Summary
In this episode of the Ecommerce Finance Podcast, Stephen Brown and Preston Alder discuss the implementation of the Profit First methodology in their business, Sole Toscana. They reflect on their initial challenges, the importance of understanding cash flow, and the mindset shift required to prioritize profit over growth.
The conversation covers practical applications of Profit First, the impact of market changes, and the scalability of its principles for larger businesses. The episode concludes with insights on navigating financial challenges and the importance of adapting strategies for future success.
Takeaways
What We Cover:
- Profit First emphasizes paying yourself first and allocating revenue into specific accounts.
- Initial growth strategies can lead to financial strain if not executed properly.
- Understanding the principles of Profit First can lead to a significant mindset shift in business operations.
- Implementing Profit First helped the business become profitable after initial struggles.
- Resource constraints can enhance focus and efficiency in marketing and operations.
- Cash flow management is crucial for inventory-based businesses, especially during growth phases.
- Adapting to market changes, such as tariffs, requires strategic financial planning.
- Profit First principles can be scaled, but the implementation may vary by business size and industry.
- Using data analytics can inform better financial decisions and forecasts.
- Creating a culture of resource constraint can improve productivity and financial outcomes.
Interview Links
- SoleToscana.com
- Contact Preston Alder – buongiorno@soletoscana.com
Work with LedgerGurus
If you need help with your ecommerce accounting, reach out to us at LedgerGurus. We are an ecommerce-specialized accounting firm, and we can handle all your numbers so you can focus on growing your business.
Transcript
Stephen Brown (00:00)
Welcome to the Ecommerce Finance Podcast. I’m your host, Stephen Brown with LedgerGurus. In this episode, I have Preston Alder, my business partner and CEO at Sole Toscana. And we’re going to talk about Profit First today. So the people have spoken, Preston. Some of the team members said, hey, you guys should do an episode on Profit First because they know that we’ve been doing it over at Sole. I was like, yeah, let’s do it. Long overdue. Let’s see.
Where should we start? Let’s talk about a little bit of the history of the business, about the business in March of 2022, and maybe talk about your strategy back then. How did you go about running the business for the first, it like nine months.
Preston (00:45)
Yeah. Yeah. So we purchased the business and I guess I knew a lot less than I thought. Or I thought I knew more. When we started. Yeah. Yeah.
Stephen Brown (00:57)
We both did.
As I’ve been running this business for years, I’ve been advising ecommerce businesses. So we thought, oh, it’s going to be transferable. And some things were, but.
Preston (01:08)
Yep. And I’d worked in the VC space a little bit. And so I had worked with some ecommerce brands and kind of done a couple of little things on my own. So anyways, I thought I knew what I was doing. And my strategy when we bought the business was basically a growth strategy that included a lot of spend. And yeah, I think looking back, you could correct me if I’m wrong, but I remember
Yeah, you were a little bit hesitant with the strategy, but we decided to move forward with the growth strategy and, and, ⁓ it didn’t work. First nine months was, was not a success. also changed a few things with the branding that we thought, ⁓ would help us expand our audience and whatnot. And, ⁓ yeah, I think we were, we were wrong with, with the plan and, and, or I didn’t execute it well, right? I didn’t know the ins and outs of ⁓ everything that I was doing. so yeah, that’s what I remember.
Stephen Brown (02:09)
Well, this is very small brand and I was wanting growth too, because we, valuations were really high. So we weren’t able to get like a seven figure brand or we didn’t want to take a risk on a seven figure brand. Our other partner, Brittany, who’s my partner and wife here at LedgerGurus. ⁓ We wanted something to tinker with and you wanted something entrepreneurial. So it was kind of a win-win. So we went on a search, but it was a smaller revenue brand. we’re like, yeah, pump it up. Go. And so if I remember right, you were creative, you had tons of creative and you had agencies and you had, I mean, what are all the things you were spending? It was a lot of stuff.
Preston (02:49)
Yeah, a lot on creative, a couple of agencies, ⁓ high ad spend.
Stephen Brown (02:56)
ad spend. You did a lot of good things too though. mean you really dialed in the email marketing, the SMS, ⁓ conversion, but the ad spend were just like go, let’s just do lots of everything. And what we found after a couple months is like, ⁓ crap dude, this thing’s burning money. We weren’t paying you a salary.
Preston (03:01)
conversion, yeah, conversion rate optimization. ⁓
Yeah.
And was right after the iOS update, right? So I that was coming into play around a year later.
Stephen Brown (03:20)
Yeah, I was like a year later, so we hadn’t fully, we knew, I think we had a sense that it was going to be hard, but I don’t think we realized how bad that change had been.
Preston (03:29)
Yeah. And I think we had seen that their ad performance was dropping and, they hadn’t been updating creative, right? The former owners were using a lot of old creative that had worked previously. So it was like, ⁓ if we, you know, work on the creative, some of the branding, should kind of right the ship on the app. Yeah.
Stephen Brown (03:49)
Yep. Throw money at it. So that’s what we did for about six, was about nine months of just throwing money at it. And we weren’t paying you a salary. We didn’t have the cashflow to pay you a salary. And we were actually like having to funnel money into the business within a few months, like more money, more money. And I can’t remember what it was, but I remember by the end of the year, was like, dang. And Brittany, our other partner and myself were like, oh crap, dude, if we can’t get this thing going, Preston’s going to get frustrated.
And, it’s about that time that I got off my high horse and read Profit First. I’d always, I’d heard of Profit First. It’s kind of popular in the accounting community. It’s very divisive though. I don’t know what your experience with it was, but I’d see two camps. I’d see people think this is the way. And I’d see people that are like, that’s the stupidest thing in the world. And I was kind of like that. I was like, that sounds really dumb. It sounds like the envelopes method for people who don’t know how to run a business. And I never read the book. And then I did.
And I was like, you know what, that was a dumb attitude. There’s actually a lot of, I was actually practicing elements of Profit First at LedgerGurus to great success. And then I think I gave you the book and said, you got to read this. And then we decided, yeah, let’s go for it.
And the principles, ⁓ just kind of paint the background of the principles. In fact, I have some show and tell here. I just did a presentation on this. Let me see if I can.
Preston (05:14)
Perfect.
And as you pull that up, you mentioned the two camps. think ⁓ after our audience has an understanding of the principles and we can kind of talk about how we implemented it. I think a lot of it depends on your goals as a business owner and the future of the business, right? And this aligns really well with certain types of owners and and their goals, certain types of goals and end games. So, yeah.
Stephen Brown (05:49)
So here’s some visuals for people that were watching the YouTube. And this was me dumbing it down. Now, first thing I’d say is go get the book. It’s fricking easy read. It takes like a week to read it if you’re really focused. ⁓ So the concept was pay yourself first, allocate revenue into accounts, operate business on limits.
And the idea, the formula he uses, it’s kind of cheesy, but he’s like, everybody thinks profit is sales minus expenses equals profit, but they reverse it. say, let’s take sells. We have a profit target and then we operate off the expenses. A lot of ways it’s kind of like the envelope method is how I would, it’s like the envelope method for business. But the principle is like, don’t operate then say, okay, what’s my profit? It’s like have a goal and then resource limit yourself, which is what we did. We basically said, okay, what, you know, and there’s a whole methodology for you.
What you think your target should be. And we went through that. And then I think we came to the conclusion. Okay. Here’s a, here’s a reasonable target. And I think we’d been doing budgeting already, but we said, okay, let’s, so we backed into it. Here’s our profit target. This is what you got to operate in. And I think we just cut every, we just cut all sorts of stuff. Mostly in marketing, right? All the agencies, all the, the creatives, we had plenty of creative. And I think.
It was still a small business. So Brittany and I just told you, we’re like, dude, you’re a marketing guy. Go figure it out. Like we’re not big enough to get, you know, a plus agencies. So this is not. to learn. And interestingly enough, I’ve since since that time, I’ve seen some people probably the most notably Taylor holiday from CDC actually says, if you’re under, I can already said it was like a million or 2 million in revenue. You should be doing your own ads because you’re going to get the B team at an agency or you’re to get an agency that’s like split across a million of those customers because you’re not generating a lot of revenue for them. You’re not getting, and we actually had some bad experiences with agencies, right? had, didn’t we get our Facebook account or ad account blocked and we had to restart.
Preston (08:08)
Yeah, we had an issue there with an agency. Yeah, that ended up, yeah, that was a mess. But yeah.
Stephen Brown (08:13)
So, no offense to the agencies serving smaller customers, but the economics are really hard for them. And so you just rolled up your sleeves and started figuring it out and said, Hey, here’s my resource constraint. am. You know, the ad manager, I’m trying to what they call it. And there’s a term in the agency world, the guys who’s, who’s, who’s running the ads. The media buyer Yeah. You became the media buyer. You leveraged the creative. You also did a lot of creative and you just tried to resource constrain.
Preston (08:35)
Media buyer maybe? Media buyer?
Stephen Brown (08:46)
the marketing side of things. How hard was that to do that?
Preston (08:51)
It was fun for me. I’m someone who enjoys just kind of learning and new things and really diving in so I mean it was a lot of time but and it stretched me but it was it was also a lot of fun and Like you mentioned I think around that time when we kind of got into profit first I’ve been hearing I’ve heard multiple people say if you’re a smaller brand it doesn’t make sense to outsource your ads and honestly, when you think about it, there’s such a big fixed fee with an agency. Their performance on ads has to be so much better than yours just to have that fixed fee make sense. of all. And then there’s disconnect between the agency and the brand. Usually they don’t quite fully understand your audience and your branding. so.
Stephen Brown (09:32)
That’s a good point.
Preston (09:44)
Once I dug in and I’m the one doing the email marketing and the SMS and I was doing customer service at the time. So I was hearing what customers were saying. We’re saying I knew what was connecting with them in our messaging, right? Through our emails, like which emails were performing the best. And they’re without, you know, an agency that I had to go to and kind of explain these things. I just kind of knew what was working. And so once I started applying that into the ads and diving in and working on ad structure, ad account structure and all these things at the time. Yeah. The learning, big learning curve, but I think it was within, I don’t know what it was, maybe six, eight months when we started to see a huge boost in ad performance. Yeah. Yeah. Yeah. Yeah. It was three months and then I think it was like, yeah.
Stephen Brown (10:28)
Yeah, it like three months, I want to say. I think it took us a couple of months to get it started and to start kind of like figuring it out. like, think once within like three months of us executing that strategy, we were able to start paying you a payroll. ⁓ We started actually being a profitable business. ⁓ Yeah, it was, you know, and it worked because you had the skill set.
We were able to cut back and you had the skill set. You know, if you’re a bigger brand, think I’ll tell you where I see waste. Not as much in the last couple of years, because I think the industry’s been so hard that people have gotten better, but like the vanity office, the, you know, the lifestyle business, like they’re too much payroll. ⁓ I think marketing is often one of the killer things is like.
You know, there’s kind of three legs of the stool within any ecommerce business. There’s your cost of goods sold, hard to change, and we’re all feeling it with tariffs. We’ll talk about that later. There’s your fulfillment costs. Those tend to be fixed as a percentage of sale. Also somewhat hard to change, not impossible. And then there’s marketing, which I think is a really variable. You got to spend it if you’re an online seller. You can be really lean and mean with the others, but the one that I think you’ve got to get dialed in or always wrestling with, and at least we’ve always been wrestling with, is the marketing spend.
That’s been kind of the path to profitability at this point. But as you get bigger, I think the temptation is like, I to more people. Let’s go get an office. I’ll start bringing lunch into the office. let’s do that. But marketing, think, in a consumer products brand, I mean, if you had $10 million, could you spend $10 million on marketing?
Preston (12:23)
problem.
Stephen Brown (12:24)
Yeah, I mean, there’s a million ways you think about every channel you could spend on every ad platform, every influencer. Like it’s so easy to spend money on marketing and consumer that if you’re not careful. And I don’t think we were ignorant. I don’t think you were spending like frivolously. You were just trying to, you were just, we were new in the business. We’re like, let’s pump this up. Energize the marketing and it didn’t work right out the gate. And so we had to retrench.
Preston (12:42)
Wasn’t crazy.
And as the one operating the business day to day, having that constraint of, okay, this is about how much revenue we’ve been bringing in a month. Set aside our profits. This is how much I have to figure out basically marketing. Like you said, fulfillment and the other expenses we kind of knew. So was like, Hey, here’s, here’s how much I have to spend each month. And for me, it was like, okay, how can I get the most out of this? And that change in mindset. ⁓
you get rid of the vanity spend, like you mentioned, number one. And then number two, it’s like, I just had to figure out how to, how to get the performance at better levels and within that app, within that spend, right? So just that constraint just really, I guess it focused my energy and, ⁓ it did something with my mindset from a day to day that I think was a huge difference maker.
Stephen Brown (13:53)
I think that’s a good point. I Profit First is as much a mindset as it is a practice. It’s about resource constraint and staying within those constraints, which is hard. I think it’s relatively easy in a lot of areas, but in an ecommerce consumer products business, think marketing is the hardest one because I mean, ad campaigns are not predictable, right? Some work, some don’t. But you have to, it requires you to focus, focus, focus. Let’s talk a little bit more about some the logistics and what we did. I’ll go back to my visual here for those that are watching on the YouTube. Profit first talks about allocating into five accounts. There’s actually a couple more accounts. So basically you take the money from your income and you need to distribute into the other four accounts. So there’s a profit account, an owner pay account, a tax account, and an operating expense account. And the idea is that you have fixed percentages on these. And we used our financials. This is something we leverage the financials that we’re producing as part of LedgerGurus to say, okay, what makes sense? And then I’ll talk a little bit about some of adaptations we did. And then you live within those constraints.
Let me talk about the adaptations. Two adaptations that we did.
And this is where some people get critical Profit First, because it’s really easy to go wild and be like, I’m going to have 20 accounts. I’m just going to have 20 envelopes, 20 buckets. We added two. We added an inventory and fulfillment account. And essentially, we’re taking the value of the cost of goods sold and allocating that into plus, actually, we added a little bit more, gives us some growth, some juice for growth. We’ll talk about some limitations of this model.
And then we added a sales tax account that we carve out every month as revenue is coming in. We put some of that. Those are some of the adaptations that we added. And for the most part, it worked. We’ll talk about some of the issues that we’ve learned over these last couple of years, but it’s worked pretty well, right? So for you, we had money to buy inventory. ⁓ We always had money to pay for sales tax, we had money to ⁓ pay taxes at the end of the year, you were getting a payroll, we had a profit as owners, as an owners group. ⁓ And then you had this OpEx bucket, which, you know, that could be in a larger company, could be, that’s your payroll, that’s your software, that’s your everything, that’s what you had to live within, right, that resource constraint.
What was your, let me ask you this. Was there any hesitations that you had when you, when we decided to go into profit first?
Preston (17:16)
⁓ Yeah, I think the biggest hesitation is okay if we’re focus on profits, you know, we’re not gonna be able to grow or we’re gonna There could be this Opportunity of more growth that we’re not tapping into that turns into bigger profits later, right? That’s kind of a The mindset that people have it’s either growth versus profit
Stephen Brown (17:42)
I blame tech companies on that. All the cool companies these days are tech and that’s their strategy is they will go 10 years, 20 years without a profit and just grow, grow, grow the business and then convert it. But it’s honestly, I think it’s a false narrative because number one, a lot of those companies never achieve profitability. They go out of business or they get bought and then they get forced to be profitable. Number two, it’s a very unique industry that has high upfront investment costs.
Most businesses just don’t have that luxury. And I think one of the best things that could happen in the business world is to erase the mindset that we’re all tech companies and kind of say, no, we are a services company. We are a product-based business and operate accordingly.
Preston (18:34)
Yeah. And if you’re always betting on the future, there’s so many factors, I feel like in business, you know, the economy, consumer spend, all these different things going on. You could bet on the future that you’re going to build your customer base now and achieve all these profits later. But something happens within that timeframe. Things are always changing. Tariffs, right? There’s all these factors that could significantly impact your, your customer behavior and change what, you know, your customer base and revenue now turns into later. And so if you’re, you can’t, you can’t bank on the profits later. ⁓ I think, you know, and what we found it, yeah, go ahead. Yeah, I was just going to say, I think what we found pretty quickly was, ⁓ once we started focusing on profit first, because it stretched me, the operator and
Stephen Brown (19:13)
Yeah. And we… go ahead.
Preston (19:35)
Ultimately, it actually helped us grow more because we became more effective with our ad spend, was the key component for the business. So we were able to start achieving growth that we wanted, right?
Stephen Brown (19:51)
Yep.
And we had growth and profits. mean, Mike Michalowicz, it’s the author of Profit First. talked about that. He was doing service businesses. He was poor. You know, he’s talking about he was always poor, always rubbing two pennies together. And it’s, mean, literally we were in the same boat. Nobody’s getting paid. You’re not getting paid anything. You’re in the business the entire, you know, 100%. We’re in the business marginally as owners. Like I’m helping as the CFO and kind of strategic partner, Brittany comes in and does special projects, but nobody’s getting paid. The opposite, we’re putting money into the business, more money in, more money in, like, this sucks. like, I don’t know, I mean, what was the psychological shift actually starting to get paid for your work, for owning a business?
Preston (20:38)
Yeah, it felt good. was before that, it was tiring and yeah, then it, I mean, it’s hard to go to work every day after a certain amount of time if you’re not getting paid, right? You start to, yeah.
Stephen Brown (20:53)
Yeah. And we, we kind of did that in LedgerGurus. We, for the first two years of our history, Brittany was doing it solo, super small. She never took any money out of the business, just kept plowing it back in, higher plow. And then I came on board two years in and we paid ourselves jack nothing, but we had like a two year ramp. So within two years, we were no longer taking money ⁓ out of our savings to make it go.
And we did that skill strategy. It was very deliberate. We were running a break even, but we weren’t paying ourselves nearly enough. was like two years of like ramping our pay up. And then after that two years, we kind of shifted to a profit mindset. So you can take that growth strategy to a point, but the, think the problem is when you’re, when you’re not taking, making profits and you’re not taking anything out of the business, you’re not paying yourself. And a lot of small business owners do that in the beginning. And even when we.
When I left my job in 2016, I was in tech. I was making more in my job than all of the revenues of LedgerGurus. We paid ourselves just like, I think it was like just above minimum wage. But every couple months we’d raise our pay, raise our pay. Okay, the business can, okay, we can pay ourselves more, which is good. But when you get nothing, dude, it’s…
Even when you’re getting up less than a little bit above nothing, it’s hard when you’re getting nothing. Yeah, that’s like what am I doing? I’m a slave to this cash burning machine
Preston (22:28)
Yeah, and I think the problem with Sole Toscana was not only we weren’t getting paid, but the value of the business was starting to decrease. And so it’s like, we’re never going to get paid. And this is a problem. So I think combined.
Stephen Brown (22:38)
Yeah. Yeah. We’re not growing the business. We’re not growing, getting my operating money out of it. So I think that’s one of the big things. One of the things I like about Profit First is the idea of you should be getting paid. When I, when I meet with a new customer and they want to consult with me kind of as a CFO or advisor, one of the first things I look at is how much you pay in yourself. And if they’re not, I’m like, we got to fix that. Like even if it’s a modest amount, you got to be paying yourself and you need to have a plan to get to a place where you’re sustaining yourself. ideally you should be making, you know, over time there, you know, took Brittany and I about five years. Then it started tipping over. It’s like, okay, now this is better than what I was doing before. And that’s, that, that should be the goal is you should be getting your business should be to a point where like financially I’m doing better than I would if I was going to go work for the man. If I’m working as hard as I, you know, am in both places, which oftentimes with a small business you’re working harder than a big business. It’s always on your mind. I don’t know. Do you feel the same?
Preston (23:51)
Yeah, I mean, yeah, I’ve kind of been in entrepreneurial situations since graduating college, so can’t, I don’t have quite the experience you do of the two sides, but I guess it’s just kind of been a part of my work. but yeah, I mean, when it’s, when you have interest in the business, you’re thinking about it more, you’re…
I guess worried about the future more in the past. There’s just more at stake. So for you personally, yeah.
Stephen Brown (24:25)
Yeah.
And business can be fun. And it’s a lot more fun when you’re solving these hard problems and getting paid to do so. Now let’s talk about, again, I don’t want to get into too many of the dynamics. It’s like, go read the book. Tell us what you think. But let’s talk about some of the
Preston (24:48)
Ask AI for a summary and how to apply it to your own business.
Stephen Brown (24:52)
Ask AI for a summary. It probably could give you a pretty good 60 second summary. I probably should have done that. One of the things that I want to talk about some of the, well, these frameworks, there’s a bunch of frameworks. I’ve always liked frameworks, but I’ve always found that there’s, there’s some issues. So we added some adaptations, which he kind of says, yeah, you can do, know, had extra accounts. Some people go hog wild. They had like 20 accounts, which seems crazy. But one of the things that we feel, I feel like Profit First doesn’t comprehend is the cashflow issues of a product based business. ⁓ Let me clarify, like he’s like talking about, this is where I diverge with the author. He’s like, don’t use credit cards. ⁓
you know, never, never take debt. And I’m like, yeah, that’s number one. I think it’s unrealistic to say, don’t use credit cards with modern business, especially if you’re using software. Like what am I going to do? Send a check to Shopify, right? Can you even pay Shopify with a bank account? Maybe. I don’t know. you know? Oh yeah. guess you could, I guess you use debit cards, which I’m going to take a quick side note. Debit cards are a terrible tool.
Preston (25:59)
a problem debit card.
Stephen Brown (26:08)
People don’t understand the risks around debit cards. You don’t have the same charge back protection with a debit card that you do a credit card. So for one, don’t use debit cards. Use it at the ATM and that’s it. And even then I’d be like, be very careful because when those things, when those numbers get stolen, there’s less protections around a debit card than there’s a credit card. So number one, I think that’s dumb. It’s not realistic. His point, and I’ve heard Dave Ramsey, Dave Ramsey is another get rid of your credit cards type of mindset.
is you spend mindlessly, right? You just, when you’re not thoughtful about your spending versus like, look at my bank account, I’ve got money, therefore I can spend. But I just think that’s short-sighted. But then there’s these cashflow issues. Let me bring up another visual and we can talk about this. Because this is something that you and I talk about. like, okay, so we do these allocations that have worked pretty well, but like,
One of the things we’ve learned with like allocating money towards inventory, if you’re growing in an inventory based business, you can’t allocate enough, right? Because you’re selling, say 10 widgets today, but you’re needing to buy 12 or 20 widgets for that future sale. And so you’re never able to allocate. There’s a point.
where you can grow faster than your ability to allocate towards inventory. We’ve decided to take debt, smart debt, don’t do MCAs, don’t do those really bad loans. We’ve been able to use some more strategic loans, but we use debt as a way to finance the inventory beyond what our sales are able to produce. And the other thing that we have ⁓ really started to realize this year is
Preston (28:04)
Can I add something in there, Stephen?
Stephen Brown (28:06)
yeah, let’s talk about inventory allocation. What are some of your thoughts, Preston?
Preston (28:09)
Or just another way to think about it. I, yeah, we kind of struggled with this at the beginning, but it’s like, hey, if you’re doing a million in annual sales, your cogs is 30 % or let’s say 20%. You’re setting aside 20 % for cogs to buy your next inventory. We are growing at 30%. Then the next 12 months, you’re going to have to somehow come up with 30 % more in cogs to pay for that. Like, so if you’re growing even 20 to 30%, nothing crazy.
Stephen Brown (28:33)
Hmm.
Preston (28:39)
It’s a big cash flow number when you have to pay for inventory that you’re going to sell the next six months, 12 months for growth.
Stephen Brown (28:50)
Yep, and if you’re wildly profitable, you could in theory fund that growth with off-roading cash from profits. But there is a point where mathematically you cannot. You’re not generating enough profits to fund growth.
Preston (28:56)
with drugs. ⁓
And that’s where I think putting profits in that situation is going to stunt. Whale, it won’t stunt growth, but if you’re putting aside that much of your profits towards future inventory and you could be using that in your OPEX to, yeah, that’s where you get into like growth versus profit stuff that I think matters.
Stephen Brown (29:32)
Yeah. And our solution was we’ve, we’ve looked at the profitability. look at the cost of capital and we say, does that fit within our profit model? Are we, and this is where I’ll talk a little bit about more, how we’ve taken a more sophisticated approach, but we say, are we comfortable with the impact profitability of financing? And if the answer is yes, we’re like, cool. We’ll fund this. We’ll fund our inventory purchases so that we can have growth, which we’ve had. mean, I think we’re going to end the year probably.
you know better than I do. What, tripled the business?
Preston (30:04)
since we bought it. ⁓ Yeah, close. Close, yeah. Yeah, probably on the right.
Stephen Brown (30:07)
or two and a half times. Yeah,
so in about just under four years we’ll have tripled the business. Now it’s small, but I’ll tell you what, if you’ve been operating these last couple years in ecommerce, man, we didn’t know what we were up to. Not only was it hard, but I think the industry has been really hard. We had come off like the peak moment. That’s when we kind of bought it. It like, it’s still rolling. like, it’s good industry. We can make some money, which you can, but.
your point let’s see what we had tariffs, ⁓ inflation, obviously marketing degradation there was the the wonkiness that everybody was talking about a year ago of Meta’s algorithm. So marketing’s continuing to be challenging. It’s been a hard couple years in ecommerce.
Preston (30:58)
Yeah. And that, yeah, we, bought it at the peak in 2022, kind of after COVID. And I think the business dropped that first year. It’s probably about tripled since that drop. So the last three years. Yeah.
Stephen Brown (31:12)
Yeah, we actually went down in revenue.
So while we’re spending money, we’re seeing revenues not perform. We’re like, man, we suck.
Preston (31:18)
Yeah, and there was that. Yeah, there was the iOS effect at that time. And then, there’s been some algorithm updates and whatnot, but. ⁓
Stephen Brown (31:26)
We should have gone back in a time machine and bought this in 2018. We’d be rich by now. Buy in 2018, sell it in spring of 2022. And then, I don’t know, what’s cool now, crypto?
Preston (31:29)
Yes. Yeah.
Yeah. Yeah, but I think there’s also some optimism right now around ecommerce with AI. And ⁓ so, you know, if we can get, we’ve gotten through some tough times and now have some solid growth. I think companies who are able to do that, they’ve seen at least Taylor CTC, they’ve talked about kind of this tale of two stories where bigger ecommerce brands have been able to survive, smaller ones haven’t. And I think the smaller ones who can get through it.
Stephen Brown (31:45)
Yeah.
Preston (32:08)
Yeah, I think there will be, you know, some good times ahead, but we’ll see.
Stephen Brown (32:14)
Let’s talk about one other learning that we’ve had around cashflow and that’s OpEx. I think you and I have talked a lot about it this year. We’ve done this fixed allocation and then we started visualizing how much we’re allocating, what we were forecasting spend to be, ⁓ operate OpEx as a spend. And one of the things that we’ve realized is like, you know, those costs are kind of fixed throughout the year.
But if you’re allocating a percentage of sales, which is what ProfitFirst does, a fixed percentage of sales throughout the year, you’re gonna have seasons where that allocation is not enough. But it evens out in the end. And unfortunately, in a consumer products business, ⁓ that evening out usually comes at the end of the year, and the beginning of year is horrible because everybody’s spent their brains out. nobody’s, you know, we go from feeling rich to…
crap, what happened in January? And it’s just a reality. January usually sucks for most brands. Unless you’re a winter sports brand that has somehow got momentum beyond that holiday season. think January is just a hard month. And, and so one of things that we’ve realized is that allocation is insufficient for what we need. And what we’re talking about now is we got to, we got to build up some working capital.
rather than using debt, we could use debt, but we’re thinking more along the lines of, we need to build up a little bit of a pool so that, you know, in those lean months where the allocation isn’t enough, we’ve got somewhere to draw that money from, and then the pool replenishes at the end of the year. ⁓ Thoughts on that? We’ve been talking about that a lot lately.
Preston (34:02)
Yeah, one thought from an operating perspective and media buying, those who are in media buying and running ads accounts, like, okay, you could just say, ⁓ reduce ad spend those months, right? So that your allocation covers your OPEX. The problem is in media buying, you, I mean, you can reduce ad spend a little bit, but you need to keep the momentum going. ⁓
So you kind of have to keep up your ad spend, right? And you’re acquiring new customers who at the end of the year, usually BFCM, that’s where you kind of bring in all your new customers all year, come back, are coming back and buying. And so you kind of rake in all the revenue at the end of the year. So, so it’s not easy. Like you said, you can’t just decrease your OPEX those months. ⁓ you can a little bit, but you have to keep those variable costs going.
Because at the beginning that’s what I was thinking. I was like, in those months we could just spend less, right? Spend less in our ads account, which is a huge expense, but it just doesn’t work.
Stephen Brown (35:06)
Well, sometimes you’re doing list building, you’re doing top of funnel stuff that you’re going to convert later during those peak buying seasons. What we’ve seen is… ⁓ go ahead.
Preston (35:09)
Yeah. Yeah, your performance is good on your outspend, yeah, you need to buy up those customers or else you’re not going to achieve the revenue that you want in November, December.
Stephen Brown (35:30)
And we’re a consumable product. for us, a customer is, you know, we expect that they, if they like the product, they will come back and they’ll buy more. If it was, I’ve had some customers that are, it’s kind of a once a lifetime, maybe once every 10 years type of a purchase. That is really hard in ecommerce. In fact, I think one of the things I’ve learned is I would always lean towards
things where there’s repeat purchase over things that’s like, maybe high, high dollar one time span, because then you’ve got your entire success is contingent on that first order profitability, which is scary.
So one of the things I think you and I found, and I’ve started watching this more closely with all our broader portfolio of customers at LedgerGurus Most consumer products companies have high sales in the holidays, so November, December.
Usually January and October suck and my thesis and you tell me what you think is January people have spent everything they can spend and now they’re going on what are put of this that thing we they do in January like no spend January or there’s these trends you can do And then October a lot of times are saving up for the holidays
Preston (36:53)
Yeah, I agree. that’s, I think we’ve seen that to some degree, especially with like our new customer acquisition has still been okay in January and October, but our, our current customer base just doesn’t spend as much in those months unless we, yeah, they’ve stocked up, they spent during the holidays, they’re waiting for the BFCM deals, right? They know that we do on every year. ⁓ so.
Stephen Brown (37:10)
They’ve stocked up.
Yeah, consumers are smarter than we get. mean, think about it like. If you’re to buy something and it’s close to the holidays, you’re like, I’m just going to wait. You know, I’m going to get a good deal. Let’s see what the deals are. You know, people people are smart. They’re spending money. They’re going to they’re going to look for those trends that they’re going to start to learn. If they’re a repeat customer, they’re going to learn your patterns and maybe wait till you have your sale that you do every year. And.
Those are things you have to be realistic with as you’re kind of coming back to profit first. This is where I think I take issue with this model is I don’t think it’s reflective of some of these nuances of different industries. he, the author Mike was in services, LedgerGurus is in services. Let me tell you, services shouldn’t have any cashflow issues. We don’t. And if you do, you’re doing something wrong. ⁓ But product-based businesses, like you and I have looked at this.
We’re importing from Italy and from the time we start an order to the time that it’s in the warehouse can be at times four months, right? Is that kind of the longest stretch we’ve seen?
Preston (38:31)
Yeah, sometimes even longer before you start selling it. I think that’s what we’ve seen like five months.
Stephen Brown (38:36)
Yeah. And then you still have to sell it. So you got to put money. You know, I, I talk about the cash conversion cycle with customers and for those that have done that in accounting class and wanted to forget it, it’s actually really meaningful in a consumer products business because these are dollars that I got to put to work for a period of time. And we don’t have the supply chains of a Dell, of a Costco, of a, know, these big companies that can get product really quickly, have really good terms with their manufacturers.
No, we had to money in. have to wait for it to manufacture. We have to wait for it to cross the ocean on the boat, get on a truck, get to the warehouse, and then we can sell it. that’s money that has to come from somewhere. And unfortunately, I feel like profit first is idealistic around these kinds of concepts. They don’t really treat them. So my adaptation is like, there’s going to be a cost to finance this product. We either have to slow down growth.
extremely, you know, and have enough profitability to fund modest growth, or we have to finance this inventory. And then, but our adaptation is to say, what’s the cost of capital? And does this fit into our profit model? And are we comfortable doing that? And if the answer is yes, then we’ve, we’ve done it.
Preston (39:55)
Yeah. Yeah. And I think we do have some limitations in our supply chain, but yeah, what can you do to decrease the cash cycle? Cash conversion cycle, I think is really important because that’s going to decrease your cost of capital, especially as you’re growing. yeah, we did a couple of things upfront that I think helped with that. ⁓ We got some terms changed with our supplier and
Stephen Brown (40:14)
some other adaptations.
Preston (40:25)
But there’s only so much you can do.
Stephen Brown (40:29)
Well, some other things that we’ve done that are beyond this is where it’s like, okay, any accountant that’s listening, you know, celebrate, we’ve tried to leverage, know, Mike Michalowicz says, this is an accounting, he kind of, he kind of poo-poo his accountants to a certain degree. We’ve tried to leverage the best of both worlds. He’ll say profit first is a cash management system, which it is, but we use our, our accounting to inform us. So some additional keys to success that we’ve applied is analytics. ⁓
You’re using Triple Whale, I’ve been using a business intelligence platform and we are looking at data around the profit and loss, the balance sheet allocations. You’re looking at marketing data. We’re looking at it all to inform us what the allocations can be. And that’s been something we look at almost every week. We’re looking at some data every week. I would say maybe not all the data, but some data we’re looking at every week and kind of using it to inform our decisions.
Maybe let’s talk about analytics for a minute because I know that’s kind of hot in business in general and stuff that got hot in ecommerce, but how has that changed your approach to running the business?
Preston (41:40)
Yeah, I mean, I’m looking at them daily on the marketing site, but having the profit first mindset, ⁓ I’m seeing how they fit into our financials. And I know when we’re getting off track in one week, I can tell based on ad performance and the metrics that I’m looking at, like, Hey, we’re getting off on our OpEx and this isn’t sustainable based on our forecast, right? We have a forecast. If I’m not sticking to what’s happening in that forecast, there’s going to be cashflow issues.
So yeah.
Stephen Brown (42:11)
Yeah, let’s talk about that. That’s kind of, that’s kind of the second tool that we’ve used. And again, I feel like it’s complimentary to profit first. don’t feel like it’s like, I’ve always been a big fan of budgeting and forecasting. And so we do an annual budget. all, we, we, look at the, do we think? Here’s our strategy. What do we think the profit outcome is going to be? And we review and typically adjust monthly.
That helps us, you know, here’s the ideal, the problem I see with like profit first. like, you should be making 10%, you know, whatever. You should be paying yourself X percentage of, I think he calls it real revenue, which is more or less gross margin. You should be paying yourself this much. That’s great. Then there’s reality. It’s like, maybe I am struggling as a business owner to execute that ideal standard.
I should be shooting for it. We use the budget to say this is what we think we can actually do and we’re regularly saying like what are the levers we can pull but there’s times like now or it’s like instead of like trying to profits up we’re trying to preserve because freaking tariffs are coming in and chewing away at our profits you know so we use that that budget forecast which is a combination of a revenue and a marketing forecast
an inventory purchase plan, an expense model, all integrated to say what do we think our profits are gonna be. And I think we’ve been pretty accurate over the years. And when we’re not, we learn from it. Like, where were we off, right? And I think that has informed our strategic decision making.
Preston (43:57)
Yeah, we’ve gotten closer and closer over time. And ⁓ yeah, if I’m trying to decide whether to invest in something in marketing, or like these tariffs come up, it’s easy to plug it into the forecast and the budget and see the impact and then make a decision on what to do.
Stephen Brown (44:18)
And this is like traditional finance, This is, you know, big, this is how big, big businesses operate. This is the kind of the world I came from. So.
It’s it’s that kind of stuff just makes sense. It’s it’s expensive either to pay with for money or time. And if you don’t have the skill set, you have to definitely pay somebody to do it. But I think it’s been really instructive for us. The final thing that we do, because again, this is. yeah, go ahead.
Preston (44:38)
Yeah.
One quick thought there. I’ve started to use, so Triple Whale has an AI agent now that you can use. And Triple Whale, if people don’t know what it is, it’s connected to everything that I do. So our sales, it’s connected to Shopify, all our marketing tools. So it has all this data. And I can now ask, you know, I can talk to Triple Whale and have Triple Whale forecast out.
our revenue for the next 12 months based on all the new customers we have coming in ad performance, looking at year over year data. mean, it has like all the data you need to come up with a forecast and I can give it more context on what we’re doing and plans. And it was amazing. We’d been working on a budget, Stephen and forecast for a long time and put tons of hours into it, into the spreadsheet. And I worked with Triple Whale for like five minutes.
And it gave me almost, it gave me like spot on our forecast for the next 12 or through the end of the year. And it was almost exactly what we had been forecasting and what we had achieved. so anyway, in like five minutes. So,
Stephen Brown (45:55)
Yeah, Triple Whale is not a sponsor, but they probably should be because we’re giving them a shout out here.
Preston (45:58)
Yeah. And I think it’s just the power of AI with all the data you have, an ecommerce brand, combine that with AI and feed it. And I mean, it can, it can do a lot of this for you. So.
Stephen Brown (46:03)
Yeah.
So let me talk about the last leg of the stool that we do that’s not profit first, but I think integrates nicely is, is we have a cashflow forecast. We use an annual forecast to understand what we think we’re going to need to finance. how much working capital do we, how much of a line of credit or some facility do we need for, again, we use it purely for inventory. And then we have a 13 week that gives us more of a tactical view of when, when we need to draw on that line or lines
of credit. And I think that integrated with the allocation model, it’s been pretty successful. And lately it’s been hard, man. We’ve been talking about tariffs every freaking week since I guess the inauguration or I don’t know, maybe a little after once it was like, oh, he’s serious about tariffs. need to start.
I think we were all just kind of like, see what he does. I’m glad we’re not importing from China. And then when he had his little liberation day announcement, we’re like, damn it. Like we’re screwed, you know, we got to figure, we’re going to have to figure this out. And then maybe let’s talk about it, how we’ve leveraged our tools and profit first, you know, profit first kind of. Looks at things kind of like a zero sum game, which it is right. Like you only have a hundred percent of sales. You can’t get 101%. You can’t get, you know, it’s not 99%. It’s a hundred percent of sales.
And so if your cost of goods go up and you want to maintain a profit level, you got to find ways to drop costs, increase revenue to further dilute those costs of goods. mean, how have you been thinking about the impact of tariffs in light of profitability and profit first?
Preston (47:57)
Yeah. So I think because we had all the profit first and these forecasts and everything in place, you, you made, at one point you made a tariff calculator where you were able to say, okay, here’s the, here’s the tariff percentage on our, on our cogs and what does that do to our bottom line? So that was really nice. And so we were able to take that and say, okay, this is going to be our impact on bottom line. We also just put it into our last 12 months. Hey, if, If we would have been charged 10 % tariffs on our landed cost of goods, or I guess it’s not landed cost, on just the product costs, this is the impact it had on our profit. So we did that first. And then we were able to look at, you know, our forecast and know the impact that it would have. then we went through different strategies and plans to adjust for that. And yeah, I mean, for us, we were able to cut a little bit of costs, which we did.
the last few weeks and then we’ve been running price testing to see if we can increase prices and what kind of impact that would have on our revenue. And we looked at elasticity. So for us, it’s been a combination of looking at what costs we can cut and changing prices. And then because we have all these models in place, it was easy to plug in and see the impact. yeah, I don’t know if you want to build off that Stephen, but.
Stephen Brown (49:29)
And I think you did a good job. You know, we’re just, we’re using the data. We’re using a profit mindset and you know, it’s not easy. mean, we’re like, crap, where are we going to, you know, we have a low cost of goods sold product. I shudder to think of somebody who’s got like a 40%, 50%, even 60 % cost of goods sold business as a percentage of revenue. That’s those tariffs, you know, add up a lot higher than a, a smaller cost of goods sold business like ours.
And some of that’s just the market we’re in. You know, the approach we have some people if you’re reselling usually have higher cost of goods sold because you’re competing against other people that are selling the exact same thing. And so you it’s a more difficult ⁓ challenge to navigate. But I think we’ve used this this profit mindset, this information decision making approach we have to navigate things. And I think it’s done pretty well.
All right, I wanna just bring this thing home. Couple of things. Some people think that profits first doesn’t scale. I think, I’m gonna give you my thoughts. I wanna get your thoughts. I know we’ve scaled it somewhat, like multimillion dollar business, $10 million business. I think principles of profit first can scale. I’m not sure.
You know, I’ve never, we’ve never really talked about, when do we deviate from this approach? But I think a lot of principles would scale for, for example, I realized when I read the book that I was using this tax allocation strategy, ⁓ within ledger gurus. let me tell you, I have never been short of, of funds for taxes. put that money aside. That is in a dedicated account that is for taxes. If it gets too, I’m conservative.
When it gets too big, say I have a good tax strategy, I might take some extra money out and put it to work somewhere else or take it out as an owner. But that is a principle that I think is really, really valuable. There’s certain funds that are earmarked for things. You should do that. I think this profit mindset, it might be different. In a bigger company, you have all these finance teams, they’re generating budgets and…
There’s controllers and there’s, you know, financial controls. So you can only spend so much and they, they’re constantly measuring and monitoring, constantly measuring and monitoring and saying, okay, we’ve got to cut budgets. You got to cut spend. It’s, it’s kind of, it’s not the same model, but it’s the same mindset. And I think that, you know, two sides of the same coin. What are your thoughts? Do you think profit, profit first could scale?
Preston (52:12)
Yeah, I agree that there’s principles that would scale. ⁓ and I don’t know how to do this at scale, but the resource constraint, you were saying like, you can put things in place in a larger business to kind of have this resource constraint, but there’s this, ⁓ for me personally, I don’t know how you do this at an employee level, but just getting the most out of someone or your spend, like there’s this resource, resource constraint mindset.
that I have that has just improved productivity. So yeah, I don’t know exactly how that translates at but I think if you have it built into your culture somehow, don’t know exactly how do that.
Stephen Brown (52:54)
Yeah, I think that’s an important thing. mean, I can tell you how resource constraint works in big companies. Finance comes in and says, this is your budget. And then when things aren’t going well, they say, your budget got cut. You need to cut your budget, cut your spend. if you’re, you’re
Preston (53:05)
Yeah. And at the employee level, it’s like, okay, how do they, okay, they’re giving me this budget, but, because I have interest in the business, I want to get the most out of that budget. Like there’s got to be some reward for like efficiency or getting set. Like that employee doing the best they can with the budget they have. don’t know.
Stephen Brown (53:21)
Yeah.
It’s translating basically having outcome expectations, which I think the bigger you get, it’s harder to do. Because I think you get these big businesses and you get these people are like, what do they do? I’m like the program manager over XYZ. There’s no direct correlation with revenue in some of these roles, which is why I think you see these big companies are just like financial impact, 10,000 employees gone. And it’s ruthless, it’s heartless, but
Preston (53:46)
Mm-hmm.
Stephen Brown (53:57)
It’s because there’s a, there’s, you know, there’s a disconnect, a cultural disconnect. So I think Profit First is definitely oriented towards smaller businesses, but the principles can scale. And I think the challenge is how do you scale it beyond an owner to a bigger team to where they have this, this mindset of resource constraint and how do you figure out how to incentivize them to have reward? And that’s probably a whole different conversation, a whole different podcast that I haven’t.
We’re trying to figure that out at LedgerGurus right now. We’re a bigger company. We have 50 employees. And how do we create that same sense of, how do I create production with my resources? That is the journey that we’re on. But I think if you can do that, you’re to have success. And I think it’s a different approach. It’s not quite this same thing, but there’s underlying concepts that work.
All right, well, we’re fans of Profit First. We think if you’re a smaller business, and by smaller, I’d say, I don’t know, I’d hate to put a number on it, but I’d say…
Even 10, $20 million of revenue, I could see how you should at least consider some of the concepts. I think a lot of it depends on the team and industry.
Preston (55:14)
industry maybe some of the scale or the actual applicability scales easier.
Stephen Brown (55:20)
But if you’re struggling with profits, I would say, you should look into it. You should think about some of these concepts. They make a lot of sense. They change businesses.
All right, Preston, thank you for joining us today. Again, we’re gonna have to have you back again. You’re always fun to talk to. And if you’ve enjoyed this episode, send us some feedback.
Preston (55:42)
Thanks for having me. Thanks, Stephen.