What would you do if at the end of the year you go to file your taxes for your e-commerce business and discovered you owe tens of thousands of dollars in sales tax?
It’s happened before and could happen to you. A simple oversight in your filing could completely destroy your company. How do you avoid this?
In the first episode of Skubana’s E-Commerce Mastery Series where we invite experts of their respected fields to share their best practices for success, our host, Dr. Jeremy Weisz of InspiredInsider.com interviews Scott Scharf, accounting expert & co-founder of Catching Clouds.
Catching Clouds provides accounting services for e-commerce businesses. We all know there are a lot of moving pieces in running an e-commerce and they have a very personable hands-on approach to help get your finances organized and optimized.
In this episode you’ll learn:
The tools and best practices for handling your online business’s finances
How to avoid being liable for thousands of dollars in sales tax
How shipping locations can change how you file your taxes
Places & events to network to help grow your business
How to protect your business from serious accounting mistakes
By understanding your accounting, you’ll discover how to invest smarter to encourage growth & much much more
RAW TRANSCRIPT: Scott Scharf of Catching Clouds
Jeremy: Dr. Jeremy Weisz here, founder of inspiredinsider.com where I talk with inspirational entrepreneurs and leaders like the founders of P90X, Baby Einstein, Atari, many more, how they overcome big challenges in life and business. This is part of the Skubana E-commerce Mastery series where top sellers and experts teach you what really works to boost or e-commerce business. Skubana is a software platform to manage your entire e-commerce operation.Today I’m very excited, we have Scott Scharf. He is the co-founder of Catching Clouds. It’s a cloud accounting for e-commerce businesses specific for online and e-commerce businesses. Scott has been in IT for over 30 years, working with global to small businesses. Scott brings the technical side of things while his co-founder and wife Patti is a CPA who provides the deep accounting expertise. Scott, thanks for joining me.
Scott: Thank you.
Jeremy: You have so much . . . I watch a bunch of interviews, videos of you giving advice and there are so many questions business owners have. So I want to start off with some of the … what you see probably a lot of the biggest mistakes e-commerce businesses need to avoid.
Scott: Specifically e-commerce businesses? I mean the first thing is you’ve got to treat your business as a business and put a reasonable amount of time into putting processes into place. So if you’ve optimized how you’re shipping and fulfilling your products or you’ve optimized how you list or select products, you’ve got to focus on the business side. E-commerce businesses are all about commerce, generating money and you need to manage that money so that you meet your own goals. And it’s finding that balance and great, I know that most e-commerce business owners and most business owners did not go into business to do accounting, okay?
Jeremy: [inaudible 00:02:02] sexy.
Scott: Yeah, they did not go into business to complete sales tax returns. And a lot didn’t go for the business to pack a lot of boxes because they really enjoyed packing boxes every day. So those are some of the things they look to outsource, are accounting and other pieces. But unfortunately business owners, you have to do it yourself for a little while when you’re starting out so that you understand what it is you’re outsourcing.
Jeremy: Yeah. So I want to talk to you about outsourcing, so what do you see when you say . . . How are people not treating their business like a business? What are you seeing?
Scott: They’re running their business out of their single bank balance. You can’t run your business because you don’t know what liabilities you have looking at that. They haven’t implemented accounting. And that’s not fighting and slogging your way through QuickBooks desktop, which is one of the most painful products.
Scott: I’m sure there are businesses that have gone out of business. So if I can save people from QuickBooks, there are better tools. So if you’re a modern e-commerce business selling on Shopify, Amazon, doing stuff in the 21st century, you want a 21st century cloud accounting platform and we recommend Xero. That’s X-E-R-O dot com. It’s easier to use. I’m not an accounting person, I get in and move around it and I’m able to do things as a business owner and I’d be much more effective. And then you find the right tools.
And so the core tools that you need are a good cloud accounting. The other piece that we include and that every business needs, is a solid cloud inventory ERP solution that connects to your channels where you generate a purchase order. So every time you buy something you know what you’re buying and you capture the cost. When you receive it you know what you’ve received and all of your orders and all of your data flows down and it can optimize and provide a structure to your business.
I’m not really talking accounting. I’m just talking about process, which means you could train your wife to do it, you can hire a virtual assistant do it, you could outsource it to someone like us. The idea is that once you have that structure and you want it to do things and leverage technologies, you don’t have to hire 20 people to do things, you could have a small team making great profits.
And then those tools, if you have a cost for everything and every sale from every channel in one place, then we can pull the accounting data off the back end. The cost of goods sold and the value of inventory, which is cash. Keep in mind if you have $100,000 or a million dollars of inventory at Amazon FBA, that’s your cash that you’re not paying interest on. Some of it is making you a profit and some of it is costing you money in storage fees. So it’s those two key things.
And then there are a number of other tools that you need to help optimize things but those are the core. A solid cloud accounting tool that you use and connects to your banks and automatically pulls in data and a cloud inventory that pulls in all of your sales and orders. Do not expect your accounting tool to be a multichannel inventory management tool. You’re just setting up everybody for failure.
Jeremy: Yeah, so what mistakes within the process … and I checked out your tools section of your website, so you provide a really good description there of some of those tools, which we’ll talk about because I want to hear personal opinion … but what do you see people making mistakes within the process? How are people making mistakes within that?
Scott: One of the big accounting processes, once you have all this automated technology is you set it up and you can forget it. So if you’re connected and you’re pulling in all of your bank feeds and credit card transactions and the PayPal feed and so you know what’s going in and most of these tools have the thing where it recognizes and you hit okay, okay, okay, okay, that’s great. That’s like the first step. But what an accountant does or what you need to do is you actually have to get the bank statement via PDF.
And I’ll tell you what my favorite tools that saves you so much time, it’s a tool called Hubdoc. It connects to Chase, Wells Fargo, Verizon, Comcast, all of these sites. It connects and automatically downloads your bank statements. So when you connect it will grab the last two or five years of bank statement and you’ll have it all in one place. So the big accounting thing that when we go to clean people up is that you have to compare what came through electronically to what the bank actually says in any other statements because there can be some drastic differences and that’s where money disappears on them. And that’s the piece that they’re not finishing, is the first step.
And then the other thing is just not being careful. You need to be simple about how you code that data so that you actually end up with a financial that you can actually read even without an accountant and understand it enough to work for you. So it’s missing those steps. And then there is a world of things we can talk about on sales tax.
Jeremy: So Scott, stand on that for a second. This is really interesting. So once people implement that, right, so they implement Xero, they implement Hubdoc and they see it, what are some of the big takeaways you’ve seen people get once they have it one place? What are they seeing then on that data level?
Scott: The big thing is and our mission statement is to provide e-commerce businesses current, accurate and actionable information so they can make great decisions.
Scott: So if you can trust your numbers, one of the big things most people can’t answer, if you told somebody you have to go on the Shark Tank in five minutes, would you know those numbers? If you met an investor that’s willing to buy your company but if you can’t tell him your sales and know how profitable you are, if you’re not at that comfort level, you’re not sleeping well or more importantly, telling your spouse or your partners or whatever how the business is doing, you’ve got a gut feel, once you have that number you’re going to be able to relax and you’ll understand the numbers.
It’s really the key thing that people want to know, is your business profitable? How much money do you owe? And then the big thing is, is how much cash is available to spend on marketing? Because people have to find you even on Amazon, you can’t not market. If you market you’ll be more effective on Amazon or your other site. If nobody knows about your Shopify site and your URL, no one is going to be able to buy it. And then how much cash do you have available? Because the last thing you want to do is go, “Yay, I can pay myself 10 grand,” but you forgot you have payroll of eight grand next week.
Scott: Or you pre-ordered a bunch of products from China that shows up next week for 12 grand. So not only do you have to tell your spouse that, “Oh, that 10 grand I took out that you needed to buy groceries with or a new car. . .”
Jeremy: We’re not eating this week.
Scott: “We’re not eating this week. I have to take that out and an extra two grand because I forgot about that.”
Jeremy: It’s painful.
Scott: Painful. It’s managing that cash flow and looking ahead enough to make smart decisions. It’s both the comfort level of knowing if you’re profitable, and you look to your accounting system, because you want to look in the right place. You want to talk to the right people about the right questions. But if you look at your accounting, it’s going to tell you how profitable you are. It’s going to tell you how much money you have invested in the inventory and it’s going to show you where you’re spending your money and where you can cut expenses. Or you go, “Wow, I’m not spending enough on marketing.” It’s those decisions.
Then when you look at a cash flow tool that’s going to help tell you how much cash you have going in and out of your business for the next few, four, six weeks out to make those decisions to say, “Okay, I can spend 50 grand on inventory and then in three weeks then I’ll pay myself,” or, “Okay, now I can increase that.” You want to do that. And so you know those things. And those are the key things you go back and forth, they’re both the cash flow management, which is different than the accounting. The accounting answers certain questions and cash flow [inaudible 00:09:47]. And it’s understanding those two things, and those are really the two tools.
Beyond that for e-commerce businesses then you want your cloud inventory solution. It should give you the analytics on the profitability per skew, the profitability on your orders, the profitability per channel. And it should show you the velocity of how fast things are selling, so which are my top five products from margin perspective, but which are my top ones that are selling faster that I can turn over every three weeks or six weeks? You want to look at it for the bought, what are the docs? Which are ones that are sitting in inventory and you’re paying warehouse fees that you’re going to lose money on if they sit in a warehouse for three months but if you sell them in under two months you make a profit? And then you should sell those off on eBay. And those are the different, those three tools. Accounting, core accounting, be able to understand that, cash flow management and then cloud inventory.
There are other dashboards and other tools that you can use to do different tasks, like listing or re-pricing your other pieces, but when you’re looking at how your business is doing and making decisions, those are the core.
Jeremy: Yeah, no, thank you for that. I want to get to the software but first I want to talk about, because people are different levels and you probably see people on different levels or people come to you and maybe they’re not ready for you. So can you talk about some of those issues? Like when is someone ready to implement these solutions and what they should be doing to build up to that point?
Scott: So my opinion is the sooner you implement the system is how much easier it is to do. So if you’re a smaller business keep in mind Xero is going to cost you 30 bucks a month, okay, even if you do that . . .
Jeremy: That’s not a lot.
Scott: So it’s not going to do their . . . Skubana is going to cost you per order, so it’s going to cost you almost nothing, which I think is a great intro fee even though they’re really powerful for a higher end sellers. I think that’s great. It means that your costs are going to be fairly low to get a really powerful tool. And when you grow and you’re making more money, as long as you’re getting a reasonable margin on your products, then it will cost you more. And you’ve got a few of these other tools so expect you’re going to spend … keep in mind you’re going to spend, if you budget $100 to $200 in tools, you maybe use Inventory Lab and Hubdoc and Xero on the accounting. Payroll, if you have to do payroll and you’re an S Corp ZenPayroll is going to cost you 30 bucks a month.
Scott: And then four more dollars for each employee per month. Before, even three years ago if you’re buying software you’re spending hundreds of dollars up front or thousands of dollars. I mean it’s amazing what you can get for $100 to $300 and just bill that in as overhead because the automation will save you time right there. And so really it’s be a business and so my basics for any of these business is not only tools are, be registered with your own state, get a federal EIN, have a separate business bank account, keep your business and personal finances separated. But that means that even if you’re . . . it’s okay if you’re using your own personal credit cards to fund your business and buy inventory for capital, that’s totally normal. Everybody does it, but when you use one card only use it for business. Don’t be buying groceries on the same card. You want to keep them separate, both it makes it easy for the accounting and it will make it easier for you. So just use one credit card for personal expenses and one card and then build the business stuff.
Then register for a sales tax license in your own state. You want to be completely legal where you live and where you’re registered as a business. And then set up the basic cloud accounting, cloud inventory and sales tax management like a tool, like TaxJar or taxify.co are the two that I work with depending on what size business you are and what you’re doing.
And then there is a bunch of other add-on tools depending if you’re an Amazon seller or if you’re doing drop shipping or you need shipping management. There is a range of other things but those are core. And you put those fundamentals in, spend $100 to $150 a month on basic tools and do your best. It is going to be better than just ignoring it and even better than running things on spreadsheets, even if you’re going to keep track of certain things on spreadsheets. That’s my basic guidance for really any business. Then you can hire a virtual assistant or an accountant or somebody else who can then clean all that up if you’re doing it at least in a consistent way.
Jeremy: And Scott, you have a very technical background. I was reading, I think your majors in college were physics, math and computer science. And I was like, “This guy should be one of the founders of Google, not an accounting program,” but what do you find with Skubana? You have a very technical background, what . . . obviously you recommend different tools, tell me a little about your experience with Skubana.
Scott: Okay, so Skubana has been right in the background. So one of the key things I do is not only evaluate cloud accounting tools and other back offices, I’ve evaluated and looked at over 30 cloud inventory platforms. And I’ve got a huge matrix that compares them all and figure it out because whenever I need a business I find the right solution for the right company. And then I have a high bar and then I provide technical feedback. But looking at these tools, and I was a product manager and ran teams of developers in my past as well.
Scott: So I’m very picky about the user interface. And there are a few fundamentals that I expect in a certain product; that it’s easy to use, okay? I don’t care how complex the task is, the technology should make the task of doing what you’re trying to do simple. It should abstract all the complexity, not be a cool, complex computer program and make the task complex too.
Scott: I really think Skubana, from a flow and a speed of being able to get the job done and make those decisions, both make the decisions and automate it. So the key things I like about Skubana is one, it connects dynamically and quickly to all the key channels. Multiple Amazons around the world that’s on .ca, .uk integrate there. Shopify, Bigcommerce, eBay. And then it’s got an automatic, very fast about pulling that data in. Because what a cloud inventory should do is you have one vision of the truth. The number one thing it has to do well is it has one vision of the truth of what inventory you have.
Scott: I have 1000 widgets in stock and I’m selling on eBay and my own Shopify site and Amazon. It needs to sell, if I sell 500 on Amazon, it should tell Shopify and eBay that I only have 500 left as quickly as possible so that you don’t oversell. That’s the number one thing. Because otherwise you have sellers out there hiring virtual assistants to try to chase their sales. So it dynamically provides that. It pulls in all the orders, so it’s what you’ve sold and then it keeps that available stock up-to-date and alert you when you need to buy more of something that’s making you money and selling faster, okay?
Scott: And then it needs the ability. The other thing that’s unique or what Skubana does very well is they’ve incorporated all of the shipping. In many other cases in cloud inventory solutions what people are using are ShippingEasy or ShipStation or another third party tool that connects and helps you filter and save costs on shipping. So if you have a product come in and you’re in the middle of the US, sometimes it’s cheaper to use UPS to ship to the West Coast and FedEx to the East Coast. And it changes all the time depending on where it’s going and everything else and they’ll do that.
Skubana does that internally and really automates that process with some really smart rules. Not a lot of these tools have the same type of rules engine that Orderbot does to say, “Look, if it’s under this size and it’s being shipped this way always ship it in a plastic bag mailer. If it’s this, do this,” and it builds those functions. So you can build those unique things that I always do it this way because our customers like it or it’s the most cost effective or fastest way to do it. And you can build those very complex rules and just better than what Outlook ever had for rules for your email. And so that’s something that’s really impressive.
Also the ability, if you sell on eBay to tell eBay anything that comes in from eBay ship out of Amazon and have Amazon fulfill that for you. That ability . . .
Jeremy: I see.
Scott: … the rules to do it automatically for you or the ability inside the user interface to look at orders as a human and say you can automate it but you can go in and say, no, no, no send it that way, send it that way, you can very easily direct where things . . . send that to my West Coast 3PL warehouse, send this one to that . . .” and you can do it manually for a while and once you figure out the flow then you can automate it and as soon as you get into the automation, not just collecting all the data but automating and that’s where I think Skubana shines. And it’s that automation that will accelerate a very fast e-commerce business.
Jeremy: Yeah, and I ask not necessary to make it a Skubana commercial or anything but I think it’s important to talk about some of the key metrics that people are looking at and also different automation people should be thinking about in their e-commerce. You list a bunch of different software on your site, Xero, Hubdoc, ZenPayroll, Skubana and then you also bill.com, that’s a similar one to, is that similar to ZenPayroll or what do people use that for?
Scott: ZenPayroll is payroll for companies, it’s awesome, super modern. Now, bill.com is bill payment. It basically is your electronic checkbook. So we work with clients all over the US and we want to access to their information, not their money, but people don’t want to write checks. And checks are going away, a lot of things are done via credit card. But if you want to write a check what happens is we get a bill from a vendor. You bought a bunch of product and you owe them net 30. It goes into bill.com and then the bookkeepers can review and approve it, you could have your operations/purchasing manager see it so it is multiple levels of approval so that your purchaser can look at it and say when you get the actual invoice and say, “No, they weren’t supposed to charge us shipping,” or, “No, that’s not right,” or, “They sent us an invoice from another client,” I mean all these things that happen but the purchasing person can say, “Yes, that’s correct,” and approve it or put comments in.
Scott: And then it goes to the owner. The owner is the one when they approve it, they can be on the golf course with their smartphone, they can be wherever. They can be at 3 o’clock in the morning look and say, “Pay, pay, pay, pay, pay,” and that’s them signing their checks, any time, okay?
Jeremy: Got you.
Scott: In our case it goes to our controller. We make sure there is enough money in the bank account to pay him and then bill.com pulls the money out the very next day. So keep in mind you don’t get the float anymore for all those checks bill.com does. They will either do an electronic payment if somebody signed up for ACH or they will print the check and mail it, including if you’re paying 10 bills to the same vendor. It will combine them all into one check and send it off. So it gives you the multilevel approval, it gives you check printing and it gives you ACH payment capability. So it’s an add-on to optimize that.
Scott: We don’t use it for every client because we have quite a few that do everything via credit card or [inaudible 00:21:07]. So it’s not for every business but for a business that wants to replace the checkbook, it provides levels of accountability. It’s just awesome.
Jeremy: Yeah, and I would encourage anyone, obviously you talk about these and you list them on your site, it’s catchingclouds.net/tools. They should check out because you have them all listed there and some description there so they should check that out. I want to hear about big messes that you’ve had to clean up but I have . . . because I’m sure you have a lot of horror stories to tell. But I reached out to a couple sellers and was like what questions would you ask Scott? What are the biggest pressing questions and two things kept coming up.
Jeremy: And you probably hear this all the time. One is they want a third party reporting software that would figure out profit. If there was an Amazon tool that’s good or they need, I don’t know if it’s a combination where you just talked about they need to do all of those together to figure out the profit, what are the different combinations that you suggest? Or what you already suggested.
Scott: Okay, so all right, so if you’re looking for profitability per skew, you should expect that from your cloud inventory like Skubana or Stitch Labs or TradeGecko or Orderbot. If you’re a purely Amazon seller only, you can look and get a reasonable P&L, a profit and loss out of Inventory Lab. It’s not a cloud inventory tool, so it’s not going to manage your inventory, it’s just going to give you information about the both margin on each both skew and order and the ROI for those. That’s at the front end, that’s the skew.
And then if you want the profitability per channel, so your gross profitability, so on Amazon I sold a million dollars and I had $600,000 in cost of goods sold for all the products I bought and then minus the Amazon fees, what’s my profit on Amazon compared to Shopify where you’re paying 2.9% for fees? And that will give you your gross before your overall expenses: payroll, rent, shipping and everything else. So you can do gross margin easily. Where you give the answer of your actual profitability for your business is in Xero, is an accounting platform where you have a P&L, a profit and loss that shows all of your income, cost of goods sold, gross then all of your expenses, payroll and everything else and then that will get to you. And how you get that is having an accountant or yourself do a detailed close where you look at every single item, reconcile every bank account. And that’s where you get the profitability for the business. So it’s different levels and you should expect different [inaudible 00:24:01].
Jeremy: Right, right.
Scott: And then there are different tools like Forecastly that does really great. That’s a new tool in beta that does some analytics around Amazon. And there are other tools depending but basically for the most part you can look to your cloud inventory for profitability per skew. It’s just like Skubana does and then your accounting system. Those are the two places to get those two numbers.
Jeremy: Yeah, you’re probably trying all the new software that comes out. So what big messes you had to clean up? What’s your, I don’t know if favorite stories is the best way to phrase it but . . .
Scott: Let me think. So we do an initial assessment and we do a … we can’t say the word forensics because we’re not forensic accountants but we do a detailed review of the books. What are some of the big messes? A lot . . .
Jeremy: Probably some horror stories, yeah.
Scott: Horror stories, I mean you come in and you look at somebody who thinks they’re doing okay and they’re missing four or five of their credit cards. So they’re ignoring tens or hundreds of thousands of dollars of debt and they’re just ignoring it. I mean they have the bills but it’s not in their accounting. So one of the things is not having everything in their accounting.
What are the other things? And we find accounting where everything’s coded wrong but the biggest nightmares that we run into are sales tax liability. Amazon FBA, so fulfillment by Amazon where you ship your products and there are a warehouse logistics company, not just a marketplace where they sell stuff and everybody comes to to the buy stuff, is that Amazon creates sales tax nexus in 15 states for these sellers. People might want to put their heads in the sand and they are going, “No, no, wait for the Marketplace Fairness Act in Congress to do something.” When they do anything they’re just going to make it worse and the amnesty is nowhere in there and so what we run into is people that have been doing business on Amazon for a number of years, we use the tools like TaxJar or Taxify to pull in all the transactions for the last few years, look at when was the first time they ship something out of Texas.
So September of ’94 was when they opened, or ’93. It was ’94 that they opened that warehouse so before then if you sold anything to Texas you didn’t have nexus in Texas. And we’ve seen businesses that have owed $200,000 to $300,000 to California, not the other 14 states and that’s money they didn’t collect when they made the sales. They don’t have $200,000 sitting in the bank. They’ll never have the money to pay. And almost every seller, if they choose to collect, they collect going forward and if they get audited then that’s the risk, is that they’re unaware of the sales tax liability. And there are a bunch of sellers that have just said, “I’m going to collect in my own state,” and you can’t choose to say as a business that it’s too expensive for me to collect in that state, whether it’s paying an export fee . . .
Jeremy: Because you have to file in every state that you’re in.
Scott: You have to file in every state. So you’ve got to register in the state then . . . now once you’re registered, if you do it from day one, you’re just paying the overhead because you basically take the time or money to collect the sales tax, you put it in a separate account and then you send it off to the state, if you do it from day one. Once you get behind that’s where the real challenge is. And if you’re going to sell your business and you either have to disclose that and say well, “There is $100,000 in liability,” they’re going to take that off the amount. Now they may not choose to get legal but they’re not going to pay you if they know they have this liability if they get audited. Now, the chance of getting audited is fairly low but it’s continuing to go up.
From accounting mistakes . . .
Jeremy: Stick on that for a second Scott, because that was the second thing people said. The first was the reporting, the third party software that figures out profits and the second major concern was the sales tax piece. So are you saying anywhere you ship goods to, if maybe you’re shipping goods to two Amazon warehouses, you should be collecting sales tax in that state?
Scott: So the way it works is where you have nexus. So you have nexus where you have your employees, so where you are, where your employees are. So if you’re back east and you’re in New York and your employees are in New Jersey you have sales tax nexus in New Jersey. And where you have property, not just buildings, but your inventory. You own your inventory until the consumer receives it and signs for it from FedEx. Amazon, if you’re on a seller central account, Amazon is not buying that product from you, you’re sending it to them, you own it at their warehouses. What happens is even if you ship all of your inventory to 1 Amazon warehouse or it’s a 101 or more items that you tell it to send it to 2 or 3 warehouses, you dynamically move it to all 15 warehouses. You’ve no control. There are actually programs you can pay more and have Amazon keep it to a minimum warehouse but then you pay more for shipping.
Scott: It’s the pro-con thing, do you reduce your piece? So where you have nexus. And then you can’t collect sales tax until you have a license. You’re not licensed to collect sales tax so it is criminal to collect sales tax if you don’t have a license.
Jeremy: I got you, yeah.
Scott: It is criminal to collect sales tax and not give it to the state. And so the next big thing we see is that somebody will be selling on eBay, Amazon and their own Shopify site and they’ll give their data to their accountant for a … well Amazon is usually the hardest but what they’ll do is they’ll give their data for Shopify and eBay to their accountant and not file the $5000 in sales tax they collected through Amazon. So what they do is they collected it properly in all three channels and then they didn’t add it all up from everywhere and send it all into the state. So we’ll run into people that are like, “Hey, you collected 10 grand in sales tax that you never sent to the state. You need to fix that right now. And you need to find that money.”
Jeremy: And do they typically get a letter from the state saying you owe this or not really?
Scott: So here is the challenge, is that no, the chance of being audited is very slim. I mean keep in mind there are two and half million Amazon sellers so if we’re talking about Amazon sellers there are two and a half million pro sellers. There are maybe 200 to 500 auditors in each state and they’re focused on, they have to by law audit the big companies, the Fortune 500 whatever companies, in their states, so there is only so many left over to go after e-commerce sellers. And so that’s just the reality of what’s out there. Pennsylvania is pretty harsh about sending e-mails out or letters out to everybody, as a . . .
Jeremy: Like a blanket thing.
Scott: I mean seriously, what most counties and cities going for state, if they were an individual or a business it would be a shakedown because most states, like all the local cities around here when you have employees they’ll send you a letter that says you owe $2000 in tax. And we say we’re a . . . and we get these too. We’re a services business, we don’t have to pay sales tax or pay tax anywhere except to the state once a year as our income tax. Go pound sand. And when you put on the letter we write, “Do it.” The other thing is any business, another tip if you ever get a survey that says, “Please complete this survey to see if you have nexus,” you can look at it. If one of the answers says, “Absolutely yes, you live in that state or you have a 3PL warehouse say yes,” but on any other case don’t check a single box. Put a cover letter that says, “We do not have nexus in your state.” Because you can’t answer the survey without saying yes, you have nexus.
So the governments do a bunch of stuff where they shake everybody down. Don’t just trust the numbers, they might say you owe $5000 in tax and you’re thinking you owe $200. You fill out the form and you send them $200 and you’re done. But they’ll send you a letter that says you owe $5000 because they’ll just guess.
Scott: So these are some of the things. It’s painful. It is complex. It can be expensive but it’s a reality for e-commerce businesses. And you need to take the time to be aware of what’s going on and then you make a decision, a risk management decision on whether or not you collect or file in any state where you have nexus.
Jeremy: Scott, are people coming to you freaking out or they are coming to you being proactive?
Scott: I get both. I get both and I do run into, more and more people these days are aware. They’re on Facebook groups, they work on different groups. I’m speaking at Jim Cochran’s CBS show in a few weeks in Kentucky and I’ll be there in their experts’ area answering sales tax questions. People are being more proactive.
Scott: I have to say it’s so complex that there were quite a few people that just can’t get through the complexity to make a decision. I run into people that are absolutely aware and say, “Hey, I’m going to only pay tax in my state, forget it. It’s the Commerce Clause. Screw every other state.” They can take that position and until they get audited it’s not going to get challenged and you are only going to get audited state by state, you’re not going to get audited by every state. And so we run into different levels and what I tend to do is I make this conversation. I try to educate people for their decision. If you’re going to sell the business or you can’t sleep unless you’re completely compliant and legal then you should absolutely comply. Otherwise you should balance the costs to the impact to your business.
Jeremy: Yeah, it’s a risk management decision, is what you’re saying. So what are the big messes that you had to clean up?
Scott: It’s the fact that if you’re not using the cloud inventory tool, you have no idea what your cost of goods sold are and you have no idea of the value of your inventory. And so literally they have no idea how profitable they are or how much money … and then if they’re not even looking at the value of the inventory, that I have $100,000 invested in inventory, they may or may not be making money then they’re making the next big mistake of not analyzing that inventory and selling off the bottom. It’s the 80-20 rule, 20% of your products are making you 80% of your profit and the other part could be costing you money and losing money.
Accounting things? People just do all kinds of stuff. I mean, one – they don’t realize that personal property tax returns are actually for the business. So if you own computers and scales and printers and all those other things you actually have to complete a personal property tax return and submit those once a year. Oh, we’ve had massive things when people start hiring people or doing 1099s. It’s great that you can hire people. One trick is if you pay all your 1099s via PayPal, PayPal submits those 1099s because the people that sign up to receive the money register their social security number or list that they’re out of the country. So that’s one thing. That’s one way to not have to do 1099s in January.
Jeremy: Just use PayPal.
Scott: Yeah. And then we run into people that just do payroll wrong, the owners pay themselves wrong and they just impact their tax liability. The other, probably one of the bigger things I see is, one of the challenges I see and this is something I’m really passionate about is when the only advisor that a business is talking to is their CPA, they’re going to tell them to structure their business to reduce their income tax to the minimum and that’s the only way they’re running their business.
Now, there is a couple impacts to that. You’re not showing profitability to you as the owner, you feel like you’re not making any money because of the way you’re doing things. You’re trying to show you don’t make any money so you don’t pay tax. Well, then you don’t feel like your business is making money because you’re trying to reduce your tax and that’s your main priority, or is that really your priority? I understand as one of the multiple priorities one, profit for the business. Two, a sustainable long-term business. Three, minimize sales income tax to a reasonable amount, you don’t give the government too much. But what you’ll do is you’ll see someone that’s only talking to a CPA in everything they’re doing and then they can’t get a loan because they show so little profit. The banks won’t give them a loan because of the way they’re structuring their business. And you want to find a balance.
So that’s a big one, is find the right person. So you want to talk to an accountant about setting up your accounting and a bookkeeper that’s going to keep things up-to-date and have that right mindset. If you’re talking to a CPA about your tax planning, both personally and business and have a few rules so that things work out the way you want so you’re not surprised by it.
So we do all the tactical stuff and deal with today, not just the past. Accounting is typically looking at the past and we try to do everything in real time so it’s all about now. And we’ll go out four to six weeks and most people themselves will project things out but people start to say, “Well, what I have to do to plan not just for this holiday season but for next holiday season? Because I want to double and then double again.” You want to talk to a virtual CFO. You don’t need to hire a CFO, you can talk to a virtual CFO and that’s what they do. And there are virtual CFOs and I partner with some that focus on e-commerce businesses, that understand inventory. They’ll help you get that long term financing and funding. And it’s asking the right person the right question. And then take the time to read the books, whether it’s ‘E-Myth Revisited.’ The big one I’m reading that we’re going to start buying and sharing with all our clients is ‘Profit First,’ which is, which . . .
Jeremy: Who wrote that?
Scott: Mike Michalowicz. And I know somebody who knows him so I’m going to meet him here shortly. But really, in my view it helps because people don’t know how to budget. Even if you use a tool like you need to budget. So I’m married to a CPA, I haven’t had to balance a checkbook and it’s awesome. Pros and cons, now she tracks every penny I spend. Okay, so there are pros and cons.
Jeremy: “What is this Scott? What did you buy here?” You’ve got to basically give an explanation.
Scott: Well, the thing is I mostly charge everything so she yells at me if I went to Wendy’s, like, “You went to Wendy’s for lunch today,” that’s just one thing. It was one thing when I travelled for business all the time and like, “You went to a steak place,” or, “You went out for seafood,” when I’m in Boston or whatever else and I’m like, “I was in Boston, what else am I going to eat there?” And so there’s that thing but it’s the even when you know budgeting, so if you say, “I’m only going to spend X amount of money,” what people do is they budget for their issues now. And there are two levels of budgeting. There is the how much should I budget for what I’m paying month to month to month? The car payment. I’ll think of a business one but a car payment, let’s say with your card you have gas, you have tolls, you have repairs and then you have . . .
Scott: For the car if you have it. Well, if you add all that up and say, “Last year I spent $500 in repairs or $1200 in repairs,” well that’s $100 a month. Well people don’t budget for that. They budget for the car payment of $300 and 25 or 50 bucks a month for gas, not the $100 a month for repairs.
Jeremy: Right, right.
Scott: And you don’t put that away. And the same thing applies for business, and then you have to look at oh, well I want to be able to buy $100,000 worth of inventory in August or September to get me through the holiday season so I can have a great holiday season. Well, if it’s $120,000 in September or $90,000 by September that means you’ve got to set aside 10 grand in January, February, March, April, May or know that you’re putting in 10,000 a month and generating profit so that you have that 90,000 available either in credit or preferably cash in September. And it’s just taking that mindset of planning ahead, it’s the next level. Once you have accurate numbers you need to budget appropriately and you have to have a process. And ‘Profit First’ provides what I think is a good way to budget for it.
Jeremy: I’ll check it out. I listen to three six per week in Orderbot so I hope it’s an audible. So two things I want to follow up on with what you said, the virtual CFO sounds interesting. Any resources to point people towards for that?
Scott: Yeah, so there is Dan, which is, well I can’t rattle up his site but I’ll be adding him if anybody wants to ask.
Jeremy: Because I didn’t see it on the tools. I don’t think I saw it in the tools.
Scott: I don’t have a partner’s page and I need to add it. I work with some lawyers that we recommend. I work with a couple of insurance agents. So when we look at helping e-commerce businesses succeed, which is our vision statement, is making e-commerce businesses better, I have relationships with insurance agents, I have relationships with lawyers which I try to avoid as much as possible, with marketing companies and people who help Amazon sellers win the Buy Box. I have relationships with people that both analyze 3PL warehouses and I also have relationships with warehouses. So I’ve got a great relationship, I should have these all listed out.
Jeremy: This is actually helpful just to hear the different partners people should be thinking about or if they don’t have one of them to look into. So yeah, keep going.
Scott: Well, yeah. So there are sites that will let you to analyze and compare and say these are my requirements for a warehouse and you tell them and then they’ll come back with three to five that are high quality, get good ratings and then you can reach out to. Because otherwise there is a ton. Like Shipwire is really expensive. I’ve a great new relationship that Chad at Skubana helped me make with a company in Ireland that will really help sellers move in and put a toe into selling in the EU. So they’ll help that. Well, you don’t want to, because if you’re going to do it right, everyone is like, “Well, I can’t sell in Europe until I can put half a million dollars’ worth of inventory there, it just won’t work.”
Scott: But you don’t know. It means you’re like that . . .
Jeremy: Go and test it.
Scott: The million dollar bet. You can go in with tens of thousands of dollars, you can’t go in with $100 worth of product but you can go in with a smaller investment. So there is the warehouse side of things.
And then there is, one of the other big ones are e-commerce marketers and there are a ton of people to avoid. Everybody should avoid Madwire, totally a scam. And they’re Marketing 360 I think is their new name. They’re also very good at squashing bad reviews on SEO. Some of these companies are really good at doing that, not that I usually say negative things about anybody. And so those are the different relationships.
Jeremy: It’s good to know if someone is thinking about using one of these services.
Scott: So you’ve got virtual CFOs are the key thing and then peers. Now, I have to say one of the better things is there are some great Facebook groups, but E-commerce Fuel is the forum that I recommend for sellers. There are thousands of sellers. They’re really good about keeping vendors out and seriously, these people lay it on the line, “Okay, I’ve had five e-commerce businesses, I screwed up this way and then the next one I screwed up this way and this way and then I screwed up again this way and then the fourth one was sort of successful and then hey, look, the fifth one I’ve learned this. But I’m sure there is a new mistake coming along.” And it’s just awesome. It’s just tons of sharing of information, both tips and tricks and the good things and the bad things that go on out there. So there is a number of those resources.
And then do you go to any conferences? So I’m sitting in a few conferences.
Jeremy: What conferences do you recommend and do you attend?
Scott: It’s tough. So the ones that I’m going to are Jim Cockrum’s which is really more for startup and focus people that are on Amazon, that are really selling on Amazon and people that are looking at rapid growth. And he provides a lot of great feedback and has a really loyal following and that’s coming up soon. I’m going to be speaking at the Prosper Show, which is for Amazon sellers.
Jeremy: Yeah, I talked to James Thomson.
Scott: Yeah, James and I just talked a few days ago and I think that’s going to be a great show. I think he’s really . . .
Jeremy: It looks really cool, yeah.
Scott: He’s found some who is who’s and the speakers are really great and I think it’s going to be a higher end show. Beyond that, the challenge is you go from the space where we live, where I live, which is one to 20 million dollar sellers that are growing, which in my view is small, and then you’ve got anybody below a million, a micro or startup. Any of the other shows typically are for businesses 20 million up. You’ve got Target speaking and you’ve got . . . and they’re great but IRCE . . .
Jeremy: Yeah, I’m in Chicago so I usually, when people come in for IRCE they’re like, “Hey, let’s do something.” So yeah, what do you think of IRCE?
Scott: It conflicted with another conference I was at this last year, I have sent them a request, James and I were talking and I sent them a request to speak there. So I’d like to go speak and it’s a bigger seller, it just depends on where you are. There are a bunch of smaller ones, I’m blanking on everybody’s name. Skip McGrath puts on a good warehouse conference that’s very focused and targeted.
Jeremy: That sounds yeah, very niche, yeah.
Scott: Not warehouse but wholesaling. It’s all on wholesaling and he does some stuff and I am going to get to meet him in a few weeks. So there are a number of focus, the idea is that one, being an e-commerce business owner can be really lonely. Your neighbor is not one, there are a few meet up groups but they’re dispersed even here in Denver. There can be more back east in Boston or Chicago. So it’s tough to interact with them so I think the E-commerce Fuel a great resource. But if you want to get up and go to them, I would be very picky to look to see are you going to get something out of it? Do you want to really check and meet with the vendors and get all the various wag? And are you going to be able to meet the influencers and really talk to them and learn and then build relationships? And you can’t just go and not talk to anybody. If you’re going to go you’ve got to go and network. And I’m not talking about the networking where you’re trading business cards, everybody is trying to sell each other, you’re trying to meet a peer and connect.
Scott: I’m a drop ship seller, great, you’re another drop ship seller.
Jeremy: Bounce things off each other.
Scott: And bounce off each other. And then you can build that support group and accountability group to help share best practices. So if you’re going to be in this it’s just harder.
Scott: But there are a range of conferences, just keep out for some of the higher end ones because all the tools and they’re just not going to pay attention to you if you’re selling under 20 million a year. Because they’re going to charge 10 grand a month for their tool and it just doesn’t make sense.
And there are so many great tools that are at the lower end that you can afford and will scale with your business and both evolve rapidly throughout your development like the way Skubana is really rapidly . . . They’ve got some great core and they have some great ambitions to continue to do more and more. And that’s what a lot of these SAS cloud solutions can do, that you pay a value that works for you and they grow. And they’ll evolve with you and if they don’t there is 20 other options that you can go look in and compare and switch to and hopefully not change too often.
Jeremy: Yeah, so Scott, you mentioned owners pay themselves wrong. So how do they pay themselves wrong?
Scott: Oh God, how do I do this from the accounting from the business owners? So one, if you’re a partnership, all of that stuff is running into your personal tax return anyway and you can’t really screw that up, okay?
Scott: All right?
Jeremy: That’s what I was thinking. Like how could someone screw this up that badly? But I’m sure you see it.
Scott: Well, if you’re a partnership you can do that. There are other rules about you have to pay the partners equal amounts and a few other things. So you need to be talking to a CPA at the beginning and then in Q4 to make sure you’re doing things right and then get things going for the next year. The other thing is, what we see is that not so much they’re paying themselves wrong, they pay their employees wrong. These are first time business owners, they don’t know the rules for setting people up, they don’t do background checks, they think they’re a 1099 but they work for them 50 hours a week and you tell them exactly what to do their employees. That’s one of the big things that’s blurring that line.
It’s one thing when you pick someone up Odesk or Elance. Now the big shift for companies and you do this with the CPA is, is it better for you from a tax perspective to go from an LLC as a partnership or a sole proprietor to an S Corp? Which means that instead of having one personal tax return you have a personal tax return and a business tax return.
Scott: And in that case the owners have to pay themselves a reasonable salary. But if you’re doing shipping, you should pay yourself 12, 14, 16 whatever you would pay someone to do your job.
Jeremy: I see.
Scott: Pricing and everything else, it’s what you replace and that’s your base pay and then you pay payroll tax on that.
Scott: Now, you might pay yourself two, three grand a month salary. You can still pay yourself a 10 grand disbursement every month and be raking in the bucks but you have to do that piece. Now some people, what they do is they set up as an S Corp if they’re not making a ton of money yet and they pay themselves what they can throughout the year and in November and December they just fix it all. They just pay all the payroll tax at the end of year. And that’s all fine, that’s just logistically how you do it. And the decision is you need a CPA to look. If you’re starting to make real money you can save thousands of dollars in tax by becoming an S Corp and that’s the reason you would do it.
Jeremy: So when do people qualify to use Catching Clouds?
Scott: So we work with established e-commerce business. We don’t make sense until a business is doing at least 50,000 per month with reasonable margins because if they’re not, they should be spending their money on marketing and inventory, not paying themselves. If they’re at that level they’re still in that growth stage and they need to do that. So we’re looking at that. We typically are working with more complex, multi-channel sellers, people that need help, that have a lot going on.
Scott: Lots of purchase orders, they’re on Amazon, eBay, Jet, Rakuten, they’ve got multiple shopping cards or they’re looking to scale. Because the best and most profitable use of the business owners’ time is probably either selling B2B to clients and setting up a connection with Target or Buy Buy Baby or somewhere else, or they’re at the point where they’re making enough money, they don’t want to do the accounting anymore. And then they want to be ready and understand that they’re outsourcing it but our whole point is we put all the data in the cloud, so it’s visible, they can log on at 2 o’clock in the morning and look at their books. Our virtual bookkeepers touch everybody’s books daily. So we download, we ask them for supporting receipts, we update accounts payable. So we do all that in a real time enough basis and we have the resources to do that.
The other benefit of an outsourcer versus hiring a single virtual assistant or hiring somebody is we have a whole team. If one of our people is sick, you don’t notice, we cover.
Scott: That outsource relationship of, we can scale and have that and then we have a virtual controller that not only closes the books and digs into cost of goods sold and we figure out all the weird stuff that Amazon did with their inventory, we file sales tax form is that we do all the work but their federal and state income tax and then we meet with our clients, including when they don’t, we have to chase them down to say, “You have to look at your books. You have to see how your business … at least once a month you have to look at what’s going on in your business.” And then we educate them, “This is what’s going on. We see this,” and they tell us what’s changing in their business and it’s that collaborative relationship there, is the part we like.
We consider ourselves part of our client’s business. We have direct relationships, they have people they know by name, we know them by name. We have a bunch that we interact with a lot and some we do via email lighter but it’s when you’re ready to have somebody involved in your business and you know you’re going to go from either 50,000k or 100,000k a month or more and you’re looking at continuing to grow. You need to have a solid grasp on your finances. You’re making great decisions every day, every week.
Jeremy: Yeah, and Scott we talked about some sales tax issues, talked about some payroll issues, we talked about software, what have you seen people do wrong or where you helped them clean up inventory type issues or expense management?
Scott: So inventory is when we’re setting up a cloud inventory solution for the first time. So they have costs either spread out on 50 different purchase orders or they have a few costs here and there. The big thing is rationalizing the data and then of course making them do a physical count. One of the benefits of the cloud inventory solution is if you set it up right you do a physical count, it keeps track of everything and then you need to do a physical count maybe quarterly, maybe twice a year, depending on what you’re doing.
Scott: So keep in mind that’s another benefit there. So first you’ve got to do a physical count and what do they have.
Scott: And then it’s a matter of analyzing the data and updating the costs and saying which products did you make money on? Which products did you sell, make money on and sell a lot of? It’s focusing on those, it’s a basic thing so it’s really just getting it all recorded in a cloud of inventory and setting that up, doing a physical count and then staying on top of it. The technology helps with a lot of that and then you can look at automation depending on if you’re doing a lot of shipping. There are some tools that focus on warehouse management more than cloud inventory and you implement bar coding. And I’m always looking for those different efficiencies. It’s those kind of things to help get past the human nature of it.
Some of this stuff is just a pain to deal with and it’s making it simpler so there is a standard process so that when you go to do it you know it’s going to take you two hours versus, “Oh, the last time I did it, it took me three weekends. I lost three weekends to doing whatever.” It’s defining those things and getting through it. Otherwise it’s just a matter of I mean, everybody caught on to Amazon, raised their storage costs and so I know tons of sellers over the last month or so, last six weeks have been selling off anything that’s been in inventory and discounting everything. And so Amazon forced everybody to clean up their inventory because they realized they’re finally . . . now, they were probably already losing money at the lower rates before but since Amazon bumped it, it forced everybody and this is what Amazon . . .
Jeremy: Put some pressure on.
Scott: It put some pressure on them to focus on products that turn over faster, which is the way Amazon works and actually is good for your business. If you’re making profit and you turn it over faster you make more profit faster. So it’s those things. The other thing is if you’re a drop shipper, if you have to be careful about sales taxes, what will happen is California and other states will make the drop shipper collect sales tax because of where they have it.
So you’ll sell an order, you’ll have X amount of profit and then you know you’re going to pay certain amount for shipping but then they charge you $100 for sales tax that you can’t get back if you don’t have a sale tax license. So a lot of people will register in California as an Amazon FBA seller so that any time they drop ship from their suppliers, wherever they are in the US into the California, they have a sales tax exemption certificate and then don’t have to pay sales tax because it can strip your profitability on all of your California sales for that way. So that’s another inventory issue.
Jeremy: With what you do, you have to know way too much. Every state is probably different, it’s a nightmare. I want to how did you even get into this e-commerce? I look at your background like I said, it’s physics, math, computer science and I look at you’re director in engineering, you did Unified Communications Program Lead, I have no idea what that is. When you were in Culver City High School, what did you want to do? What did you want to be?
Scott: Oh no, everybody else was on track, which I trained on the weekends. I worked at Computer Land of West LA. I built some of the first IBM PCs and XTs at the market in the early 80s. So I’ve been playing with computers since I was five which I can see myself, which was in ’73. So I’ve always been working on computers.
Scott: Which was a big deal then because not everybody had computers and they were stupid expensive and everything else.
Jeremy: What did you want to do? What did you want to be when you grew up?
Scott: I have always wanted to be well, a computer geek and consultant. And I have really fallen in and it’s being a consultant, it’s helping understand the topic and apply it and solve problems. So if you look, I got into security for a long while and figured out … I’m a CISSP and that’s fun. How are hackers getting in and what’s going on. I like solving problems.
Scott: And whatever I get involved in I get really passionate about. And if you’d asked me what would … I have owned an accounting company, and that I’d be focused on e-commerce, e-commerce not so much but you know I’m not in this selling products and packaging products. I’ve always been a consultant doing services.
Scott: So about four or five, about five years ago I was at a global multinational British corporation. I’m an entrepreneur and an idea guy in a company that takes three years to do something that small business owner entrepreneurs do in a week, driving me crazy. I was the expert. I get to fly around the world and do cool stuff but it drove me crazy. So my fo