Scott Scharf | Accounting Tools You Need Now

Adam LeanPodcast

Scott Scharf, of eCommerce-focused bookkeeping service Catching Clouds, has seen too many entrepreneurs with no idea how to track the success or impending failure of their business. It’s all about monitoring the right metrics and numbers – and then being able to figure out when and how to take action.

What’s the issue? At the core, many eCommerce businesses have ineffective bookkeeping and accounting. It’s seen as too complicated or too much of an expense to get the right software and service provider.

But without it you’ll never be able to make timely decisions. Scott shares his accounting tips and tricks, including…

  • How to tell if your bookkeeping is up to par in three steps
  • The key way bookkeeping is different than accounting
  • The first financial report you should look at
  • Ways to leverage real-time financial information
  • And more

Listen now…

Mentioned in This Episode:


Adam Lean: Welcome to P is for Profit, a podcast that breaks down business concepts into simple and clear language. This season is dedicated to interviewing ecommerce experts that can help you improve your ecommerce business. I recently had the pleasure of interviewing the cofounder of a bookkeeping business geared towards eCommerce businesses. He helps eCommerce businesses keep accurate bookkeeping.

So why does this matter? Bookkeeping helps you keep score of your business. Imagine coaching a team without being able to know what the score is during the game, it’s almost impossible, you must have good bookkeeping so that you know essentially three things. Number one, where and how you’re making a profit or loss. Number two, where the cash is coming from, and where did it going. And number three, to ensure that everything is accounted for everything in your bank account matches what’s in your box. So let’s jump into the interview with Scott and learn how he and his team does it.

Okay, so imagine all of a sudden being picked to be the head coach for your favourite team, you’re in charge. But there’s a caveat, you nor your team will get to see any data the entire season, you won’t know the scores of the game, you won’t see the stats of the players on your team, the entire season, you will be in the dark on how well the team is doing. How will you the head coach? Know how to manage your team? How will you know if you’re winning? How will you know what players to bring on which ones to bench? How will your fellow coaching staff know how to manage their departments. As you can imagine, this will lead to disaster.

But it happens all the time and small business, the quote-unquote head coach is operating without knowing how their business is doing. So what should you, as the head coach of your team do to ensure that you know how your business is doing at all times? So to help answer this, I’ve invited the owner of one of the best eCommerce bookkeeping services around on the show today. Scott, welcome to the show. 

Scott Scharf: Good morning, Adam. Thank you.

Adam Lean: Yeah, so I’m I’m really excited to have you on because, you know, the whole point of business is to make a profit, which turns into cash flow that the owner can do what they want, where they can give it all the way to charity, they can reinvest back in their business, they can save for retirement,  but in order to know how to make a profit, they have to know how they’re doing, they have to keep score, if you will. But before we dive in, tell me, you know what led you to own an eCommerce focused bookkeeping company?

Scott Scharf: It’s really kind of funny because I’m a 30 plus year IT geek. And every once while it just boggles my mind that this is where I’ve ended up and I’m so happy. But it really started with the fact of me marrying my wife, Patty. She’s an accountant and CPA power user as well as had her own. After she did the Big Five, had her own bookkeeping and really outsource controller service, I was working for a global multinational doing it communication stuff and everything else. But we kept talking about whatever we want to do together. And I wanted to get back to being an entrepreneur, after spending time in, you know, national company, and then an international company. And she said, “Hey, if I built this business, would you help?” and I said, “Sure!” And so we started kind of pulling it together.

And there’s so much technology when we started talking about this in 2010. And 2011, for the cloud, was just coming together that that, you know, is really where accounting and cloud technology came together. So there was a ton of technology for me to play with. And then we always knew that we would focus on a specific niche, we weren’t sure right away. But our first client in January of 2012 was an Amazon FBA seller. And I geeked out on it from there, it’s complex. There’s a lot of money in it. Amazon does all kinds of crazy stuff. And it’s so difficult to get to all of the data, which I could do. And then Patty could turn that into accounting, financial data. And then we’ve always meant to build this as a business, not just a job to keep us busy. And now we’ve got a team of 19. And we’ve been doing this for seven years and really consider ourselves the leaders in eCommerce accounting, because we’re just so focused on it about, you know, working on our business and delivering value to our clients and being part of the community, both the eCommerce community, as well as the accounting community.

Adam Lean: Very interesting. I mean, it so the reason why you focused on eCommerce is that your first client was eCommerce focused? 

Why eCommerce?

Scott: That’s kind of where we’ve got a touch far.. But we looked, we did a couple, we did a local Chamber of Commerce, and we looked around from that point. But when we looked at the market, you know, their services market, and there’s nonprofit. And so we looked at all of those. But we had this one client and the more we worked on it, we realized there were like no accounting tool, and that Amazon has all these crazy fees and literally created a new fee like every week, okay, like, like, and it was, the more we got into it, the more interesting plus it has such a future view, it’s like growing like mad at the time, there were maybe a million Amazon sellers in the US. And now there are 6 million Amazon sellers in the US. So it kind of fit all of those models. But that’s what got us you know, first because we got to see inside. So it just the way it worked out. I’m happy about it.

Adam: Interesting. So I’ve worked with a ton of businesses. And I would say that most businesses, bookkeeping is not what I would consider up to par. So let me ask you, what do you how do you define a good bookkeeper? How would a listener know whether they’re doing the books themselves? Or they haven’t? Or they have outsourced to a bookkeeper or internal team? How do they know whether or not their books aren’t just simply good?

What Defines A Good Bookkeeper?

Scott: So it’s a couple of things I mean that that’s important. So every entrepreneur No matter how much you hate accounting, and I don’t like it, but I do and I’m happy about this business, but you have to do every job, you have to run and be in every single position, whether it’s bottle washer, or you know, cook or whatever in no matter what your business is, in eCommerce, you have to do the accounting enough so that you understand enough because you care more about your business than anybody else, and you care about those numbers, you think you don’t really understand it, to begin with.

The next piece I would say is, is read a book, from my perspective, one of the things I did not only talking to my wife but read a book called Financial Intelligence for Entrepreneurs, which really talks about kind of bigger businesses that kind of introduces these concepts that you kind of have to educate yourself, you at least know the verbiage, you know, what’s the balance sheet versus the income statement, or the P&L and what belongs each one, what’s an asset or liability. And there’s some basic verbiage, no matter what you get involved in that you really should know.

And then the idea is that you need to have somebody whether it’s your CPA, or for every business, you talked about a coach, every business should have a bookkeeper or an accountant. Okay. And those are different, who can actually explain what they’re doing and coach you on it to the point where you understand it, you don’t have to be an expert on it, but you have to understand it. And once you’ve got a level of understanding, and you look at the numbers, then you should be able to ask every question possible until you understand your own numbers, and you can look at the financials and go, “Oh, I know what that means. I know what it means for our business.” So it’s just one of the key things.

And then once you get that base knowledge and you find someone you can trust, you can let them do the bookkeeping in the accounting, and then you can touch base monthly and look at the statistics or the financials, to understand what’s going on. But you just have to focus in on it, no matter how much you hate it, you know, if you’re a husband-wife, team, and we deal with a lot of those, if one of you deals with the financials in the house, and the other one doesn’t get that person that works with the financials to focus on it, until you have that understanding, and then go together.

And it’s just that same thing, as an entrepreneur, you have to continually educate yourself. But there really is a base set of financial accounting knowledge that once you’ve got it, then you really can work with someone like us or someone like you. Because they actually have it, you have to be able to talk the talk. 

Adam: Yeah. Why? Why do business owners? Why are they so scared or afraid of the financials?

Scott: Well, there’s a couple of things. One is, everybody’s got these… different people have different weird emotional attachments, connections to money, like, like, I was all concerned about the debt, when I got together with an accountant, you know, wife, and she looked at it went, this is lame, and then she didn’t care. She just fixed it. You know, I have credit card debt and things like that, you know, marrying an accountant and cleared that all up. So that’s the other side. Keep in mind, as you said, it’s the scorecard, however, you have to look at it. It’s scorecard. It’s the statistics related to your business. And I think that’s a great way to look at it.

Small businesses are the most under-coached entity out there, okay, you have coaching for soccer, you have coaching for baseball, you have coaching for all kinds of different things. For some reason, small businesses think, Oh, I just got hit, you know, I’m an entrepreneur, I need to know that I’m constantly reading new books, and learning more about being an entrepreneur or, and you just have to put that aside and then just say, “Okay, what do I need to understand to run my business, so that at the end of each month, I can sleep better, and I understand how profitable they are.” It’s just, it’s a combination of things. But for the most part, if you’re serious about, it’s not a hobby, and you’re running a business, and you expect to get money out of the back end of it and know what’s going on. This is one of those things, you just have to take the time and rip off the band-aid and do

Adam: Should business owners try to do the books themselves? What’s your philosophy on that?

Working In Every Position: The Key To Success

Scott: For a short, while, you really should do every job all the way to the bottom yourself. Like, like, if you’re an entrepreneur, if you’re an eCommerce business, you should pack boxes, you should order purchase order stuff, whatever business you’re in, if you’re serious about it, you should do every single job, okay, as you should. And if you’re really a smaller business, especially eCommerce, you should be spending your money on products and marketing, not even paying yourself.

So you can’t afford. or you shouldn’t be spending your money. Otherwise, that’s impacting them, and you have to kind of get off the ground to get going, and every business should do that. So there’s great training around like the cloud accounting that we use, we have courses to give people the basics for smaller sellers so that they can do it themselves, that you can do it.

Now, this could be a week, you could do it every day for an hour for a week and decide you’re done. Or you could do it for the first three, six, twelve months of your business. Until you’re at the point where you know the best and most valuable use of your time is to pay somebody else to do it. And, and so, but you whether that’s a week, or one weekend, or three months, or whatever, you really have to, as an owner of a job, go do every single job, and then go, “Oh, I need to hire a high school student to do this one”. And “oh, I need to hire international virtual assistants do these three jobs online.”

And then you know, and then I’m going to hire a full-time person to do this. And then this is what my role as an owner is going to be able to decide those things.

Adam: Yeah, that makes sense. And by the way, the Financial Intelligence for Entrepreneurs book, absolutely agree with you. It’s, it’s gold. Every business owner needs to read that. And it’s kind of funny when you mentioned that. It’s actually that book is sitting on my desk right now, because I had to look up something yesterday for a client. And I knew that book had a good definition of it. What a small world that I would a hundred per cent agree with you. 

So let me ask you this when whether a business owner is doing the books themselves, or they have a team or they’re outsourcing it? What are some? What are some signs and you may see this for clients that come to you, you know, at the beginning of the engagement, what are some signs that a business owner can look forward to knowing that their books are just not effective that they’re not giving them the right information?

Scott: Yeah, well, the first unfortunately, is if you don’t have access to it in real-time, so if you’re working with an accountant or bookkeeper that has a copy of your QuickBooks desktop file, and they send you the file once a month, and say, “Here you go, here’s your accounting file” that’s worthless to you, okay?

Like, there are tools, they’re both free accounting, but whether you use Xero or QuickBooks Online, you want to use the cloud accounting tool, that you have real-time access, whether you’re a night owl, or morning or whatever, to get to it. The next thing is that if you don’t realize most of the data entry work is automated. You can take these tools and connect the bank fees and credit cards and it automatically pulls all that data and you’re not paying someone to type in the information. Just that alone will make sure that you have every bank account every credit card, and you can look and say, “Oh, yeah, I spent money” and “Oh, wait, where’s my you know, Amex card that that’s related to the business.” If you can get all the information in there efficiently, then, of course, you have to post your income and invoices and things like that. But if you work through these tools, they’ll cost you $30 a month or $70 a month– it is one of the first outside tools you should invest in. Okay? It really is.

So even if you don’t know how to assign it or apply payments, or or, you know, close the books, at least you’re capturing all the information and it will give you at least some basic information that is better than just looking at your bank account to say I got 20 grand in the bank, I must be doing well. All that tells you that you have $20,000 of available cash, but it doesn’t tell you that you’ve got a $10,000 bill the next day, okay, that’s due or anything else, that just the basics of doing that you wouldn’t believe the number of $10 million-plus eCommerce businesses that are under six months old, that are growing really, really fast. They have spreadsheets and a bank account, and no financials. Okay, so you’re serious about being a business, you just have to set up either Xero or QuickBooks Online, and connect the bank feeds and start pulling that information and then go “Ooh, what’s next who I have to get all my invoices in here, who what’s next, I have to get all my bills in here. Oh, what’s next, I have to get all my inventory in here. You just work your way through it.” And you’ll be closer to having accurate books if all the data is in there.

And then a bookkeeper or accountant or CPA can clean it up once a month or once a quarter. And it’ll cost you a lot less. And then you can keep tabs on things and then just incrementally learn to get better. That is kind of the main thing is they’re just not tracking things better. Or they think they’re saving money by not paying for, you know, an accounting tool. And it’s one of the bigger mistakes.

Adam: Yeah, 100% agree. So a business owner, who starts what you’re, you know what you just talked about, they either get on Xero or QuickBooks and they start taking that first step, and then they take the next step and so on. And let’s say that they’re a non-financially minded business owner, they’re more of an expert at the craft of their business. What, what is the one report that they need to get to know intimately first in their accounting software?

Scott: That’s the tough part. Because until I mean, the challenges are that unless you have somebody unless you’ve made sure that the balance sheet balances and everything’s done, right, you can’t necessarily trust the financials, it’s just kind of record-keeping, it’s not something that will give you detailed, accurate information. So as soon as you’re at that point, I would think that you could hire an accountant or bookkeeper to clean things up and post things and just say, okay, you know, “Hey, I’ve done the last 10 to 15%,” then the first thing everybody wants to know is how profitable they are.

And so that’s the income statement is the look, this is how much income came in. This is how much expenses came out. And to see and tell you if you’re profitable or not, that’s like the first thing you want to do now from a more advanced person will look at the balance sheet to see what your liabilities and equity and how much you know how the business is doing.

But I would say that the income statement is the first one. But you have to make sure you’ve done the additional work to make sure that there’s just a level of accuracy before you can trust it. But then once you can, you can look at it on a regular basis and understand what’s going on in your business. And that’s where I want to start.

Adam: Yeah, makes complete sense. So let me switch gears from just bookkeeping. Huh? Where do you see eCommerce going?

Scott: Well, eCommerce is going to continue to grow. Now the question is, is Amazon? Are we all just going to you know, is Amazon going to take over the world?

So eCommerce… eCommerce is still a little bit what like it’s in the second phase of being the Wild Wild West. Okay, so the last 10 years or so, was kind of the first phase where there was just crazy amount of opportunity, you know, it is definitely maturing and maturing faster than anything else. But eCommerce is a great place that if you have an idea or a niche, and in my view, the best way to go is to be as focused as possible.

So let’s say you’re, you know, a cyclist, you would pick, I’m just going to make the best wheels and maybe not even the best wheels, but the best front wheel ever like, like the more focused you can be, and then build a community around social media and focus in and then be super-efficient about buying that product and buying a great product, you can be really, really successful.

Because Amazon has taken… we can sell anything because they know a couple of hundred brands that they’re selling under their Amazon basics or other names that you don’t realize they’re owned by Amazon. And they’ve kind of taken me everything kind of approach, okay.

But for a small business, you can focus in on a small niche, and you can focus on a view, kitchenware or whatever else. But the more you focus, it tends to scare people. Same thing with our practice, from an accounting perspective, the more you focus, the better your marketing is, the clear your vision is, the clearer your communication is, the less clutter you have. But from an eCommerce space is a great opportunity over 50% and it’s growing every month.

Of all the sales on Amazon. com, a lot are from third-party sellers. There are about 6 million of those sellers. Now, it is probably five times harder to sell on Amazon than it was even five years ago. Because there are more competition and Amazon evolved and there’s a lot going on. But there’s a huge opportunity.

Or to set up your own Shopify site and sell your own brand. And it is just, there’s just a huge opportunity because the barrier to entry is so low. I mean, there’s a lot of things to learn, and you need some capital. But if you have some cash, you’re willing to risk it and you’re willing to put some focus in, you can do really well on eCommerce because you can just list stuff on Amazon and Amazon is pulling everyone in there.e

Now they take 20% to 25% of every sale or more before you pay for marketing. But at the same time, everybody’s already coming there versus “Hey, I built a Shopify site, nobody can find it except my mom” to sell on. So there are different challenges. But there is really a huge opportunity, whether you’re buying products locally, and you want to help your local community and find a manufacturer that’s not selling, or you want to design your own product and buy it from China and have it designed and built in China. Anything along those lines, there’s just so many different offers entrepreneurs in so many different business models, that it’s going to continue, continue to evolve and be an opportunity for entrepreneurs that are willing to you know, have that risk mindset, a reasonable risk mindset and have some capital. But you have to have focus, you just can’t take a shotgun approach to it and can be successful.

But I think there’s just a huge opportunity worldwide for people to sell online for all those products that we all need and want to buy. 

Adam: So what do you believe makes some people successful at eCommerce while others struggle? What separates the two?

Struggle vs. Success

Scott: Yeah, so the first thing and really kind of applies to kind of all entrepreneurs, but specifically eCommerce businesses is that be successful. As I said, you need to pick a niche and a product you’re going to sell. And then the next thing is all about efficiency. Okay, this is  high paced, 24×7 everything is going on and that the business owners, after they’ve done each job in the business, they need to make sure they step away from the business and that the people that focus working on their business, not in their business, and that the majority of the time or at least half the time of a business owner, they are looking at what systems and processes and tools and checklists and making sure if they hire somebody, those people are as efficient as possible.

Because otherwise, you’ve just created an 80-hour, 100-hour a week job for yourself if you don’t take a step back and really look at the efficiency. Because if you’re not focusing on efficiently, efficiency and eCommerce business can be just completely insane.

So when I talk to people, you know, what we want everyone to do is really focus on efficiency and sanity first, and build the business. Like if you’re a one-man show that you have two or three people helping, whether it’s family members, or the kid next door, or international virtual assistant, you want to really be thinking in that mindset. And those people that work on their business and take the time to read business books. So whether it’s Profit First, or Rocket Fuel, or Traction and books in the EOS, the entrepreneur operating system, or they’re paying an advisor like you or somebody else to help provide structure to their business. And then they focus on doing those things that you don’t want to you know, plan for the next 10 years, you can look out the next three to six months and say, Well, you know what, I really need to add this person.

And then when you’re ready, and your business can afford it: Outsourcing critical functions. So if you’re an eCommerce business, how soon can you outsource the shipping, because if you’re shipping everything out of your own garage, and it’s taken over your living room, that’s a great way to start. Lots of people start that way. But when you get to that point where it’s worth the cost and the overhead, have to pay somebody else to do that, then you can massively scale your business. And then that frees up a ton of your time and you’re not packing boxes until three o’clock am every night.

So then when you’re ready, outsourcing accounting, okay. And then when you’re ready, and eCommerce, let’s say outsourcing, listing your products to international virtual assistants, it’s costing you a few hundred dollars per month so that that’s really the piece. And then as the owner, you decide, where do you provide the most value over is the most fun for you, that could be purchasing products that could be designing products that could be selling that could be doing business research, whatever that is, at first, as a business owner, you have to do everything, okay, and then you outsource the things you don’t want to do effectively. And then you move on. And you just have to continue to look at that. Another book I’d recommend is a book called Virtual Freedom, which is a great book that really talks about how do you think before you hire that first virtual accountant.

So if you’ve read the four hour workweek and things along those lines, this is a book that will give you kind of the guiding on how you do that if you’re like a one-man show, but you’re already a business and it’s how do you make this owner and your team as efficient as possible?

Adam: What’s the name of the book again?

Scott: Virtual Freedom.

Adam: Okay.

Scott: Then, of course, there’s Tim Ferris’, Four Hour Workweek.

Adam: Yes. Well, Scott, this has been very, very valuable and helpful. Thank you so much for coming on the show is there… where can people learn more about you and about Catching Clouds?

Scott: So of course, you can go to our website, catching, or look on YouTube a great way to get to know us and we have over 100 YouTube videos just go to Catching Clouds Academy in YouTube. So we have a new video every week. They’re all my wife. So you know, you don’t have to listen to me more. I’m on a few others.

But the whole point is to provide feedback or guidance for all sellers, as well as accountants. So we have quite a few people that follow us. So there’s a lot of content for accountants helping eCommerce businesses, there’s a lot of fundamentals, like how to read a balance sheet and an income statement for any eCommerce business. And then, of course, we have our training courses, if you’re looking at doing things yourself, but those are probably the two best places to see what we’re either up to or what we’re thinking about a lot of book reviews for different books that we’ve read. Those are probably the best places, find out what we’re up to and then reach out to us.

Adam: Excellent, and we’ll make sure we put those in the show notes as well. Well, Scott, thank you so much for coming on today. We really appreciate it.

Scott: Well, thank you very much.