The E-commerce Leader

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[00:00:00] to me as an outside observer that they don’t even have their business set up fully. And yet they’re complaining about no profit. We’re like, well, there’s nine or 10 things we haven’t even done yet.
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[00:01:13] using your in, uh, let me try, take two. Using your income statement, also known as your profit and loss statement to help run your business is almost always a good idea. But there are special times when those rules don’t apply, and in those times, it is a horrible mistake to obsess over your profit and loss statement.
[00:01:33] So in this episode, we’re gonna discuss these unusual but critical times. Jason, um, you came up with this idea as soon as I saw. The idea that came through from you earlier today. I, I thought that’s very odd. And then I realized, looking through the statement there, there’s actually quite a lot of times when you need to be very careful about that.
[00:01:49] So what a shocking idea. Tell us more about where you’re going with this. Yeah, yeah, yeah. It is a little bit of a shocking claim, I guess you could say. Controversial thought maybe, because most people would say that your profit and law statement is your, you know, the, the, I guess you could call it the Bible of your business.
[00:02:05] I mean, it’s like, it’s like the truth of what’s happening, you know? So when would there ever be a time. When you don’t wanna depend on it. Um, and yes, there are times and so we need to dive into those. Uh, just looking at a buffet quote a moment ago and he said, um, managers and investors alike must understand that accounting numbers are the beginning and not the end of business valuation.
[00:02:28] And I think that speaks into sort of the, the theme of the conversation here today. This idea that there, uh, are times when the valuation of your business or the, the running of your business can’t directly be tied to just the accounting numbers. And so we want to jump, uh, you know, into that with, uh, good solid conversation around it today.
[00:02:45] So I’m happy to, um, to talk about those. I think maybe before we jump into it though, we might want to just been a moment or two discussing, you know, what is the. Of a income statement to a business. And there are some entrepreneurs who have just never heard of such thing and don’t really, you know, they don’t know about kind of how to run a business by the profit and loss statement.
[00:03:06] And, and so it’s sort of new to them or they’re not quite clear on it. So I figure we might wanna just talk about that for a moment or two. Before we, uh, we talked about the exceptional cases when you don’t use them. Um, what are your thoughts? I was say, yeah, what stands out to you as it relates to why a p and L is so, I.
[00:03:23] That’s a good idea. Yes. I guess we’re doing, we’re taking this sort of counter position as we ought to define the standard position. Yeah. Um, so I guess the first thing is just to clarify language and, and talk about what it means. I think the first thing I would say is, okay, very obvious thing. Income statement doesn’t mean the revenue you’ve made.
[00:03:38] It means the same as profit and loss, just in case there’s confusion about that. But also I would say this, um, right from the off your profit and loss. Isn’t your cash flow statement and to your point that you can sometimes be led down a blind alibi or wrong direction. I think when you’re in a startup particularly, um, and to some degree when you’re operating and expanding, especially if you’re expanding a physical products business, then there can be a big difference between the cash flow and the profit and loss.
[00:04:03] So that doesn’t necessarily mean you should ignore the profit and loss, um, but it means you shouldn’t be only guided by it. For sure. So that’s the first thing. Let’s try to, yeah. Totally agree. And what I guess to restate what you’re saying is that you, you can’t always just run your business based on what’s in your checking account and then look at, at your checking account and, and you realize that over time you realize, oh, there are these times when I’m doing fine with my checking account, but I have a big problem.
[00:04:28] Or conversely, I’m doing horrible with my cash flow and I have a big problem, and yet my business is very healthy and growing. Or, you know, those tension points, uh, between sort of the checking account view of your life and the income statement view of your life, become more and more clear over time as you operate a, you know, growing business and a, a thriving thing.
[00:04:49] So I guess we ought to come back to the point you were just asking me to help with that, which is very important point. What is a profit and loss? I mean, I guess, um, first of all, generally it is important because profit means the leftover, not turnover is as, uh, one of my guests put it once and in other words, what’s left in the business to put it mm-hmm.
[00:05:06] In simplistic terms. And that’s really what generates the value of an e-commerce business. If you ever want to sell it. Um, and of course if you haven’t got any profit left, you, you can’t legally in the UK law anyway, or English law, um, pay yourself dividends. So there’s various things that come out of it.
[00:05:18] Mm-hmm. If there’s no money left, you can’t pay anyone and there’s no real value to the business. So profit is critical. Um, but I guess not at all points. Right. That’s when you come to sell it or come to live. I’m gonna, I’ll, I’ll hold my, I’ll hold my commentary about that statement that the value. The business doesn’t have value.
[00:05:34] If, if it’s not, uh, doesn’t have a profit in an ongoing way. I want to dive into that a little bit cuz it gets sort of the heart of one of the exceptional times. Yes. But um, but anyway, if you’re not familiar with it, sorry, this is boring. People who are very familiar with these things, but if you’re not familiar with it, uh, an income statement or a profit and law statement is basically just a one page.
[00:05:52] It’s very simple. That shows at the top of it your, you know, your revenue lines, what you’re sold, how you know your, what, you know, what sales have come through your business. And then underneath that, it’s your set of expenses. They can be organized in different ways and bundled together and, you know, kind of, uh, bucketed up.
[00:06:09] Uh, and then the bottom line is, uh, are your, you know, revenues at the top, the top line numbers, uh, greater than the expense. And thus the income, uh, you know, will sit down right at the bottom of the page. A very simple concept. Um, I remember learning this from my business mentor. I mean, I knew about it from academic work.
[00:06:26] Like when I got my mba, I was like, yes, I know these things. But then when I actually in my business had my mentor say, here’s how you create this in QuickBooks. Let’s look at it for your particular, uh, business. Then I was like, wow, this is so interesting, you know? Um, and so, uh, I, I really, I really. I think all of us kind of need to go through that.
[00:06:44] If you haven’t, and if you run in your business with a, a p and L, then you’re very familiar with this, but it adds so much clarity as it relates to the expenses and to the revenue lines. Um, it adds clarity as it relates to overspending or maybe underinvesting in some expenses. You know, maybe you got expense line that’s zero, and honestly it should be, you know, a big number.
[00:07:06] Uh, and you can see that in a, in a profit and law. Yeah. I would say in non exceptional times, it is definitely something that, you know, um, gets ignored a lot of the time by entrepreneurs who are generally very drawn to marketing in the worlds that I move in anyway. Mm-hmm. And new product creations, they like creation and shouting about their creation and of course.
[00:07:25] Mm-hmm. Yeah. If you don’t know. What is going on in your profit and loss statement? If you don’t understand it, really line by line I would suggest is the, the simple version, and we probably should talk about the conventional cases at some point as well. But you know, sit down with your bookkeeper, your accountant, and ask them questions like, don’t be afraid to look stupid in private.
[00:07:42] Mm-hmm. After all, you are paying them and to say, What does that mean? What is gross profit? And by the way, that is not a simple question. Like we have a lot of discussions in the mastermind. There’s one particular member whose heart is in the same place as mine, which is like, when we say gross profit, let’s define that.
[00:07:56] And what goes into that and what doesn’t. And these are important questions. However, we are, I, I guess we’ve defined the, the fact that for most people, most of the time managing bio profit loss, Is important. And I guess that’s fairly standard. Yeah. Yeah. But I’m kind of interested now you peak my curiosity.
[00:08:11] Well, let me, yeah, before we go there, before we go there, there just mentioned a few other value, you know, uh, benefits of having the, the p and l, um, the, the thing that can happen with, um, kitchen table entrepreneurs or small businesses over the course of some duration of time, you can end. Different revenue streams.
[00:08:27] I’m like, oh, well I make, you know, I make $6,000 a year this way, but I really make all my money this other way. And, you know, I’ve got these streams of, of revenue leading into the business. And, and one of the real value propositions of having a p and l statement that you look at is you get to see, to say to yourself, oh, those little.
[00:08:46] Pennies or quarters or dimes that came through the door here and there throughout the whole year added up to a pile of money. And I didn’t, you know, you, you kind of like stuff sneaks up on you sometimes and you realize, oh man, sometimes you can, you can realize, man, I made, I made $7,000 this last year in this odd little way and I didn’t even try and I didn’t even spend any money doing that.
[00:09:08] And you know, it kind of, it allows [00:09:10] you to see things in your business and the numbers of it that really can be. Beneficial. Uh, and then to your point earlier, just my last little comment here, having an ongoing, you know, profit does allow an easy valuation method for your business. You know, like it’s a standard valuation technique to say, you know, what’s, uh, what’s your annualized or prior 12 months, uh, where you might call, um, owner discretionary income or you know, your profit basically.
[00:09:34] And, uh, and, and, and then to value your business, maybe somebody will give you three times. Amount, or five times that amount or whatever it is, you know, seven times that amount, that the range is debatable. But, um, but that’s a standard valuation technique and it’s built on the back of having a clear understanding of your prior 12 months or whatever, you know, your, your annualized profits.
[00:09:54] Um, so those are the reasons why profit and loss statement are so valuable. All right. Were you ready to get into the, when, when they’re not valuable? Yeah, I just, before we do that, I think, cuz you’ve got a few other things that you’ve, you’ve noticed just to be, um, clear that this way come from. I think one of the things that is very useful as well is when you have, uh, a clear profit in loss, That you can benchmark against generally accepted ranges for things.
[00:10:18] So if you are, for example, I was working with somebody, I don’t do this very often, but he’s got a Shopify based, uh, drop shipping business. And so I looked at what was sort of expected, um, you know, pre-tax profit range should be, and gross profit margin. It was about a 30% pre-tax, you know, gross profit margin and 10% after overheads.
[00:10:34] I mm-hmm. Pret. Profit. Mm-hmm. Not to get too jargony for those who aren’t familiar. And, um, it’s, it wasn’t rocket science to see this, this business is off track because it was losing my, it was minus 20% pretax. But nevertheless, you know, what are we aiming for? And I, cuz I didn’t know the business model as well as other things, I thought I’d better just check what the benchmarks are.
[00:10:52] And so that’s a very good sanity check. Mm-hmm. Um, you know, if you are expecting 50% pre-tax profit from a physical products business, for example, if you’ve been used to like an information marketing or a SaaS, Then again, that might be a reality chat the other way. So yeah, that’s really, really useful as well.
[00:11:07] Yeah. Another example of that would be we always work with our clients and say, Hey, you know, how much did you spend on, uh, marketing and advertising Yeah. In the last 12 months. And a lot of times they’re like, well, I, I got a little money I’m spending over here and you know, a little money over there and I do some influencer deals and you know, I got my Facebook.
[00:11:26] Like, yeah, add it all up, you know? Yeah, yeah. Right. Okay. So then we put it all in a bucket and, uh, that should be between 12 and 18% of your top line revenue. Very simple mathematics. Yeah. And you’re like, well, why is it sometimes 12 and why is it sometimes 18? Well, all things being equal, you wanna spend as much money on marketing and advertising as you can afford.
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[00:12:33] But, um, businesses over time, Basically averaged in many ways around these things. And, uh, so there are rules of thumb or, you know, heuristics you can apply once you know the PNLs, uh, info and, uh, that’s why it’s valuable. Yeah. Okay. So we’ve definitely dug into why it’s valuable and, and for anyone who’s not using a profit and loss statement or doesn’t look at it, by the way, if you’ve got a bookkeeper working for you and you don’t look at your profit and loss statement, welcome to the club.
[00:12:57] I’ve been there. My clients have, all I would say is, Look at it like preferably once a month, at least once a quarter. Can I just pray that you don’t look at it about nine months after the year end and discover your business loss money? Yeah. Last year because it’s a bit late to change it. And I’ll just say that, you know, so that, that’s my, my plea to you.
[00:13:14] Uh, if you’re listening and it’s easily done, no criticism, but I promise it will really, really, really repay that work. Yeah. So having banged people out the head of the fact that it’s actually really valuable to use a profit and loss statement to run your. I’m interested in your controversial thing that sometimes it’s a really horrible idea.
[00:13:28] So when, when is that? Yeah. Uh, I’ve got two examples and I, there’s really a third one we can talk about if we have time of when it’s really, um, a, a, a mistake to, you know, try to look at the p and l statement. Um, and the first one I’ll mention is during the startup phase of your business, which is sort of obvious in a way once you mention it, but when you’re investing into your business to get it going, you’ve gotta think of it like a.
[00:13:53] A little baby seedling of a tree or something like that. You know, think of your, your business as an oak tree in the future, right? Or a, like, let’s say a fruit tree, cuz that’s a better metaphor maybe. But a, a, a fruit tree, uh, you know, the first phase of its life, you’re going to be digging a hole for it.
[00:14:12] Literally, like financially digging a hole. Uh, and you’re gonna be investing in fertilizer and faithful watering and protecting it from pests and frost and sun and all the, you know, kind of all the things you have to do to invest in, in keeping something alive that’s just a little baby idea, but little baby thing.
[00:14:29] And, um, so that’s not the time to ask the question is, Uh, making me money, you know, and, and a lot of times investors can be very, very impatient and it’d just be the same as saying is my, you know, one year old peach tree. I just stuck in the ground giving me a lot of peaches. Well, it’s not the season of its life to do that, and it’s a huge mistake for you to think it would be in a first time.
[00:14:53] Entrepreneur will make that. Hundred percent. Oh, well, and, and you know, it’s funny cuz a lot of times, we’ll, we’ll, I mean we’ve worked with, I’ve helped 40,000 people set up Shopify sites now through my, my trainings and I’ve worked with a ton of coaching clients since 2017. And, you know, you get people who all get on a coaching call or, you know, advisory call and they’ll kind of describe their desire for, you know, what they’re trying to solve for.
[00:15:20] And it’s very clear to me as an outside observer that they don’t even have their business set up fully. And yet they’re complaining about no profit. We’re like, well, there’s nine or 10 things we haven’t even done yet. You’re not done with implementation, I’m sorry to say, but you know, profit’s not the problem.
[00:15:37] Thoroughly implementing the business is the problem, or maybe the business model or, you know, there’s a different other things. And so I think that’s the first thing I’d say is you gotta understand in the investment startup phase of your business, um, you need. Really understand that it’s a baby. Do not put heavy demands on a baby unless you want it to be, you know, weird and warped and, you know, stressed and unhappy.
[00:16:05] What are your thoughts on that? I, I agree entirely. I think, um, yeah, that the, I guess I like your analogy of the baby. I think Emma, I, cuz in the past I’ve done quite a bit of education work. My wife still has the, the doubtful pleasure of educators and more children in, in trying to play the piano and.
[00:16:20] What’s specific to human development at very different ages is very, very specific. I mean, like a five year old, um, will not grasp things that a seven year old easily grasp and their 10 year old will go, oh, that’s for babies. I’m not doing that. Mm-hmm. Mm-hmm. And it’s true with businesses if it’s in the startup phase versus, um, early growth versus very established.
[00:16:36] In these very different things. I think you’re absolutely right. Mm-hmm. And I think, um, the other thing I see, I’ve literally had an example of this yesterday without revealing anything, uh, personal about the the client. But I’ve got a new client, um, sort of person I don’t tend to take on very often now cuz it’s sort of pre-revenue and it’s kind of harder to help people before you got product market fit to, to, to quote.
[00:16:53] Person whose name escapes me, a very famous startup, uh, incubator founder. Um, you’ve got before product marketing fit and after, and they’re different worlds. And so to your point, I think really, um, before you worry about profit, you’ve gotta think about does anyone actually want the product I’m selling?
[00:17:09] And one of the, one of the reasons that people obsess about revenue, Correctly at this stage, which then can stay as a habit, that’s very inappropriate when you’ve got a, an established business, in my opinion, is revenue is an indicator of product market fit. If people buy a lot of your stuff, it means they want it, and that means you’ve got, you know, a chance to build a business with that product or product line.
[00:17:30] And so I think that revenue viewed in the right way. Can be a, a very important indicator at this point, whereas profit isn’t necessarily, because if you can source something rather over inexpensively and sell it at a price that will be profitable in the future, once you’ve sourced more sensibly, if you will, then that’s a fantastic start because you’ve proven one half of the equation, which is product market fit.
[00:17:51] The next thing is, okay, can you make it profitable? Which is a different equation to solve in some ways, you know? Yeah, yeah. Totally. No, I, I, I totally agree with that. Um, a a hundred percent. So, so that’s the first, uh, scenario. And I would just say that, you know, the best businesses sometimes take the longest, you know, to mature, uh, you know, that old story or what are the example of the, the giant bamboo from China that grows underground for five years and then [00:18:20] literally in like, I forget what duration of time, but it’s like a very, very short period burst to like 90 feet.
[00:18:26] Wow. So for five years it’s like nothing. And then I forget how fast, but it’s very, very fast. It just skyrockets outta the ground and, you know, all things being equal. Which would you rather have, uh, a business that actually gets to a skyrocketing point or one that, um, you know, never does. And, and so you have to think through like what is it you’re building and sometimes you don’t.
[00:18:48] You don’t profit. Now, Bezos is a good example of this. You know, there’s, I guess there’s an a, a, a tweak to this, you could say, or, or, or kind of an exception, within the exception. And that is, let’s say you do get profitability and you do get good income coming through a sales methodology of a product, but you’ve got another thing that you wanna invest in another major investment.
[00:19:09] Every time you enter the na a major investment phase of your business, you’re basically reentering that baby startup. Cycle, uh, and you’re doing it with cash, you know, from the business, you’re doing it with profits. Ideally, you know, obviously you would be doing it with profits, uh, but nonetheless that’s gonna write down your, your income.
[00:19:28] You know, let’s say, let’s say you made, let’s just say one year, you did great and. You made a million bucks of income. We went right into your bank account and the government took its big giant chunk and whatever. You know, you, you, you had a huge windfall and the next year you’re like, you know what? I can buy a whole different business, but it’s gonna take me a million dollars to buy it, but I’m gonna make a million dollars, but I’m gonna spend a million dollars in my, you know, my income statement will show that I had zero income.
[00:19:56] Yeah. Uh, which would you rather buy that other business or not? Yeah. Like, do it, write down your, you. The next year up to zero because you’re investing in a new big thing or, you know, building a new revenue stream. So every time you do that, you’re really fiddling with your, um, you know, your, your income statement.
[00:20:14] Now, I would just say at that point you have the income statement, you’re looking at it, you know you’re making money, and you’re using it as an informed tool to use that, you know, to make that decision into investing into a new thing. Uh, when you’re starting, of course you’re doing it all. You know, you, you don’t have any proof of concept to your point.
[00:20:32] Yeah. You don’t have any, you know, product market fit. You’re, you’re hoping for those things, but once you’re established and you’re investing in something new, you’re doing it from a position of strength. Well, that’s true, but I think what’s interesting talking about more established businesses, but the fact that each new product line in a way is a new, you know, baby or it’s got a new mm-hmm.
[00:20:50] It’s early in, it’s, it’s growth phase of its life, if you will. Mm-hmm. Um, I think you’ve gotta, you make an interesting point that this is a newish sort of thought for me, which is you’ve gotta account for new product lines and your overall profit aims. I mean, just because your existing product lines average out to.
[00:21:03] Including the overhead, say 20%, um, s d e or pre-tax profit. Let’s keep it simple. Mm-hmm. Which is generally seen as a very desirable number for most people who acquire e-commerce businesses. At least the ones that are focused on Amazon that I’m more familiar with. Mm-hmm. The market tends to be that you need to be making 20% pre-tax.
[00:21:18] Okay, well, fine. But if you are launching new products, then. Those will suck a lot of cash and, and some of it come back in profits and some not. So I think you need to have appropriate targets again, for where you are at. If you want to sell your business in five years, for example, you might accept a lower profits, um mm-hmm.
[00:21:32] Target for the next three or four years, but then make absolutely sure that in the year or maybe even 18 months before you try and sell it and hawk it around the best brokers and aggregators and whoever’s the players at the time that you make damn sure that you’re training 12 months is at least 20% pre-tax.
[00:21:47] Yeah. So you’re probably gonna be growing less. But because of the rather rigid way that sometimes, and to your point, there are 20 different valuation methods for businesses or something like that, aren’t they? But most things are sold as a multiple of the last 12 months, which is kind of rather foolishly narrow really.
[00:22:02] But if that’s how people buy it, then you can make that number look good and manage for that number. So in other words, even with an established business, you have to vary the profit targets and not be alarmed if it’s lower this than this year, than last year. Cuz you launched a bunch of products, you know, something like, Yeah, so you just unloaded a he heavy duty set of things there.
[00:22:21] Let me, let me unpack a few of the points there. So, STE is seller discretionary earn discretionary earnings. So basically you can receive benefit or value from your business in several ways. In the us for example, if you got, you’ve gotta, you’ve got a planned income, you, you need to have part of that going through as a W2 employee.
[00:22:41] And then if you’re, if you’re in LLC taxes and Es. Of course we’re not attorneys or CPAs not giving advice, but basically the way it works, if you’re an L l C tax InCorp in the us, you know you got part of that income that you’ll put through as a w2, and then the other you’ll take at as a owner’s draw. Uh, and so there’s different ways you, uh, get value and maybe you have your business paying for your truck.
[00:23:03] Or, uh, you know, your dental vision and health plan or whatever, you know, there’s all these different ways that a business in value be valuable to you as the owner. And so, when you think about business valuation, the standard phrasing is seller discretionary earnings. And that’s sort of the, uh, number that Michael’s mentioned.
[00:23:21] Is 20% sort of a seen as a, a healthy, you know, uh, number. Um, but you’re. Um, those can be written up and written down any given year based on what you do in the business, of course. Uh, and if you wanna sell the business, you wanna make sure that you have a large as possible seller discretion or earnings number.
[00:23:38] Um, and if you wanna grow the business, you want to have, uh, be as lean, mean, you know, as much as invested into the future as possible. And, So those are the, the dynamics at play here. Okay. So anyway, so all of that to say inside the startup phase of a business, you, uh, you, you’ve got this weird place where the profit and loss statement is in as, as helpful.
[00:23:57] Now, you kind of mentioned this idea of valuing a business for selling it. So let me just mention in the second way in which, or the second time in which the profit and law statement gets thrown out the window in a way, and that’s when you’re considering closing or shutter. Uh, winding down your business and I’m in, um, you know, relationship with a lot of sellers who have the peaks and the growth and the, the, the s-curve, momentum upsides.
[00:24:25] And sometimes I’m in relationship with business owners who are in that wind down phase. And, uh, you know, I mentioned in my newsletter to our coaching clients, um, this last week, the anonymous story of somebody I worked with not that long ago who. Want to continue the, continue the bus, her business, she was, I think it’s fair to say frustrated because she didn’t have an ongoing income.
[00:24:48] You know, she, she wasn’t taking a draw. There wasn’t enough to have W two earnings clearly, you know, kind of, you know, planned and drawn. So she didn’t feel like it was making any profit. Uh, and so I saw her announce on Facebook, she. Gonna close her business. So I reached out and said, are you selling your business to somebody?
[00:25:08] Or, you know, are you planning to sell it?
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