Care About Profit? Get Serious About Forecasting. transcript

foreign [Music] podcast thanks so much for joining me for another episode of the show and today on the show I want to talk to you about what I'm calling the hidden value of forecasting your business there are probably actually lots of hidden values to forecasting your business but I'm going to show you one that's come to the top of my mind recently as I've worked with clients and seen businesses up close especially as businesses are scaling an earlier stages I think that forecasting your business is one of the most important exercises an operator does and not because you're going to be correct in your forecast not even to plan your supply chain in your inventory though those things are important too but because I think by forecasting your business you will have greater Clarity than ever before to where profit will be generated in your business I'm going to tell you why and how to do it let's jump in all right just Tails From The Trenches here today things that I uh have seen in businesses that I've been working with and that I think are just so important and and here's the core idea I'll just get right to it straight away the core idea is this when you forecast your business intelligently you end up designing your business as you do it and you may not realize that you may not realize you're doing both the same time but you are if you forecast your business and you forecasted thoughtfully and all the way down through every big element of your business like I'm not even actually talking about the details here but sort of the big chunks of your p l if you forecast your business with the big chunks of your p l clearly thought through you are going to by definition design your business as well and so if you're trying to create profit in your business then thinking about how to forecast appropriately will give you more clarity than you've ever had before to where in your business you are going to be able to actually generate that profit now let me explain what I mean you've probably heard me before talk about the concept of four quarter accounting that's the term I got from Common Thread Collective Taylor holiday and I announced so we're gonna reject it it's still a helpful overview idea but the idea of four-quarter accounting is just breaking up theoretically I mean there's a couple ways to look at it but it's just to break up your p l into four quarters right each being 25 percent and those four sections are you're underneath your Revenue right so Revenue comes first those four sections of your costs on your p l r cost of goods sold and really all variable costs associated with selling a product I would call that cost of delivery okay that's that's quarter number one the quarter number two would be CAC right so all of your advertising costs quarter number three would be operating expenses or SG a but basically fixed costs right so if you just think of cogs as variable cost cost of delivery it's variable cost associated with selling a product and then Opex is fixed costs and then sort of CAC CAC is a variable cost but we'll we'll put in its own bucket okay those three things that means there's one there's one quarter left that's profit if they do four quarter accounting is if you can make each of those first three cost centers uh into 25 of your Revenue then that leaves one 25 chunk left that 25 chunk left is profit and so it's a really good way to think about how to generate profit in your business now very few e-commerce businesses are running at a 25 bottom line profit and there's a pretty good argument that if you're running at that profit if you're anywhere in early stage of growth I mean under I don't know 200 million dollars you should probably be trying to find ways to reinvest more into your business somewhere because it's probably too profitable but that's a problem for very few people and you get the basic idea right there's those four quarters well I mean thinking in those terms is very very helpful even if you don't think in terms of 25 because the other truth here is that the vast majority of businesses are not actually having a 25 landed cost of delivery okay that is a that's a very high margin business if you're there fan fantastic good for you you're going to make your life a lot easier with that I'm working with one business right now that is somewhere right around there right but for them you know it's really really hard to keep their cack low enough to make that go under 25 because their LTV is not that great and so it's hard to create organic revenue and on and on and on it goes and what I'm doing right now as I start talking about those things the thing I'm doing there is beginning to break down the design of the business what I just did with a business I thought about was I thought okay cost of deliveries right around that 25 number that's great now there's not a ton of returning customer Revenue in this business I'm going to come back to that actually a second there's some but there's not a ton and so that CAC number is going to stay a little bit higher Because unless there's some organic new Revenue channel that is generating a bunch of organic new customer Revenue organic customer acquisition without that the number one source of organic revenue is going to be returning customer revenue and that Revenue also isn't that Heinz business which means if there isn't tons of organic new customer Revenue if there isn't tons of organic returning customer Revenue I'm gonna have to pay for a lot of that Revenue unless I'm running that paid spend at like a three to one or a four to one or whatever it's going to be very very hard for me to keep that number to 25 or less that could be okay by the way the trade-off for this particular business may be that cost of delivery is very low tax a little higher and so other businesses might switch that right the cost of delivery is going to be a little higher but they're going to have massive LTV and therefore they create a bunch of profit by keeping that CAC very low and so on and what you see is this trade-off between these different buckets of the p l to where the CAC adding more cost into the cost of delivery side of the p l and I'm reducing cost in CAC well that means that my profit gets affected by those two okay and vice versa and and so on and what happens when you start forecasting your business if you do that with any honesty is that you start realizing those truths about your business hey wait a minute no matter how I look at this that cost that CAC is pretty high right maybe that's what you're thinking or wait a minute no matter how I look at this that cost of delivery is pretty high now that assumes that your forecasting cost of delivery into your business somewhere you're forecasting your cogs and you know even on a p l basis not even on a cash basis so I'm not so much worried about when the payments are going out to your suppliers in this case think more about like on a on a accrual accounting basis on a p l basis are you what is the percentage of your Revenue that's taken up by cogs and are you thinking about that in your forecast do you have a baseline forecast that does that because as you start doing that you'll start to go wait a minute next next month I'm forecasted for 35 percent cost of delivery okay that's all right no big deal if I can make that up elsewhere oh wait but I'm forecasted for 40 CAC or two and a half ner 2.5 mer be another way of thinking about that all right now I've eaten up 75 of my Revenue in costs that leaves 25 left over for Opex and now I can make a decision okay if those two things are are really going to be hard for me to beat okay then can I keep my Opex to 24 or lower if so I'm you know just better than Break Even or maybe if I can keep it to 15 I've got actually 10 bottom line my business is okay and all of those ways those different buckets of the p l start affecting each other start to become clear to you and crucially you can start managing them you can start deciding where those big points are points are and start thinking about okay how do I make sure that as I approach each of these issues that those numbers are coming in where I wanted them to now I'm going to step one back one step back into the forecast and say one of the things I am assuming here is that you are actually building a cohort based forecast that's what I'm assuming an LTV core base forecast and I will put in the show notes a link to my favorite tool to do this I've mentioned it a lot of times in the show I use it with tons of entrepreneurs and I will also say I've watched a lot of entrepreneurs get stuck on this because it's a big job it can feel a little bit like trying to go on a run through the mud where your feet are just getting stuck or through a marsh right through a bog like it can feel really hard some entrepreneurs I think they get really overwhelmed by this job but I'm going to tell you and beg you if you want to make your business better I am going to beg you to please do this work do as good of a job as possible on this work if you get tripped up figure out how to get help work through the problems go take Dave recook's course on how to forecast your business in e-commerce the cxl course I'll link out to it as well in the show notes do those things do the work required to forecast your business in an intelligent way because if you do you will know exactly what is going right and what's going wrong in your business and that's the true value of forecasting an e-commerce business it's not about being right it's about when you are wrong understanding why you're wrong where it went wrong how it went wrong now when you think about that there's this first area of the forecast that is the most obvious place for things to go wrong that's your ad spend right so you project let's say uh you know 100 000 spend at a two to one okay and so there's two hundred thousand dollars and and if you're thinking about this the right way you'll think of it most of that Revenue as new customer Revenue there's going to be some leakage there maybe 20 grand to that as returning customer Revenue but mostly that's the main goal of your your ad spend in e-commerce is to drive new customer Revenue drive your growth those kind of things so and I don't care what channel this is on by the way whether it's meta or YouTuber I don't know what even if it's organic content creation you're putting a different bucket that maybe you call it a CAC maybe you don't but you get the idea if you're if you've got that spend and you're projecting a bunch of Revenue based off of it it's going to be kind of hard to figure out how good of a job you're going to do and spend in Revenue they're just re the error bars on your forecast are pretty wide okay that's really normal but these other two areas of your forecast are actually a lot easier to maintain control of and only in my view really get out of whack if you are not paying attention to them and what the forecast does is forces you into a world where you pay attention to them I honestly don't know why at this point I honestly don't know why if you are growing your business and looking to add talent I don't know why you would not be considering working with incredibly Commerce talent in the Philippines and doing it with my friends at more Staffing I love more Staffing they are awesome I am so glad to have the spots on this show because I believe in them if you want to get to know them go listen to my bonus episode from a couple weeks ago with largovara the CEO who herself is in the Philippines it has been a Filipino remote worker she knows all about what it's like why it is a great arrangement for both sides and tells you all about all the things they do to find you and incredible e-commerce talent for your business and in fact if you're ready to get past listening to Lara talk and go higher e-commerce talent in the Philippines yourself which you should be if you are forecasting your Opex realizing you're going to need help and going like okay I I know that I'm gonna need the help so where do I go find it go find it with more Staffing who I love go to morenow.co their whole approach is we don't just want to find you the cheapest person possible we want to find you incredible eCommerce Talent virtual professionals not just virtual assistants who can really help your business grow and they do a lot they bend over backwards to make sure it's a great arrangement for both you and them it is definitely cheaper than hiring in the U.S still and so it's just a really really good arrangement really good deal go check out more Staffing tell them I sent you more now.co to go consider adding eCommerce Talent from the Philippines to your team make your business better and keep it lean and profitable at the same time is a win-win go check it out more now.com so cost of delivery let's say you forecast your cost of delivery to be 30 and it comes in at 35 percent well that leads this leads this very obvious question which is like wait how come I spent so much more on my cost of delivery than I expected what happened here and then you break cost of delivery down and go okay my merchant account fees credit card fees that kind of thing that's going to be really hard for it to suddenly go from three percent to five percent but there was a day actually where that would have changed when by now payment pay later providers first came on the scene you know they were charging a much bigger percentage of Revenue than your regular credit card fees your Shopify fees and so you you could have sort of seen a couple points of of cost of liver getting eaten away there if people were heavily buying with you know those those platforms on your website but mostly what's actually going to happen here is some cost went up for your supplier or you discounted a bunch more than you thought you would until your cogs got estimated low or you have a really wide SKU set and people bought product a a lot more than product B and you would expect that to be reversed or whatever some bundling change or something or something went wrong with your fulfillment center and and maybe there was a mistake and you plan something wrong or against the way you bundled products ended up creating a bunch more costs you know heavier packages and more picks per product and and so suddenly they're charging you more than you guys whatever there's like a million things that can can go wrong here even if you can generally project more stability you know lower SKU count brands are going to have less variability here most likely but that's helpful right right because then you can know okay wait I projected 25 30 it went 30 to 35 or whatever Now by forecasting that by having a target for that and then by measuring each month what happened getting that p l update from your accountant or whatever on the 15th the next month you go look at it where did it come in relative to my forecast you just compare those numbers here's my p l here's my forecast now I know and I see this number came in a lot higher than I expected or a lot lower than expected whatever and you start to dig into that and begin to control those things again your ad spend like I talk about that all the time that's going to have ways in which it gets better or worse than expected it's normal the thing that's more interesting to me is this question of like like why does that happen and then the third bucket not only on the cost of living side but that third bucket Opex is something where I so rarely see entrepreneurs really seriously forecast this have a goal for it and then try to meet or beat that goal so like okay let's say you're scaling from two million bucks to five million bucks in revenue or let's say two to ten million two million to 10 million in revenue and that's your we'll say like monthly Pace okay so you go from a pace where you're here two million what is that over 12 months well let's call 2.4 million so we'll say 200 000 a month okay so you go from a 200 000 a month Pace it will say from 2.4 million to 12 million so so you go from a 200 000 a month Pace to a million dollar a month Pace okay straight lined we'll just say this business has exactly the same Revenue every month and six of ease rarely do I see entrepreneurs when they think about that change they project the ad spend they project the revenue they project the cogs maybe even but what they don't do is Project the Opex on that next stage they don't think about okay am I going to want to add an email agency am I going to have more software fees with Shopify or with clavio or whatever am I going to have is my you know some people are using these attribution tools that scale with spend and it ends up costing you it ends up being a you know a thousand dollar a month or whatever tool I don't know how much they cost to use them but but you know those kind of things all go in there and especially with personnel and with agencies and those kinds of things what I would recommend that you do is say okay if I'm going to get to that spend level I see these five areas of the business that could get better and every founder every entrepreneur knows what this is like you see all the holes in the business you're doing too many things yourself you want to Outsource some work you want to bring on person over here person over there like whatever those areas that you see are plan ahead of time and budget yourself here's how much money I will allow myself to spend as I go as my business grows and if I if I can't keep my Opex under the under my budgeted number now if I can't do that then you know what I'm not hiring more I'm going to do more with less I'm going to keep my business lean because that's a place in my business that I'm going to create profit and so forecasting the business basically gives you builds in a plan for how you will Design each section of your p l to create profitability as you scale assuming profitability is what you're trying to create but hey even if you aren't trying to create profitability having some Target as you scale being this key idea and so so this is the thing that I see so many people get wrong and struggle with and this this happens with bigger businesses too they don't project their Opex until they end up adding way too many costs because they're like wait a minute emails broken and our ads could use a little more creative and our you know we need a new office space and whatever like whatever all these things are they end up not thinking about them and because of that those costs get out of hand and then they lose profitability or even more broadly they simply don't really know where profit will get produced and they aren't thinking very much about having a goal for each of those for each of those sections of the business okay so they just don't think about the idea that wait a minute if my Revenue goes up that much I should call my supplier and see if I can get you know one percent reduction in costs uh or one point of margin back in my costs or you know think about renegotiating with my 3pl to do those things or again like I said all these elements of Opex that end up creating additional efficiencies in your p l they don't they're not thinking about those things and the reason why is you're not actually forecasting your p l to have those four different buckets and then seeing how you do against that the interesting thing is almost everybody does this with ad spend right if I was working with you today and you wanted to know how good of a job I was going to do right the way we would have that conversation would be you would say okay okay Andrew I need you to hit a you know two to one row ass at a hundred thousand dollars in spend like you know that's just simple simple numbers some number like that you'd say if you hit that you're doing a great job that's my goal and then and then we would review okay hundred thousand dollars in spend what was our roast or 150 and spend what was our search it's 15 span it was like and we would have that conversation we would have a Target we would hit it we would or not hit it and we would review what happened why did it go wrong what do we need to change do you need to fire me whatever it is right but we don't do that with these other parts of our business we don't give ourselves a Target and then give ourselves a solution forecast your business use the lightspeed model use Dave's information forecast the business and go from there and you will have so much more clarity in the end about whether or not you are on the right path you will keep costs under control and as an operator those are the kinds of things that are right in the center of your job description keep those things straight know where profit is going to come from manage to that profitability and you'll be in really good champions thank you foreign [Music] episodes where I really don't know if it was so obvious to everybody else and you're just going like of course we all already do this if so please tell me I would love to hear that you can email me at podcast ajfgrowth.com DM me at Andrew J Ferris on Twitter I would love to hear from you about those things and all of the usual other stuff applies subscribe you can watch me on YouTube now if you didn't know that subscribe wherever you're listening to podcasts rate review and if there's an operator who would get help from this please share this with them that would really help me and hopefully help them as well I am pumped about next week's episode I honestly think one of the best five episodes I have ever recorded it is with Jack Rubin co-founder co-ceo of Purdy and fig a subscription based clean like house cleaning brand that is in the UK I actually Coach Jeff and work with them closely and carefully on his business he is a killer operator and provided an insane amount of insight and generosity about what is going on with the business like I just really want you to listen to this episode so listen next week to my episode with Jackie you will get a ton of value out of it subscribe to the show if you've not done so already and don't forget to go visit my friends at more Staffing you are forecasting your p l and you're like hey I'm going to need to add talent and if you were doing that like don't be a dummy go consider working with that with people in the Philippines who are incredibly conference professionals and my friends and more Staffing can help you do that go to morenow.co to go do that one last thing one last thing somebody DM me recently and said I'm so glad your show's on YouTube now thank you for that but here's the thing you are really distracting because you move around too much when you talk please stop doing that everything else is great please stop doing that I was so helped by that so if you have comments like that for me anything at all related to the content of this show I want to hear from you I'm not precious about it I'm well aware that I'm a professional podcaster and that I could be better so if there's ways in which I could be better email me DM me all usual stuff and just yell at me just tell me how much I suck at something and I would love to hear from you so that's all I will see you next time my interview with Jack coming soon thanks so much [Music] with my high school [Music]