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Unprepared Ep 31 - How Businesses Can Survive During Recession with Wayne Richard

Timestamps:

  • [00:00] - Intro
  • [00:30] - Preparing your business for tough times
  • [02:28] - Accrual accounting or cash-based accounting?
  • [03:27] - Types of systems to use
  • [05:40] - What creates success?
  • [07:48] - Other survey findings 
  • [08:40] - Where to find Wayne
  • [09:49] - Sponsor: Rewind

Resources:

Key Points:

  • Ecommerce businesses need accounting processes and financial systems in place like cash flow forecasting tools to survive when going through a recession or a global pandemic. 
  • The typical advice for larger Ecommerce brands is they need to be in accrual accounting. Accrual accounting is where your revenue or expenses are recorded when a transaction occurs.
  • But accrual accounting alone does not provide the clearest cashflow visibility. For example, the matching cost you may have spent before (like on restocks or paid campaign strategy) and the profits you believed you had isn’t actually the cash in your bank.
  • In tandem with accrual accounting, you should have a cash flow forecast to have insight into where cash are coming and going out of your business each month.
  • Use accrual accounting and introduce additional reports to supplement the basic internal financial report to prepare for the financial crisis.
  • Implement Xero or Quickbooks within your business. You have the framework from that core accounting system to then utilize other 3rd party apps then do cashflow forecasting.
  • Third-party tools also allow you to plug-in and enable you to support your accounting system.
  • To be in the best position even in times of crisis, you should have already implemented a text stack that provides clear visibility in your numbers.
  • Prepare a war chest or a cash-on-hand and have at least 3 months’ worth of operating expenses to ensure that your teams are cared for and you restocked on your most critical SKUs when sales reduce.
  • Bean Ninjas surveyed a hundred of Ecommerce businesses with 100,000 to 9 million annual revenue to understand what creates their success. 
  • Respondents came from 6-7 continents. The respondents were US-based and Australia-based businesses.
  • 77% of the respondents have been in the business for at least 3 years and had at least 3 employees.
  • 43% of our respondents use Shopify as their sales channel.
  • 95% of sellers doing more than a million in estimated annual revenue use a cloud-based accounting platform. 
  • Using spreadsheets for accounting often causes inaccurate financial records, broken formulas, and overpaying or underpaying taxes, and more. 
  • Tools like Xero, with its open API, can give an opportunity to integrate tools like inventory planner or DEAR inventory systems without doing tedious spreadsheet tasks.
  • 85% of sellers review their financial reports at least once a month.
  • 87% of sellers with more than a million in revenue have done the cash flow forecast as opposed to 73% of sellers under a million that had not.
  • Those who survive these types of crises are the ones taking the time to implement these financial management practices, using the right tools, and systems before the critical event happened.

Transcript:

Chase Clymer  

Hey everybody, welcome back to another episode of Unprepared. Today I've got an awesome guest sharing with us the recession impact study that their company, Bean Ninjas did. Welcome to the show, Wayne Richard, how are you doing today?

Wayne Richard  

I'm doing well Chase. Thanks for having me. I'm excited to share.

Chase Clymer  

Oh, yeah. You said you had a bunch of numbers that you're gonna throw at us. And, you know, we talked quickly before this during the whole camera debacle, we're figuring it out. 

But once we got that figured out, there was something I wanted to bring up here, which was the best time to have all this information kind of prepared in the readiness of your business was, unfortunately, like months ago? So maybe we start there. And with kind of just with what happened, right?

Wayne Richard  

It's probably the most troubling conversation to start having with an entrepreneur, right is, hey, the best time for you to have called us was probably like three months ago. 

If you're in a position where you're having challenges within your business or some uncertainty because those that...I guess our hypothesis really is those Ecommerce businesses with accounting processes and financial systems in place like cash flow forecasting tools are simply better off when going through tough times like a recession or a global pandemic.

Chase Clymer  

Yeah, I think with Ecommerce, it's wild because unfortunately, it's...you've got your money invested in your product that's sitting on your shelf. And then you're usually spending a lot of money on paid acquisition through Facebook and Google, so you're really cash poor. 

So when the world gets flipped on its head, for example, when a pandemic happens, and users’ shopping habits just go berserk. If you don't have an understanding of how your numbers work, you're unfortunately, you might not survive.

Wayne Richard  

Yeah. And to add to the challenges, you'll typically hear the guidance: if you're a larger ecommerce brand you need to be on accrual accounting. 

And accrual accounting by nature does not provide you the clearest cash flow visibility because you're matching costs or dollars, you may have spent months before, like on the restock, POs, or the strategy around the paid campaigns and building the landing pages and the email funnels that today, the profits that you believe you have aren't actually the cash that's sitting in your bank.

Chase Clymer  

Okay, so if there's accrual accounting, and then there is cash-based accounting, are you saying people should be sticking to cash-based? Or is there a hybrid model?

Wayne Richard  

No, I would say if you're a larger store, absolutely, you want to understand your gross profit margin. So it's critical that you're on an accrual basis. 

But in tandem to that accrual basis accounting within your view of your profit and loss, you should have a cash flow forecast that allows for you to actually have insight into where cash is coming out and going out of your business each month.

Chase Clymer  

Okay, so it is not necessarily hybrid. It's accrual through and through, but you need to have a few more questions answered on a more routine basis, essentially.

Wayne Richard  

That's right. You need to introduce additional reports to supplement the basic internal financial management reports you typically see from an account.

Chase Clymer  

Okay, here's a question for you. What should I have had? How should I have been prepared for a tragedy like this, financially? What kind of systems should I have in place? So obviously, I should do accrual accounting.

Wayne Richard  

That's right. Best-case scenario, you're utilizing a tech stack that's creating visibility, ease of use, and confidence in your insight into your numbers. So have either Xero or QuickBooks Online implemented within your business. 

You have the framework from that core accounting system to then utilize other third-party apps to then do something like I suggest to cash flow forecasting. 

There are tools that also allow for you to plug in and enable technology to support that like Helm, Futurely, there's a number of them. But to be in the best position three months ago, you would have already had implemented a tech stack that provided you clear visibility into your numbers, and that's either through a smartphone or through your laptop. 

You also would have had in terms of practice, a war chest. So cash on hand that was available. Our suggestion is to build that war chest up to three months of monthly operating expenses so that you can ensure that your team's cared for your restock on, your most critical SKUs is already set aside and available to spend when sales may be reduced.

Chase Clymer  

Yeah, that's the most unpretty thing about business. This goes beyond Ecommerce service, SAS, whatever is building out a runway is the most boring thing you can do. 

The most important thing you can do, and honestly, it hurts, because you're just going to see a big number sitting in that bank account that you worked hard to acquire. 

Wayne Richard  

Yeah. 

Chase Clymer  

But you're not touching it. Because you want a sustainable business and you want to keep your team employed, and you want to keep the business going. When unpredictable things happen. Yeah, you got to just do that, essentially. 

Wayne Richard  

Absolutely. So it was interesting. So we surveyed and naturally as accountants, we got curious. We're like what, you know, we have an opportunity here to understand which of these tools and what creates this success. 

So we surveyed over 100 Ecommerce businesses doing between 100K and 9 million in annual revenue. And we found that 77% of the respondents had been in business for at least three years, had at least three employees and that 43% of our respondents use Shopify as a primary sales channel. 

What was exciting, Chase is we had six of seven continents represented. We couldn't get anyone from Antarctica. So sorry, for those listeners that might be from Antarctica. And roughly a third were US-based businesses. And then being a global provider of cloud accounting services. We also had a third of our respondents from Australia. 

But as I suggested cloud accounting tools. We found that 95% of sellers doing more than a million in estimated annual revenue use a cloud-based accounting platform. And really, without that, you run into problems. We do see people still trying to do spreadsheets, you know, financials. 

And within that, you often see inaccurate financial records formulas that get broken. Often, they're paying too much or too little in tax. They also have inventory planning headaches. The ability in tools like Xero, or that with its open API, you have an opportunity to integrate tools like inventory planner or Dear inventory systems to help pull aside some of those typically manual, labor-intensive spreadsheet building tasks that many Ecommerce operators face. 

And then, as you mentioned, cash flow shortages, it's hard to get that true visibility of where you stand in your business without implementing and taking advantage of these tools.

Chase Clymer  

Absolutely. Were there any other findings within this survey that you thought were curious?

Wayne Richard  

Yeah, so 85% of sellers review their financial reports at least once a month. And what was interesting is also 87%, of sellers doing more than a million in revenue, actually have done the cash flow forecast that I talked about, as opposed to 73% of sellers under a million that had not. 

So it kind of went in line with our hypothesis that those that are better suited to survive these types of crises are those that have taken the time to implement these financial management practices, and have the right tools in the right systems in place before the critical events came about.

Chase Clymer  

Awesome. So if someone out there is listening to this, and they're like, I don't think I have these tools in place. How would they reach out and get a hold of you?

Wayne Richard  

Yeah, so you can check out our Ecommerce Recession Impact Report on our website. Ecommerce recession impact report on beanninjas.com. We provide services for folks that want to do it themselves. 

We have courses available to those early-stage sellers how to do bookkeeping in Xero course, and know your numbers course, we also provide do it with you services where we can get you set up in Xero and provide you the necessary training to do the day to day operations until which time you understand it might be of benefit to you to then outsource to a monthly recurring model where we come alongside you and your business and share with you insights and advisory based on our experience and supporting many sellers across varying stages and industries of business.

Chase Clymer  

Awesome. Wayne, thank you so much. 

Wayne Richard  

Perfect, thanks, Chase. 

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