren't considered.

9:54 Spreadsheets, ownership, and monthly checks

Karlie

Let's hit reason number three. So question again for you. How many of you are still using spreadsheets to track inventory, or even, how many of you maybe just do it in your head or on a whiteboard? Pen and paper, manually.

10:14 Madison Kishen

Yeah, pen and paper.

10:16 Karlie

Which, not that any of this is bad, but how many people are doing that, right? And a follow-up question is, do you fully trust it? Do you trust your spreadsheet?

10:30 Karlie

I just want you to think. I can't see the show of hands, I don't even know how many hands we have going up, but I have a feeling there are quite a few people that still do that. And it does work great. I love spreadsheets.

10:38 Madison Kishen

I love spreadsheets. A good old spreadsheet.

10:40 Karlie

And it works great for inventory if you have 10 or 50 SKUs, you've got one location, costs don't change very much, one person's in charge of it and is good at spreadsheets.

But what happens, Madison, as things grow in inventory with our spreadsheets? The spreadsheets typically break, and it's not a fail overnight. They just slowly stop telling the full story there.

11:07 Madison Kishen

Yeah, like you said, spreadsheets work great when you have 20 products, everything is pretty stable. But as you add more products, you add more sales channels, you add more locations, your cost is changing variably with the environment we're in today, that causes your spreadsheets to break.

All it takes is one formula to break, or someone overwriting a number to make something reconcile, and then suddenly your numbers on your spreadsheet don't look right anymore. They don't quite tie out anymore. I feel like that's that moment that you kind of realize.

11:42 Karlie

Yeah. And you don't even realize it until you see a problem in the financials, right?

11:45 Madison Kishen

Exactly.

11:46 Karlie

You're just going along thinking it's doing good because it's a slow thing. Then all of a sudden, oh, it's not working. Then you have to fix it.

So if you love your spreadsheets, I don't know. I love my spreadsheets.

12:00 Madison Kishen

Yes. But there might be a better way.

12:03 Karlie

Might be a better way.

12:08 Karlie

Oh, number four. No one owns the numbers. So a little show of hands here, or I guess maybe if you could drop it in the chat. Who owns the inventory at your company? Is it ops? Is it accounting? Is it a mix?

12:22 Madison Kishen

I will say that I feel like we usually see a split. We usually see operations owning the units and what's happening in the warehouse. They're responsible for receiving inventory, picking, transferring, keeping stock moving. And then the accounting side owns the dollars. So what shows up in the financials, product cost, all of that great stuff. But then no one owns the full picture.

12:52 Madison Kishen

And the challenge is that inventory lives in both worlds, in the operations and the financials. So when there isn't a clearly defined owner, things can start slipping through the cracks.

So for example, I actually have a kind of interesting anecdote here. When costs aren't getting updated and supplier prices change, landed costs get added months after the fact, someone makes a correction, this creates problems essentially.

13:17 Madison Kishen

So a company might think their system is broken, but when you dig deeper, it's actually the fact that no one owns things like product costs or inventory adjustments. We've seen situations where product costs haven't been updated in eight months because everybody assumed somebody else was responsible for it.

So sometimes the issue isn't the system, isn't the software, it was the structure around who owns the numbers. And tools can support the process, but they can't replace ownership. Inventory accuracy really starts with clear roles, responsibility, and consistent updates.

13:48 Karlie

Yeah. And understanding each other's roles. I've found as I've worked with clients, some people, I can ask them their role and they can tell me, but they can't tell me what the other people are doing. So the left hand's doing this, the right hand's doing that. They didn't realize maybe they're both doing the same thing, or they're counteracting each other, or nobody's doing one thing.

So making sure, and then there's some fingerpointing, right? And then there can be some confusion. But if there are full roles that everyone understands across, and it's defined, it really does help owning those numbers.

14:25 Karlie

Are we to reason number five already?

Reason number five, when there's no monthly reality check. So how many people out there are reviewing and validating your inventory numbers every single month?

14:44 Karlie

This we find is a really big gap with people. They'll wait until something feels off, and then they'll check it. And so really making sure you keep an eye on your inventory. It's your biggest asset, it's really important. But we do find this is a big gap. People wait till it doesn't look right, then they'll get into it. It makes it harder to fix. There are errors that have been compounded over months, and it can become a big problem and costly to fix.

So check it. Check your inventory.

15:18 Madison Kishen

Yeah. And from an operational perspective, that monthly check is really important, because as I'm sure a lot of you guys know here, inventory is constantly changing and constantly moving. And if those movements aren't being reviewed regularly, then those small discrepancies can slowly build over time.

And sometimes it's something simple, maybe freight costs increase for a few months, or supplier adjusted pricing. But if those changes aren't reflected in the product costs, the margins start drifting. And I feel like that's why those monthly reality checks are so important. It gives the team a chance to step back and ask, do the numbers that we see actually match what's happening in the business?

15:59 Madison Kishen

Inventory problems rarely happen overnight. They usually build quietly over time. Monthly checks are really important.

16:04 Karlie

Yeah. And they can be really simple checks, like just looking at your balance sheet and seeing if it ties out to what you physically have, or if it's close, right? Or checking those margins and seeing what they're doing, seeing if there are any anomalies. So it doesn't have to be a huge big thing, but just a simple check helps a lot.

16:29 The three-step fix

Madison Kishen

We've been walking through these five areas, and you might have recognized a few of these in your own business. And if you found yourself saying, yeah, that sounds familiar, at any point, the good news is you're definitely not alone. These are the exact challenges we see with growing ecommerce brands all the time.

16:46 Madison Kishen

And the important thing to understand is that these issues aren't caused by one big mistake. They usually happen because the business is growing faster than their processes around inventory are.

So we talked about, for example, starting with a spreadsheet that works great early on, and then you add more SKUs, more channels, more warehouses, and then suddenly inventory becomes more complex. But the good news is that these are fixable, and it's not about having the perfect data or rebuilding everything overnight. The goal is really clarity. Clarity around your numbers, your processes, and the tools supporting the business.

17:23 Madison Kishen

So when we work with brands going through this transition, we really focus on these three key steps. First, establishing your baseline. Second, fixing the structural gaps in your processes. And third, implementing the right tools to support how your business actually operates. And again, here the goal isn't perfection, it's clarity and having numbers you can actually trust.

17:51 Madison Kishen

And first step here, establishing your baseline. So the first step in fixing any of this is actually pretty simple. Before we start changing tools or processes, we need to understand what the current state is today, and that means establishing a clear baseline.

So one way to think about it is almost like a quick diagnostic for your business. Three areas that we look at are tracking, costing, and accounting.

18:15 Madison Kishen

The first is tracking. How are you actually tracking and valuing your inventory today? For some businesses it might be through a spreadsheet. For others it might be looking at your sales channel data. And some teams have a full-blown IMS to help. And then sometimes, honestly, it's just what someone remembers in their head. So the key question here is whether you have a single source of truth for your inventory.

18:46 Madison Kishen

And that second piece is costing. So are you capturing the true landed cost of your products? That means including things like freight, duties, shipping, customs, anything like that. Because the real cost isn't just what you paid your supplier for the product. It's everything it took to get that product from that factory to the shelf in your warehouse for sale.

19:06 Madison Kishen

And that third piece is accounting. Do you understand how inventory is actually flowing into your financials? Inventory should be treated as an asset, not an expense, which means the cost of that inventory doesn't hit your P&L when you buy it. It hits the P&L when the product is sold, as COGS.

19:24 Madison Kishen

So a quick way to check your baseline is by asking a few simple questions here. Do I know my exact inventory count right now? Do I know what that inventory is worth? Are my product costs up to date? Am I using accrual accounting? If any of those questions are hard to answer, that's usually a good signal that the baseline needs some work. And at the end of the day, you can't fix what you haven't measured.

19:48 Karlie

Yeah, I love that. First, just establishing your baseline and understanding where you're at. Then it leads straight into fixing the structural gaps you might have.

And this is one of my favorite things to do with clients, is looking at those gaps, because sometimes we just don't know what we don't know. So it takes maybe just talking it through with someone, or looking at that baseline to see what might be missing.

20:15 Karlie

As we talked about ownership, that's a big one we start at. Who owns the number? Who's the person? And not everyone can do it, but who's the one person that owns certain parts of the processes? So defining your roles and who does what, and understanding what each person does, is really important. I think you'll find as you do that, you better understand what the whole company is doing in business and how it works together.

20:39 Karlie

Then you'll want to look at your processes. We can't put a process into a tool or bring it into accounting if it hasn't been created. And a lot of times people aren't really sure what the process is, and they haven't documented it. They haven't written it out, it's just in their head. So, well, this is what I do. Well, what happens if you're not there? Then someone does it differently.

21:02 Karlie

So really understanding your processes and getting them written out, and some good SOPs written out for people. Processes from how do you receive inventory, how do you order it, how do you transfer to other places, how are adjustments accounted for and put in, looking at trade shows, and then processes that lead into fulfillment and sales. If you're manufacturing, what do those processes look like? And honestly, just writing out step by step, creating some good SOPs so everyone knows what's happening.

21:26 Karlie

And then cycle counting is a big one. We talked about checking at least once a month, and we have some businesses that need to check more than once a month. They have a lot, and this is where cycle counting can come in.

If anything, at a minimum, check and count your inventory once a year. And if you can do it monthly, or if you have a ton of inventory and it's too much, you can cycle count. And so we love cycle counting. Make sure you have this process well defined and that you're counting and checking inventory regularly.

21:56 Karlie

And then ask yourself, here's something you can ask. Can I name the person who owns cost updates? Who's the person in charge of cost updates? Whether that's on a spreadsheet looking at vendor bills, or if it is in a tool, someone's monitoring those and making sure they're accurate.

Do I have a written SOP for receiving? And for every process included, we'll say receiving, but is there a standard SOP for how that is happening?

22:24 Karlie

When did we do our last cycle count? If you're like, I don't know, and we don't have an established count or even how we do the counting, that's a gap. That's a big gap.

Do we track every inventory movement? A lot of people think, well, yeah, we track inventory coming in because we purchase it, and then inventory going out for sales. But inventory leaves for a whole lot of other reasons, and those need to be tracked.

22:53 Karlie

So the tool doesn't fix unclear ownership. People and processes go first. So before you decide what tool you want to use, or maybe you're using a spreadsheet and you want to update it, or just come up with a better process for tracking your inventory, this needs to be fixed first, and understanding who owns it, the processes, and how you're counting it. Because that comes first, then the tool.

23:18 Karlie

Oh, I love this slide so much. It just speaks volumes, right? Garbage in, garbage out. Meaning, if you don't have that structure and there are lots of gaps, or you don't even know where you're at from the beginning, you don't know what's going in. Then here we are as accountants, or LedgerGurus, on the end getting the numbers out that aren't making sense, and it's just garbage.

23:46 Karlie

And we find it's because what's going in is garbage. And meaning, what's going in, people maybe don't understand what's going in. They don't understand that they're missing something that needed to go in.

So garbage might be a strong word, but we need to make sure the data going in is actually accurate, and that everything is getting captured. Because we've said before, every inventory operation, every task that happens operationally day-to-day needs to be translated into a financial number and captured in your books.

24:15 Karlie

Because really our books, your balance sheet, your P&L, it tells a story. I need to be able to look at that and tell a story. And the story is going to be wrong if what's coming into my story is wrong.

24:27 Karlie

And it's interesting, because I met this morning right before this, I was meeting with a client, and Nelson told me he was going to be here today, and I hope he is, because we've been working on this. They actually use Finale, and we were trying to pull numbers from there, but we were like, this cannot be right. And so they decided to have us come and help them and work through what was actually going into the tool.

24:53 Karlie

And so if Nelson's here. He is not here. Dang it. I wanted Nelson to maybe share what that process has been like. So maybe I'll just share what I think he might say.

25:07 Karlie

It's been great. We've been meeting weekly and going through all of their operations. We talk about physically what was happening, and then looking at how they were doing it in the tool, and we found huge gaps. Things that were happening weren't being put in the tool correctly, or they didn't even know it needed to be put in the tool. There were things happening that they didn't understand. One person needed to do it or the other, there was no ownership. There were no processes written out.

25:30 Karlie

So as we've written those processes out, gave ownership, checked the tool and made sure it's actually reflecting what physically was happening, we found so much that we've been able to fix. And now we can truly look at the numbers in the tool and feel good about those, and accurate, and we've got good stuff coming out.

I don't know if you've had examples or experience with that, Madison, where you've worked with clients and understanding what goes into Finale, or in any type of tool. It has to be good or it's not going to produce anything good.

25:59 Madison Kishen

Yes, that is definitely something we see a lot, especially as businesses are evaluating new systems. I feel like sometimes the expectation is that the new tool will automatically fix everything. But if the underlying processes around receiving and all your operations aren't clear, then those same issues will just carry over into the new system. So the tool truly is only as good as what you put in it.

26:26 Madison Kishen

And there goes the saying, garbage in, garbage out. And I feel like I first heard that saying from an accountant, because it's so true for financials. Like you were saying, Karlie, if you're putting in bad inventory numbers and bad average costs and bad product cost information, then the financials that come out of it are going to be inaccurate. And that's not helpful when you're trying to make business decisions based on those margins.

26:50 Madison Kishen

But yeah, that's why I feel like the first two steps we talked about are so important, that baseline and structural gaps. Because before implementing any tool, you need to have good processes that your technology can support. We can't replace it, but it can definitely support.

27:04 Karlie

Yeah. And you've got to understand those processes so when you go in the tool, you understand what you're putting in there. And someone needs to manage it. Like you said, people pick a tool and hope that it will just solve everything, which it can, as long as you still manage it, put the data in, understand the processes. Then it can be magic.

27:23 Madison Kishen

Yes. And here we are on step three, so getting the right tools. So once you've established your baseline, you've fixed your structural gaps that we talked about earlier, that's when technology and a tool can really start to help. And again, the right tool shouldn't be expected to fix broken processes. It should support and scale the processes that already work.

27:50 Madison Kishen

And the first thing to look for is accurate tracking. Your inventory system should be able to track stock across all your sales channels, all your locations, in real time. Every inventory movement, from receiving to transfer to adjustment to sale, should be recorded automatically. That way you're not constantly trying to manually reconcile or catch up at the end of the month, which I feel like is a very common place to be.

28:16 Madison Kishen

And that next piece is accounting. So your inventory system ideally should connect directly to your accounting system, so your financials reflect what's actually happening operationally. For example, automatically calculating and posting COGS when inventory is shipped, and syncing that data directly to QuickBooks, eliminates that manual process of getting that data into QuickBooks by a human, and allows inventory to be treated properly as an asset rather than an expense.

28:41 Madison Kishen

And that third piece is operations. So your system should really reflect how your business runs. That means supporting your purchasing flow, your warehouse workflows, the sales channels you operate on today, and just as importantly, growing with the business as you add more products, more channels, and additional locations.

29:04 Madison Kishen

When you're evaluating tools, there are some good questions to ask, and those are, do I understand my sales channel and fulfillment flow? Do you understand how your orders are being placed, how they're flowing into your shipping system, how they're getting picked and packed?

Who on the team will own this? A big thing. Like Karlie said, ownership of processes is a pretty big deal. So who on the team is actually going to take ownership of entering this data in the tool? Like we just talked about, if you're putting bad data in the tool, you're going to get bad data out of the tool.

29:46 Madison Kishen

And then, are my operations clean enough for a tool today? Another great question. Like I said, a tool doesn't fix broken processes, it can help support your processes that are working. So that's when those first two steps, making sure your baseline and fixing those structural gaps and processes, make sure your operations are clean enough to move to a tool.

30:09 Madison Kishen

And then the last one here, am I ready to move beyond spreadsheets? I would like to think that most people would probably say yes. They're ready to get off those spreadsheets, ready to get out of those errors and looking at all those lines. But in the end, the right tool doesn't really fix your operations. It makes the ones that work visible and scalable, helping your business grow.

30:30 Karlie

Yeah. And I love that tools can be a spreadsheet, but the spreadsheet won't fix it if there's a structural gap or you don't know your baseline.

30:43 How inventory becomes a financial transaction

Karlie

So let's see how inventory becomes a financial transaction. I'm so passionate about this, and I know we've said it, I'm going to say it again. Every physical action in your business maps to a financial entry.

30:58 Karlie

And one thing I love about Finale and how it's set up is that it breaks it up into those main operational activities around inventory: purchasing, inventory, and selling. And all of those operational activities flow down into the accounting module.

31:18 Karlie

And so as we think about purchasing, it's important to understand that when you receive inventory into your system, the inventory value is going to go up, right? When you have those supplier invoices, you've got to track, do we want to pay it? Have we received it all? Have we not received it all? Do we need to make some adjustments there?

And it's those POs and the purchasing that will actually calculate that landed cost. And it's there where you put in all those extra expenses we talked about to bring the inventory to your warehouse. It's placed on those POs. So it's a really important piece.

31:48 Karlie

And then in the middle, you've got your inventory. And this is where things go for stock changes and takes on your inventory. If inventory goes out, most people think of inventory leaving for just sales, but it goes out for different reasons. And that needs to be captured in the system. And operationally people do that really well, but then they forget to capture it financially.

So all of that happens, and then the cycle counts and making sure the inventory number is actually what you have.

32:12 Karlie

And then on the selling side, this is a big one, because this is where your COGS is. How am I fulfilling my orders? Like Madison said, we've got to talk about fulfilling, the pick, packing, and shipping. Can we make that more efficient? How are they leaving? Do I understand all the sales orders coming in? Understanding that at the time when you fulfill, that COGS is calculated, and that's what's going to flow into your financials.

32:39 Karlie

We need to think about returns. Anytime you have a return, is it getting put back into inventory? If so, that's going to change the value, and that needs to go into your financials.

The nice thing about a tool, it helps manage that. I've seen people try to, if we go back to the purchasing side, manage all their purchase orders in a spreadsheet, or calculate a landed cost. It can get really hard, especially if you start purchasing a lot, or your costs get really volatile and change a lot. If you've got a couple SKUs and your costs never change, you probably could do it. But the nice thing about a tool is it keeps that updated cost for you all the time and gives you some really good numbers. And then that cost flows into the selling side for COGS, calculates a really good COGS.

33:20 Karlie

And why is COGS important? It's your biggest expense. It's what gives you that gross profit margin. So we really want a good clean COGS number. When we think of accounting and all that comes down in the tool, if your operations is good and run right, and you're using the tool correctly, it comes into accounting, makes everything so pretty for us. And remembering that every action becomes a transaction financially.

33:52 Madison Kishen

So on the previous slide we talked about how every operational action in your business eventually becomes a financial transaction. Purchasing affects inventory value. Inventory movements affect stock levels. Shipping sales triggers COGS. And that's exactly where Finale comes in.

34:09 Madison Kishen

Everything starts with purchasing. In Finale you can create, manage, and execute your purchase orders. You can receive inventory against those purchase orders, and multiple shipments if needed. And with those purchase orders, capture that landed cost.

And so within the purchase orders in Finale, like Karlie said, you're able to add adjustments, whether it's for duties and freight and shipping and taxes. And if it's all of those things, we would add all of those adjustments there. That way Finale is calculating your true landed cost.

34:40 Madison Kishen

And as those products are received, Finale automatically updates the unit cost of your inventory. So at any given moment, you're able to click into a product in Finale, see that cost, and that is your true accurate average cost today.

34:59 Madison Kishen

And then once inventory is in the warehouse, Finale helps manage everything happening operationally. So you get real-time visibility into stock on hand across multiple locations, support for cycle counting, transfers between warehouses, inventory adjustments. Finale keeps a stock history log as well. So as inventory moves and changes, you can always audit those operations, and even make those a part of your monthly reviews that we discussed a few slides back.

35:24 Madison Kishen

But then when products are sold, Finale syncs with your sales channels within five minutes. So we're pulling in orders from your sales channels every 5 minutes, and then we're also pushing our stock level back to those sales channels every 5 minutes to prevent overselling. That way when you sell a product on eBay, it doesn't get sold on Amazon or on Etsy or on another platform. Finale keeps all of your channels in sync and everything aligned, preventing that overselling.

35:49 Madison Kishen

We also help with that pick, pack, ship workflow in the warehouse. And we do also have a barcode scanning application that helps improve picking accuracy, warehouse efficiency, reducing fulfillment mistakes. So maybe you're having a high number of mispicks or a high number of reships or things like that. That's something where the barcode scanning tool can really help eliminate a lot of those errors and make that process a lot more efficient.

36:20 Madison Kishen

And then as those operational actions happen, Finale automatically records the financial impact. So when inventory ships for a sale, COGS is recognized at the right time and synced directly into QuickBooks. Inventory is tracked as an asset on the balance sheet rather than being treated as an expense. And because the product costs in Finale are your true landed costs, your margins start reflecting the real cost of the products that you're actually selling. So instead of guessing what the numbers are and seeing if they're accurate, you're able to look at your financials and actually trust what the margins are telling you.

37:00 Madison Kishen

So instead of operations and accounting living in separate worlds, in Finale everything flows together in one system. And that's what allows your inventory valuation, your margins, your financial reports to reflect exactly what's happening in the business. And Finale doesn't replace your processes. We run on it. And the cleaner your processes are, the more the system can support and scale with your business.

37:27 Karlie

Yeah. And I want to make two comments here, Madison, that we may have missed.

One thing, as I've helped clients, a lot of times clients will come to me and a big pain point is just knowing when to reorder. And I love that about Finale, or tools in general. They can help you know when it's time to reorder. That's hard to do manually.

37:53 Karlie

Another thing I love about tools, and as an accountant, if I look at the balance sheet and I look at the inventory and I have this huge number, I need to back that up. I need to have an inventory valuation I can pull to show, this is my inventory by SKU, by cost, by quantity. And I can prove that number almost. I can explain that story being told on my balance sheet, and it's right there in Finale.

38:15 Karlie

It's easy to back up and it really adds to your financials. It makes you feel confident in what you're showing in your financials. And you can go to Finale to pull all sorts of reports to back those numbers up. If you're using categories, it just adds so much and can really tell the story of what's happening with inventory that you can't get on a spreadsheet or you can't get from your head. So I love that. I love using a tool.

38:38 Karlie

And so as we go to the next slide, it says, how can LedgerGurus help you?

We can help a lot of people who just don't even know where to start or what they need, and help them get into a tool, decide if they're even ready for a tool and what the right tool is for them.

38:56 Karlie

We like to help them get clean. So make sure the inventory on the balance sheet is a good number and is clean. Help you switch, if you're using cash based accounting right now, switch to an accrual basis. Help you fix any errors in your historical COGS that you might have.

We can help you get really confident in making sure you have a true landed cost that is set up right, that you feel good about it, that it's flowing through the financials correctly, that your product costs are updated, whether you're doing that manually or using a tool, and that we can look at your monthly margins with you, help you figure out and watch that.

39:29 Karlie

We can help you get compliant in different areas, sales tax and nexus with your filing and remittance. We're ecommerce specialists, so we can help in all those areas. We can help you get clarity on your P&L, make sure you trust those numbers, that your financials are built and are reliable to make those good decisions. So we handle the numbers while you handle your operations and your business.

39:55 Karlie

And one thing that we're offering now is a free inventory reality check. Because again, sometimes people just don't know what they don't know. They're not sure where their baseline is, even though we presented some questions for you to help start asking.

We do have this inventory reality check, and there's a link in the chat that you can use. It goes through and asks you some questions to help you determine your current state, or that baseline. And then it's going to give you a result that tells you where you're at risk, maybe help you find where those structural gaps are. Then it'll provide you with an action plan and help you know where to start, and then give you some personalized recommendations at the end, and give you a good idea of where you're at with your inventory, where your gaps are, what you may need to do. Just a little guidance there. It's a really good tool that I recommend everyone using. It's free.

40:58 Madison Kishen

Yeah. If anybody wants to dive deeper into how this works in practice, we're always happy to continue the conversations. We have two QR codes here. The first one here is to the LedgerGurus inventory consulting services. And the second is to schedule a demo with Finale.

But yeah, we'd love to continue these conversations. So please scan these QR codes and reach out, and we'd be happy to talk about these practices in real life and how they relate to your businesses.

I think we'd love to open it up to some Q&A now. So if anybody has any questions, please feel free to drop them in the chat and we'd be happy to answer.

41:45 Questions

Madison Kishen

I think we've got a few here. I'll read off the first one. And this one is from an attendee here. I feel like I spend a lot of time on my financial inventory process. Where can I be saving time?

42:04 Karlie

Loaded question.

42:06 Madison Kishen

Yeah, it's a loaded question.

42:09 Karlie

Because I feel like I spend a lot of time on my financial inventory processes. And I know, Madison, you feel this too. We do. We spend a lot on the financial and the accounting side, not realizing we're trying to figure it out from the numbers, but those numbers aren't right because what's happening operationally is wrong.

So maybe a suggestion here would be, instead of looking at your financial inventory processes, stop for a minute and go review your inventory operations. How's that going? And then move back in. What do you think, Madison?

42:44 Madison Kishen

Yeah, exactly. I mean, it kind of goes back to the three-step fix we talked about, establishing your baseline, seeing where you are in your current state today. What are your operational processes? Are there any opportunities to enhance them or make them more efficient? And are those same inefficient operational processes driving all this time you're spending on your financial process?

But no, Karlie, I think you're exactly right. Making sure your operational processes are clean and perfect, and then I feel like that's when it flows downstream and you start saving time on your financial process.

43:23 Karlie

Yeah. Because maybe you're spending a ton of time trying to come up with a good landed cost, but you don't have all the right information. A tool could help there, right? Because it could calculate that.

But maybe you're spending a ton of time trying to track quantities and trying to reconcile quantities between your 3PLs and your warehouse, and trying to come up with a value, but you don't realize that there's no one in charge of where the quantities are in the 3PL, or no one's actually in charge of this.

43:54 Karlie

There's so much. This is a loaded question to me because I'm like, well, where are you spending your time? Maybe we can add that in the chat. What time are you spending? Is it on coming up with product costs? Is it just trying to come up with a value? Do you have huge adjustments all the time? Where are you spending your time specifically? Maybe we could help more.

44:12 Madison Kishen

Let's see. We've got another question. It says, COGS, margins, and more. There are so many KPIs. Which is the most important one to focus on for my business growth?

44:28 Karlie

I keep going back to the operations, Madison. You want to get to COGS and margins, but maybe start with that baseline and really define your business and where you're at and those gaps.

Yeah, I feel like we're just saying the same thing, but I feel really strongly about that. Because a lot of people I meet with, they really do want to grow.

44:53 Karlie

So then we'll talk about, well, tell me about your purchasing process. And they don't have one. They're like, well, I don't know. When I need it, I purchase it. I'm like, okay, well, where are you purchasing it? Where are you tracking your POs? Who receives it? Are you checking that what you've received is what you actually ordered? Who pays it? Do you just pay it, or do you make sure what you've paid for you actually received? If the cost changes on the PO after you received it, are you changing it?

45:17 Karlie

So, talking through it, there are a lot of things that need to happen before you can go to, we want to go straight to COGS and straight to margins, because that's where our P&L is. We know it. It's kind of like our scorecard, right? How much we're making, and it's our profit, and that's what we want to know. But we skip all the other pieces that get us to a good number.

45:43 Madison Kishen

Yeah, I totally agree with that. Sometimes it might be even hard to rely on the COGS you have, or the margins you have, because maybe you're not tracking your product correctly right now. So I feel like it definitely, like you said, always goes back to operations, and making sure that your processes are intact, the ownership is there, the structural gaps are resolved. And then your COGS and your margins are more reliable numbers to look at for business growth.

46:15 Karlie

Yeah. And then if you do want to grow and scale, get those tools in place that can help you do that, so you can scale and you're ready.

46:26 Madison Kishen

Automate the inventory syncing, automate the COGS posting, automate landed cost tracking. Yeah, those are really big things too for business growth.

46:37 Karlie

Let's see. Do we have another question?

When shipping costs are in an order, I'm assuming they mean sales order, but maybe purchase order, but we'll say sales order. How would you divide those shipping costs onto the items? So maybe they are talking purchase order. If they have different costs, say an item is $89 and another is five, would you divide each of the shipping fees into the cost of each item by how many items, or would you put more shipping cost into the more expensive?

47:12 Karlie

Oh, this is such a good, I mean, it's done manually, but do you want to explain how you do it in Finale? Because Finale has several options of allocating those landed costs into the product cost. And I'll let you tell them the different ways, and why Finale is great, because they help you determine, it's not the same for every business, right, Madison? It would depend on the business. So let you explain the different kinds.

47:35 Madison Kishen

Yeah. No, you're exactly right, Karlie. So Finale does have multiple allocation methods when it comes to adding your shipping costs and your adjustments to your purchase orders. So we can allocate equally, we can allocate by quantity, we can allocate by volume, and we can allocate by subtotal.

47:54 Madison Kishen

So if your more expensive products are carrying more of the shipping cost, we can allocate by subtotal, which will land that shipping cost higher on the more expensive item.

If you're maybe doing, and I'm no freight expert, but maybe like freight container shipping, and the bigger your product is, the more of that shipping cost it holds, we would want to allocate by volume. That way the larger product is holding more of that shipping cost weight.

48:23 Madison Kishen

And then we also have equal distribution. Maybe you're selling widgets all the same size, shape, weight, and they all get the same shipping cost allocated, but we can do it equally as well.

And then quantity too. So if your freight provider is charging you more for the more quantity that you have, we can allocate based on quantity, so that the product on the order with the highest quantity gets the highest shipping cost, and then it flows down to the rest of them.

But yeah, I'd love your input on that, Karlie, and kind of what you see.

49:00 Karlie

Yeah. And this is such an enlightening question, because it's important to think about.

I worked with a client who did a big shipping container, like you said, and they had bikes on there, but the shipping container also had just some helmets, right? Well, they weren't thinking in the tool. Whoever was running the tool just did it by quantity or something. So it was a huge, they were landing a tariff, I think it was. So it was a big amount and it changed the cost of the helmet. So all of a sudden the cost of the helmet went from like $2 to like 300, because that shipping should have gone more to the bikes, because that carried the heavier load of it.

49:39 Karlie

So just understanding, and it could be different from one shipping to a different one. You don't have to do it all the same just because it's how it works with this PO or this vendor. It might be different with another one depending on what you're ordering. I mean, we've got clients ordering stuff from hundreds of vendors, right?

49:57 Madison Kishen

Yes.

49:58 Karlie

So it's hard to pinpoint it into one. And this is again why you've got to make sure those processes are written out and everyone understands, how are we landing these costs for these items with this vendor? How are we managing it with this one? Who's doing it?

50:16 Karlie

Because like I said, the client I was working with, they didn't know. They were just like, oh yeah, we just put it on the line on the PO, and didn't realize they needed to allocate it differently. It wasn't written out anywhere. There were no standard processes for that person to follow, and there was no ownership on who actually put the costs in there.

50:28 Karlie

And then on top of that, as the accountant, I didn't realize they were landing those. So I was taking the tariff and I was expensing it straight to the P&L, because they didn't tell me they were landing it.

So now what happens, Madison, if I already put it on the P&L and they put it in the product cost? Where am I going to see that expense again?

50:53 Madison Kishen

Through COGS, right? Because now it's in the product cost.

50:56 Karlie

So then I've double counted COGS pretty much. So your P&L, your margins are off. But it was just because that person didn't know how to put it in. There was no standard operating process written out, right? They didn't inform the accounting piece, because you've got ops and accounting, a lot of times it's broken up. They didn't understand that they were landing that, so we were expensing it. So there was no communication.

51:22 Madison Kishen

Yeah. Structural gaps.

51:24 Karlie

Structural gaps, you guys. And it's so fun, because sometimes people don't know what they don't know, Madison.

51:31 Madison Kishen

Literally. Yes.

51:34 Karlie

They didn't know what they didn't know. Sometimes it just takes time to think through it. And only because I have run a business and taught entrepreneurship, we don't want to think about that stuff, right? We want to create cool products and we want to sell them and see how much we're going to make. Like, who wants to worry about all of that? You really don't want to. But all of a sudden your margin, you really have to. Or heck, find someone in the business and give them that ownership.

52:04 Madison Kishen

Exactly.

52:05 Karlie

No, someone's got to take that ownership and understand what it's doing. Write out those SOPs. And if you don't want to write them out, join us. We'll help you. We'll talk through it. We'll write your SOPs. We'll help you find those holes and those gaps, because everyone has them.

52:17 Madison Kishen

Absolutely. 100%. No one is alone in this. These are very universal issues across a lot of ecommerce brands.

52:31 Karlie

Yeah. And as more and more people are selling on more and more channels, right? And then you're buying from, it just can get so complicated.

52:40 Madison Kishen

Yes, really can.

52:43 Karlie

And then I've also seen, I don't know if you've seen this, as you start with a client that's not in Finale or not in a tool, maybe they're in three or four different places. So just trying to bring all the data into one is exhausting.