Is Your Brand’s Profitability Healthy?

So your bookkeeper finished closing the month, and you’re ready to dig into your financials? Hats off to you! Many DTC brand founders rarely, if ever, look at their monthly financials. 

But there’s something you need to be aware of before you dive in. 

Unfortunately, most bookkeepers aren’t trained to set up your chart of accounts in a manner that actually helps you understand your contribution margin, which is an absolute necessity if you want to be armed with the insights you need to scale your DTC brand alongside healthy profitability. 

But don’t worry. I’ve got you. 

Here is a simple process for organizing your expense chart of accounts so that you can easily measure your brand’s contribution margins, which will make it a breeze to understand and improve your growing brand’s profitability. 

How to Group Your Expense Accounts 
Your chart of accounts should be grouped into 5 categories that are needed to easily assess your contribution margin.

  1. Cost of goods sold (COGS) 
  2. Variable order costs (VOCs) 
  3. Sales & marketing costs 
  4. Fixed overhead - headcount 
  5. Fixed overhead - other 
Remember - without visibility into these 5 buckets of expenses you can't quickly and easily measure your contribution margin.

And if you can’t measure your contribution margin, you can’t manage and improve your profitability.

The action steps here are this –
  1. Have your bookkeeper set up parent accounts for each of these 5 categories.
  2. Have your bookkeeper nest all other expense accounts as a sub-account under one of these 5 categories.
What if your bookkeeper doesn’t know which expense accounts should be nested under each parent account?

I’m glad you asked…

What to Include in Each Expense Category
Now that your bookkeeper has set up the 5 parent accounts, it’s time to nest every other expense account under one of the 5 categories.

Here is a list of common expenses that typically exist within each cost category.

Cost of goods sold should include all accounts and transactions associated with landed product cost. This typically includes:
  • Materials product costs
  • Manufacturer costs
  • Inbound freight
  • Import taxes and duties
Variable order costs are any per unit cost incurred between the time a customer order is placed and when it arrives at the customer’s destination. In other words, these are the costs that are incurred to process, fulfill and ship the order to the end customer. These typically include:
  • Credit card processing fees
  • Fulfillment costs - 3PL or in-house pick/pack and outbound shipping costs
  • For Amazon Sellers - Amazon seller fees and Amazon FBA fees
Sales & marketing costs are largely made up of ad spend, agency fees, and sales commissions (if your DTC brand has a B2B presence).

Fixed overhead – headcount costs are your recurring, fixed overhead costs that are driven by employee headcount. These typically include:
  • Salaries and wages
  • Payroll taxes
  • Employee-driven insurances like workers comp and health, dental, and vision
  • Other employee benefits costs like 401K matches, etc.
Fixed overhead – other is the category that all other recurring, fixed overhead costs are nested under. So - basically every fixed cost not driven by employee headcount.

The ability to easily measure your contribution margin is essential for managing your profitability as you scale.

If your bookkeeper follows the instructions laid out in this article – you will be able to use your monthly financials to quickly spot opportunities to improve contribution margins, and more importantly – company profitability.

The ever-elusive ability to quickly improve profitability can be yours.

And improved profitability will help you scale your DTC brand alongside healthy cash flow and confidence.

Until next time – scale on!

Image by Steve Buissinne from Pixabay