131. Top Accounting Mistakes for CPG Companies

Mike Pignatelli, founder of Unloop

Jordan Buckner: [00:00:00] Accounting is one of those topics for C P G brands that everyone needs to do, but no one knows if they are doing it the right way. I know when I was running TeaSquares being a inventory based business, I. I realized we were doing things like throwing all of our purchases into expenses instead of as a inventory asset item, and that was really throwing off our books.

We didn't really understand how to properly instrument, you know, cost of goods sold and the effect of that. When you're smallest, not too big, but as you grow. It begins to be create systematic problems. So I really wanted to bring in the guest today to talk through, you know, what are some of those areas that founders need to know when they're thinking about accounting, especially for inventory based businesses.

And so for that conversation, I've invited on Mike Pignatelli, who's the founder of Unloop. Mike, welcome. 

Mike Pignatelli: Thank you, Jordan. Appreciate you having me on. 

Jordan Buckner: So I'd love for you just to give a quick introduction. [00:01:00] Tell me what Unloop does and what's your mission about. 

Mike Pignatelli: Yeah, so my name's Mike. I'm the co-founder here at Unloop Accounting, and we are a team of awesome real people who do the bookkeeping for C P G companies.

So we mainly work with any C P G and inventory business between zero and 15 million in annual revenue using QuickBooks Online or Zero. And our number one priority is basically just to get your financial reporting perfect and delivered to you on time so you can use it to make better decisions. 

Jordan Buckner: I think that's really helpful and something that a lot of founders have trouble with as they're doing that.

I mean, one of the first things right, is like a lot of founders are like, I can't really afford a bookkeeper or account. Like, I don't really know what I need. So like, when should a founder bring on a bookkeeper? What exactly do you think they should be doing at that level at the beginning, and how much should they pay?

Mike Pignatelli: Yeah, that's a great question. So I think accounting is like really boring for a lot of people. I think they don't even understand, you know, , what accounting is , or bookkeeping is and what they should be doing. Obviously at the early stage of a [00:02:00] C P G business, you're focused on marketing, you're focused on product development, product market fit.

So an expensive accountant or or bookkeeping service may not be ideal. Especially now, Jordan, like cash is tight for everyone, right? So accounting is one of those places you may be able to save some money, but you know when you look at it, I see like our clients, some of 'em are getting involved with Unloop at like just starting their business some at the 1 million mark.

I could see that I'd recommend you pay about one to 2% of your annual revenue in accounting costs as a maximum. You can start with , a cash basis approach, but you're gonna wanna move to an accrual accounting system. Something we're gonna talk about a little bit more today.

Jordan Buckner: Awesome. That totally makes sense. So, kind of going into that, where do you think C p G companies are missing the mark with their accounting? 

Mike Pignatelli: Yeah. So, I think of accounting is really like the language of business, if you think about it, right? So the way we do our accounting matters to tell us how good or how bad a company is performing, but we have to compare it to something, right?

So when we look at financial statements, a profit and loss or a balance sheet, you know, namely a profit and loss statement. [00:03:00] We wanna see how good or how bad we did compared to, you know, last year or a competitor or perhaps like, you know, an industry benchmark. So people are always asking me, you know, are my numbers good?

Are my margins high enough? You know, a lot of c p G companies are asking me that, are my gross margins high enough? And I say, you know, compared to who, right? So if the counting is not done properly, if we don't do enough work into our cost of goods sold, the valuation of inventory are revenue recognition, which, and, you know, can only be done using it in an accrual accounting system will never be able to answer these, these kinds of questions.

Jordan Buckner: Yeah, I think that is definitely key. You know, , I think a lot of founders don't really know the numbers behind their business, and it leads to a lot of foundational issues that, you know, for some rounds that I've actually met, they're actually losing money every time they sell a product. Right. And on the surface they got the cogs like, you know, day five and their business is a year old.

Supply chain is and expenses have gone up, freight's gone up and a lot of them haven't refactored what their cost of get sold really is, you know, [00:04:00] today, right? Or on average over a longer period of time. And they're actually like losing a lot of money. 

Mike Pignatelli: Yeah, it's crazy sometimes , we give people their profit and loss report at the end of the year or the end of the month.

And, you know, it shows that they lost money and they're like, Mike, there must be a mistake here. What's going on? And, you know, they're pretty shocked. 

Jordan Buckner: Yeah. , I mean, that's important to find someone that actually knows that. So, you know, what do CPG founders really need to look for in their bookkeeper?

Mike Pignatelli: I think like if we're keeping it really simple right in plain old English what I like to say is you definitely wanna be able to review the historical performance of your company, right? So I find so many founders in the C P G space are always trying to set up their accounting, their QuickBooks or their Zero or their inventory management system but they're not in this like monthly cadence of financial reporting.

So once you have this set up and you're just kind of receiving the financial statements every month, you can trust the data's accurate. At that point you can kind of look back and say, okay, this is what's happening right now. This is what happened last month. So a lot of people , aren't really there yet, but once you get there, you can look at things like [00:05:00] trends, the seasonality of your business, really just becoming familiar.

Once you're there with your bookkeeping and the books are clean and in order, that's when you start to do a little bit more of the fun stuff, and that's like the fractional c f O type of work. That's setting future goals. But you know, you can't set goals unless you, you know, the past first, right?

You can't set future goals. So, you know, looking into the future setting targets, setting deadlines updating budget to actuals, and having like a dedicated day every month, no matter what, it's blocked in your calendar where you populate those actuals and say, you know, why did we miss.

Budget. And then you start really thinking about your business differently. And you know, of course, don't ignore things. Don't ignore red flags that you're seeing. That's what I always say. The third thing I would say is cashflow. So I find a lot of founders are using their accounting, like their profit and loss statement as their cashflow statement.

, which is okay. And if you're comfortable with that, you know, you have to kind of slowly transition. But once you transition to an accrual system, I usually just recommend like a scrappy like Google sheet for cashflow. So you want to get into like weekly [00:06:00] cashflow. Always having a pulse, the operator of the business on what's the opening bank balance how much. Cash is expected to come in and hit the bank, how much cash is expected to go out? And then what's your projected ending bank balance? So like I do this every day. A lot of my clients do this every day, but definitely something you want to get , a tab on. And then tax is obviously a whole beast on its own.

So filing your sales tax returns and your business taxes on time, and you know, doing all those things and spending as little time and money as you can, getting the above. Like those things done. 

Jordan Buckner: Yeah. You know, I think it's really funny, Mike, because I also see a lot of founders who see these red flag items like you mentioned, like you were unprofitable or your expenses in this one category really high, and founders kind of don't take action on it.

Because if you kinda shove it under the rug, then it doesn't exist. Right? And they just ignore Yeah. The numbers. And that's , the good thing, like if you have a good accounting system and someone who's doing it, then the numbers don't actually lie and they are telling [00:07:00] the truth. Your interpretation might change of that and sometimes you might know you're losing money and that's okay.

But you should really know. How your businesses are performing every single month. I think that said, at minimum you should be looking at that if not on a weekly or daily basis. 

Mike Pignatelli: Exactly. You know, you just kind of reminded me , of something , when you said that about normalization adjustments.

So I see some of my clients are selling or you know, there's some transactions that come across my desk. Or even, you know, when they're reviewing their monthly statements, they're saying, oh, you know, this was one bad marketing campaign , or you know, , this is a one-off event, but the one-off events kind of keep happening every month.

So yeah, that's another thing. 

Jordan Buckner: I see. Yeah, that definitely happen. You know, I think the cashflow thing is really interesting because like, as you mentioned, financial statements are not kind of a view of like the everyday cash coming in and out the door for your business, especially when you move in that way.

Mm-hmm. I'm just kind of curious, there a reason there aren't like, A cashflow tool built into systems like QuickBooks. I know they just started, I think they're like testing one now [00:08:00] or they started rolling one out. But to see that kind of daily view of your in and outflows, I. 

Mike Pignatelli: Yeah, , I'm not sure why.

Like, I guess I would say every business is so different, right? Cash is coming from so many different places. A lot of times it's not just revenue. It can be in injections, it could be from financing, it could be from a lot of different places. And I don't think like a QuickBooks or another tool has been able to capture this.

Even C P G alone, every business is so different. So, you know, what I advise to our clients is set up a scrappy Google sheet. Customize it the way you want and the way you understand. And I always tell them, it's your job as the operator to, you know, keep a pulse on this cash flow every day or every week.

Jordan Buckner: I have some ideas. Mike I'll run by you after this on , a tool and you can build it into Unloop because I think it'll be so helpful , for founders to see. So we'll get into Awesome. Have another time. But you know, I think that kind of leads into a lot of these things that founders aren't really paying attention to.

So, from other things that you've seen, what are some of the other accounting mistakes that you see c p G businesses make? 

Mike Pignatelli: I guess like the umbrella issue over all of this is you wanna move [00:09:00] to an accrual accounting system. And I know when I say that word to so many founders on discovery calls , or my own clients, they kind of roll their eyes and , they don't know what that means, right.

And it is complex, but there's no use in me , and you Jordan sitting here and kind of using technical, you know, accounting, accounting words that no one really understands. So I'll kind of go through a few different things and , just explain as simply as I can the difference between the cash basis method , and the accrual method.

And how that relates to C P G specifically. So on the revenue side, there's obviously like so many promotions we're all running. There are chargebacks there are all kinds of things going on. But with revenue, there's a timing delay with a lot of our sales channels in C P G that we're receiving cash much later than when the sale is made.

So we wanna recognize revenue when the sales are made rather than when cash is hitting the bank. Through Shopify or through Amazon or , through the direct to consumer side of the business. It's obviously a little bit easier because that timing delay , is smaller, right? So we don't need to worry too much about it there.

When sales are made on Shopify, we see them come through when the payout. Comes through in QuickBooks, but we're seeing a [00:10:00] lot of c p G business owners just categorizing that entire amount as revenue, when really there's, there's sales in , there's some refunds, there's some discounts, there's Shopify fees.

So really just splitting things out , in the chart of accounts really helps makes things a little bit clearer and be honest about our numbers. The next one is inventory. And this is obviously a huge one, right? So I think you mentioned at the start of this episode, , when you were running a previous business of yours, you were putting all your inventory costs into a purchases account, which would be on the profit and loss statement.

So , we obviously, under the accrual method, want to have this on the balance sheet as an inventory balance and only expense it when we sell items through cost of goods sold. So this has two parts to it. We need to know how much inventory we have on hand at all times, and we also have to know what the cost of each SKU is.

Few different ways to do this won't get like, too in depth with it here. I wanna bore everyone, but there's the weighted average cost method and the first in, first out method that are the most common. So , you know, the main goal here is. There's a lot of things going into each SKU of inventory, [00:11:00] right?

There's packaging, there's production, there's shipping. You know, , there's a co-packer, there's all these different things, and it has to be mapped out, and then it has to be updated frequently as these costs are fluctuating. Look, in the past, you know, year or two, , all these costs have kind of been going crazy, but people are using cost of goods sold figures from way back, right?

So keeping a close pulse on this. And, you know, we do this for our clients, we update it for them if they don't have a system that's already doing it automatically, 

Jordan Buckner: but Mike, it's so hard. Yeah, there's so many variables that you have to put in as you're thinking about that. And I think that's the biggest challenge that founders see themselves and they're like, oh, there's so much to keep track of.

I mean, , with that business TeaSquares, we were doing our own self manufacturing, right? So we're purchasing 20 different ingredient items across our three flavors, and each one had different prices that were changing every month. So I was like, yeah, let's just kinda dump them all in someplace and figure that out later.

Mike Pignatelli: I think to get it like a hundred percent perfect could be a huge undertaking. And we don't wanna waste , too much time on something that's just [00:12:00] gonna have like a small difference, especially if you don't have like us gap reporting or anything serious like that. But yeah, like, I think we gotta make, , do our best, right?

Depending on how many skews you have, how complex it is and all this stuff. Like I jump for joy when somebody , has, you know, two or three skews. Yeah, I know. I could get, I could get it perfect. Right? 

Jordan Buckner: Nice. Yeah. Awesome. What's next? I

Mike Pignatelli: think also, you know, obviously the deductions part of this industry is huge.

, I won't talk too much about like deductions management and disputes and all that's another beast on its own. I'm actually thinking about like starting some sort of service there as well, but we haven't really launched that yet. But the accounting for chargebacks is huge, right?

Nobody's really estimating in the form of what we call an accrual. What this amount is gonna be. So, you know, what we do for our clients is we expense it in the current period and always have an accrual or a reserve for a little bit later, for the next month when , these chargebacks are actually gonna come in.

Yeah, I think that pretty much covers it accounting wise. 

Jordan Buckner: Yeah, we'll have to have another run on deductions because the things that founders are going through when you like, don't know what the deductions and chargebacks are going to be, [00:13:00] but you need to be kinda reserving money to pay for those.

But they affect kind of cash that claims that, or inventory that's been sold. So yeah, it gets really complicated there. I bet. In terms of like making sure one, You're accounting for it all. And then two, you have the right numbers to actually plan for what that's gonna be moving forward. Exactly. And know a lot of s have actually you know, even on those like purchase orders, they're like, what?

I'm only getting paid 60% of , what I put out. So yeah, definitely something to keep an eye on and knowing what all those things are. 

Mike Pignatelli: So many founders are doing this themselves. Like man, especially in the early stages, like they're just wasting so much time , on that. And you know, I haven't figured it out yet, but there's definitely another way where we can help them with that process too.

It's just nice. 

Jordan Buckner: Yeah. So let's talk through some of like the cash flow issues. I know we talked through this earlier. What have you kind of found from a cashflow management perspective? 

Mike Pignatelli: Yeah, I think we pretty much covered everything already. I just think like, it needs to be done by the operator.

Like, so many people call me and they're like, Mike, , can you manage cashflow for me? Right? And I'm like, no, I can't. You know, we can do the accounting, but cashflow , is, you know that's your [00:14:00] department. But cash conversion cycle is something everyone I think , should figure it out.

I think I haven't seen many of my clients with a negative cash conversion cycle. But your cash conversion cycle is a simple calculation days inventory outstanding plus days sales, outstanding MI minus days payable outstanding. So days inventory outstanding is how long it takes you to sell your inventory day sales outstanding.

How long it takes you to. Convert a sale into cash in the bank. And days payable outstanding is how long it takes to pay your suppliers. So once you figure out all these on average you'll have your cash conversion cycle, how long it takes to go through the whole process and get cash hitting the bank.

If you have this negative, it's amazing, but it's very, very rare, especially in inventory. 

Jordan Buckner: Yeah, especially , in the C P G business and food and beverage in particular. When you are buying ingredients and doing manufacturing way upfront, and then you have a 30 to 90 day payback period for goods. Mm-hmm.

Understanding kind of how much cash you'll need and how long it takes to get [00:15:00] repaid is so crucial and. I think like the formula that you mentioned is a really great one. The lot founders are like, okay, let me go back and re-listen to that. But, you know, talk to someone who, either your accountant or someone who's kinda doing some fractional C F O work for you to understand what the metric really means.

And that whole idea is that you wanna be able to reduce that ratio so that you have more cash on hand and less out there. As receivables and. Payables that you have. So definitely make sure that, and, you know, , it's great. I think you, like you said, the negative number basically means you're getting paid for products that you're selling before you have to pay your suppliers.

Yeah. And so you already have the money in the bank which would be amazing. Right. I think we all love that business. Yeah, 

Mike Pignatelli: that's a business we all, we don't buy. And if you have that business, let me know. I'll buy it. 

Jordan Buckner: I think they're really quiet. Don't want anyone know. And so I think kinda wrapping this up, right, like how important is it around like reporting all this stuff and thinking about being timely , and getting these reports and should they be a hundred percent accurate or, you know, what should be that [00:16:00] approach?

Mike Pignatelli: Like, I think if we're moving from a cash basis to an accrual basis of accounting, we're you're already making a huge jump, right? So you know, if you can find somebody, your bookkeeper , to give you an accrual set of statements on time every month for a pretty affordable rate you know, you're already on your way there.

Spending all the time in the world spinning your wheels on this stuff, it's not going to, you know, really make a huge, huge impact to get it , a hundred percent accurate, right? But if we could get it like 80 to 90% accurate, then you have statements that you can use to make decisions. But aside from the accuracy, the timeliness is also super, super important and is somewhere where, you know, so many founders are really, you know, falling behind.

It's the reports are not coming in on the 15th of every month. Like I said before, they're in a constant state of like, trying to clean things up, changing the chart of accounts you know, setting up new technology. You really need to get into this, you know, 15th every month you set a deadline. You review the financials with your accountant or your bookkeeper.

You populate the actuals and the budget to actuals document, and then you know, [00:17:00] assess why did we miss our goal? Why did we meet our goal? You know, what are we going to do next time to make sure we're hitting target? And then once this whole flow is kind of there, you're all set.

And that's pretty much it. That's what founders in the C p G space need today. 

Jordan Buckner: Mike, I know a lot of people don't get excited about accounting, but I absolutely love it because it really shows you behind the scenes of your business. So thanks so much for being on the show and talking about this today.

Mike Pignatelli: Thanks so much for having me, Jordan. 

Jordan Buckner: Yeah, anyone listening if you wanna learn more about Unloop Accounting and see how it worked for your brands, their pricings, super affordable getting sort out for c p G brands. So look for the link in the show notes on how to find out more. Thanks, Mike. 

Mike Pignatelli: Thanks. Bye.