277: Demystifying Inventory in Your Business  

Michele Williams: Hello, my name is Michele and you're listening to Profit is a Choice. Joining me today is Ciara Stockeland. She is a fractional CFO focusing on inventory-based businesses. She has a podcast called Inventory Genius along with a book by the same name. She also has a new book called Profit Genius that is out soon. Today we're going to demystify inventory. All about inventory, how it works in your financials, why it's so important to find resources and people who understand it, and how you can strategize around it.

Every day, empowered entrepreneurs are taking ownership of their company, financial health, and enjoying the rewards of reduced stress and more creativity. With my background as a financial software developer, owner of multiple businesses in the interior design industry, educator, and speaker, I coach women in the interior design industry to increase their profits, regain ownership of their bottom line, and to have fun again in their business. Welcome to Profit is a Choice.

Hi Ciara, welcome to the podcast.

Ciara Stockeland: Hello. I'm so excited to chat with you.

Michele Williams: Oh my gosh, you don't even know. Well, maybe you do. We just had a conversation on your podcast recently. We've been kind of playing, I guess calendar tag for a while here, trying to get between both of our schedules. But I love what you are doing and how you are supporting business owners to be profitable and primarily those that have some type of store, boutique, or inventory as part of their business. And before we came on this call, I was telling you, you know, not all interior designers carry inventory, but there is a large amount who do. I’m sure you've worked with some of those that have boutiques and storefronts or lifestyle stores. And so, that's going to be our focus for today. But what I would love to hear, and I find so parallel to my story in some ways with, you know, we thought we were getting it right, then we didn't get it so right. I would love people to hear a little bit about your journey and why inventory management and financial management are so important to you.

Ciara Stockeland: Yeah. Thank you for letting me share my story. So, third generation entrepreneur, around small business forever, of course, and started my first business when I was 13. It was an acting company that I grew for about a decade. We had a studio, we put on full-length productions. So that was my first business. No inventory specifically with it. But I learned how to sell and market, and I loved it. Got married, had a couple of kids, and when I was pregnant with my second, I decided you know what, I think I'm ready for the next chapter of small business. And so, I closed the acting company, and I opened my first retail store. I had never worked a day in retail in my life, but I thought I could sell stuff. So I wanted to build a brand and not just have a hobby. So, I looked around Fargo, North Dakota, which is where I was living at the time, and thought, what could I, bring to this area that's unique? So, I opened a high-end maternity baby boutique. Six months later, my husband was working at the time for a trucking company, and they would haul for Nordstrom, Neiman, and Saks, and they would have salvage freight. So, for things that got damaged in transportation, Nike wouldn't take them back, and Nordstrom wouldn't take the load. The trucking company would pay for the salvaged freight and then they would just collect it. And so, it was sitting in his warehouse and he said, hey, Ciara, you just opened a retail store. I have all this product. Would you sell it in your store? And I said, well, that'd be kind of weird to sell a hodgepodge of stuff in a maternity store, but I will never say no to an opportunity. So right next door to our beautiful boutique was a space that was empty. And so, we just had a handshake deal, which I still love that part of the story to this day. You know, there are good people out there who are honest and true to their word, and Bob was one of them. So, we had a handshake deal, nothing on paper. He said, “I’ll supply the product, and I will pay the rent. If you pay the people and you work in the store, we'll split the profits”. And at the time that didn't click, you know, with me. Like, split the profits. He didn't say split the sales, he said split the profits. But that business was very profitable. So, he would let me bring the salvage freight in. I could market whatever I wanted. He gave me full discretion there. And I just built this outlet concept. So, then I had two different concepts. Door to door. I say the beautiful child and the ugly little stepkid. I had to decide which of those I was going to go forward with. And that was my first lesson in listening to the customer's wallet, not to your emotional attachment to what you thought your business would look like. So, I ended up saying, you know what? The maternity baby is a beautiful boutique concept, but it's not really making money. This outlet concept is making money. It appeals to the masses. So, I merged them and created a designer outlet boutique. So, think like TJ Maxx in a small boutique environment, and then I built that and grew it, franchised it in 2010 and we just started going to town like I was the seven-figure business. A team of 12 warehouse stores around the country, spoke at the White House on behalf of small businesses. Like I was up at the top as an emerging franchisor. But behind the scenes, I had this really uneasy feeling that something was brewing. I know a storm is coming to Atlanta right now and you're feeling that. That's what I felt like. I don't know what it's going to be, but something's not right. I would tell my team that I would even tell my husband. Something feels off and they're like, Ciara, what are you talking about? Like you just made a million dollars. You know, you just hired another person, you sold another store. And what I didn't realize was I was focusing on top-line revenue. What's going to get me the next hundred-thousand-dollar deal? What's going to make me more money? Oh, my goodness, I'm short on cash. I'll just sell more stuff. I was really good at selling stuff and I was not focusing on profitability. And so, I was making decisions, chasing the top line instead of making decisions that would keep money in the bank. In 2017, I was scrolling through Facebook, just looking at all my franchisee's locations, and saw that one of my franchisees had changed the color of her store. Cannot do that when you're a franchise. Had changed her name overnight, had really rebranded, and had gone rogue. And I was like, oh my goodness, what do we do? So, we filed lawsuits for trademark infringement, and breach of contract, and through that found that there was a group of franchisees that was really operating outside the system. We filed lawsuits, we won every single lawsuit. But we lost everything, including our home. And so, by a year later, we had closed our flagship store. I sold my brand to one of my franchisees and I found myself just sitting on the couch crying. I had ulcers. I ended up having a hysterectomy. I didn't realize all the stress that I had held for so many years and thought, what is this all for? Like I answered every email, I was always on answering DMs. I cared about my franchisees, I was building a brand, and I was making careers for women. All these things that look so good, like what was the point? And a good friend at the time who coached me through many tearful hours and days said Ciara, you know, in life, things happen to you, right? And a lot of times it's beyond your control. Other people do things that are not good, but you always have to look and see what part did I play in that. And so, at that moment I could either say I'm going to grow bitter because this is not fair and they were wrong, or I could say that was not fun, but what could I have done differently? And I decided the latter, thankfully, and so launched my next business and this time said, you know what, from this time forward, I will pay myself from day one, going to build a business with profit. I'm going to focus on cash in the bank and not top-line revenue. I built that, grew it, and sold it within 18 months and proved to myself more than anything that I would learn from the lessons. And that's why I'm so passionate now, to help other entrepreneurs understand that if you chase top-line revenue, there are ramifications for that, and it will catch up to you eventually.

Michele Williams: Oh, that is so true. You know, we always call that kind of like that's the ego number. You know, I'm a $7 million firm, I'm a $6 million, you know, or six-figure this or eight-figure that. And it's really a vanity metric is what it is at the end of the day, and I know that more focus on gross profit and then net profit, the profit that's actually sitting in the bank and staying in the bank is so much more important because let's talk about this for a second. First, thank you for sharing every bit of that. You know, it's the second time I've heard your story and I'll be honest with you, I actually have feels like I've got feelings that, that come up when you share your story. One, because I know that, my husband and I have been in situations where I'm going to put in air quotes. We did everything right and we took the hit for other people who did some things really, really wrong. And we ended up paying out a lot of money and doing a lot of things that were not, it wasn't the way it was supposed to be. And you know, I remember at one point my husband worked in a company and we didn't know it at the time, but the owner was taking a lot of extra and doing a lot of things behind the scenes and it was crashing, burning. And my husband did not take pay for six months so that we could use his pay to pay the employees. It has to be nasty. And then we got taxed on all that money that we never made, like, it was just crazy, crazy train stuff, right? But I think that was a lesson for us too, that you can do it all right, and have things go wrong. There's not a direct cause and effect between right and wrong. But what could we have done differently? And if we had understood, he would have raised a flag earlier. You know, he certainly would have still had the heart that he has to give and give and give, but he would have recognized maybe what was happening behind the scenes so that he could stop the flow at some point.

Ciara Stockeland: And you know what? That's something that I've talked a little bit more lately about. Like, when I think of the choices I made, and this is where I find entrepreneurs, and I'm sure I know you do as well because we get into people's finances usually when they're a mess. When I could have made choices I knew I should make because I had the cash ability to make them, that path would have looked so different, right? Because it's like, I can't hold that person accountable because I need the royalties, because I have to pay the bills for this decision. Right? Or I can't say no to that franchise sale because I need the cash from that sale to fund the decisions over here. Right? And so often the choices, we know what we need to do. I can't close down that wholesale department, someone might say, because I owe XYZ and that money's coming in, even though closing down the wholesale department is actually the profitable choice.

Michele Williams: That's right.

Ciara Stockeland: And so not understanding,

Michele Williams: Or fire this person, like, even all the way down to, I need to let this resource go. And. But I can't because of this and this and this. But you know that they're toxic. I mean, it shows up in so many areas. Right? And. And what is so interesting about that, to that same point, you and I both know that profitability, true profitability, like really having money in the business backup plan, a couple of months back, like, all the things that we do to really be profitable, not profitable to zero. Right? But we're talking about really having cash to be able to have breathing room and breathing space for decision making so that we don't feel like we're up against the wall every single time, because that changes in many cases, the decisions that we make. One of the things that you said was, you know, I just thought, I'll just sell more. I'll just sell more. I remember having a client one time, and I actually said to them, I need you to quit selling. And he said, what do you mean? I said you're digging the hole deeper every time you sell, I need you to stop selling. I need you to focus on fulfilling what you've done. And then we need to rehaul this thing so that when you sell, you sell and manage it differently. Because if you keep selling like you're selling, you're just shoveling a deeper hole to get into. And it's counterintuitive, right? Because you would think I need to sell more, sell more. But I told somebody the other day, I'm like, if you're selling at the wrong price or in the wrong way or doing business wrong, you can't make that up with more sales. That's not the solution to the problem.

Ciara Stockeland: Yeah, for sure. And that's something, it's really hard for entrepreneurs. And I speak this because it, like me, right? It's hard to say stop and slow down. I had a client that she just graduated from the program, and when she came to me, that was our whole, like, that was our mission statement, her and I together. Slow down, slow down. Every time you make a decision, slow down. I'm like you cannot spend one penny without telling me. Not because I want to micromanage you, but because I want you to slow down and think about what am I spending, and what bonus am I giving. What's the real reason? Why do I really want to add another product line, and what are the ramifications if I do that? Right? And so, yeah, that's. It's a hard skill, but learning how to edit in your business, how to slow down, that all comes from really understanding what the numbers mean so that you know what you should be focusing on.

Michele Williams: A couple of weeks ago, we had my strategic planning workshop with my clients here in the Atlanta area. And we talked about having a strategic pause, which is that breathing room, that moment where you go, what am I doing? You know, it really, to what you said, really understanding not just how to make money, but how does money flow through the company, and how is money used in the company? Because every decision, every choice, everything that's sitting on that strategic plan, every product line that we bring in, it is all tied at some point in multiple places all the way down the chain from the time the money comes in the door or the product comes in the door, before the money comes in the door, and then by the time we have any money to save at the end, and if we're focused on profitability, then we're going to think, hopefully at least once, if not twice, about the decisions we make. If you focus on the top line, you don't think the same way. We've even talked about in our program, you know, when do we give bonuses? Do I bonus the revenue? Do I bonus gross profit? Do I bonus net profit? And we talk about the differences, and here's what happens or what could happen, positive and negative, if you bonus here, if you bonus here, if you bonus here. Stop and think. What are you trying to incentivize to your point, what is it that you're really trying to do and accomplish? And then let's bonus that. Sometimes they're bonusing just to keep people. Like you said, they're just paying and just.

Ciara Stockeland: Yes, you're bribing. I did a lot of bribing of employees. Yeah.

Michele Williams: Just bribing.

Ciara Stockeland: Yeah.

Michele Williams: Yeah. They would never call it that. Right. But that's what we're doing. All right. So, you went through so many tough times through that. You decided I'm going to go back and do it again, but this time I'm going to do it. Not because you didn't want to do it to enjoy it, but you also were trying to prove a point to yourself that I've learned the lesson from that. Now what am I going to do to turn it around? I remember that was the kind of that same moment that I had at our kitchen table that I talk about in the Scarlet Thread origin story. That whole idea of, oh, my gosh, okay, I get it. I get it. I see what, I see what I did. I, see what's happening. How do I turn it around to prove that I can do it differently? And to this day, I've started three other versions of the business since then. I won't start anything without a strategic plan and a financial plan and knowing where things are going to come and go, because I know what the cost is to do it, without that. Right. And so, you did that, you sold it, and you now work with businesses. A lot of them are boutique owners or they carry inventory of some type. What was it in that journey, outside of just focusing on revenue, that made you kind of dial in on the inventory piece?

Ciara Stockeland: Yeah, that's a great question. So, I started the subscription box, that was the next business that came out of the ashes, the one that I said, I'm going to prove I can do this differently. Built, that sold it. At the time that I was growing it though it was a subscription box for wholesalers and retailers. So of course, I was meeting so many boutique retailers, and I thought, they were all shysters. They're all out to get me. You know, I was like very burnt. And so, I thought, I'm not going to help, right? I'll just sell them. I'm just like, in and out, right? Here's your subscription. God, of course, in his amazing way of, you know, creating a tapestry, was like, Ciara, I have a different plan for you. I was very resistant, but he brought a gal to me, her name was Lisa, and she's given me permission. She shared her story with my group as well. Lisa came to me and said, “I just found your subscription box. I have a little mobile boutique. My husband and I decided to launch this boutique. It was our dream together. He just got tragically hit by a drunk driver and killed, and I'm left alone. He was the numbers guy. I have no idea how to run a business. I have no idea what to buy in inventory. Can you help me?” Well, of course. I couldn't say no to her. I was like, okay, fine. You're the one person that's not out to get me. I'll help you, and then I'm done, you know, So I helped her, did some coaching. She brought along some other retailers. I know this person who does retail, you know, and we kind of had this little Facebook group going for my subscript description box. And so, people were asking me the same questions. How much inventory should I have? How do you be profitable? How do you read a P&L? So, I did these little beta coaching programs. And as you open your heart to do things, if you're willing to look at what the next chapter should be, I think, for me, anyway, it was really healing. So, I would help people for six weeks, and then they'd say, oh, my goodness, Ciara, look at the budget. I've never had a budget. Thank you so much. I feel so empowered. And so, I started to do more and more of that coaching and really started to see that I'm really good, really good at problem-solving. Like looking at a mess and figuring out a solution. I always tell people if you put me in front of your home and you open the garage door and it was packed full, kind of like those storage wars, you know, just packed full of crap in the garage and said, Ciara, I don't know what to do. I'd be like, oh, I do. I'll figure this out. Give me Five minutes alone. Just let me think for a minute. And I would pull it out and I would figure it out, like, what do we do with it? Like, I'm just really good at sorting through problems. Inventory is a very complex problem. And it's really overwhelming. It's not sexy to talk about. So, most people ditch the subject, including accountants and bookkeepers. They don't talk about it; they don't address it. I was able to help people unwind their story of inventory and do it really well and see success. And so, I just started doing more and more of it, Michele. Like just more and more of it and getting better and better success with it and bigger and bigger problems. Now I have a $500,000 business I'm working with. Now I'm working with someone who has a million-dollar business that's just more inventory, more zeros, more commas. Yeah. And so just started to do more and more of it and saw that I was really good at it. And when you're really good at something, you just, I don't know, you find passion and joy in it. And so that's what I, that's what I ended up doing. Like, I did not set out to be an inventory coach or a financial coach.

Michele Williams: I hear you. You know what's so interesting is, I am a firm believer that I love the Bible verse that says, that all things work together for good to those who love God and are called to his purpose. And then there's another one that says, He who started a good work in you will be faithful to complete it. And so those give me peace. Like when my journey is going in a different direction than perhaps, I plan for it to go in my humanness, that if I can open my heart. I love how you said it. If I can open my heart and do kind of what I'm being called to do, or what feels like the next right thing to do, I can do it with a kindness and a love even for the work. Right. It's like it just kind of grows. Like, I would have never thought that I would have a software company and be coaching. I was going to be a math teacher, and then I was going to be an accountant, and then I was going to do all these things and my life just was winding a lot differently than I could have planned for it to wind. But I'm very, I love what I do. I love, like you, empowering other business owners to go. I understand my numbers because my tagline is what you own, you can change. I can't walk to somebody else's garage and clean it out, but I can clean mine out. I can do it at my house, right? Or if they invite me in to help them do it, then I certainly can. You made a point, and I know you and I had chatted about that a minute, as well, that there are a lot of bookkeepers and accountants that either don't know what to do with inventory or they don't want to touch it. I've spoken to many when I would say to them, what is your ideal client? They'll say, send me people, but do not send me people with inventory. Do not send me people with inventory. And I'm like, okay, I'll do business, but I don't deal with inventory. I think there are some who are just afraid of it. And it is messy, it's intricate. There's a lot there. And then I think there are some that are willing to take it on, but they don't know what the heck they're doing. I mean, it. We’ve talked about this. They just throw it into expenses or just throw it here and throw it there. They don't understand. And honestly, then when you add in, a point of sale system on top of a financial system, it can get muddy very quickly on what they have and what they don't have. We'll talk about that in a second. But, you know, there was something when I want to say it was like 2020, well, back in 2008, I remember doing some research on still being in this industry, what was happening. And one of the things that I looked up was about the great depression, what was one of the problems that happened? A lot of people were carrying too much inventory, and they couldn't get rid of the inventory. And so, we started noticing in 2008-2009 prior to that Ciara, you could walk into, like, there were probably three or four fabric stores within two miles of my house. So, I could just walk into boutique fabric stores and buy it off the roll right there. Well, that's a lot of money tied up in a whole lot of products that if people aren't buying, there is no money to pay. Like, money's not flowing the way it needs to flow in the company to pay the people. And so, for our industry, what happened was a lot of the fabric companies started saying, we're not going to. We're not going to hold all this inventory. We're going to sell what we got. And we will run, we'll do another fabric run when we get collective orders of like 100 yards, then we'll reprint that fabric. But we're not going to go print that fabric until we get enough orders to print it because we don't want to hold the inventory. We're not tying up our cash. And it was interesting because a lot of us who maybe didn't deal in our own personal business inventory started seeing for the first time how inventory was playing in for these other companies that had too much product and not enough liquid cash to pay their people and to pay the other vendors and to keep things going. I remember telling my clients then don't buy inventory, that you don't just start holding a lot of inventory. Try to get rid of some of your inventory that's old and it's been sitting there like, how do we create some cash here? And it was just so interesting because I'm not an inventory genius like you are. I understand it, I understand the process. We talk through it. I don't shy away from it because I have quite a few interior designers who have stores with inventory. So, we certainly talk about it even from like a profit first methodology of do we save money? How much are we going to put in? What is it? You know, how much are we saving for it? It has to come out of profit. Like all the conversations, you know, I say that because even if there are people listening who think I don't carry inventory, you probably work with a vendor who carries inventory, and understanding how it works for them is going to give you an insight on your purchasing and how that, that process is working.

Ciara Stockeland: Yeah, for sure. I think a lot of times people don't think, they wouldn't traditionally think about their inventory. So, like right now, my clients, I have of course some boutiques, and I have some women's clothing. I have a kid’s clothing store. I have a men's boot company. So, they have inventory. They don't hold it all. They do, you know, drop shipping. There are different methods. I have a seafood company, that sells shrimp, oysters, and lobster. That's inventory. Okay. So, they have to figure out what's their cost and then what do they sell it for. And they have a wholesale and retail side to it. makers. I have a skincare distributor that private labels or imports everything. So, the way that she buys inventory is very different. She sells it to retailers, and a salon, they have inventory, shampoo, and hair dye. Like how do you figure that out makers where they have raw materials, chain clasps, jewelry stores where it's all, like, loose diamonds. That's all inventory, right? Yeah. So just figuring out and understanding that in a profit and loss, there are five main components to a profit and loss. Four of those are directly tied to inventory. Your sales, your cost of goods, your gross margin, and your net profit are all tied to inventory. And if you don't understand how inventory plays into each one of those, that's where you just keep selling and you don't understand everything that falls underneath. And then I think, you know, going back to your thought of like an accountant and bookkeeper, I didn't know anything about numbers, I knew how to sell. So, my first retail store, you know, I hired a bookkeeper and I would ask her questions. Unfortunately, she's still out there coaching. Whenever I see someone that she's coaching, I'm like, oh, my goodness. Maybe she's learned it since then. But I would say, like, I don't understand how I use QuickBooks point of sale. QuickBooks point of sale was still an option then how does it work together? And she's like, oh, I don't. I don't really know. But like, here's your financials. Never delivered them on time. Never taught me about anything. Never told me to focus on anything. She really had no business entering data points and then selling them to a business owner. Selling them pieces of paper. Right. Like financials but didn't tell me what they meant. So, then I moved to the next accountant. He was better, but I remember arguing with him about the cost of the goods sold. I did not know what I was talking about. He actually did, but he wasn't good at explaining it. And so, I would argue. I'm like, no, you don't understand. I just went to market, and I got three invoices, and I just paid $10,000. It should be on my P&L. And he was explaining like, no, it's an asset. It lands on the balance sheet first. But he didn’t do it that way. And so, I had no idea what he was talking about because it was so over my head. I just did a class last week for a bunch of estheticians. So, they'd be similar, right? For the most part, their income is service, but they do carry skin care products that they use on their clients. So, I did a class for them. And afterward, one of them came up, and she said, I have had a bookkeeper for five years. He has told me this so many times. I did not understand it until today. I think as a small business owner, if you don't understand the numbers, you have to advocate for yourself. If your bookkeeper is speaking bookkeeper language and it's over your head and making you feel dumb, that is their problem, not yours. You either need to tell them, I don't understand, or you need to find someone who can help you. And then the other thing I would say bookkeepers and accountants are not strategic. Rarely are they strategic. CPAs are maybe a little more strategic, but they're not really either, except for tax stuff. Okay. So, a bookkeeper's job is to collect your information, put it in a pretty little package, and deliver it to you. But it's always the rearview mirror. They're always looking at the past. Here's what you did, here's what you did, here's what you sold. You have to have someone on your team, like myself or like you, that's strategic, that can say, okay, yep, here's the numbers, but here's what we need to do with those numbers. And someone who will teach you to be strategic in the hope that you can fish on your own. Because there are also companies out there, and I know them. I won't name them, but they come in with a strategic plan. But they only give you so much information because they want you to be stuck with them forever. And that is a really poor philosophy. I believe as a consultant, like, it's my job to teach you how to have your own confidence and understand where to find the numbers. Not to say I'm going to give you 90% of the info so that you have to keep me on staff with you for the next 10 years. So, all those thoughts I have about accounting, bookkeeping, and all the things.

Michele Williams: Yeah, I agree with you. And, you know, it's interesting. I wouldn't want this from my side. I even sometimes go, oh, well, we can do your accounting, your bookkeeping, and your CFO work. And I'm like, I would not want to have one person doing all of that. First of all, even if you're in a firm and you've got different people, the firm's going to cover for the firm. At some point in time, a CFO in the same firm is going to cover for the accountant in the same firm. They're going to do that. And I get it. So, I'm always a proponent of if you've got a Bookkeeper and accountant. One firm gets a second look. That's why we do audits. That's why we have people outside looking in. I get a lot of my bookkeeper didn't tell me that. Well, it's really not their job to do some of that heavy-lifting strategy. And if you're asking them to do that, it might be outside of the way they think and manage numbers.

Ciara Stockeland: And that's okay. You just have to know that.

Michele Williams: And that's okay. You have to know that. And then there are some accountants that, that do it as well. Some are good. I've seen some good. Like you said, they have a better chance really at being very consultative in nature. But a lot of times it is mostly about the tax implication. And especially if they don't understand the nuance of your business. Right.

Ciara Stockeland: And it's not usually a business growth strategy. So even if they're good at some strategic thinking, it's going to be tax-focused or they'll give you an answer if you pursue it, but they don't come to you. And if you don't know what to ask, you can't pursue it.

Michele Williams: That's right.

Ciara Stockeland: So that's why you need someone that says, have you ever thought of it like this? Have you looked at it like this? If you make that decision, here's what's going to happen. A proactive strategist is really important.

Michele Williams: It really is. One of the things that I also find interesting is I've had a couple of clients that had, and I'm like you, I know the bookkeepers out there that I would say run for the hills. I will not say them. But there are a couple that are just, they don't follow through. They're just not good at what they do. I see them pop up all over the place. And every time I just am, I start praying for the people they're working with because I know their books are a mess. I know they are. But what is so interesting to me is I even had two clients that were three clients with a specific bookkeeper. And they would say to that bookkeeper, I don't understand. She was, I think, a little bit more, I think she would call herself like bookkeeper slash accountant, but not necessarily doing tax prep. And they would ask a question about their financials and she literally would say to them what, you don't trust me? Why are you asking these questions? Do you think I don't know what I'm doing? I mean, she was just harsh and nasty.

Ciara Stockeland: Those are red flags that they're not doing.

Michele Williams: That is a huge red flag. Right. And especially with something like an inventory or how things are on the books. I see a lot of conversations about sales tax. How do we handle sales tax and why is it not on my P&L? Where does that show up? Just so, just the understanding again of money flow. And if you get yelled at, if you get put down, then that's a problem. That's one of the reasons I built the courses that I built. You know, like, how do I price? Understanding your financials. That's a whole course that I have. How do I just understand them? Because nobody could tell them and they would, they weren't getting it.

Ciara Stockeland: Right.

Michele Williams: Talk to me a little bit about it. As we move on, let's talk about inventory. I agree. It touches four of the five anchor points on the P and L. When does it show up? I'm gonna ask this question. It’s very open-ended and filled with a lot of fun, but when does it show up in the cost of goods?

Ciara Stockeland: Yeah. So, it shows up. Okay, so if you look at the word COGs, okay, cost of goods sold. So, it's the cost of the goods that have been sold. So, I always give the illustration like my sweater. Okay, so I buy five of these in a pre-pack. They're each $10. I put them on the floor when I receive them, and invoice the cost for these five at $10, so $50 for that invoice that shows up on the balance sheet as an asset. I own five sweaters now. And the asset value is $50. If I sell one of these next month, then the $5 moves from the balance sheet. So now my assets are $45 on the balance sheet because one of these sweaters is gone. And that $5 for the one moves right on over to the P&L and it sits right underneath the sale. So, I sold it for 10, I bought it for 5. And the gross margin is $5. So, then it moves over to the cost of goods. And one thing that's interesting is a lot of times accountants will say, which I think is funny, I don't want to touch inventory. It's so complicated. It's actually really not complicated for them to do it. I tell clients because I'll get their P and L and I'll say, okay, they're accounting for everything as an expense. That $50, it's an expense. It's an expense. And that's why if you look at your P and L, you'll have one month with a 90% margin and one month with a 10% margin. Because I went to market, and I bought all this stuff. I expensed it all out in June and then I didn't buy anything in July. So now it looks like for all the products I just sold, I had $100, right? So, if you ever see that really crazy up and down on your P and L, chances are it's not. Inventory is not recorded properly. So, I'll tell them. Okay, I want you to go back to your accountant and tell them. From this time moving forward, the first stop for our inventory is on our balance sheet. That's its first stop. And then it moves to the P and L at the end of the month, they can do an adjusting journal entry out of your point of sale system. It's not that hard. Like it's a dollar amount. You don't do it piece by piece. I don't have to figure out what this is, or which sweater, and that's all managed at the point of sale and the cash is managed in the financials. And they can do one adjusting journal entry and move it right on over. And then, you know, you do your inventory accounts if you need to adjust out. So, it's actually not complicated. I asked the one accountant that I'm going to share his name with you, I'll tell you. So, I asked him why did they also like to use cash accounting instead of accrual accounting. You should be accrual if you have inventory, so they use cash. And I asked him why, and he said, it's just lazy. It's lazy accounting.

Michele Williams: That's exactly right.

Ciara Stockeland: Throw it on as a bill and you don't have to figure it out and you don't have to go. It's pure laziness. So that's what riles me up too, because, you know, it's like we trust professionals to do things when we don't know what we're doing. Right? Like, you're good at your craft, you're not good at accounting, and you should be able to trust your bookkeeper or your accountant. There are good ones out there. I mean, I know a couple of really fantastic ones now. Towards the end of my franchise business, I finally, it was, that was a little too late too. But I finally found my Ciara. So, the guy who came in and helped me with strategy and he brought a bookkeeper with him. She was hardcore. Like, she would tell me, Ciara, I will not reimburse you for that without a receipt. I mean, everything was a paper trail, all the things. But she really taught me the importance of accounting for stuff properly. And then Randy was the one who would show me. Okay, now, Denise gave us our financials. Now here's what we have to do with them, Ciara. And so, if you can find a team like that, that's just so great.

Michele Williams: Yeah, it really is. In my mind, I don't know if you remember, but back in the day, I can't remember the name of it. I remember the cartoon Conjunction Junction. What's your function? But they would do one where they would, like, it was all cartoonish, and they would show you, like, here's the government and here's the legislative system, and this is how a bill moves from place to place, right? They would show you all these things so that you could understand it. And then my brain, as you were talking, I'm like, hello, I'm a piece of inventory. I start on the balance sheet, and then I get into the cost of goods. That's right. Stop number one, stop number two, cost of goods. And then you work your way down to, you know, the impact of that. I do think that is what is so important. What I see sometimes is I'll see they might start off with really great intentions, meaning they put the inventory on the balance sheet, but they forget that adjusting entry. Right. Or they get into the weeds and think they need to move it line by item by item. And it's just that that is a nightmare, and that is too much to manage. You know, if you're selling like that. So sometimes I'll see it, and I'm like, have you adjusted your inventory? They've not made that adjusting entry, for a while and need to go back and update that. That's it. That’s one of the places that I think that it can get most broken if. If they don't even make the stop on the balance sheet. But you know what that also pushes back to is, as business owners we really need to understand both this. So many, I think, are just trying to run their business on the P and L. They're not trying. They don't either have an understanding of, the power of the balance sheet. So, they're not even going to the balance sheet to help them make decisions. And if you get that. Was your guy named Randy? Is that who you said?

Ciara Stockeland: Yeah, Randy. Yep.

Michele Williams: If you get your Randy, if you get your Ciara, or if you get your Michele, we're going to help you look at both because your business uses both to make decisions and to move forward. Right. This is the same thing I see on the balance sheet when they've not made their adjusting entries for their sales tax. And I look at it, I'm like, oh, so you owe 300,000 in sales tax? No, I don't. Well, the balance sheet says.

Ciara Stockeland: They're like, no, we actually don't have a balance and don’t owe anything.

Michele Williams: Like, well, let's go look at that balance sheet and get that cleaned up. Again, laziness with taking care of all the pieces and parts. Here's another question I'm going to ask you. Maybe you have a guideline or rule of thumb or even just a way to think about this. So, because we're going to market in October and in April and sometimes January and July, based on which ones they're doing around the country, there are multiple. I swear these days it feels like there's a market in some city every month and there probably is close to it. But the big markets like High Point that a lot of people go to are usually around April and October. And some people like to buy some things off the floor. They like to buy things either to go into their showrooms or they're buying some things in bulk because they know these accessories or whatever and they're going to use them. So, they are carrying inventory in all of those cases. The thing is when they go to buy it, they don't unless they have a direct purchaser for it. Then it's going to go into inventory. But that is money that they're spending out of net profit on the P and L or out of a pre-profit, you know, from a prior year that's sitting in a bank account. How do you instruct people like, here's the percentage and maybe that varies per business type. Here's the percentage of inventory you should carry or how to not carry too much inventory at the end of the year because we have to pay taxes on all the inventory that we hold at the end of the year. How do you help them manage the fact that you got to pay this out of profits before? I mean it really is a payment in advance of your sales revenue coming in. So how do you know how much of that the business can handle spending on that?

Ciara Stockeland: Yeah, so there's a couple of things. So, using more of like a profit-first type model, I have them take their cost of goods weekly and move that over to a separate account. So, we use your cost of goods. And I think of that as like one bumper on the bowling alley. Right. So now the ball can't go in the ditch if because we have like, this is how much money we have in the account, that will take a while to build up. Like, especially if you have, you know, really poor margins or there's other things that we're working on, but it's just one great tool. And then the other thing.

Michele Williams: Stop right there. Stop right there. I'm going to ask a question on that. So, for those that are listening, if we're, if we're imagining this profit loss, we, prior to buying that inventory we had, let's just say we're going to work in the current calendar year, we have net profit at the bottom of the P and L. We use that net profit, and we go buy inventory, which makes it stop on the balance sheet. And when we sell it, we do an adjusting entry and move it into the cost of goods account. And you're saying that out of that cell, let's say that we sold the sweater for $10, the cost of goods is five. We're now taking that five and putting it back into a cost of goods account that we can use as an inventory replenishment account to come back around.

Ciara Stockeland: Yep. And you don't have to have financials that are finished to do that because you can look at your point of sale system. So, I just have them pull up their point of sale. Last week, what did you sell? I sold $7,000. Great. What was your cost of goods? $3,297.65. Great. Move that amount over to an account. Now, sometimes it won't work if we have a lot of other issues. So, if we're running at a deficit, if we have way too much OPEX, if our gross margin, you know, so it does take some time to figure it out.

Michele Williams: But that's what you're working on to get back in alignment so that we can use that to replace.

Ciara Stockeland: Really, you just want to be replacing constantly what you're selling. So, we move that over. And then they really need an open-to-buy. And an open-to-buy has several, so, it's a formula. So, it's your sales goal plus what you want to keep on hand, minus what you're starting with, and then that's going to be your open-to-buy. So, let's say for the months of June, July, and August, my sales goal is $50,000. I always and this is at retail value. I always want to have $90,000 in my store to keep my store full. So, 50 plus 90 is 140. And let's say I'm starting, of course, I'm using hard numbers. And then let's say I'm starting with six. I'm starting with 40. I'll make it easier myself. I'm starting with 40. Then I would have $100,000 at retail value, open to buy. And then you divide that by your margin, and that's what you should purchase because you're purchasing into future sales. But you're looking at what's going to keep the store full. But what am I actually starting with? And that's the other bumper in the bowling alley. Now, I can't go over either because if I didn't make my sales goals the previous time, or if I sold way more than I thought, my inventory is down. It's going to tell you what to purchase. So, if you use and build up your essentially, you're funding your own inventory. You build up your own line of credit with your cost of goods sold, like building that. And then you're saying, here's my open to buy. Here's my available buying budget, which is going to help me make my sales goal and keep my store stocked. If you use those two things consistently, you'll get into a really good rhythm.

Michele Williams: Yeah, I love that. That's a great tool to use. I figured there had to be something like that because I know that even when we are thinking like that, just the whole money management system, even for my designers that do not carry an inventory, I have them put their cost of goods at all product sales directly in a separate bank account for that same reason, so that it does not get absorbed in the other running of the business so that it can actually pay the vendor. Right? So, one is paying us back. If it's inventory, we're paying ourselves back for something that we paid in advance, the company itself. But the other, we have to make sure we can pay the vendor. I see sometimes, not always where they're coming to me, they're in a moment of distress, or lots of moments of distress, and they have heavy credit card debt from past products that they use the cost of goods to run the company. And now they are personally, they are selling forward to pay off debt from other people. Right. Or their misuse of funds from other sales. They are literally just trying to sell their way out of that hole. And that's why when if you don't understand that inventory or anything that you pre-purchase without that client paying you to do is really an inventory-type situation and it's coming out in net profit. So that means we have to have the money in advance to make that payment. If somebody were to start, if they were like, okay, I'm one of these people that I have inventory. I'm not even sure that it's right. I'm not even sure if my point of sale system is kept up with the property. I'm not sure if my financials have kept up. Like, I don't even know if I, do I trust my POS system or do I trust what's on the bound. I don't know what to do and what to trust. How do they start? What it is almost the equivalent of, like you said, walking into the garage and there's crap everywhere and you got to figure out how to. Where did they start looking? What did they go look at first? Did they go look at that point of sale system first or did they go look at their, let's call it QuickBooks Balance Sheet first? Do they go look at what's on the floor? Like where did they start?

Ciara Stockeland: Yeah, so I think starting with your point of sale, I always have them, like, are you entering your costs when you receive your inventory? A lot of people don't. So, they just, you know, because they didn't know they had to or they're moving too quickly. But going forward, we're going to receive our costs. If you know your costs, you can go back and put them in. I'm not one to have people spend a ton of time on the past. Like we don't have a lot of time anyway, so we don't need to spend hours and days and days looking at old invoices and finding the actual costs and like, that's just silly work. So, if you know the cost, great, put them in. If we don't, from this day forward we're going to be entering our costs and then doing a physical inventory count. Let's see how much we actually have compared to what the point of sale system says. I would do those things first because if you go to your financials first, that doesn't tell you anything like you need to know on the floor, in my point of sale, when I'm ringing it up what do I actually own? And then we have a number that we can start with doing an adjusting journal entry in QuickBooks. Yeah, perfect.

Michele Williams: So, we're going to where we would consider the details to be held. And I think that that brings up a good point that if we think that there that we are not fully using our point of sale system, maybe not entering the cost of goods at the time that we buy the product so that it can give us the information for the adjusting journal, that entry that we need to make. If we're not things, how do we start improving by doing them? But also, if that point-of-sale system isn't supporting the work that we're doing and what we already have, it's not going to get better, it's going to continue to get worse. And whether it's your QuickBooks or Xero or Sage or, you know, a point of sale system, people are always saying to us, probably saying to you the same thing, I just want to know what to trust. I just need to know what to trust. I don't trust my numbers; I don't know my numbers and I don't trust the numbers that are given to me. So, help me figure out how to, regardless of the story that they're telling us, just help me put them into a format that I feel like I can trust.

Ciara Stockeland: Yeah. Yeah. I think having, just knowing that your accounting system is one system, your inventory system is your point of sale system. They each have their own reason and function, and the information needs to be accurate in both. It’s up to you to give your accountant accurate information and they a lot of times pull it from your point of sale. So, make sure that that's accurate. And every mess can be cleaned up, every problem can be solved. So even if they feel like it's all out of control, like, we can fix it, it might take some time and some money, but it can be fixed.

Michele Williams: But it can be fixed. Ciara, you have a couple of exciting things, so tell everybody the name of your podcast.

Ciara Stockeland: Inventory Genius. It's all about inventory. Yes.

Michele Williams: I love it. And you also have the Inventory Genius book, right?

Ciara Stockeland: Yes, Inventory Genius book. It's on Amazon and it's an eBook or hard copy or audible, so whatever floats your boat.

Michele Williams: And you have a new book coming out. Tell us about that.

Ciara Stockeland: I do. I'm so excited. Profit Genius is the second in the series and it dives more into just how profit works. Both books would be fantastic even if you don't have inventory because we just walk through, like, financials, how money flows. Profit Genius, again, is a lot about, like, how we find profit, how we keep it. The tagline is why keeping cash is better than making money.

Michele Williams: So true. It's so true. Is there a third one that you're going to put out? If you got two in the series, gotta have three.

Ciara Stockeland: Yes. Yeah. So, we'll have a trilogy. So, Business Genius will come out in the spring.

Michele Williams: Awesome. Fantastic. So where can people find you? Where are you hanging out? Online.

Ciara Stockeland: Yeah. The best place would be just my website, CiaraStockeland.com and you can find all of the information there, my socials there, lots of free information, courses, and classes that you can download and take. And then of course, if you want to work with me, all of that info is there as well.

Michele Williams: Awesome. Well, I really enjoyed this conversation, digging in a little more to inventory. It's kind of the thing that nobody really wants to talk about. So, I'm glad that we brought it out and strutted it on stage a little bit.

Ciara Stockeland: We did. And hopefully demystified it a little bit. It's scary. It's just a math problem.

Michele Williams: That's exactly right. That's exactly right. Well, Ciara, thank you for your expertise and your time today.

Ciara Stockeland: Thank you. We'll see you later.

Michele Williams: Bye. Ciara, thanks so much for sharing your time today. I love the idea that inventory really is just a math problem and looking at it like that changes things. One of the courses we also mentioned in our time today was the Understanding Your Financials course by Scarlet Thread. If you want to take that course, you can go to my website atscarletthreadconsulting.com and look under resources. You can also join us in March of 2025 where we're going to be offering this course along with live coaching so that you can get in and ask your questions. While you're taking the course, be held accountable to really once and for all thoroughly understand your financials. I would love to support you in that. Choose today to understand your profits because profit doesn't happen by accident. Profit is a Choice is proud to be part of the designnetwork.org where you can discover more design media reaching creative listeners. Thanks for listening and stay creative and business minded.