If you’re sloppy with your accounting when doing lead gen or if you fail to track your numbers accurately, you’re setting yourself up for a financial ambush.
The day will come when a big bill from Facebook or Google lands on your desk, and you suddenly realize you don’t have enough revenue to cover it. That’s not just stressful; it’s a crisis.
But how?
Let’s assume you have an ad spend of $1,000, and you project a revenue of $1,200, thinking you have a 20% profit margin after ad expenses. But don’t get too comfortable.
You still need to pay for wages, software, and other operational costs.
Now, imagine you double-counted conversions or miscalculated sales. Instead of $1,200 in revenue, you actually made only $600 from three valid sales, not six.
Now you’re in trouble.
Your ad spend remains fixed at $1,000, but your revenue is cut in half.
Your cost per lead has skyrocketed, wiping out your profit and pushing you into the red.
Worse yet, you might not recognize this mistake until your credit card gets dinged, and suddenly, you don’t have the funds to pay it off.
The timing difference here is critical.
Ad spend happens today, but your credit card might not be charged for seven days, and you might have another 30 days to pay the bill.
That’s a 40-day window where financial mistakes can accumulate unnoticed.
If you’re making tracking errors daily, they compound, and before you know it, you’re in a financial hole so deep, the only way out is with a large cash reserve—which most businesses don’t have.
Here’s the crux: You must have a system in place to recognize and adjust for these financial discrepancies.
This guide is here to help you navigate these treacherous waters.
By adopting meticulous accounting and tracking practices, you can avoid the pitfalls and ensure that every dollar spent drives genuine profitability.
Note: this article was adapted from a Conversion Lab series video. You can get more context by watching it:
Real-life horror story
In a recent consulting project, I reviewed the financials of a pay-per-lead agency.
Numbers looked great but one item was quite concerning…
This business is doing about US$1M per month in revenue (nice) but every quarter their revenue jumps by about 20-30% without an increase in their adspend!
Odd right?
It was a client who deposited funds for the next quarter.
So far so good, but this nice buffer could end up hiding a bad month or two if you’re not tracking your business on an accruals basis.
Well, they did have a bad month… in fact a very bad month with a loss of about $600k.
Let that sink in…
If you don’t have a spare $600k lying around, it’s game over! This means prior months and year’s profits better be available.
This was not picked up until the bank balance was pretty much emptied out!
Why am I telling you this?
Because the reality of a lead gen business is not quite as straight forward as its often presented. And your business could literally be wiped out in a heartbeat.
So, what happened?
An agency I worked with wanted to sell their business, and they needed my guidance to prepare it for the exit.
Their business was doing okay, bringing in around one to one and a half million each month.
While not top earnings, it was a solid business that made a good profit.
They showed me their earnings and expenses because I advised them it’s essential to clear up any problems before selling.
No one wants surprises when selling a business.
They told me, “We have an accountant.”
So, I asked to see their business structure.
They had a parent company with a few smaller ones underneath it. A bit like a family tree, but for their business.
One of the smaller companies was lending money to another. It was pretty confusing.
I suggested to simplify things. If one company is lending to another, then what one company is owed should match what the other needs to pay.
But the numbers didn’t match up. I asked if this was just bad timing, or if there was a bigger issue.
We looked closer at their finances and saw that the official numbers didn’t match the actual money coming in and out of the business.
Long story short, I helped them hire a new accountant to straighten things out. Then, I asked to see their updated profit and loss statement.
Now, I was looking at their bank records, the real money they had.
The pattern was strange: the figures were usually around 1.3 million, but then they’d suddenly jump up to 1.7 million. This inconsistency was there for about 18 months to two years.
I started thinking they were laundering money for the mob or something because every quarter there’d be a nice, big lump sum payment coming through.
But somehow, the ad spend never went up.
Unless they had a secret discount deal with Google, Facebook, or any other ad provider that I didn’t know about, something was off.
Turns out, it wasn’t a secret deal.
Every quarter, one or two of their clients would pay ahead for the next quarter.
It was like receiving a large sum of money in March to pay for leads they’d provide in the following months like April and May.
Improper Revenue Reporting
Firstly, there were issues with how they were reporting it.
That should not be reported as revenue. A terrible accountant right there.
What they should’ve done is treat it as prepayment or unearned revenue. Then, as they delivered the leads, they could invoice it and record it as income.
Therefore, you don’t have these big, lumpy jumps which made it clear they were doing a whole bunch of stuff that was also not correct from an accounting standpoint.
They were in no position to sell because if you show this kind of thing to a potential buyer, they’ll know they’re dealing with a bunch of chumps, and the price will drop quickly during due diligence.
The Fix
So, I said, “Alright, selling is off the table. Let’s go fix up the financials.”
But I also gave them another warning.
“If you have a bad month or a financial quarter but don’t notice it because you aren’t monitoring your cash flow—you might not realize until it’s too late.
Like when you’re trying to pay Google or Facebook or whatever, and you realize, ‘Oh, our bank balance doesn’t quite look right. It’s a bit lower than what it should be and perhaps not enough to pay the bills.'”
But they reassured me, “No worries, we’ve been doing this for five years. We know what we’re doing.”
I said, “All right, you know what, it’s your business at the end of the day, not mine. But you guys should go and do this, but hey, what do I know?”
The Consequences of Ignoring Cash Flow
What happened next was unexpected.
They ended up with a significant amount of fraud traffic.
Meanwhile, their ad buying team reported a positive Return on Ad Spend (ROAS).
Here’s the twist, though:
But what was really happening was:
- The sales team was giving credits for fraudulent or duplicate leads.
- The true ROAS was zero or even negative, but the media buying team couldn’t see that because refunds, rejections, and duplicates were processed days later.
- This was not reflected in the server-side API call to manage conversions in the ad network.
So, the media buyer had no idea that the leads they were supplying were actually junk and that the campaigns were nowhere near as profitable as they thought.
Ideally, if you were in charge of both sales and ad buying, you’d probably spot this issue.
But when you’re dealing with millions in monthly ad spend, you tend to have different teams handling these tasks. So, problems like these can slip through the cracks.
Understanding Profit vs Cashflow
So, how do you bring it all together?
At the time, I told them, “You should track your finances based on accrual accounting, not just cash flow.”
I even built them an accrual accounting tracker and said, “Use this tool. It’ll help you find and fix any financial issues you might have.”
Sure, you can automate all these processes.
I’m a fan of automation myself, but sometimes it’s more efficient to organize everything in a simple Excel spreadsheet first, and think about automating it later.
It requires only about 10 minutes of your time. Even if you automate, would it save that much time and money?
I understand the desire for automating marketing processes because when they go wrong, the costs can skyrocket.
But updating a few values on an Excel or Google spreadsheet doesn’t have the same financial risk.
So, what I told them is that you’re going to put your income here on an accrual basis.
Understanding Accrual Accounting
So, what that basically means is if I sold, let’s say, 100 leads, I want to put the revenue of that right here.
I put my ad spend here, which is the ad spend that I have accrued for the week.
And then track my impressions, my visitors, my gross leads, and how many returns there were.
For instance, if I returned 10 leads for that week, I would note that down.
Adjusting for Return Leads
The key thing I emphasized was this: if you have any returned leads this week, next week, or any other week, but those leads are from the week ending February 17th, you need to update the data for that specific week, not the current or future weeks.
Usually, if there are returned leads in the current week, businesses might just add those returns to their current week’s data.
But what if the client is slow in getting back to you and the returned leads are from two weeks ago? This is a common occurrence.
You need to update the data for the week when the leads were actually generated.
That’s why it’s important to get information from your client like the lead ID, the date when the lead was transferred, or some other metric that allows you to adjust the data on the correct day.
The reason behind this meticulous adjustment is to ensure you’re tracking genuine conversions for the specific day or week, rather than being misled into thinking all leads were valid.
This is vital for your media buying team to understand what’s truly happening days, weeks, or even months later.
Here’s a scenario to illustrate this point:
Let’s say you generate and sell five leads on January 1st.
On January 10th, your client informs you that one of those leads was fake or a duplicate.
By this time, you cannot send this correction back to Facebook because it falls outside their typical seven-day lookback window.
Even if you attempt to mark this lead as invalid now, Facebook won’t back out the conversion you reported on January 1st.
However, you must have a system in place to internally recognize that on January 1st, you were not as profitable as initially thought. For example:
- You recorded five leads on January 1st.
- One lead turns out to be invalid, so in reality, you only sold four leads.
- You spent $100 on ads for January 1st.
Initially, you might have calculated your cost per lead based on five leads, which is $20 per lead. But with only four valid leads, your actual cost per lead is $25. This 20% increase can significantly impact your margins and profitability.
Failing to adjust your financials for January 1st means you are not recognizing the true cost and profitability.
Many businesses continue to track rejections, duplicates, or fake leads on a rolling basis without going back to adjust the original data.
This oversight can leave you in the dark, inaccurately assessing your campaign’s success.
To avoid this, you need to revisit and adjust the financials for the specific day when the leads were generated.
While this might seem like a tedious task, it provides a clear and accurate picture of your metrics over time.
Realizing Profitability
When you make these adjustments, you realize one of two things:
- You’re not as profitable as you thought.
- You have a clear understanding of your metrics over time.
Filling this out week to week, and over six months, you’ll get a very precise understanding of your key metrics.
For example:
- Average CTR around 1.2%
- Lander to leads conversion around 13%
- Rejections around 6.5%
If these numbers deviate significantly, say the rejection rate jumps to 10% or the conversion rate drops to 2%, those are indicators that something has gone wrong.
Have I made a mistake in my data entry? What’s happened?
Whenever you move away from the average, set a trigger. Google Sheets is an excellent tool for this.
For example:
- If a cell goes above 9%, send a trigger.
- If a cell goes below 4%, send a trigger.
Using tools like Zapier, you can automate these triggers to send messages to Slack or email, alerting you to potential issues.
The Benefits of Accrual Accounting
If you do this, you catch issues a week after the fact, not a month or two later, or never as what happened with the agency.
This is the difference between a cash flow-based model and accrual accounting.
Accrual accounting allows you to look at your P&L on a week-to-week basis, ensuring that you catch any financial shenanigans quickly.
Monitoring Fraud in YouTube Traffic
This case specifically involves YouTube traffic. In some markets like solar, we see up to 80-90% of fraud coming through.
In prior weeks, I’ve shared on the tracking and technical aspects of how to manage fraud in real-time.
Ultimately, this accrual accounting method is also a tool for fraud checking.
If a number jumps really high for whatever reason, or the conversion rate isn’t backing out, it’s an indicator that something’s wrong.
How can I have a lot more clicks coming through but fewer people converting? Something has gone wrong.
Daily vs. Weekly Monitoring
You can catch this a week or two into the issue.
If you monitor daily, you can catch this daily, but daily volatility might be too great. If your ad spend is high enough, you should be monitoring daily.
However, you want to ensure everything across the entire business is running smoothly.
You can break this up by client, vertical, or other factors.
For example, if the bulk of your spend is in a specific vertical or client, strip that part out and analyze it separately.
Using the 80/20 Rule
Use the 80/20 rule. Where you have significant risk, you need more checks. Where there’s less risk, you can monitor less frequently.
For instance:
- If I spend a lot on the highest-paying lead generation niches such as personal injury, I’d do weekly checks.
- If only 5% of my spend is in solar, I might do monthly checks, as issues there wouldn’t significantly impact the business.
Recovering from Financial Stress
Thankfully, the agency I was working with had been around for five or six years.
They borrowed against their houses and credit cards to pay off Facebook or Google, surviving with a bit of stress.
After 12 months and regular calls, they’ve improved communication and internal processes.
It looks like they may be ready for a sale in the next six months.
Balancing Your P&L and Balance Sheet
I don’t want to say much more, but I will share one thing.
I made a Facebook post about it some time ago. For those watching on YouTube who don’t know my background, I was formerly in Investment Banking and created a course called Finance SOS.
The course covers eight or nine key ratios or KPIs you want to track about your business.
People often overcomplicate things, but you don’t need to.
You’ve got your P&L, your balance sheet, and these feed into different ratios you should track monthly.
These days, if you’re using QuickBooks or Xero, you can integrate this data into third-party metric systems.
Obviously, I covered how you should structure your balance sheet and P&L.
The point is to ensure you’re driving enough value in the business to get paid for it.
There’s a lot of focus on “I just want conversions,” but when you’re selling the business, the buyer doesn’t care about your ROAS.
They care about:
- How much they are paying for the business.
- How much money the business generates (cash flow).
- What the growth outlook is.
So, when it comes to exiting, too much focus on just running campaigns and not enough on financial organization means you’ll realize, “I should have been doing this for the last three years,” once you try to sell.
This is what happened with the agency I mentioned earlier; their financials were disorganized and unsellable.
In my 2nd Bonus, included with Tracking SOS course, I’ll be sharing the fundamentals of finance.
In particular how to use BOTH cash-basis and accruals-basis to run your business. You need BOTH. One is for survival or solvency… and the other for true profitability. This is not commonly understood…
Frankly, you’re really not going to grow much without this foundational understanding.
Until now, there has only been 1 way to get this. It’s been part of the consulting work I have done. I avoid doing this as much as I can.
You’ll get the simple spreadsheet that assures not just survival but also how to thrive in your online business.
Now, it will be offered as in the Tracking SOS course.
This bonus itself is worth at least 100X the price of the course.
What is the value of never facing a business-extinction-level event? Anyone who has been through this knows the pressure cracks even the toughest. That’s not even including the impact on your health and relationships with your loved ones.
Grab the course even if you just want this bonus. https://courses.leadshook.com/tracking-sos/
P.S. You won’t get this understanding from ChatGPT!
