Stop Flying Blind: An Accounting Expert's Guide to Financial Clarity for E-Commerce Founders | Stephen Brown | LedgerGurus | Profits on Purpose

Episode Description

Most e-commerce founders treat bookkeeping as a tax necessity and nothing more — until the day they realise they've built a million-dollar business with no idea whether it's actually profitable. Stephen Brown, Co-Founder and COO of LedgerGurus, has seen this story play out hundreds of times. In this episode, he and Nate dig into what good financial infrastructure actually looks like at different stages of growth, the three key metrics every e-commerce founder should be tracking, and why the cash conversion cycle is the most underrated number in your business. Stephen also shares what happened when he and his partners applied Profit First principles to their own DTC brand — including the moment they fired all their agencies and finally got profitable. If you've ever thought of accounting as a cost center, this episode will change your mind.

Key Takeaways

• Accurate financial records are essential for predicting future growth in e-commerce.

• E-commerce requires specialized bookkeeping approaches due to its unique challenges.

• Effective inventory management is crucial for profitability and informed decision-making.

• The landscape of financial software tools for online brands is continually evolving.

• Understanding profit margins and key financial ratios is vital for business success.

• Shifting the mindset from viewing finance as a cost to recognizing it as a growth enabler can drive business success.

• The Profit First methodology can be adapted to address e-commerce challenges.

• Industry challenges and opportunities are anticipated through 2026 and beyond.

• Choosing the right financial tools and systems is critical for e-commerce businesses.

• AI and emerging technologies are transforming the finance landscape in e-commerce.

See More from Stephen and LedgerGurus

• LedgerGurus's Official Website 
• LinkedIn
• Instagram
• Facebook
• YouTube
• Podcast: eCommerce Finance Podcast

Listen to the full episode to discover how Stephen's experiences can inspire and guide you on your entrepreneurial journey. Don't forget to subscribe for more insightful conversations!

I hope you enjoy this episode!

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– Nate and the Profits on Purpose podcast team

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Transcript

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00:00 Introduction to E-commerce Accounting Challenges
03:05 The Importance of E-commerce Specialization in Accounting
05:57 Building a Bookkeeping and Accounting Stack
08:57 Common Mistakes Founders Make in Accounting
12:01 Preferred Tools and Technologies for E-commerce Accounting
15:07 Understanding Accounting as an Investment
17:50 Key Metrics for E-commerce Founders
20:59 The Cash Conversion Cycle Explained
23:49 Profit First Methodology in E-commerce
26:56 Future Challenges and Opportunities in E-commerce

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Nate Littlewood (00:06)
So look, as a fractional CFO, I spend a lot of time helping founders get their businesses future ready. But the truth is that without an accurate record of all the stuff that's happened in the past with your business, predicting the future is a complete waste of time. Welcome back to Profits on Purpose, the podcast for e-Comm and CPG founders who are looking to scale their businesses both profitably and purposefully.

I'm your host Nate Littlewood from Future Ready CFO, I specialize in helping founders go from a state of financial chaos and confusion to one of clarity and confidence. Anyway, today's guest is Stephen Brown, who's the COO and co-founder of LedgerGurus, which is one of the leading e-commerce specialized accounting firms in the country.

Now, if Stephen's voice sounds familiar, it might be because I was actually recently a guest on his podcast and we spent some time talking about all things, financial data and how to make better decisions. Today, we're gonna be flipping the script. Stephen and his team work with hundreds of seven and eight figure e-commerce brands.

which means that he has seen just about every bookkeeping and accounting issue that you can imagine. In today's conversation, we'll be talking about how much an e-commerce brand should be spending on accounting and when we'll be covering the most common mistakes he sees founders making and some of the unique ways that bookkeeping and accounting can facilitate growth. Stephen, welcome to the show. It's great to have you here.

Stephen Brown (01:52)
Thanks, Nate. I'm glad to be here.

Nate Littlewood (01:54)
Of course. Well, I always like to start this conversations talking a little bit about the backstory for folks who haven't had the pleasure of, you know, following you or unfamiliar. Tell me a little bit about the business and how did you come to be doing this?

Stephen Brown (02:11)
Yeah. So it's a security circuitous path for me. think we discovered on my podcast episode that you and I share a common origin story. both are civil engineers by, by education. You actually worked in the industry. I did not. I got sucked into enterprise software around the.com days. and eventually married a CPA.

And she was the one, my wife, Brittany, she started the business. I helped her a little bit in the early days, but she had the idea, was a fractional CFO herself, but decided not to start a fractional CFO business. She said, I wanna start an outsourced accounting business. Actually, she went to a conference. It wasn't even, it was just kind of outsourced accounting. Now it's in the industry, it's known as Client Accounting Services.

Heard somebody talk about it said I'm gonna start one of these and I was like that's cool, you know and I helped her on the on the technology side because I didn't think it was gonna be this big of a deal. But two years in, it became more than she could do by herself. Yeah, and so I quit my day job and we went all in on Growing this business and that was about the same time that we started to specialize in e-commerce. So that's about 10 years ago.

Nate Littlewood (03:36)
Wow, it sounds like you've had quite the ride since then. Tell me what is significant about being an e-commerce specialist for someone from the accounting world? Why does having an e-commerce specialized accounting person helping you, why does that even matter?

Stephen Brown (03:56)
You know, every industry has its issues. One of the reasons we decided to specialize is we were, like a lot of accounting firms, we were just taking anybody who would be willing to give us their business. And we started to see challenges in different industries and we said, we need to specialize. So we spent a long time and ended up on e-commerce because it matched our business model and kind of our ideas.

But as we started digging in really hard, had a couple existing businesses, we realized there's some key challenges. Revenue accounting for an e-commerce business is a lot harder than just a vanilla services business or even like a brick and mortar store. There's lots of challenges on timing a payout. The second thing that's really challenging and is we've been chasing this white well for years now is the inventory and cost of goods sold accounting. Inventory based businesses are just inherently more complicated.

So that's that's another thing there is often times the third leg is sales tax is a big challenge for these these businesses it wasn't and when we started and then they had the big Supreme Court ruling that changed the game that really opened the door for multi-state. Sales tax and so multi-state sales tax compliance is a big challenge then on top of that you get you're dealing with some currency stuff and then I would just say e-commerce is a very dynamic industry.

There's always another sales channel or another marketing channel. And each one of those brings unique accounting and finance issues. And so I feel like whoever is supporting a business from an accounting or finance perspective, there's these constantly changing dynamics, which is both fun and annoying at the same time. But all of that means there's a lot of complexity that you don't get in many other industries.

Nate Littlewood (05:57)
Yeah, yeah. Okay. Makes sense. So I had a call with the founder, it was maybe two weeks ago.

And we were chatting through his business, going pretty well. Like he said, he needed some help with the finances. I was like, okay, let's chat. Through this conversation, he tells me that, you know, he's doing about 1.2, 1.3 million of sales and, you know, got to the end of the call and we're talking about next steps. And I said, okay, well, why don't we do a review of your financials? And, you I'll tell you what I see and then we can reconnect in a week. It's my usual sales process.

We got to this point in the conversation and he says, yeah, I don't actually have any books. Like there's nothing for you to order. He'd gotten to 1.2 million of sales. He had no bookkeeping and accounting system in place. So there was nothing for me to review. I'd love to get your perspective on what the evolution of the bookkeeping and accounting stack should look like as you're going from just starting out, getting into seven figures, you know, growing and evolving, hopefully to eight and beyond. Like how much should people be paying?

For their bookkeeping and accounting and what are the different kind of choices and options that they have.

Stephen Brown (07:08)
Yeah, one of the challenges comes back to that complexity. It's inherently more complex than a lot of industries and often you can't pay what you need early on. But I would say, and there's some shortcuts you can take early on, but I would say at minimum you need accounting software, a general ledger where you're going to capture things.

If you wanted to save some money early on, you could do everything at a cash basis, which is just to record transactions as they are hitting the bank account. And that'll be good from a tax compliance perspective, but it's not gonna be very helpful to understand what's going on in the business. As you start getting into, hey, I actually wanna know my profitability on a more detailed basis, on a month-to-month basis, then you need to start looking at things like you know, revenue accounting where we use A2X is the tool we've been big fans of.

There's others out there, but that's when we really liked and they do a lot of the accounting of payouts of, know, what, what's behind the payouts, all the fees making, getting the timing right. So you can actually see this is when sells actually happened. When you get into inventory and cost of goods accounting, that's a whole another ball game like the best outcome is to use inventory management system, again, those can cost, you know, they can quickly get up to hundreds, but there are some lean ones that are less than that. The bigger issue with that is less the software and more the processes.

Nate Littlewood (08:50)
What do you mean by that with the processes? What are some of the process upgrades that a business needs to have?

Stephen Brown (08:57)
With inventory and this is, mean, we have a lot of peers in the industry who don't do inventory accounting, who just tell the customer, give me, you give me the value at the end of the month. And we have been for better or worse, like Captain Ahab chasing that white well. We were like, no, we're going to help you get where you need to be. But the problem with inventory is inventory accounting is not just an accounting thing.

It's an operations thing because you really need to be thinking about inventory along all areas of the journey. So that starts with purchasing. It continues with the import process. Um, then it gets received. Then it gets, um, you need to be tracking. You're like, it's in the warehouse. We just have to, now we just have to track when it ships, which alone can be a problem.

But then you have all these little small things that it can add up like, um, damages, uh, theft, loss, returns, inventory used for like marketing or influencers. And those can be kind of small, but if those aren't tracked, you'll have, you'll go to do a count at the end of the year and you're doing a 10 % adjustment. You're like, where did it go? You know, well, it wasn't tracked really well. And so there's all these different processes, even if you're using a 3PL, you know, checking in on your 3PL.

And where we've seen problems is, you know, we'll, go through the, do inventory accounting and then we'll do a account and it doesn't, or the customer does the account. We'll do the adjustment and they're like, why do we have to write off 10 % of our inventory? And occasionally we'll dig in, you know, they're, willing to pay and we'll be like, okay, this, this, this, and this, these weren't captured. These processes weren't done. And over time, those, those add up to material amounts of, of money. So an inventory management system is great because they're designed to help manage the data through those processes, but they're only as good as the processes that you're executing around those systems or through those systems.

Nate Littlewood (11:09)
Yeah. Okay. That makes sense. So when you're taking on new clients, people rock up and I'm guessing they, they maybe come to your doorstep and sheepishly say, Hey, I got a bit of a mess here. Like, can you help me clean it up? What are some of the most common, you know, mistakes or issues that you find with their books?

Stephen Brown (11:32)
Probably the areas of complexity that I talked about earlier. The revenue isn't being accounted for accurately. The cost of goods sold is a mess. It's not accurate at all. Sales tax compliance is not happening. Those are the often, every mistake, but I'd say you could expand this to almost every small business owner. You see stuff like they're mixing personal and business expenses, they're not tracking things very well. Like these are just common small business owner mistakes that you see as well. And sometimes they're willing to change and sometimes they're not.

Nate Littlewood (12:17)
Yeah. Okay. I say, and do you guys have any preferred technology and tools? Are there specific softwares you work with or?

Stephen Brown (12:27)
We do, and I would say as I kind of outlined the stack that we like to support, I'd say there are alternatives out there and some of them are great. It's just we chose some of these for a variety of reasons, but we like QuickBooks Online, but Xero is a great tool as well. There's nothing wrong with that. We like A2X for the revenue accounting. There's a couple different inventory management systems that we like, but there's so many out there.

There are, we've used a lot of Avalara, but there's some other sales tax software we've used in other cases as well. And then you get into kind of just a lot of other things like payroll and bill pay, banking. There's a lot of interesting things in that space that aren't necessary. Some that are e-commerce specific, some that aren't, but you know, they're all good.

We're a little bit more open-ended in some of those areas, but I am seeing, like I'm really intrigued by Highbeam right now and what they're doing with banking and just the financial stack in general. There's just a lot going on and there's a lot more that needs to be solved. those are the things that some of the tools that we use that are e-commerce specific, but there's a lot of other things that we use that were a little bit more open. You know, if somebody was like, what do I use for payroll? I'd like, well, Gusto's really great, but there's a lot of other tools that are pretty good too. So just use something good, right?

Nate Littlewood (13:57)
Gotcha, gotcha. So I have quite a few clients on Final Loop. Do you work with that at all? Do you have an opinion on it as a platform?

Stephen Brown (14:07)
Yeah, you know, final loop is doing a really interesting thing. They have really worked more with the outsource CFO community than the outsourced accounting community. They're a little bit of a, of a closed system. I like the concept of final loop a lot. there are some things I think are challenging though. I am a, you know, I mentioned earlier, I spent my time in enterprise software almost two decades before I jumped onto the finance world.

And I'm a big fan of open systems and open platforms and open ecosystems. And so one of the challenges of Final Loop is trying to build everything. And I think that's really hard to do because you can rarely build everything. so having a platform with integrations of other apps is really important. And that's where I think QuickBooks and zero really shine into it, ironically, is becoming a little bit more self-focused and not, they've shifted from being really ecosystem friendly to a little bit more we're gonna build it ourselves. And I just think it's a mistake. I hope they change course because platforms and open systems are always better than closed systems in my opinion.

Nate Littlewood (15:36)
Yeah, yeah, true, Okay, makes sense. And what would you say to founders who are thinking about bookkeeping and accounting as a cost center? And, you know, I come across this a lot, people like, you know, this is just something that I kind of have to pay for. I'd rather be spending it on ads or inventory or something else. Like, what's your perspective on...you know, the investment that people are potentially making in having good books.

Stephen Brown (16:11)
I feel like there there is a level of investment that you have to make before you start getting that return But as you're starting getting good data I mean like you you said it yourself like it unlocks insights if you're willing to look for them and you and I talked about this on on my podcast about I'm trying to remember you called it the maturity cycle the or

Nate Littlewood (16:39)
Yeah

Stephen Brown (16:40)
The four phases of, what do you call that? I forget the terminology. We need to come up with the four phases.

Nate Littlewood (16:44)
They have a catchy name for it. Phases of your evolution of your relationship with finance, I guess.

Stephen Brown (16:51)
Yeah. It's kind of like your, and I think if I remember right, I need to, it was really quite great. was, was, um, ignorance, right? That was phase one. That is Denial and curiosity, overwhelm curiosity, enlightenment. Like this is an amazing framework. The reality is there's, there's this, it's an open club. There's this club you can be a part of and it's called knowing how to run a business.

Nate Littlewood (17:02)
Yeah, denial or ignorance.

Stephen Brown (17:21)
And in big businesses, the people up top, they're part of that club. They know how to read financials. They know what they're telling them, whether it's the CTO, the VPO marketing. I worked in some publicly traded companies and some large private companies. Those people, they have to know what the financials mean. If they don't, they're gonna be excluded from certain elements of the conversation.

And so for small business owners, it's like, this is an open club. There's no secrets to getting into it. You just have to spend a little bit of time to cross over the chasm of some of the weirdness of accrual accounting. But once you do, it's more than just a club like in a big business where I can now talk shop with those. No, now you get to see what these savvy folks see. You get to see the insights that this data is telling you.

And that insights is a map that can help guide you on your journey. And so, your model of allowing yourself to be stuck in denial or overwhelm is, it's a tragedy because if you can push through getting into curiosity and then into enlightenment, you are going to be a much different business owner, a much different business leader, one that can.

There's no guarantee for success, but the odds of success, I feel like are gonna go up significantly because you're gonna see things differently. You're gonna understand your business differently. That's what I would tell somebody if they're like, it's just a cost center. It's just for the accountants to send data each other so they can file taxes. And I'm like, you're missing out on something that can be life changing.

Nate Littlewood (19:14)
Yeah, yeah, totally. if a bit founder has bought on to that idea and they are invested in the data and the insights and wanting to understand their business better, when they start to look at the various metrics and ratios, I mean, it's easy to get overwhelmed by all of these numbers is literally hundreds, not thousands of different calculations that one could theoretically do with all these numbers.

What are some of the most important ratios or metrics that an e-commerce founder should be watching? If I gave you say a list of, I don't know, three or five, what would you put up there on that list?

Stephen Brown (19:59)
Three to five, I would say, so on the profit and loss, I wanna look at some key income ratios, which are certain categories of spending divided by the revenue. So that becomes a ratio. I would say your gross margin or you could also say your cost of goods sold as a percentage of income, gross margin.

How many dollars do I have after the set, after, paying for the costs of goods is really important because that margin can really determine, dictates how much you can do in terms of marketing and payroll and everything else. Watching that very closely and I like for brands, I feel like there's a wide range. not sure if you, I came to my own set of numbers.

I don't know if you have your own benchmarks, but I listened, I spent years trying to figure out what is that range and for, I felt like the number was about, let me make sure I get this right, 40 % to 80 % gross margin. Now 40%, you're gonna be, you're probably a reseller, you probably, because you don't have pricing power when you're reselling somebody else's brand and you're gonna be really limited in what you can do.

I'd say 40 % is barely viable, but it is viable if you look at some really big retailers I think Costco has like a 10 % gross margin. It's something ridiculous Wow, I think that I you might have checked me on that but I was looking at them but they're making up for it with volume so these super huge You know discount retailers like Costco and Walmart.

They're they're getting very little margin and then that works for them though because they have tremendous volume to offset their fixed costs. But a small reseller, like you got a little store online, you set up a little Shopify store and you're just reselling somebody's goods, you don't have that luxury. So 40 % is really bare bones. For a DTC brand, so like you come up with a product idea, you go out and either manufacture it yourself or you source the manufacturing, you have a unique brand, have a product that is somewhat unique. Usually you're going to want a higher margin profile. I feel like it's about 70, 80 % gross margin because you're going to probably need more dollars for customer acquisition. so that's the second one is what is your marketing or I hone in more on advertising, but I think you could also expand that to total marketing spend.

What is your spend as a percentage of revenue? If you're a reseller, all your dollars got taken up in and cost of goods sold. So you're gonna have to do customer acquisition using SEO, using product listings, using social media, whatever it is, community building, more free or low cost customer acquisition methods. If you're a DTC brand, that's probably not gonna work because nobody's gonna know what brand XYZ is. You're gonna have to go out and...

Find your buyers, and that's where advertising becomes much more critical. And oftentimes, they're spending 20 to 33 or more percent of revenue on marketing and advertising. So that's the second one. The third one I like to look at is fulfillment. How much am I spending on fulfillment as a percentage of revenue? And I like to see that between about 10 and 15%.

Nate Littlewood (23:38)
Yeah.

Stephen Brown (23:49)
So within those three metrics, I feel like are the secret to profitability. If you're checking the box on all three of those and not doing very well, it's usually pretty easy to find out why not. It's usually payroll or some, I see three reasons people stumble in that area. One is payroll, they've got way too much payroll.

Second is maybe they went out and they got this huge loan to start the business, had all these aspirations and the debt services just really burdensome. The third reason, and I don't see it as much anymore, is lifestyle. But I saw it a couple years ago. They'd be like, bougie office, they're bringing food into the office every day, they're going to every conference known to man, they're just living it up. I don't see that as much anymore because I think the pressures on profitability have squeezed that out of them.

But usually, if you've got those three key components of the cost of goods and the cost of sale dialed in and you're not profitable, it's payroll, sometimes interest expense.

Nate Littlewood (24:55)
It's a good list. I'm surprised that cash conversion cycle wasn't on it.

Stephen Brown (24:59)
I'll get there. get there. Those are my, sorry, I took a little detour into some other so those are the three and then obviously you want to your bottom line profitability You there are some other intermediate? Margins that you could look at as well, but I don't always introduce them because they're a little bit more confusing. So the contribution margin is really an interesting Measurement, which is really your dollars after your cost of goods and your cost of sale.

And this one, you could probably talk to a couple different people and have a different answer. I think the more traditional way of measuring that would be, I'm going to take my, what's leftover after cost of goods, fulfillment merchant fees, which is tends to be small. And yeah, but I also like to add in contribution margin after advertising, and see what is, what is that?

And what that tells me is every time I make a sale, what's left over? Is it 40 cents on the dollar? You're doing pretty good. Is it 20 cents on the dollar? Not so good. Is it five cents on the dollar? You better not be scaling that business because you got to dial some things in first. But that's kind of an advanced concept. I don't always introduce right out the gate, but I think it's really important. Another one that can be interesting is your operating margin, depending on how you're treating other expenses and income. But again, that's more of an advanced concept.

But if I had to just pick like four on the income statement, I'd be like, gross margin, fulfillment percentage, advertising percentage, and then bottom line, net margin. On the balance sheet, it's cash, inventory, but a lot of times inventory's garbage. So you can have an inventory balance on the balance sheet. Nine times out of 10 when they come to us, probably 95 % of the time, it's not good data.

So it's good to track, but you got to get the data right first. beyond that, mentioned, am a huge fan of cash conversion cycle. I don't always introduce it to people right out the gate though, because they have to have good data to get it calculated. Right. And usually when you have bad inventory data, your cash conversion cycles bad too, because it touches on both the balance sheet and the income statement.

But within the cash converse, I feel like, I don't know about you, Nate, I feel like there's so much that's told in the cash conversion cycle.

Nate Littlewood (27:32)
There is, especially if, yeah, when you look into the individual components, yeah, you can learn a lot. Learn a lot.

Stephen Brown (27:38)
And those components are your day's inventory outstanding. This usually is the biggest piece. How long is inventory tied up? Or how long is dollars tied up in inventory? Think about it, you put the dollar in and it's going to manufacturing and then it gets to, has to be shipped to your warehouse and then it sits on the warehouse and you're paying storage fees on it potentially until it comes off there as a cost of sold. And most of the time, the way I talk about cash conversion cycle, I'd be curious how you talk to people, but I try and dumb it down. I remember learning this concept in MBA school and I said, I don't ever want to calculate that again. That was horrible. That was like the worst extra. It's kind of like when we had to, I don't know when you first learned structures, I was like, this is awful how to calculate. I remember I had to.

design a building and you'd put in the parameters, you'd do all the math, and this was the 90s. So we had spreadsheets and we had computers, but it was basic. And then it'd be like, my design failed, I have to start over again. That's kind of how I felt about cash conversion cycle. Until I got into e-commerce and I was like, this is the greatest thing in the world.

The way I like to explain it to people is it's a representation for how long your dollars, when you put dollars into your business, how long it's gonna take before they come back out in the form of not sales, but cash received from sales. And the longer that number is, the more you're gonna need to have cash available, either in the form of cash from profits, cash from investments, or cash from debt, to sustain your business. How do you like to describe cash conversion cycle?

Nate Littlewood (29:28)
I usually start off by telling founders to imagine that their business is a pipe and what we're doing is putting money into one end of the pipe in the form of inventory and then taking money out of the other end of the pipe as know receipts from customers. The length of the pipe is essentially your cash conversion cycle and the problem with having money locked up in that pipe is that you can't use it for anything else.

So you can't use it for advertising, you can't use it for hiring people, you can't use it for any other growth initiatives, it's just locked up in that cash conversion cycle and you've got to wait for it to come out the other end before you can make a decision about what else you might like to do with it. when you have a business that is cash constrained, which most bootstrapped early stage e-commerce businesses are, what we want to be doing is moving cash through that cycle or through that pipe as quickly as we possibly can.

Because the more times we can move money through the business, the more times we can reinvest it in inventory, make new decisions about hiring new team members or whatever else we might want to do.

Stephen Brown (30:36)
I love that analogy. You've got great analogies and frameworks, by the way, Nate. I love some of these concepts that you've shared with me.

Nate Littlewood (30:46)
I appreciate the feedback. I think it might come from a lot of posting on LinkedIn. know, when you have to put this into a LinkedIn post blurb, you kind of force yourself to think about, okay, what's a good hook on this? Like, how can I explain this in a way that forces, you know, it makes it understandable for someone who's scrolling on their phone. So that's probably where it comes from. I would love to pick your brain about profit first.

My understanding is that you may have actually implemented it for your own DTC brand. What is profit first methodology and why should people care about it?

Stephen Brown (31:26)
Yeah, so as a little background, a couple of years ago, my business partner and wife here at LedgerGurus, we wanted to go have our own brand that we could use to experiment. And we decided, let's go buy one. We had our marketing guy at the time who was interested in going and doing his own thing. And so we said, hey, hold on a second. Why don't we collaborate? You can do it. We'll help find a business. He wanted to buy. And we were cool with that. We said, you run it. We get a tinker with it.

We, so we bought a little Italian skincare business and he had all the great ideas. He was like, well, I'm going to, we're to throw all this money at agencies and creatives and just turbo charge this thing. And it didn't work. It just didn't work.

You know, we were post iOS 14 five and so we, spent months burning, just burning money putting more money into the business, just losing on a profit basis. Okay, we gotta put more money in the business, put more money in the business. And we were getting a little bit tired of that. We weren't able to pay our partner anything. Literally, he's working for free. We're all putting money into the business, including him. We at least had income from LedgerGurus. His wife worked, but we're like, me and Brittany are starting to get worried. like, crap, he's gonna get tired. He's gonna wanna quit on us.

And around that time, I finally decided to read Profit First. I had heard about it and I'd always poo-pooed it because I was like, that's a stupid thing. That's for people who don't know how to do accounting. But then I read the book and I realized, well, crap, I've been doing Profit First and LedgerGurus for years. Not exactly the way they outline it, but you know, they talk about allocating money into buckets. It's like the envelope method for business.

So around that time, I finally decided to read Profit First, book. And I had pooh-poohed it for years because I thought, this is a book for people who don't know how to use their accounting or how to read accounting or do accounting. And then I read the book and realized I'd actually been practicing principles of Profit First for years. And they even go into it and say, this is not an accounting methodology. It's really a cash management methodology.

For example, I had allocated not exactly the same way that Profit first did it, but I had been putting aside money for taxes since the minute we became profitable and led triggers. We ran kind of breakeven for a couple of years while we were trying to grow the business up to a certain size. But then when we started shifting into a profit mode, I had been putting money aside into a bank account every single month and I've never had problems paying taxes. It was awesome. In fact, most of the time I had too much and every year I get a you know, do an extra distribution because I was over conservative. And so I realized there was...

Nate Littlewood (34:24)
Sorry to interrupt, but just a question for those who have maybe not heard of profit first. You've kind of spoken about it and I get it because I am familiar with it, but for someone who's never heard of it, can you just explain the concept of profit first and how it might differ from someone who is not operating on a profit first approach?

Stephen Brown (34:48)
So the way that Profit First works is it says, start with profits in mind and back up from there. And it's really a system of constraints. So it's like money comes in, you immediately allocate money into different accounts. you're putting money into a profit account, into a owner pay account, into an operating account, into a tax reserve account. I think those are the key ones.

I've gone a step further. usually do an inventory and fulfillment account. You can go crazy. This is one of the things, criticism of ProfitFirst is sometimes you'll go into somebody who's doing ProfitFirst and they'll have 20 accounts, they'll have 20 buckets. I haven't seen that, but I've heard of it. But the idea is I have to operate off of the cash on hand.

Now where I feel like ProfitFirst does not do well in the e-commerce space is that model works really great in a services business where there's no cashflow issues. When you get into a cashflow, cash constrained business like e-commerce, it's challenging. The other thing is they would preach like don't use credit cards. like, I don't know how to run all this tech on not on credit cards.

So as I've applied it over the years, I've kind of looked at this resource constraint model use layering and accounting to help understand what the real constraints are. What are we spending against that constraint? Is what we're allocating meet what we're spending? Really tighten up that cycle. But the idea is using this theory of constraints, you're like, I can only spend so much. What am I gonna do to achieve those outcomes?

And I think fundamentally for a consumer product business, e-commerce business, it's marketing efficiency because a lot of the other things are somewhat fixed. You can try and improve them. You can try and improve your fulfillment costs. But what you get out of your marketing, it can be a little bit of a black box. And that was where we were losing it in our business. And we just told our partner, dude, I sent him the book. He read it. He's like, yeah, let's do it. We got rid of all the agencies. We got rid of almost all the creatives. Brittany, our other partner, she was just like,

Press in your marketing guy, go figure it out. Just do it yourself. We're too small to be paying for agencies at this point. And so he did. He just rolled up his sleeves, got into the weeds on Meta and Google advertising, and figured it out, and we got profitable. And I'm a big fan of it. I think it's easier said than done.

Like if it was easy, everybody'd be doing it. But I do think there's some core principles that any size of business, whether you're using the profit first methodology or not, that profit mindset and understanding that you can't spend unlimited dollars to achieve outcomes, that you have to learn to operate in limits and understand those limits. And I think when you can couple that mindset with good accounting and financial strategy, it's killer.

You've now created a killer combo. Is it gonna guarantee success? No, it's like, I don't know, it's like before, to come back to that question around is accounting and finance just a cost center, it's kinda like when you look at it that way, it's kinda like you're walking around with a blindfold on. Can you navigate the world without a blindfold, without seeing? Sure, we see a lot of blind people that can do it and they, they become pretty adept, but being able to see, it's a game changer. You're just gonna be able to move faster.

Nate Littlewood (38:48)
Yeah, absolutely, absolutely. So you work with a lot of brands, like hundreds of clients. You are deep in this ecosystem and you have been for many, many years. I'd love to get your thoughts on what you see as some of the biggest challenges for the industry in 2026. Like if we're having a conversation with you again a year from now and reflecting back on what happened in 2026, what do you think we'll be talking about as the big themes of the year?

Stephen Brown (39:22)
We've been experiencing years of challenges after years of not challenges, right? There was it was just growth growth growth for so many years and I feel like we were what we're dealing with is Just layers of challenges that have been added one year at a time and have never really gone away So I feel like it started with the changes in marketing efficiency that change with iOS 14

I think that was 2021 or 2022. I can't remember exactly when it took effect. marketing got more expensive and then inflation hit and with that increased interest rates. So now not only am I dealing with increasing constantly increasing costs. I'm also dealing with more expensive capital and you talked about this right the that money got money was cheap now. It's not cheap anymore.

And then we've got tariffs. So as I look at 2026, I think we're this is the first full year we're going to realize this tariff shift. That's I think one thing how if you look at 2025, yes, tariffs were announced, but they didn't get put into place till later in the year. And in reality, we are just now starting to sell inventory that was fully tariffed. So what is the full impact of tariffs? The other thing that I'm thinking about very much is what's gonna happen with the consumer? There's divergence in the economy and divergent forces.

And everybody's talking about a K-shaped economy, which is you've got two things going on. You've got things are going pretty good for those on top and going pretty poorly for those on the lower end of the economic scale. And it feels like it's just getting worse. I also wonder if like who it's affecting is creeping up.

It used to be a certain economic threshold and I feel like it's getting harder for those that are making more money So I'm really curious about consumer demand What that's gonna do to sellers and how they're gonna be able to navigate that? Those are the those are some of the things that I'm most concerned about is the the ongoing impacts of tariffs and then this this economic force like is it gonna tip over are we gonna grow out of it. It's been a hard couple of years for consumer product businesses, but we technically haven't been in a full recession. If these headwinds actually put the economy into recession, how would we navigate that as an industry? Because let's be honest, the COVID dip was technically a micro recession, but it was short lived and then it turned into a boom.

We haven't really seen a full recession in this country since, what was it, 07, 08? Long enough that we've got a generation that doesn't even know what it is to go through a recession. And we have an industry that really has matured in a up economy. So I'm really curious. And if it's not this year, when is it going to be? But how will consumer products do through?

Recession and and and we've kind of felt that to a certain degree. So I think the last couple years have hopefully built built up some muscle But if we were in a full-blown recession How would you as a seller navigate through that knowing that your consumers? Trying to pay rent not by you know cool things that you're Those are the things I'm thinking about a lot

Nate Littlewood (43:10)
Very interesting, it's certainly not the game it used to be. Definitely gotten a lot of f**** for years.

Stephen Brown (43:17)
And everything goes in a cycle, I think we've been in a hard cycle I keep waiting to come around back to where it's not so hard. I do think Because it's I feel like you know, we're now like year if we started if we let's say we start with 2022 For we're now four years into hard for ecommerce It would be nice to get back to where things weren't as hard and there's there's some things I mean, I talked about some things that I think are headwinds on the opportunity side

I'm really interested in what's going on with AI, with AI advertising, with AI commerce. I think that is a, to me, that's the thing that I am most excited about is agentic commerce, AI commerce, AI advertising. What is that going to do? Is it going to be, you know, the next big wave or is it going to be?

Snapchat right, you know, it's just like that was cool. Some people got some a little bit of cells out of it But it didn't really hasn't really materialized as a real channel, but I think AI hits so many different ways Whether as an ad platform could be done, right? It could be really interesting As a a path for selling, you know, they're Shopify and Google released that the new protocol That allows stores to be automatically

Able to sell they don't you don't have to be on Shopify. You just have to plug in and this is this hasn't been fully launched It's like being tested. So I'm really curious to see where this goes because I do think as I've kind of tested shopping on like chat GPT, it's it's really transformative and You know, where does it go?

Like there are there I've heard some some people talk about is there a future not only where I'm using these platforms to find the right products and buy there. What's the next step? Now I've got agents who know me and I say, here's my budget, go buy me $100 of apparel, $100, $200, $300 of apparel this month. And it just goes out and finds stuff for you. To me, that's a big step forward. We're not anywhere close to that, but I could see how we could get there. And that's really interesting from an e-commerce perspective. If consumer behavior goes that route and you can ride that wave in the right way put all the other headwinds aside, that could be a really big game changer for brands.

So I think there's challenges, but there's some really exciting things, and I'm most excited about what's going on in AI and agentic commerce.

Nate Littlewood (45:52)
Very interesting, yeah. It's gonna be a wild ride the next couple of years. Fun to be in the front row seat, I guess, and seeing all these changes unfold in front of us. But Stephen, this has been a really enjoyable conversation. Nice to have been able to flip the script and have you on to talk about your perspective on the industry. It's not often that I get to talk to people who have such broad perspective over so many brands.

I'm not gonna repeat the number, but you told me before we started like how many clients you have and like, it's a fricking big number. You know, you guys work with a lot of brands and so you see a lot of these situations and data. So I appreciate you coming on and sharing your perspectives. Before I let you go, where should people go if they would like to either get in touch or learn more about what you're up to?

Stephen Brown (46:45)
So obviously our website, ledgergurus.com, but we also have been really big into content marketing. So we have a YouTube channel, we have a podcast, the eCommerce Finance podcast. We do a lot on social, so you can see a lot of our content there where we'll share our thoughts and ideas.

Nate Littlewood (47:03)
Amazing, thanks so much. I'll include those links in the show notes below if anyone's interested. And thank you again, Stephen. Great having you on.

Stephen Brown (47:10)
Thanks Nate.