Turn Your Accountant Into An Asset

[00:00:00] Richard Gaffin: Hey folks, welcome to the Ecommerce Playbook Podcast. I'm your host, Richard Gaffin, Director of Digital Product Strategy here at CTC. And I'm joined yet again at a brand new angle by Taylor Holiday., our CEO here at Common Thread. Taylor, what's going on, man?

[00:00:14] Taylor Holiday: Yeah, we have an ever-evolving tech stack over here. We're trying to just raise a little bit, the quality, we've got some new cameras, new, some new lighting. So stay with us as we get it right, but we're we're honing in, we're honing in.

[00:00:25] Richard Gaffin: Yeah, exactly. So today we're you just took a trip out to. Toronto, the city, the city where I was born, by the

[00:00:32] Taylor Holiday: No. What?

[00:00:33] Richard Gaffin: really, I'm a Canadian by, by birth, a

[00:00:36] Taylor Holiday: you have Canadian citizenship? you have, can it,

way. Do you have Canadian passport?

[00:00:41] Richard Gaffin: do. I have a Canadian passport, but the the photo is of me as a, as a six month old.

So I haven't gotten it updated in a while. So

[00:00:49] Taylor Holiday: amazing. I didn't know that about you. That's good know. It's a, it's, it's a nice city.

[00:00:53] Richard Gaffin: It is. It is. As far as I, I can't remember it, but that's certainly what I've heard. But yeah, so you were out in Toronto and Taylor, tell us a little bit about what you were doing in Toronto.

[00:01:02] Taylor Holiday: Yeah. So oddly enough, I was speaking at an accounting conference. So a two X is a sponsor and partner of ours that had,

And so they have an annual, they actually do something called camp eight to X, where they bring in all of their top fractional accountants and CFOs that use their platform. And they take them out to camp in the woods for three days and do like all sorts of learning stuff and row canoes. And I dunno, relays and eat s'mores or whatever you do in the Canadian woods.

So I came out and I, I didn't join them in the woods, but I spoke to to them before they all left for the woods and the conversation was about an invitation for accountants to come closer to marketing. So, so sort of building on top of the bridges premise I've been talking about for a long time of trying to bring together the worlds of finance and marketing closer.

And I think that in particular. Accountants have this really, really important role within an organization, which is to provide accurate financial data and insight are for accurate financial data. And I think there's opportunity for them to go further into insight. If they were to lean in to understanding the marketing world and then as fellow professional service providers, I talked a little bit about how CDC markets itself to help coach them on opportunities to grow their own businesses as well.

[00:02:16] Richard Gaffin: Gotcha. So kind of what we were talking about before you hit record. Is that. Not only obviously there's an invitation to accountants to think more about how they integrate with marketing. It obviously goes the other way around. And of course, in this context, we're talking to mainly marketers or people control that aspect and entrepreneurs.

And so I think like one thing that I think would be interesting to discuss is how the relationship goes the other way. Which is to say, what is the entrepreneur's relationship, right? Like with the accountant and how can that be improved?

[00:02:42] Taylor Holiday: Yeah. So what we wanted to talk about today is one of the things that I've experienced in interacting with different founders is that it's not. Generally obvious what the expectations should be of their accountant. What does it look like to have a great relationship with your accountant? And so today I wanted to talk through an offer to entrepreneurs.

What is a reasonable expectation and standard for an excellent relationship with your accountant? And I want to talk through a few of those things today that I think are really useful that I think could provide. A way for that relationship to become like an essential part of your workflow and life.

[00:03:19] Richard Gaffin: Gotcha. So actually, maybe a good place to start then would be, what does, what's like the current state of the relationship between an entrepreneur and an accountant? Why is that relationship so poor right now?

[00:03:28] Taylor Holiday: Yeah, so I think that it's because that in any great service provision relationship the onus honestly lies in the hiring. Organizations like if we hire an outside vendor, it's the emphasis is on us to set the definition of success to define how the relationship will be really successful. And I find that entrepreneurs in the process of hiring accountants, there's sort of this baseline standard that the information is correct.

Like that's like the thing is rightness. And so that becomes the only thing that matters, but I think there's a lot more that entrepreneurs could do to define the expectation of the relationship such that it would be more productive for both sides. And that's what I want to offer you today is some of those things that I would set up as expectations in order to get the most out of them.

[00:04:11] Richard Gaffin: Gotcha. Okay. So, so maybe what's the, like, what is the expectation? Like, what's the kind of default that the entrepreneur comes to it with? Like, what, what are they thinking the accountant ought to do? Gotcha.

[00:04:22] Taylor Holiday: Usually the relationship revolves around closing the books each month. So getting you to a completed financial statement of actuals, once the period has closed, and then also it often has a lot to do with tax preparation. Right? So it has to do with tax planning and making sure that I am filing legally compliant taxes.

Accurate books for the IRS at your end, or accountants might get involved in the point that there's a transaction or liquidation event to help create accurate and compliant books. And that is a lot of times the sort of nature of the relationship is it's again, it tends to focus on compliance and accuracy of information as the gold standard of what they're attempting to accomplish.

And that certainly is true. Part of it, but I think there's a lot underneath that then then becomes the way in which to make it more operational and insightful on an ongoing basis. So rather than thinking about the accountant as something that just steps into these moments, rarely, maybe at the end of the year to help with tax planning or to make sure that I have this like reconciled, accurate book when needed, how could you turn them into a tool to generate ongoing insight and action to make the business better?

And that's, that's, I think the opportunity that both accountants have to differentiate themselves and you as the entrepreneur have to get more out of your account. So we want to talk through some of the ways I would do that today.

[00:05:40] Richard Gaffin: Okay. So let's, let's dive right into it then. So what is, let me, the, Number one way that you shift that relationship.

[00:05:46] Taylor Holiday: Yeah. So the first thing is about setting an expectation for speed. So one of the big variables is when do you expect them to have the books closed? And I really believe that. In most businesses, there are obvious exceptions where there is lagging financial data for some reason related to the complexity of a business that this cannot be true.

And I'm sensitive to that, but it is a reasonable standard that the books are closed within 15 days of the previous month. And demanding that is really important because you need that information in order to make decisions on a go forward basis. You need to make sure that your S your assertions about things like your cost of goods, your actual operating expenses.

Your expected profit from the previous period or all what you thought they were. And if not, you likely probably need to make changes. And so I think it's really important that speed and accuracy are a component that go together and that there's this phrase they use in the accounting world that I learned this week called materiality, which is that the question of, is the Delta to accuracy material such that it alters something In a way that would change what the underlying context and what it would mean.

And so I would encourage you to bring that principle to your account and say, Hey, speed is really, really important for this information. And I'm only interested in accuracy changes that would be material or alter the underlying meaning. That I am about getting it actually sacrificing speed to get actually down to this penny accuracy.

That is it's material. And so I think really setting that standard, I see people wait sometimes six, eight weeks for the closure of their books, and you just can't make decisions in that way. It is fair and reasonable for most e commerce businesses, especially if you're single channel. And you're in the low eight figure range or lower to ask for this.

This is not overly complicated in that way.

[00:07:34] Richard Gaffin: And so, and so would you say like, generally speaking, the the instinct and this makes sense, given the stereotype, the instinct of the accountant is just to get everything down to the smallest detail, their tendency is, do they need to be pointed towards what is and isn't material? Or is that something that they ought to know given their training or how's

[00:07:49] Taylor Holiday: Yeah, that's, that's a, that's a fair question. And I think that's where I would actually encourage accountants to state their opinion about what they believe to be material and not, and build consensus with your partner in those definitions in what would or wouldn't be material relative to the individual business.

But I think there's, if there are reasons why. They say to you, I can't close the books in 15 days. I would ask what those reasons are and discuss if those things are material to the outcome or not. And that's where I would sort of approach it is, can we get this closed within 15 days? If yes, no further discussion needed.

If no, what are the items or data points that are prohibiting us from reaching that? And are those material? Yes or no. And so that would be the sequence I would have around the conversation to try and set an organizational standard. And then I would review those closed materials with my leadership team on the 16th of the month.

Like, so at CTC, as an example, we have an even higher standard. Like I want the books closed within 10 days. There's nothing about our business that should prohibit my team from doing that. Our finances are not that complicated. And then tomorrow. The 12th of the month, we have a finance meeting with all of our executive team to review last month's closed results.

So, and then we say, is there anything here that causes us to change the plan go forward, but we are reviewing final closed books for the month of August on September 12th. Number

[00:09:09] Richard Gaffin: Okay. So thing one is speed as enabled by materiality. Let's say, so let's move on to the next one. What's what's next on the list.

[00:09:17] Taylor Holiday: two has to do with the composition of the material. And this, this is going to spill over into some of my series that I have of in bridges, but it's about what do you want the PNL in particular to look like? So ideally there are three core financial statements that we have to review. One is a balance sheet.

One is a cash, the income or cashflow statement. And then number three is the P and L. Okay. So one, I want you to build a habit into reviewing all three of those with your accountant every month, literally go through all of them together. And if you don't understand a line item on any of them, you raise your hand and you ask a question.

So this has to be a back and forth that for the first few times is going to require you to ask a lot of Q and a because what I find is that. In the way the chart of accounts, which is the phrase to represent how an accountant will group expenses, groups get created that CEOs have no idea what they mean.

So your chart of accounts will get built by your accountant. And I am shocked how often CEOs or even CFOs have no idea what the line item references that is not allowed. You are not allowed to not understand. You need to know what every line item represents in your P and L. On your balance sheet, et cetera.

And you need to go through and ask, cause there's often things created that you won't understand. So every month there has to be a Q and a related to every line item on all three on all three financial documents. So that's like step two is you need to understand each of the line items and you need to build consensus around what they mean.

So that's like, okay, just generally speaking, there has to be an interaction between you. Don't just receive things via email. Thank you. No problem. Set a habit of reviewing every line item so that you could represent them to your leadership or you could understand what needs to happen. Go forward. And I promise you will discover unexpected costs that you didn't see.

From there. So that's number two.

[00:11:09] Richard Gaffin: Gotcha. What? So you mentioned sort of like the ways that accountants group things on the PNL or whatever that ends up obscuring. Can you give an example of that? Like, what's what's an

[00:11:18] Taylor Holiday: So this is, this is sort of my rule number three, which is for eight figure businesses I want more individual line items on my chart of accounts and less grouping, so I will give an accountant rule that says if it's more than a thousand dollars, it gets an individual line item in my chart of accounts.

So as I'll give you an example I've seen PNLs that say media spend and it's one light item for all the ad dollars. No, no. I want to see Facebook, Google, Pinterest, Tik TOK, all individually listed on my chart of accounts. I don't care if it's a sub categorization under media spend, no problem, but I want to see all of it.

This happens with vendors. It happens with Like things like you know, software where it's all just sort of bundled together. And I, I, I don't really understand the composition of the numbers. So I create a rule that says if it's greater than a thousand dollars, it gets its own individual line on it.

And you're not allowed to group it. That's going to make for a messy chart of accounts, right? A longer, bigger list. And this is, I think in times. Especially, I would say this is more true when you are need to be really, really clear of your cash management. And so you need to know every cost that exists.

And so I just think having some standard or whether a thousand is the right number or not for you and whether those groupings are intuitive to you and obvious, I think is up to you. But my point is just. To create some standard for when things are grouped, how they're grouped so that you understand them and you can see them because the problem with grouping is it hides individual changes that may be surprising to you.

I'll give you an example of this. I was doing, working through this exercise recently with a CFO and a founder, and there was a vent set of External contractors. Okay. It was like the grouping and within that, the number was sort of fluctuating pretty dramatically each month. And as we broke it down in QuickBooks and went and looked at the individual cost items that were assigned to that code.

What we found was that there was a vendor that was charging them overtime every month and they didn't know it. They thought they were paying a monthly fixed retainer, but they were actually paying a much larger Expense related to The, the, the person apparently being asked to do overtime work. Now there's a whole question about how things get approved and invoices get paid, but for this case, because it was sort of lumped into this contractor line item, they didn't, they didn't see that it was actually substantially more every month than they had anticipated.

And so this, this discipline of like, Nope, if the vendor is large enough, they get their own line item that I see when I get my chart of accounts back, I think is a good, is a good habit. And to, to set aside for the sake of this exercise. Simplicity of grouping as the primary objective and more about, I want to see specificity of costs as much as possible over some certain set limit.

[00:14:02] Richard Gaffin: Gotcha. Okay. So we have speed. We have making sure that you're familiar with all 3 core financial documents. 3rd, we have making sure that, Specificity of grouping, let's say. Okay. So what's, what's comes after that?

[00:14:14] Taylor Holiday: I think have percentages for every cost item. So on the PNL in particular and this will sort of set up what I think is the last thing I'm gonna say, which is to make sure you track four quarter accounting and give, create that table and just make it part of every receipt of every PNL you do. But I think every cost should have a monthly percentage and that you should be able to see.

Your entire PNL as percentages, not dollar amounts alongside each other. So final loop does this really well where I can actually instantaneously view my entire PNL justice percentages. And I think everybody who receives their documents should have that opportunity as well, because it just shows you the trend of costs over time.

And then ideally I would actually ask my accountant to create a heat map on side of that percentage cost that if any of them, where, where the rows were defined by the average. And then it was red or green rather relative to being above or below the average. So what I'm looking for is changes in cost as a percentage of total revenue.

I want to be aware when something breaks against and costs went up or down dramatically. I need to explore and understand that. So that idea of looking at the cost as a relative percentage of the overall revenue. And having some sense of that, because what's really hard to do is like, is 64, 000 the right number?

Like I. It just so hard to go then look at my revenue and understand that and think about that as a percentage of my total. And this is where. If you start with the four quarter counting of your own understanding of your P and L is like, okay, my gross margin needs to be something. My ad spend needs to be something.

My op ex needs to be something. Then you can sort of work through. Oh, okay. My op ex was too high. It was 32%. Okay. Now, what percent does payroll represent? What percent does software represent? What percent does other marketing expenses represent and which one of those do I need to go after to push down to get into profitability?

And so I think that's. Just starting to think about the P and L through both dollars and percentages is really helpful.

[00:16:06] Richard Gaffin: Yeah. And that's part of, it's kind of the larger principle of, of that. These numbers kind of only matter in terms of the relativity to each other, not relative to any absolute standard. So this kind of like the question that we sometimes get Hey, is this a good CPA or Hayes 300 a good AOV?

It's like, I know. What is it relative to your costs or

[00:16:27] Taylor Holiday: That's right. And then, and then you can start to set goals. Like one of the things that's been a huge unlock at CTC as an example is when we got really clear that like, Oh, Hey, if we want a 20 percent net margin and we're actually like, we push above that. Now we're, let's say if I want a 25 percent net margin, then basically what I need is Payroll plus cost of service.

So like the human labor needs to be 57 percent of revenue. And my OPEX needs to be 8 percent of revenue. Like if I can accomplish that, right, that I can get to a place where I'm like, all right, that's 65 percent of my overall revenue. That's going to be a great margin objective. Once I layer in sales and marketing, then I get to where I need to be.

So you can start to think about these costs as having a relationship to your forecasted revenue. And then when you go to think, okay, can I hire. Well, the question is, does it violate that boundary in some way? If so, for how long and what is the net end benefit? So you start to get a better sense of what the cost should be versus these random dollar figures that are really hard to understand how they sit within the context of your business.

[00:17:26] Richard Gaffin: Gotcha. Okay. So speaking of percentages, then let's, let's roll into four quarter accounting. So we've talked about this a few times on the pod, but it's probably worth a recap of what that is. And then maybe talk to us a little bit about how you would kind of package that for your accountant.

[00:17:39] Taylor Holiday: So I would just ask at the bottom of every P and L and we, we shared a template that I think is, is worth doing. And we'll put that in the show notes here. And it has two addendums to the standard revenue chart of accounts is one is four quarter accounting table. So break now, this is the opposite of what I'm saying, which is that this is a sim simplified categorical view of the entire P and L broken into four categories.

So Profit as a percentage, cost of delivery, which is all variable expenses ad spend. And then OPEX, and you just see as a percentage of your revenue, a table like that for every month for the year. That's like a very quick view of intuiting to yourself, okay, where did my money go versus these four categories?

And what has it been over time? That's going to help you think about the unique composition of your business and how to go solve problems. And it's going to, it's the doorway to the next set of questions in detail. And then the second thing I would add is a bunch of key operating metrics. These are not.

These are not financial metrics. These are things like AOV number of new customers, returning customer revenue, new customer revenue, like broke it out into a way to think about the relationship between those metrics and your financial metrics. Like that's what you're forcing yourself to do is to put these things in the same place where.

Oh, we had a really profitable month this month. What was true of our AMER? What was true of these different metrics and how does that start to tie together in your head to what does it look like when this business is really profitable? And so I would put those things onto the same table. If you can, and if the, again, this is where as an accountant now, if you started offering that.

That like, Hey, we have this point of view that you're going to get your P and L it's going to be, you know, there's this isolated view that's sort of what we're going to send to the IRS or what we're going to file as your official books. But that that's like gap compliance, but then there's sort of like the operating sort of insight P and L that includes a richer set of information.

You're going to differentiate yourself really dramatically from other accountants in terms of how they're providing insight and opportunity.

[00:19:32] Richard Gaffin: So actually, so that was a question that I hadn't, and I'm curious about from the perspective of like, what was the reaction of the accountants to this particular talk? Like, what

[00:19:41] Taylor Holiday: Well, so, so here's the reality is that The production of the chart of accounts is in many ways, a commodity function. What do I mean by that? It's data entry and it's like good data integrity and data entry. So it's like, but it's just about saying like the costs exist in QuickBooks and I will make sure I know how to categorize them and put them into a P and L accurately.

And what happens is a lot of these people have outsourced the production function to the Philippines where there's a team doing that labor. Or in the case of like, what's coming is like, you've got someone like find a loop who's trying to automate the process entirely. And so just like every other industry.

They're under the pressure of AI and machine learning and outsource labor for the commodity layer portion of their business. And so what they're all trying to do is figure out how to bot be more consultative, to offer insight and value as a way to maintain their price and to differentiate from all the other people in the room.

And so I think everyone's kind of aware that this is a reality and they kind of got a good thing going right now. But they understand that there's also pressure coming to be more to offer more unique value and insight to their partners.

[00:20:45] Richard Gaffin: Gotcha. Yeah, so it's sort of an opportunity for accountants to provide in essence, maybe like the type of analysis or to be able to come to those conversations with a mutual understanding of like, let's say, what AOV is and how it plays into the four quarters or something.

[00:21:00] Taylor Holiday: That's right. And ultimately, the last thing I'll say is that accountants generally only exist in providing a historical point of view in that they like their documents are intended to represent what has occurred definitively. And I think there's a huge opportunity if anybody's willing to step over the line and provide in particular, the best 13 week cashflow forecast that exists to ask, where does your revenue forecast come from?

How can I help you build a expected cash payment system that allows you to have a 13 week cashflow forecast, which I think should be the first tab of every entrepreneur's browser should be their 13 week cashflow forecast. And if I'm an accountant, if you want to become incredibly sticky, you build the most important place that people look every day and you become responsible for ensuring that that maps to the accounting systems with accuracy about when those payments occurred, what the bank balances are, provide them a quick ratio as it relates to their total assets and liabilities brought forward from the balance sheet in a way that is the living and breathing.

Culmination of all of the financial data into the most important thing an entrepreneur can do, which is to grow their cash. And that to me is like, there's just a gap where that document doesn't exist for a lot of people. And so it should be the, the most important thing in an entrepreneur's world and entrepreneurs.

I think you should work if you don't have one to collaborate, to build one. And I think accountant accounting firms. Could step over the line into the future, which I know is a thing they're generally uncomfortable with because it's not really the point. But I think it's a, it's a big opportunity if they do it.

[00:22:34] Richard Gaffin: Okay. So, I mean, it sounds. Obviously, like if this should be the first tab in your browser, this is maybe one of the most critical things you could possibly do as an entrepreneur. So what, what would be your advice to, let's say our listeners about what, like, what the first step should be towards building something like this?

[00:22:49] Taylor Holiday: So if you think about it, there's two pieces that you need. One is you need a revenue forecast that allows you to imply the future. Earning of the organization. How much revenue are you going to be receiving from customers in the future? So all of this sort of spills very quickly into. A full financial system that governs your organization.

That's automated and gives you ability to accurately predict your own future. Like that is, that is everything. This is what we're obsessive with here at CTC. We help to build the forecast portion of this. So find someone like us or. Do it yourself in a way that gets you to the revenue lineup of your 13 week cashflow statement.

Then all of the costs below it, which are this is mapping on a cash basis about when you're going to actually make the payment. When is the money going to leave your account? And there's a bunch of things that are probably recurring and automated in some way. Maybe you have rent that's due on the 1st of every month.

You have payroll that processes on the 1st and the 15th. Every month, and those can be easily layered into the future by an accountant based on the days that they're obligated to be done. You have a credit card payment to a certain time, and then there's a bunch of things that you get to choose when you pay, right?

But now you can go through and go, okay, I owe my credit card bill and I can pay it up until this date, or I have this vendor invoice that I can pay up until this day. And you can go and you can now think about how you can leverage and negotiate terms with certain suppliers, et cetera. Which again, I think is the kind of insight.

That a great accountant is going to help you understand is that, Hey, you know, this, your cash has kind of deteriorated because you have these poor terms and you're obligated to make these payments. So ahead of time on inventory, could we go negotiate with the supplier to get better terms here? What if we switched from this credit card to that credit card, you know, like, or alternatively, maybe you have a bunch of excess cash.

And so you want to use a partner that gives you 3 percent cash back. If you bank the payments more frequently, like there's just now A whole navigation around what's possible to grow the bank balance if you're here. And then as your, as your treasury grows, like in CTCs reality, a big thing in learning for me is like, okay, I have excess capital.

Where are we going to go out and get yield accounts? And Treasury bonds that we can actually earn money on this excess capital that we have while we're not deploying it. What's my accrued tax liability that I can start to save that money for it. And all these different elements that become a treasury exercise that hopefully a CFO or a fractional CFO is providing you support on.

But it all lives for me in the centered world around the cashflow forecast. That really is the ultimate measure of the value of the organization.

[00:25:14] Richard Gaffin: Gotcha. All right. Well, as the man said, the first step here is to build a revenue forecast. And if you want somebody to do that for you, we can do it. Common thread, co. com, hit that high risk button. And we'd love to have a chat. Anything else you want to hit on this Taylor before we,

[00:25:27] Taylor Holiday: I I think the biggest thing that I would say is that. To try to test for yourself, what is keeping you from leaning further into this area and then to try to repress whatever story you have about this information being too complicated or hard or unknowable, it is often not the most exciting thing you're going to do, but it is often the most important.

So if you could just. Obligate yourself to spending an hour more reading each financial document, every time you receive it, and then asking yourself about the relationship with your accountant. And how could you make it the best relationship you have? I think your business would really benefit. And oftentimes it's just the thing that's like, sort of like what I've experienced, it is, is similar to people's relationship with their primary care physician.

Which is it's like I got to go get my physical once a year, but really, I think you would benefit immensely if you had like an ongoing interactive dialogue with a primary care physician about your well being, it's very similar in that, like, it's just becomes this thing that's like sort of, we should do, and we know we kind of have to do, but what if you actually saw it as an asset, a resource that could make you healthier and better?

I think that's what your accountant has the potential to do for you.

[00:26:34] Richard Gaffin: That's right. All right, folks. I think that'll do it for us this week. Thanks y'all for listening and we will talk next time.