If you haven’t heard about the book, Simple Numbers, Straight Talk, Big Profits: 4 Keys to Unlock Your Business Potential by Greg Crabtree, you are in the minority.
Very soon after online retailers start building their businesses, they are anxious to tackle the most common financial questions:
- How profitable is my business?
- How much money do I need to set aside for taxes?
- How much should I pay myself?
- What can I do about cash flow struggles?
The Simple Numbers book answers these questions and more. Here is a review of the book I did a few months back.
I’m expanding here on my four biggest takeaways:
10% Profit Is The New Breakeven
Profit is a tricky thing. When you have zero profit but also have no losses - true breakeven - it’s easy to breathe a sigh of relief and say, “I may not have made any money, but as least I didn’t lose anything. Yeah.
The problem is that your business needs more cash than simply covering what gets expensed on the Profit & Loss Statement. Most notably, ecommerce sellers need cash to buy more product so they can keep selling. You need money to cover principal payments on loans. You may need money to invest in equipment for your operations. Basically, you need enough money to cover expenses on your P&L AND to cover any cash outlays for your balance sheet. Plus a little more to save for the next rainy day.
The best way to do this is to remember that unless your net income is 10% of your total income for the month, you are underwater. If your business isn’t consistently 10% profitable, you’ll have absolutely no cushion for a rainy day. Or even for a partly cloudy day.
Pay Yourself a Market-Based Salary
The IRS actually enforces this with companies taxed as an S Corporation, and I think this mentality does a great service to business owners in general (despite the fact that, yes, you have to pay payroll taxes).
Entrepreneurs who work in their own businesses wear two different hats: one is the employee hat (as they build up the business and make daily operational decisions), and the second hat is the business owner hat. You deserve to be paid for both roles you play.
Think about it like this: if you sold your business to someone else but continued to work in the business, who would receive the profit? You? Of course not. It now belongs to the new owner. And if you weren’t taking a salary from the business, would you continue working for the business for free? No, of course not.For the work you do as an employee, you should be paid a market-based salary for several reasons:
- You need that money to live on. If you’re paid appropriately, you won’t need to pull money out of your profits willy nilly as personal needs arise.
- When you’re determining whether you’re making at least 10% in profit, it needs to be calculated after you’ve taken out your salary so you aren’t skewing the performance results of the business.
- If you are ever hit by a bus, or more optimistically, hit by the desire to retire on a beach somewhere, your business will have the cash flow necessary to replace you with someone else at market rate.
- Last but not least, you’re doing the work. You deserve to be paid for it.
And as the owner, you get to decide what to do with the profits for the company whether it’s reinvesting it in the business as cash, using it to pay taxes, or distributing it to yourself to pay for your own private island.
Keep It Simple
Now, I’m an accountant, so there’s not much more that I enjoy than pouring over numbers. But I’m also an entrepreneur, and that means my time is scarce, and I’m spread pretty thin. So if *I* don’t have time for complex gymnastics when it comes to evaluating the financial performance of my business, I can only imagine how difficult and tedious it is for ecommerce sellers who don’t share my affinity for numbers.
That doesn’t negate the fundamental need for business owners to know their numbers.
So the solution is… to make it as simple as possible, and the book gives you some great tips and suggestions on how to do that.
A Couple Caveats…
Cash vs. Accrual
Greg Crabtree argues that you should report your financials on a cash basis if at all possible. But on this point, I will disagree with him for one specific reason - chances are high that if you're reading this, you're an online retailer.
I understand why he prefers cash basis. It's simple. You have more control over expenses. You don't pay taxes unless you've received the income. I get all that. But for ecommerce sellers, the pros typically do not outweigh the cons.
- The vast majority of your income is received immediately, so the argument that you’re paying taxes on money you haven’t received yet is usually moot.
- Your biggest expense, by far, is product. When you buy products for resell, it goes into inventory. You don’t get to expense it until you’ve made the sale regardless of whether you’re cash or accrual basis. So if you’re thinking you can buy a bunch of product on December 31st and get a big ole’ tax write-off… you really can’t.
- You need to understand your financial position to be healthy and grow, and accrual-based financials give you a more realistic view of your monthly performance.
Closing Books by the 5th of the MonthI love this idea, and if you’re not selling on Amazon - ok, I get it. But if you are selling on Amazon, the data necessary to close your books is typically not available from Amazon until the middle of the month. So I caution you not to hold your bookkeeper to an unrealistic standard just because the author of the book says you should expect it. I doubt he’s familiar with ecommerce.
If You Need More Help
Overall, I really liked this book and even incorporated some of his tips and suggestions into our own practice. I think if you haven't read this book, it's a very worthwhile read, and I hope you get a lot out of it!
If you need more help getting your finances under control and staying on top of your numbers, I encourage you to check out our information about how to find the right ecommerce accountant for you.