eCommerce Accounting with Scott Scharf of Catching Clouds

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Scott Scharf is the co-founder of Catching Clouds, a company that provides outsourced cloud accounting services to eCommerce businesses. They work with eCommerce businesses selling on Amazon, eBay, Walmart.com, Shopify, Etsy, and other channels.

Scott is extremely passionate about helping business owners run better businesses by having detailed and accurate financials so they can make great decisions. He has been in IT for over 30 years providing consulting and solutions from global multinational businesses to small businesses and is an expert in Unified Communications and Collaboration, IT Security, and now cloud accounting technologies.

In this episode…

Many eCommerce sellers are faced with great challenges when it comes to accounting the financial transactions of their businesses. Their CPAs, tax accountants, or other accounting professionals often don't have the required knowledge and expertise in doing accounting specifically for online business transactions.

To help solve this common problem and assist business owners, Scott Scharf and his wife decided to set up an accounting firm specifically geared towards helping eCommerce sellers. 

In this episode of Sales Tax and More, co-hosts Michael Fleming and Ellie Moffat interview Scott Scharf about why it is important for business owners to take care of their financial accounting and why there is a disconnect between eCommerce sellers and their accounting service providers. They also discuss the need to set aside the money allocated for tax payments despite government extensions and how business owners can protect their companies during these financially challenging times. Stay tuned.

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Here’s a glimpse of what you’ll learn: 

  • Scott Scharf explains why there is a disconnect between eCommerce sellers and their accounting service providers

  • How business owners should manage their businesses and finances in a financial crisis

  • Why businesses should avoid using the money for payroll and sales tax for cash flow in States that issued extensions for filing

  • Why businesses should prioritize and look into their accounting

  • Scott talks about working with his wife and the benefits of doing accounting the right way

  • Common accounting challenges eCommerce sellers and how to address them

  • How Scott and his company interacts and works with clients

Resources Mentioned in This Episode

Connect with Michael

Sponsor for This Episode

Sales Tax and More assists companies and their trusted advisors like CPAs with sales tax needs. They offer consulting and research, registrations, returns, and so much more. Over the years they have assisted thousands of sellers both foreign and domestic with their tax issues in the United States and in Canada.

Episode Transcript - Audio Version

[0:10] Intro: Welcome to Sales Tax and More, your go-to resource for all things state tax-related. Now, here’s your host, Michael Fleming.

[0:26] Mike: Hello everyone. Mike Fleming here founder of Sales Tax and More, and today's co-host of the Sales Tax and More Podcast, where we talk about everyone's favorite topic, which is of course sales tax. Today we're going to be discussing eCommerce accounting with Scott Scharf. But, before we introduce you to today's guests, I want to introduce you to my co-host, Ellie Moffat. Ellie, you want to say hi.

[0:50] Ellie: Hi, everyone. It's great to be here. As always, we're excited for you to listen to today's podcast. But before we get started, I want to do a brief introduction for Sales Tax and More. Sales Tax and More is a full-service consulting and solutions firm. We have a really great team here of experienced tax professionals who are very dedicated to fulfilling your state tax or related needs. We do a lot of returns, registrations, consultations, research, and like our name states more. So if you have any questions, please don't hesitate to reach out. We're happy to answer those questions. Back to you, Mike.

[1:22] Mike: Okay, as I mentioned, today's guest is Scott Scharf. Scott is the co-founder of Catching Clouds. And Catching Clouds is a company that provides outsourced cloud accounting services to eCommerce businesses. Scott is extremely passionate about helping business owners run better businesses by having detailed accurate financials so they can make great decisions. I've known Scott for years and he loves talking to consulting with eCommerce sellers by reviewing their technology stack, internal operations, cloud inventory, and then sales tax management. Hi, Scott, welcome to the Sales Tax and More podcast.

[2:04] Scott: No, thank you very much. It's great to be talking to everybody remotely these days and I'm looking forward to this conversation.

[2:12] Mike: Absolutely. So, Scott, let's dive right in, you know, so many sellers I talked to say they're their CPAs, or bookkeepers, or accountants, you know, anyone they're working with doesn't really understand eCommerce. And, you know, there seems to be a big disconnect here. So, can you explain perhaps why there is this disconnect and why there appears to be a shortage of, you know, accounting professionals who don't understand eCommerce?

[2:41] Scott: Yeah. So I'm married to a CPA, but he's a very power user and our peers and friends are those speakers that have been talking for years about moving to the cloud, work remotely, and take a look at you know, leverage this technology. Now over the last few weeks, every accountant that's been fighting working remotely is having to do that and embrace the cloud more, because, by nature, we have a team of 26 accountants, they're - they don't like change. Okay, we change a process and they're like - No, we want to go back to the old process. So it's a little bit of their approach. But everybody needs those accountants, those people that look at the details and have to build a spreadsheet and look at the numbers and the details. You need those people because they catch those details, they give information. Where entrepreneurs, like me, have entrepreneurial ADD and don't want to focus on it. So there's just a number of things. So one CPAs and accountants aren't big on change, even though, yes, the cloud’s been around for a while. The next thing is a lot of them don't really focus in on a specific niche. What they'll do is they'll take a nonprofit, which has some special accounting, and then a restaurant, which has special accounting, and then they'll take a couple of services businesses, and then a chamber of commerce, and then they’ll have one or two eCommerce businesses. The problem in that model is for some accounting, it's fairly generic and standardized. But for eCommerce, accounting is accounting, but the challenge is that they're typically not into the technology. You know, they don't understand either the cloud accounting apps, they don't understand how to log into the different systems like Shopify to be able to rip the data out that they need to understand to get to an accurate cost of goods sold. Okay? Or understand the behind the scenes technology of the difference between Amazon as a marketplace and shopping Shopify as your shopping cart. Or, you know, oh, well is Etsy a marketplace or is eBay a marketplace? It's, there's just a lot of nuances and they haven't focused so they don't have a set set of tools. We only work with e-commerce clients that are million-plus, more complex and multi-channel, which means we have the same accounting platform zero in our case. We have the same set of tools that we can use over and over, and then we can leverage our knowledge across a wider base of those clients that have one client as an issue. We can apply that to everybody. So it's kind of a combination of focus. It's scary for people to go into a narrow niche, okay, and only focus on it. Now my opinion is there are riches in the niches. You can provide more value to your customers. If you're focused on an area, because I spend every day, just like you do, talking to eCommerce sellers. I understand their challenges. I understand their businesses. I know what FDA stands for. You can talk to them, and it's just it just takes accountants are while to change. So a lot more of them will get there. More and more of their clients who they have great trusting relationships with will start adding Shopify, you know, Amazon sales or Shopify sales, and they're just going to have to learn it. And it'll be more focused, and they'll get less expertise than we have, but they'll still be working off that trusted relationship. But in general, it just takes accountants a while to change and it takes a while to learn all these things. And all the technologies are maturing and evolving. But it's really up to the sellers to decide, you know, who's the right person. So I don't ask my lawyer to do tax stuff. And I don't ask our CPA, which we actually pay someone to do our taxes, to do bookkeeping, and they're very different things. And you know, if you want a sales tax expert, I point people to you, for people to truly dive into that stuff from audits and VDAs and all that other detail. You want to ask the right person to do the right job. I don't ask a carpenter to work on my car, and you don't want to ask your CPA who's totally focused on tax to learn all this other technology, when what they care about is paying attention to tax. And that's kind of the bigger thing from a seller's perspective is you want to ask the right person to do the right job.

[6:45] Mike: Now, all great points Scott, and I love that term, “there's riches in niches.” I think I'm gonna borrow that from you

[6:53] Scott: Go for it.

[6:55] Ellie: So eCommerce is such an important thing right now as well. So a lot going on in that world. Mike, did you have something you wanted to add to that?

[7:03] Mike: No, no, no, no, I think that you're gonna touch on this now. You know, we've got a crisis going on. And, you know, that's showing the importance of eCommerce sellers. And, so take it away.

[7:18] Ellie: Yeah, absolutely. I, like I was just saying eCommerce is more important than ever right now, and like you were saying, we're in the middle of a crisis. And I think a lot of people have a lot of questions. And a big one is how, how should people be managing their businesses in a financial crisis? And with everything that's going on, what would your advice be?

[7:41] Scott: Yeah, the main thing is just like everybody, don't panic. Decide that it's time to focus on the business and your finances, and then just work your way through some of the basics. You know, the first thing for really, everybody, is you really need to understand your expenses and you cut back those expenses. Go through all the SaaS apps that you're using to support your business, and put anything that you can on hold. Okay, so both, you just have to hunker down, and you might feel bad for those other companies, or whatever else, but you need to look at that. And we're doing, both, the same thing. So I'm married to an accountant, so every penny is tracked, but we went through our business and knocked a few tools down. We had a couple slack add-ons that we liked, that we decided to turn off. We've cut off you know, some of our personal spending for things like that, that weren't automatically cut off, like massages, and other stuff that were stopped here in Colorado. But we've put those things on hold, and that you really do need to kind of step down to what your base thing is. So you really need to know your expenses. The big one is, the first one in the business, the biggest expense for most sellers right now is take a deep dive and look at your accounting. Turn off all the automatic settings. Some of your automatic settings in this current mode could have people sitting at home clicking a lot more, but not really converting into actual sales. So one of the biggest expenses beyond inventory for sellers is marketing. Go get a handle on that, and then decide what your plan is on how you're going to market, or turn it off, or slow it down. But I wouldn't necessarily stop it, you need to keep maintaining a base amount, but get a handle on that's where you have costs that are variable and could run away on you. The other one is to build a cash flow projection. If you don't already have one, this is separate from your accounting. There's a difference between accounting, which we'll talk about more, and cash flow. Your cash is the money in the bank, and when you're paying for rent, and the internet, and Shopify plus, and your Amazon fees, and all these other things that you need to list what are all those expenses. What's coming out today, tomorrow, this week, next week, whatever, so that you can plan and say this is how much money. Now it's the same thing that you should be doing all the time, which is how much money is left over at the end of the day for sellers to spend on new product to sell, marketing to sell that product, and hopefully, there's money left over as profit for the sellers to take out. But you really want to keep an eye on your cash flow, because even profitable businesses, even if you're doing well during this downturn and craziness, you need to keep an eye on your cash flow. Profitable businesses go out of business for not managing their cash on a regular basis. So those are the like, just take your time and look at the long term, and say - Look, I'm looking at this not just immediate pain, but how does this help me over the next few weeks and few months so that you both survive this, as well as potentially come out stronger. One last thing, and then, is that I just want to make sure everybody, if you're looking to protect your team. Okay, you have warehouse workers, you have other people in your business, take a step back and that's great that everybody wants to do that. You have to protect the business and you might be considering layoffs, or terminations, or whatever else. Okay, I recommend that you check with your payroll provider and HR expert. Because things are changing, you don't, you can cut back hours for people, and then they can still get unemployment to fill that gap. So you don't have to fire them to enable your team. If you're planning on coming back in weeks or months, you can do that. The other thing is if you terminate people, that pushes them on Cobra and gets them off your health insurance, which is bad timing for that. And then they might have a 30, 60, 90 day delay once you bring them back before they can get back on again. So you can not pay them, but keep them on your, on your insurance. So there are a lot of options. Most of our clients we've talked to are looking to keep the business long term, but they have to cut back on either hour or lay people off or whatever else and there are better ways to do it versus I have to fire them so they get all the benefits. That's not the case. So that's the key point I wanted to make.

[12:00] Mike: Yeah, all great points. And as I'm listening to you talk about cash flow, something that you and I were talking about off-screen, I just want to add here. You know, payroll taxes, if you're doing your own payroll and sales taxes, you know, which are being collected from your customers, a lot of states are saying that, you know, we'll give you extensions to this. And some of the people that I'm talking to believe that they can use this money included in their cash flow and help meet, you know, everyday business expenses. But as we were discussing, it's not your money. You're collecting it in trust for either the state or the federal government. So that money should be put aside. That money should never be included in your cash flow. Because things can get a lot worse. If you, you know, looking to take that money and fund your business with it through these hard times, when it comes due, you know, when that extension is over - 60 days, 90 days, whatever the state is saying - now we're in a situation where it's tax collected, not remitted. And you know, the states are not saying they're going to waive that. That's, you know, that's serious. Now we're talking about civil, not only civil penalties, but criminal penalties. So, you know, if you've collected that money, turn it into the state, don't be tempted to use it to fund the business. So

[13:27] Scott: I completely agree. I completely agree. Just take care of it file your returns on time. I'm all for the IRS delay.

[13:35] Mike: Oh, yeah.

[13:37} Scott: So the federal, your personal taxes, and business taxes, we’re are all over that one. But for all of these ones, if you're not using a partner, like Gusto, that we use, that escrows all the money out so you've already, that's already out of your bank account. But I completely agree to know what that number is. Don't include the sales tax in your cash flow projection. Know what that cash is, and like file it. Maybe if you’re quarterly, you know, contact the state, you know, they'll take the money, pay it in. Just know that that's not your money and that just don't touch it. Like, because, I can tell you, the administrative burden, as well as engaging someone like Michael to help you deal with that, will increase whatever savings between interest, and time, and hassle, and fines, and consulting. It just never adds up.

[14:25] Mike: Absolutely. And you mentioned interest there. Most of these states, if you do extend out, the interest clock keeps ticking. So they're waiving penalties, but most of the states are not waiving interest. So all great point, Scott.

[14:40] Ellie: No, there's a lot of prioritization that needs to happen. I think we've talked a lot about a lot of it. Why should people be focusing on accounting, we talked about right now, but in general. Let's kind of broaden this so that it ages well for our listeners out there. Why should they pay to prioritize accounting?

[15:03] Scott: Yeah. So, accounting is not just to be used once a year to file your income taxes. And you just don't want to know once a year if you're profitable or not. Okay? So, we really believe in management in accounting. And that accounting is not a real-time service, but it's a daily, weekly, monthly process, so you know, where your business stands financially, okay. What are your expenses, what are, what is your income, and understanding your profitability. And you have to complete each of those tasks so that you can make great decisions. If you don't know whether you're profitable or not, and it's all about adjusting your gut. And I know that everybody's super monitoring their sales, and their conversion rates, and their marketing spend, and their cost of goods sold per unit in real-time on these apps on Amazon. And that's all great, and you should be making those real-time decisions about purchasing, and marketing, and other things. But you need accounting that goes through double-entry accounting, okay? Not made up new types of accounting on an app, and that you want to make sure that you're using, you're having this data and that all of your income, all of your expenses, all the inventory you purchase, every marketing spent, you're not missing credit cards, you're not missing PayPal, that everything's included in your, what's called your income statement, where all the income and cost of goods sold go, and then your balance sheet, which is where you're holding your inventory, which is an asset of the business it’s just cash and another form. That you need both of those things that they need to be accurate so that you can make those right decisions and adjust your gut. We've got sellers that are like - I had a great month - and you're like - Yeah, you lost a bunch of money. Then they're like - Why? Because of whatever reasons and then you need to adjust those that understanding. So it's just part of your regular process of being an entrepreneur and running your business. But it's all about making those great decisions, being able to sleep well at night, and really understand, are you profitable or not? And then being able to see those expenses. Oh, I'm spending most of my money on marketing. Why am I spending five times as much on Facebook ads versus Google ads? When I convert more Google. If you don't have that information, and/or either yourself as an entrepreneur or an accountant, that’s asking you those questions. Why is this? Why did you spend so much more on marketing, but your sales went down? If you don't have that information to refer to, you can't ask questions about your business, okay. So those are the big ones. And then like we talked about, cash flow. So you can be profitable on paper and your balance sheet, and look great, and then, if you're not managing your cash flow, you can run out of cash. And then not be able to pay bills or buy new inventory, okay. And then just keep in mind, this is a daily, weekly, monthly process. And we can tell you, we do as much daily as possible, because eCommerce businesses are very busy. There are lots of transactions, there's lots of complexity, and there's a lot going on. And that if you try to do it all in one weekend, once a month, you'll get behind another month, and another month, and then you don't have this information that becomes this huge project to clean up. It's something that you just want to block out time, whether you're doing it yourself, and all entrepreneurs should do it for a short while, and you can't just marry an account like I do. I did. And then I don't have to balance checkbooks or doing any of that stuff for the last 25 years now. But you should do it long enough so that you understand it, that if you do choose to outsource it, or hire someone on Upwork to do the work, you can oversee it because you're always responsible.

[18:45] Mike: Great point, Scott. Now here's a question, who's more against made-up accounting methods, you or your wife?

[18:53] Scott: Wait, who makes up the most?

[18:55] Mike: No, who's against it the most? Boy, you're talking in there. And you say, you know, you want to use double accounting. You don't want to use any of these made-up accounting methods.

[19:05] Scott: Yeah

[19:06] Mike: I just thought that was this was a great point. But, you know, of the two of you, which one is, you know, anti-made up accounting methods, or is that equal between the two?

[19:19] Scott: It’s equal, we're both, I mean, like, we're like, we've been doing this nine, you know, almost nine years now. And our focus is just making eCommerce businesses better. And that means, really accounting. And I've learned so much. I knew nothing about accounting, like nine years ago, I know teeny bits and I had some stuff. But when you get in, I can now read financial statements, and the balance sheet, and advise customers, and cover a whole range of things. But there's actually a process of this accounting that, when done right, truly shows you hard numbers and truth. That’s so hard these days to get truth. When accountings done right, and all the steps are done, and the balance sheet balances, it means you can trust the income statement, and you can trust that you're profitable or not. And then you can make decisions off trusted information. And so I'm totally a convert. I've read books like Financial Intelligence for Entrepreneurs, and I spend a lot of time looking at it. But also I'm a longtime 30 year IT geek. So I think there are great tools out there that will give you an income statement, and give you that real-time data, to make a decision that day, but not a financial decision. Where double-entry accounting truly means that everything balances out, and the debits and the credits all match. And that if you do that right, then you truly can have data you can trust, your investors can trust, your the banks will trust, hopefully they'll lend you money. If you go to sell your business, it is one of the critical items to have all of those numbers under control. But in general, it just shows you everything in one place so you can make those decisions. Oh, I’m spending too much here and spending too little there. And then you can see how those changes impact your business as you make changes and review those books in detail once a month.

[21:06] Mike: Absolutely in the old adage, why reinvent the wheel? So, the tried and true. Other than that, Scott, what are some of the accounting challenges that eCommerce sellers face?

[21:22] Scott: Yeah, the biggest one is the assumption that if you make a sale, you have to record every single order in the accounting, and you have to duplicate that, and that accounting is approving every single order. Okay, that is the most biggest challenge we run into is you can't keep up. One day you could sell 20 orders and the next day you can sell 2000. And it really is creating busywork, because the point is to get to detailed financials that allow you to make decisions. There's no law that requires you duplicate every order in your accounting system. In most of the accounting systems, Zero, that we use, or QuickBooks Online, which is the most common small business accounting platforms, or at least here in the US, they're not built to handle that volume of data. And it's just literally busy work that your accountants, or a VA, or somebody has to say, okay, okay, okay on and try to apply payments. You don't have to go to that level of detail. Now. If you're doing, if you're trying to fulfill your orders, you need a cloud inventory another tool, that has every single order, so you fulfill every order, and you know whether it's canceled and shipped. The same thing for sales tax, okay, you have to have every single order b2b, Amazon, everywhere in your sales tax data, so you're reporting all the data properly. But from an accounting perspective, you can post summary information for Amazon. We post two invoices per month that match the Amazon two weeks settlement statement. It has about 100 different fees all the crazy Amazon fees, but that's all we need to record all the Amazon income. Okay, sales tax included and it breaks out all of those details. That gets you the information. For Shopify, we use the same tool, which is A2X accounting, which we love for both Amazon and Shopify income posting, because it posts, it will post your Shopify payment data, including fees, every single day. And that all of that data is posting the income and all of those fees and doing most of the accounting for you. And we're all about leveraging technology to help you. So that's probably the biggest one that people get caught, where they're downloading every transaction and trying to manage it. And you can be a very small business and very quickly exceed your ability to keep that up to date. But that's, that's probably the core people. And then in most cases, we can't use their accounting file, we have to start off with a brand new one because there's so much garbage data, you literally can't spend enough time to clean it up to fix it. So, that's probably the biggest challenge. And the other challenge is there aren’t automations for Etsy or Walmart or others. And then the inventory and cost of goods sold, which I will tell you is a monthly process. Once a month, you need to know the cost for all of your products for the end of that month, the inventory you have at Amazon FBA or any warehouse - the quantities, so you have the cost, the quantity, and the skew. And then you know what you've sold to get your cost of goods sold. I sold 100 of these widgets at $10 each - that's $1,000 of cost of goods sold. That can be a monthly process. Even if you're watching it in real-time and a cloud inventory or other tool, that's a monthly process. But it's critical, but that's what's going to tell you whether you're profitable or not. If you've recorded everything through the automated bank feeds and tools like A2X, that's the last big step from accounting, that if you get those things done and in commerce, you've covered the major portions of it. There are things that can be done better by other accountants, our team and things like that, but that'll get you the fundamentals is posting income, every expense, cost of goods sold and inventory.

[25:00] Mike: Great information, Scott. And I really liked that you guys like A2X - quality company. They're a company that we work with, with also. So yeah,

[25:11] Scott: They're good friends, they're Kiwis, they're there in New Zealand and they're amazing. They're good friends of ours. And, no, they really do provide a great value, and the difference between them and any other tool is, and it's in their name, is they understand the accounting. They understand accrual versus cash accounting, and that they're very focused on getting accurate accounting information, not just its data for data's sake.

[25:35] Mike: Absolutely. So, you know, Scott, this is all great information. We could talk all day long about this, but how to how do you work with people directly? So if someone wants to follow up, what, how are ways they can interact with you?

[25:51] Scott: Thank you. There are a number of things. So first, we have a YouTube channel called Catching Clouds Academy, which has 100 plus YouTube videos, all free. All my wife, Patti, mostly presenting topics in a common-sense way in which we're just trying to help, because our main focus is to help those sellers move forward. For people that are looking to do their accounting themselves, or you have your accountant that has no idea about technology or how A2X, we have our accounting for Amazon and our accounting for Shopify course. They are $400 each, but they go over, they don't cover how to do all accounting, what they focus on is how do you post the income and cost of goods sold for either an Amazon business or a Shopify business, okay. I am always, we also have our Facebook groups that support that, one for sellers and one for accountants. We spent a lot of time supporting our peers and cross-training and coaching them to help other sellers, because we can't possibly work with everybody. And then I'm always happy to talk to sellers. So if you contact us through catchingclouds.net/contact, and out that contact form, I really respond to almost every single question requests. And if it's not something we do, or if somebody wants only sales tech support, we point them at Sales Tax and More. And we'll, I’ll be happy to answer those questions. But if you're a million-dollar plus seller, and you want detailed, accurate financials, our main services providing that outsourced accounting in which we do the daily, weekly, monthly accounting, you have a team of three supporting, somebody doing all the bookkeeping daily, an accountant that's doing all the accounting, and then a controller who's a CPA that makes sure the balance sheet balances, are paying attention to all the details, we're overseeing sales tax, and then they're educating you on how to read the financials and helping with that interpretation. So if you didn't start your business to do accounting, that you built your business to support your big why or whatever else, and you've outsourced your fulfillment, you're doing other things, you've outsourced marketing, maybe, and you want to outsource your accounting? That's what we're here for. We're just looking for long-term relationships. This is what we do and we love doing it.

[28:06] Mike: And you do it very well. I mean, I must know you have Scott for eight, nine years. And you guys have always done a great job. So, and Patty does excellent work on those videos. I've watched quite a number of them myself. So really appreciate you coming on, and, by the way, we can get you in touch with Catching Clouds and Scott also. But I really want to thank you for sharing some of your knowledge today. And you know, there's so much to cover. Perhaps we can, you know, have you back at some point in the future, to share a little bit more of your knowledge, you know, especially as we see some of this crisis unfold and what you're seeing out there and we can share some of your experiences, but thanks again.

[28:56] No, thank you. This has been great. Happy to help.

[28:58] Mike: Okay, and if any of you have any sales tax needs, need any information about how the different states are responding to this crisis that we have here, we've got a new chart going up, it's going to be detailing what all of the states are doing. And, you know, in general, as both Scott and I have said, you don't really want to take advantage of these extensions unless you absolutely have to. And then more for the paperwork not being able to get done rather than the money. You really don't want to be to be using the money in your business. But we're going to have a chart out there for every state and what they are or are not doing. Other great resources, lots of free resources up on the website. And of course, we can help you with just about any state tax-related service out there. So thanks for joining us in this edition of the Sales Tax and More podcasts, and we hope to see you next time.

[29:58] Outro: Thanks for listening. Be sure to click subscribe and check all of the resources we have out on the web.