Dec 17, 2019
Getting control of your business is the key to navigating towards a profitable future. The most common obstacles for successful eCommerce businesses are inventory and cash flow. Today’s guest is an expert in providing forecasting tools to help skirt those obstacles to grow your business and prep for a successful exit. Scott Deetz was one of the advisers whose input was crucial to a successful overseas deal we discussed on a previous episode. In this episode, we explore the ways Scott’s forecasting techniques have fact-based evidence to support predicted ROI for potential buyers.
Scott is the founder and CEO of the Northbound group, a company that helps eCommerce businesses uncover the value in their businesses and prepare a successful exit. With a background in corporate transactions, Scott got into the amazon selling space in 2013. He soon realized his interest remained where it had started, in mergers and strategic advising. He now spends all his time assisting eCommerce businesses on how to maximize the value of their company for either keeping or selling.
Joe: Mark, one of the things or a dozen of the things that I always see happen with entrepreneurs that we speak with is that everyone runs out of inventory, everyone has cash flow problems, in fact I was just on a call prior to recording this podcast with someone that does an amazing job with their business to the point where it’s growing 150% year over year which causes what? Cash flow problems, inventory problems. I did a webinar yesterday and one of the questions was have you ever run a stock? Yes, no, or I’m so amazing I never run out of stock. Oddly enough no one checks the third option which is really good. But a lot of people run out of stock. It seems to be the status quo. I understand that you had our friend Scott Deetz on the podcast talking about forecasting, talking about cash flow management; what it does for your peace of mind number one but inventory management and how you can use all of these forecasting tools to renegotiate with your suppliers to build a more valuable business and to grow it with more confidence. How did the call go?
Mark: Yeah. So, Joe, I know the podcast episodes that you do are so well packaged that you have an amazing podcast, right? I just want to start out with that. You have an amazing podcast and you package these together so well with their incredible exits series that you’ve been doing and actually, in all honesty, it is a really good series that you’ve been doing where you’re interviewing some sellers. With my less desirable or appealing package, I’ve been doing essentially the same thing with the UK deal. We really had Joseph Harwood on. That episode aired I believe in August and we talked about Joseph’s exit as a UK company. And one of the things that we brought up on that call was how many advisors helped us through that process. Well, Scott was one of these advisors and I’m going to also have another podcast with one of the other advisors on that that helped us through that. One of the crucial aspects for shows of sale, one of the things that really made it run was the forecasting that Joseph and Scott did with the business now forecasts. A lot of us see them and think they’re just kind of a wing and a prayer and they’re kind of hoping and hey, if my rosy assumptions work out this business, is going to have a hockey stick amount of growth. And so they get discounted quite a bit. I remember I spoke to somebody else about this; Andy Jones from Private Equity Info and we asked him about forecasts and he said look you look at forecasts they are all hockey sticks. I guarantee the buyer is going to do their own forecasts. Well, Scott has a different approach to forecasts. They’re very very conservative. He ends up doing scenario analysis to see Scenario A, Scenario B, Scenario C; one’s very pessimistic, ones very optimistic, one is what they actually expect to happen and there’s actually a methodology here. Now we spent the first half of this call going over why is this important. He explained how he uses this to negotiate supplier terms that don’t pinch the supplier but actually help a partnership with that supplier. He talks about how it was crucial for Joseph having the ability to order a really sizable amount of inventory as we’re going into a busy season so that he didn’t run out. And then finally we talked about how it has an impact on the actual selling process. And he brought up a point; super simple, you and I talk about this all the time, when you’re talking to a buyer for an online business you need to be able to speak to the return on investment they’re going to get. And their buyer is constantly doing that sort of analysis. Well, Scott was able to go through an analysis that was based on reason and logic and numbers and it had been refined if we could take a look historically to see here’s what we were forecasting, here’s how close we were, right? We were off and so we’ve modified our assumptions. So about half of it is on why the second half is on how and kind of giving people a little bit of a jump start on how to actually do forecasting. And it’s something that I would highly recommend. We had Ben Murray on from the SaaS CFO and he talked about the importance of forecasting in a SaaS business. So this is a really important thing for any online business and frankly any business to start doing.
Joe: And these guys are all connected with running multi-million dollar businesses that will have a multi-million dollar exit. And that’s they’ve; I want to say grown up into forecasting. A lot of people bootstrap things and sort of do the best they can. Those that hold on long enough or mature enough to get to the forecasting part. I think it makes a huge difference. The folks that I just had on the call prior to this they’ve got an incredible business and they’ve grown up into that as well. I think that this podcast will help them tremendously. I know Scott personally he’s a great guy, very smart, very very good at numbers so let’s jump into it.
Mark: But before we get there, I just want to throw out there to the listeners in case you didn’t catch it. Mark Doust is an expert at very subtle wise assery; here’s why, I told him I was going to read this quote, quote-unquote this is from a listener, a guy named Chris Rock is his last name. Thank you, Chris. I just want you to know you are my favorite listener at this point. Quote, I’ve been impressed by several podcasts with Joe Valley; no space there for Mark Daoust, no mention of Mark Daoust at all, Joe Valley and we’d like to set up a call this week to discuss the process and valuation. Thank you, Chris. You are my favorite without a doubt. Let’s go to the podcast.
Joe: I was being sold. I just want to make it clear.
Mark: Alright here we go. Scott Deetz, here we go folks.
Mark: Alright I’m really excited this week to have Scott Deetz on. Scott you and I worked together for a long time and frankly it’s been way way too long for this to even happen. I should’ve had you on the podcast probably a year ago or so but I don’t know if you’ve listened to the podcast at all. We have a tradition of guests introducing themselves mainly because we don’t do show prep so I’ll hand it over to you. Why don’t you introduce yourself to the audience?
Scott: Sure, perfect. Yeah, I’m excited to do this Mark. So my name is Scott Deetz. I’m with Northbound Group which is a company that I founded. I was an Amazon seller starting in 2013. I was ASM3 for folks that may know what that is and I got into the Amazon selling side of things but my background has been in more corporate transactions, mergers, and acquisitions. And once I got into the industry for a little bit, I realized that I liked helping people and looked at the industry and thought I could help people in a series of ways with strategic finance and with corporate development work and with being, in essence, a strategic advisor to people that may want to consider exit strategies as well. So I started Northbound Group about three years ago and now that’s what I do full time; it’s just assist Amazon and other e-commerce businesses on how to maximize the value of their company for whether they want to hold it or whether they want to sell it.
Mark: Yeah. And you worked on; actually, we worked together on Joseph Harwood’s deal. We had him on the podcast a few weeks ago talking about how to sell a UK based business and that was a complex transaction. We talked a lot about that on that podcast about how complex it was at least compared to what we typically see in the spaces as to how these transactions go. The topic that you and I are going to discuss today is forecasting. And I really think with Joseph’s business and the way that we presented that business to potential buyers there was so much that it hinged on the forecasting that your group did to be able to say what are we looking at for sales coming from the future. Now this is a bit of a touchy subject because within Quiet Light we don’t rely on forecasts all that much, right? We would never sell or trade necessarily on a forecast on its own. However, your forecasts were a bit different than what we’ve typically seen in the past. If I could just kind of put it bluntly most forecasts that we see are kind of a wish and a prayer. If someone is saying hey here’s what I like to do over the next twelve months or it’s even more simplistic than that; well this is what I did the first three months of the year, a straight-line projection shows that it’s going to be this so that’s going to be my forecast. And it’s just very unreliable and that’s why we’ve never used it. Yours tended to have quite a bit more specificity and we really put a lot into that forecast including structuring the deal around the forecast as well which meant that our client, in this case, Joseph really believed the numbers that were coming out because he was riding a lot on that. So I wanted to talk about forecasting and I want to start out with just kind of a basic question, is it just a wish and a prayer to say this is what we’re going to be doing in the future? And again this is a softball question. I’m leading you into the answer pretty easily here. Or is there actual science and actual methodology here where we can use these forecasts with some level of reliability?
Scott: Yeah. So to me, that case study really showcased the power of how forecasting can ultimately affect the amount that you receive for your company. But I would say the short answer to your question is if an Amazon seller came to me and said would I rather have a simplistic forecast than no forecast at all I would say yes. But the answer to it really is that I think forecasting is not a one-time event but something you implement. So, in other words, people don’t build a forecast and then it collects dust. You implement a forecasting methodology in your business that is continually being updated as new information is coming into the business. And when your self as an owner or when an outside party can see that not only is it a science and it’s around a tool but it is also an ingrained methodology for the business, I think that’s really when the power of forecasting takes hold. And particularly in Joseph’s case, for example, the first forecast that we built and if he was on the call we would laugh together, it started out like you would expect. I have no idea. Let’s put some numbers on a board. Let’s start looking at it. Then we started implementing it on a regular basis and we would get it down to the point to where we could update a complete forecast for the business in under 60 minutes. And every time that we realized we were either short of our forecast or over our forecast we started tweaking it and we got more and more and more accurate so that by the time that we, for example, got in front of a potential buyer for the business the buyer could sense our confidence in the forecast and obviously then that in turn gave them their confidence in the forecast and ultimately helped facilitate the transaction.
Mark: And I want to get into methodology here in a little bit but I want to start at a maybe a little bit of an earlier point because we talk a lot in Quiet Light about how having a good exit strategy and preparing a business for sale often gives you a really good business to own, right? And this exercise of forecasting is not just for an exit. It’s actually really good from a business ownership standpoint. What are some reasons that people should be implementing forecasting as a regular part of their business?
Scott: Yeah. The easiest way I can answer that is that I say there is no cash flow planning without forecasting.
Mark: For anybody out there by the way it felt like a good rhyme.
Scott: It does, doesn’t it? Yeah, there is no cash planning without forecasting or something like. But everybody out there that is in this industry struggles with the fact that as you grow because you have to front a lot of your inventory oftentimes or at least a portion of that you have to invest in the business. Everybody is doing this dance between growth and having enough cash to grow. A forecast fundamentally is the link between the two that doesn’t look at what your accounting numbers were in the past but looks at what the next six or twelve months forward of your businesses and we’ll answer the question for you do I have enough cash to succeed? And the way I look at if you use Xero or Quickbooks or a good accounting program is very simply that gives you a gorgeous picture of what’s in the rearview mirror but you don’t drive your car based on what’s in the rearview mirror, you drive your car based on what’s out in front of you. And really what forecasting is that capability. So whether you ever want to sell your business or not if you want to have an accurate cash flow of your business you by definition have to be good at forecasting. The second reason that I think that it’s really really critical is because forecasting helps you determine where you’re making your money and where you’re not making your money. So very often in our forecasting tools that we have built for Amazon sellers, we’ll build a forecast for people and it doesn’t only forecast the revenue but it forecasts the profitability. And it’s not uncommon at all for example to see somebody who’s selling a product in the US that’s making a great amount of profit and they take that same product and when you add the VAT or other costs in the UK it’s not profitable at all. So why put the gas pedal down so to speak and grow an area of your company that’s not as profitable? So I think it’s really helpful in two things; well three things actually, the first one is cash flow planning, the second one is analyzing your profitability, and then the third one is once you have an accurate forecast we have found it’s the single most important thing to help you get better supplier terms. So when we go negotiate with suppliers on behalf of our clients or we give them the tools to do it themselves we are incorporating forecasting to show the suppliers a forecast that they then believe. And if your supplier believes an accurate forecast then what they’ll do is they’ll say to you, okay wow we’re going to grow this much. That is the basis for the conversation of getting payment terms after shipping. And it’s also the basis for being able to ask for a better price for your product. So those are really outside of even selling the business; as far as running the business those are the big three.
Mark: Yeah. This idea of cash flow planning; I mean the number one problem with Amazon businesses is what it’s cash flow, right? I mean people are growing, their business is growing and they’re putting all the money back into inventory and I think a lot of Amazon sellers are really just sticking their thumb up in the air and saying okay I think I should order this much. Maybe there’s some level of estimation going on there. But the number of people that we see the number of businesses we see where they have inventory shortages or they have a busy season and they end up ordering too much and so they’re sitting on just a big pile of inventory that’s there for another year waiting for the next busy season. I mean it’s kind of a rule; it’s not an exception that we see this. Your supplier terms that you mentioned in the third point that plays into this cash flow problem as well. I don’t want to get into the details of exactly what Joseph’s structure with his business and his supplier terms but suffice it to say he eliminated all of the cash flow issues that you would normally have with an Amazon business because you guys were able to negotiate really good terms with the suppliers. I assume that was based on the forecast that you’re able to put together.
Scott: Yes absolutely it was and the key part that we were able to do was bring in the supplier in essence in partnership and have them realize, and this is what I’d recommend anybody that’s listening to this, this is not about beating up a supplier. This is about being upfront with them and saying if I had no cash flow problem this is what the growth potential would be for the products that I sourced through you. We were able to make that case with this particular supplier. And in essence, it rapidly accelerated the growth of the business prior to then ultimately exiting the business because we eliminated the cash flow problem which also became a competitive advantage against other people that had cash flow problems because when they run out of inventory we get our sales. So it’s absolutely critical and the number one reason that a lot of suppliers don’t want to give better terms is because like you said they don’t trust that either the business will sell that many units. So then if they know the business doesn’t sell the units they may be stuck with them. Forecasting helps eliminate that concern and we were able to go to the supplier and say look at all of these trends, look at all of this information if we sell this many units of these many products this is how fast we could grow. But the problem is we don’t have the cash to order that many units, can you help us out? And ultimately we are able to come to a very favorable situation for frankly both the supplier and for Joseph.
Mark: Yeah. This idea of profitability as well. I mean this is just a common area where we see a lot of waste being spent on ASINs that frankly aren’t that profitable. And these are the areas where people are spending time, resources, maybe they’re spending money on this and it’s really just diluting what their efforts should be as well. So this idea of going back I liken it to something that again we preach over and over at Quiet Light which is it starts with having good books, good data that you can go back and look at. Personally in my personal life like when I review my finances and if you do this at home and you look at your credit card statement, how many times have you looked at your credit card statement and you look at something and say oh my gosh I have this subscription; I didn’t even realize I still had this subscription on there, right? Going back over and over again and like you’re doing revising assumptions of what the business is doing helps you think about your business more critically in a different way than maybe we would normally think of you know especially with a product-based business you’re thinking about product variations, you’re thinking about customer service, how can you make that customer experience better but maybe not thinking strategically about your business as you might want to. And I know with Joseph’s business looking at his inventory purchasing history he made a couple of purchases in there which I looked at and I just thought oh my goodness this guy is brave. Because he was taking huge chunks of inventory on at the time but he was able to do that because you guys had worked on this and he felt very confident about what was coming up plus he got great supplier terms that came with kind of a safety point there.
Scott: We simply would not; two notes on that, one without going to the suppliers for the supplier terms we wouldn’t have been able to grow as fast because we wouldn’t have wanted to take on the personal risk that comes when you sign a letter of credit at a bank or anything like that. You’ve got a personal guarantee. So good supplier terms allowed us to have a business partnership that while we had a good-faith guarantee that we were going to pay them for that it’s not the same as putting up your house or putting up all of the other assets that you have in the business. And forecasting was sort of a key aspect to that. Here’s the other thing and I’ve seen it go the opposite way as well and I always like to stress this is that if somebody is thinking about eventually selling their business you have to understand that every dollar of profit in the year that you sell costs you three to four times as much. Because when you apply the multiple to your valuation if I am a company that’s making $200,000 a year and they go out of stock and that stock going out of stock costs them $10,000 of profit. You not only lose the $10,000 of profit because you went out of stock you lose three times that amount and if your multiple is three and we’re not here to discuss multiples. But the point is that just going out of stock we had somebody that we work with that went out of stock during a busy season for only two weeks, it cost them about $30,000 of profit and instantly they lost $100,000 off their sales price by one outage that forecasting could have prevented by knowing that they needed to order more. So I think if you needed a fourth reason out there why this is so critical I always say the most expensive way to finance your business is by running out of stock and not ordering enough not because we’ve all seen that yo-yo. Forecast at least allows you to see the problem so that you can address it proactively as opposed to all of a sudden boom you’re out of stock and you’re in a scramble and you’re shipping by air which also costs you on your valuation and those things. So for those reasons that’s why I think it’s just so absolutely critical to running a business successfully particularly on Amazon.
Mark: Yeah and I want to comment on that real quick because I was about to say obviously we’re going to be Amazon-specific; that’s where you really know your stuff extremely well. The forecasting is an exercise that pretty much every business should be doing. I know I had Ben Murray on the SaaS CFO and he talks about the importance of forecasting in a SaaS business. And I know at Quiet Light we just recently implemented some forecasting models as well. And it’s super helpful when I can look at; our major expense is conferences, right? So when I can even look out and see what our expense profile in the forecast for that over the next six months is it really helps us understand how to spend our money and gives us a different way of looking at this. Alright; forecasting, we could talk a lot about why we should do it for just running the business. When it comes to selling a business the impact of having a reliable forecast and the impact that it has on a buyer, I’m going to just comment on this real quick because with Joseph’s business I was obviously working with buyers directly on that and I can tell you that oftentimes forecast get met with some skepticism. People look at it and they don’t really trust them. When people look at your forecasts partly because of the way we structured the deal and there was an earn-out that we were upfront with saying look we expect some pretty big growth in this business so we’re not asking for everything upfront. We’re willing to do an earn-out type of structure here but also because of the way that the forecasts really seem to have some specificity to them. That became an integral part of that sales process where people wanted to delve in and understand the forecasts. And as we were going through an update in months people were checking the forecasts as well. And when they saw that you guys were right on them or in some cases maybe a little bit wrong but here’s why. It changed the discussion dynamically. This was not just kind of an amateur business of somebody who found a product that sold well on Amazon. This was a business that was being run strategically and had a real plan moving forward. And so on the sales process, I think the very simple conclusion is you added a lot of value to Joseph’s business by virtue of having the strategic planning and the strategic background that you were working on and then structuring a deal around this as well.
Scott: Thank you. Yeah, so I think a couple of points on that; one of them as you transition over to the sales side of things, the first thing I always want to state is that most buyers like you said will say to you we can’t buy on future projections. As a general rule, there’s a lot of risk in Amazon and all of these reasons for it but I want to make this statement and I state it so boldly when I talk with sellers because I think it’s so critical in forecasting such an important part of it. The only multiple that a buyer cares about is not the historical multiple, the only multiple they care about is what I call the buyer’s effective multiple which is what is the price I pay divided by the earnings that I get which by definition is something in the future. So while they’re not sharing their forecast with you if they don’t believe they are building a forecast on their side which is helping them calculate what’s called the return on investment in various ways. So the notion I want sellers to understand just as how when you build a listing you need to speak in the language of your customer in order to have your product listing make sense. It’s the same thing when you go through a transaction you need to be able to speak in the language of a buyer to have the most credibility for that particular buyer. So the forecast that we built with Joseph is built very very much with that purpose in mind. We think of ourselves as an outsourced CFO to a business with the responsibility of communicating in the language of a buyer. So when I think about sort of forecasting and what I’ll call more advanced forecasting what we were able to do was not just to say hey if you give us a bunch of cash we think the business will double what we were able to do is to look at every product on a per unit basis of how many units it’s doing right now. We would then apply seasonality to it so that we had all the historical information to apply seasonality. We did that for every current product in every market based on the margin in that market whether it was in dot.com or in Europe or in the US. And then we were able to build in each of all of the product launches of new products that didn’t exist today but we’re coming out to market. And we were able to be conservative on those but in essence, show that even if we hit conservative numbers of that we’re gonna be in a pretty positive situation. So I think the message is when a buyer sees all of that underlying logic in the forecast it’s more than just an idea. It’s really a strategic communication tool between the buyer and the seller. So they were able to go okay, and you bring up another great point which is that this is absolutely a process through the life of getting the transaction done. If it takes you a few months to sell your business every month you’re updating that forecast; you’re having that dialogue as to where things are at. So I think what I would encourage people is that when you want to be in front of a buyer the same way that you want to be in front of a customer and think about it from their lens. You want to do the same thing for a buyer and a buyer needs to understand what the potential is of the business in order to pay the highest price for it. And if they don’t know the business as well as you do I look at it as we’re sort of obligated in our minds to provide them that picture. They can agree or disagree and we can structure a deal accordingly but unless we have a common view of what we think reality is in the future that’s really the only effective multiple that they can use to calculate their return on their investment.
Mark: Yeah. And the phrase I’ve always used for that is buyers buy for ROI. And you see it’s got that rhyme so it’s more memorable.
Scott: Yeah, I love it. I love it. Exactly.
Mark: No one buys a business to lose money. People buy a business because they want to make money. And speaking in the language of the buyer it really does boil down to that and the more firm that we can make that ROI pitch of here’s why you’re going to see a return on your investment; the more fun you can make that the more certain a buyer is going to be, the more willing they’re going to be to pay a higher price for the business. I feel that we spent a lot of time speaking on why and that’s my fault here. I want to get into how to do this because it’s one thing to say okay here’s what my historical sales were and maybe we’re going to assume certain growth; I mean what sort of assumptions would you start with when you’re doing some forecasting on an Amazon business? And then I’m going to wrap in multiple questions here and just kind of let you go to town on this, how would you do like a new product launch as well? I’m interested in both of those questions; like existing products in the next year and also new product launches.
Scott: I got it. So here’s the way I think; I’m going to refer to this as the building blocks of a forecast. So the building blocks of a forecast first is an understanding that there are two types of forecasts that you need. One of them is I’m going to refer to it as a product forecast or a product sales forecast and the second one is one I’m going to refer to as a P&L forecast or an overall profit and loss or income statement forecast and here’s how they relate together. The first thing that you need to build is you need to build your product forecast which is, in essence, each one of your products. And part of what we’ve built over the last two or three years is toolsets to do this. But even if you weren’t going to use our toolsets and just think about it conceptually every one of your products you need to know what the margin of that product is. You need to understand what the historical sales of that product have been. And then very simply you need to be able to project out; we do it on a per-day basis because that’s generally how people think about it and then multiply times 30 but you need to be able to project out how many units per day or per month of each one of my current products am I believing that I’m going to sell. The second thing is most of the time when we build a per product forecast for people and they say that they want to double the size of their business or that they could, the first thing that they realize when they look at all their existing products is that that’s not going to get them where they want to go. And that’s where new product forecasting comes in. And the way that we do new product forecasting is exactly the same way but we build in what we call a launch budget and then a launch ramp up for each one of those new products. So we’ll build in an upfront cost of let’s say $5,000 to do giveaways or ads or review gathering; those types of things. And then we’ll build in that if I eventually get to 30 units a day of this particular product then it’s going to take me four months to get there so we’ll start at 10 units then 15 then 20 and then 30 over each particular month. So visually the way it looks is in the product forecasting all of your current products we have out on the top and then down below that over time you have a bunch of zeros but then you eventually have revenue coming in down below that if you list out all of your new products. And that gives you what I refer to as your product forecast.
Mark: So how do you project out with some of these products on a per-day basis? I mean obviously; let’s say I’m selling 10 units a day right now and I want to get to 17 units per day, where do you look at to say I think I can get here. You have to be looking at; we have to do X, Y, and Z to get here almost working backwards to be able to say we’re going to do X, Y, and Z to get here or are you looking at here’s what we’re doing and here is just kind of the trajectory and where do you see the limit as well? Because that’s more aspect of it where if you’re doing 10 years a day you might want to sell a thousand per day but that market just isn’t there for that.
Scott: Yeah. So the way we think about that is first of all you have to look at what the overall market potential is. So pick whatever tool that you want to use. We use Helium10 for example when we say okay if I was in first spot for this keyword, this keyword, this keyword, and this keyword what is really a realistic assessment of how much I could gain? And then let’s look at the product trajectory of where this product is at and if we’re rank 15 then we believe that we can get; and we usually say start conservative. Start your product forecast on if I could eventually get to the top half of Page 1 but don’t necessarily build a forecast based on I’m going to outtake the competitor. A more advanced forecast what we want people to do is literally situate themselves compared to the competition. So it’s pretty obvious sometimes when you go into a market and one of the clients I was speaking with yesterday while we’re doing our forecasting work he said yeah for me to get to spot one or two is I’m going to have to have literally 4,000 reviews, I’m gonna have to do massive giveaways, so we said really for this product and this keyword and this niche we’re going to keep the forecast is based on being in positions 3 to 6. And then let’s look at where you’re at now and if you’re in position 22 but you’re working your way out then you can build your forecast up to that particular level. But you really have to do it that way. And then the other key that we really really focused on a lot is every month has a seasonality factor to it. So you have to understand what is your seasonality factors when you’re building your forecast. So in our tools for example we have the ability to set up to 12 different seasonalities because we want to basically allow you to understand when it gets to August how much should I order for the holidays or for a lot of people they have summer seasonality when should I place my orders. So you really have to assess not only the units per day but assess the seasonality side of things. And then the only other thing that we look at in terms of building that sort of bottoms-up forecast is don’t always plan that a product is always going to stay level. You have to plan sometimes over a two or three year period based on the product life cycle to start to even put in a slight decline. There might be competition there might be price wars and those types of things and I think that’s absolutely critical to forecasting because it encourages you to always innovate. Where sometimes people get a few; and I’m sure you’ve seen this a ton of times, you get a few hero SKUs that are doing great but then they don’t invest in new product and we’ve talked about this before, you have to keep doing that even if you’re thinking about selling your business because you can’t count on those products always being the big winners that they might be today.
Mark: How many influencing variables do you typically look at in a mature forecasting model and are they working together in a formulaic way or are you really just taking more subjective assessments of these things? And what I mean is let’s say that you’re looking at I know this is what my keyword volume is for particular products, I know what my [inaudible 00:36:08.1] says so I can kind of back into some projected numbers here from just the paid model and here’s the organic models so you can almost approach this formulaically or you could sit back and again have more of this the subjective look at all the different factors. Are you taking more of this variable approach?
Scott: Yes. So here’s what I would say. I look at formulaic as tools that provide insight but do not provide wisdom. You as the owner of your business need to become what I’d refer to as wise. And my way of thinking about it is you have a bunch of data that eventually leads to information that then information leads to decisions and then decisions over time leads to wisdom. And so the way that I think about that is sort of like a pyramid building up. The tools provide you the data and the information but it’s your insight and your time and experience that provides the wisdom. So the way that we think about it is every one of your products with our best clients that we force them through the discipline of looking at all of the data out there but committing to units per day in the future going forward on this particular product and think of it as sort of a manual override. All of the forecasting tools out there are great but every one of them every time; and we built all these tools because I built that originally for my Amazon business and eventually what ended up happening in every conversation we have with owners of businesses they say oh yeah I know that I used to do this the last three months but I’ve really taken a hit. My review rating went down to 4.2 and I lost 20% of my sales. Oh good, then we better put this one down at 20 units a day down from 30 until we feel more comfortable with it. So once you get the process down, that’s what I want to encourage people, as you get the process down to where it’s a half-hour a week the one that we do that takes an hour a week they have 75 parent SKUs out there and we can go through that in an hour and just yup, yup, yup, yup, and just continually refining what that particular process is. So I always think of it as tools versus wisdom and you need to apply the owner’s wisdom to it. That’s the only way we’ve found; same thing with launches you have to build into a launch what do you realistically think that it’s going to take. And then oftentimes that’s why this cashflow thing is so important is that we have multiple clients that will list out 15 different products that fit the brand. Then we’ll look at the cash flow and we’ll say here’s the first five, the second five, and the third five, and we’re going to roll them out over the next year so that you can then implement them in a way that is cash flow acceptable to the business.
Mark: How do you recommend people get started? I know we’re getting up against the clock here but starting something like this can be terribly daunting because there are just so many factors to be able to consider. Any recommendations on how somebody can start out maybe with some simple forecasting?
Scott: Yeah. So here’s what I would say there’s four levels to forecasting and if you take nothing else from today implement Level 1 which is look at every one of your products, what it’s done historically, and implement what you believe that it can do over the next 12 months. And if you want to do it by using the historical sales via ASIN report or the business report that comes out of Amazon for the last month and then just project what that is in terms of units and then in terms of sales build yourself a very simple spreadsheet in order to do that. That will at least start to give you an idea. And if you commit 30 minutes every week to looking at that sheet that you’ve built and you build that and just continue to update that I guarantee you you’ll learn more about your business. So step one is just do that every week. Pick a time that you’re not frustrated and you want to just kind of look down and see what the potential of the business is because frankly, that’s a pretty exciting goal for you to then say hey if I want to get here; that’s what we always…another action we say is you can’t manage what you can’t measure. So you have to build it to that. Level 2 then is to apply seasonality and new products. So layer on new products you’re thinking about and if you don’t know what they are right now still layer in I want to release 4 new products in the next year, I’d like to think that they could be as good as my current one’s etcetera, etcetera, and then look at your seasonality trends. The next level beyond that and I want to describe this because you do have a lot of advanced sellers that are thinking about selling on this podcast is transition from a product forecast to then look at the rest of your income statement on what I call a percentage of revenue basis and project out that if the revenue doubles or grows up by 20% does my cost of goods sold go up by what percent. And so each one of your line items I always look at it as product costs are 19% of revenue, Amazon selling fee is 15%, FBA is 21% and get to where you can easily know every one of your; overhead and tools is 4%, paid media is 12%, know every one of your numbers on a percentage basis and you’ll now have the product forecast and then the budget forecast and you’ll be at what I’ll call it an advanced level. And then the expert level what we build for people when we want to take them to market is we apply what we call a scenario analysis which is where we’re looking at worst case, middle case, best case so that we can show it to a buyer that hey even if this thing doesn’t do everything it’s still going to have a positive ROI for you. But if it hits either the middle or the advanced case or the more aggressive cases your ROI is going to go up to 70 or 80% IRR. So the most advanced one then is to take a base forecast and then create scenarios and that probably building a toolset to do that all by yourself unless you really like doing that might not make the most sense. There’s folks like ourselves or your accountants or other people out there that you probably want to work with but that is sort of the ultimate level because now and my closing comment of this will be relating it all back to the topic of selling your business. For most people, more than 50% of the money ever put in your own pocket will come when you sell your company not when you run it because you’re always having to finance your inventory. And forecasting is the simple thing that tells you when is the right time to sell because it answers the question when does my value reach a level at which I go oh wow if I could get that much for my business now is the right time to sell. So we haven’t talked about that at all but the number one question you get is the number one question I get; what is my business worth and when should I sell, and is now the right time to sell? Forecasting is the answer to that particular question and not some answer that Scott gives you or Mark gives you. But my goal for everybody on this podcast would be implement forecasting and give yourself some time to get good at it and you’ll be able to answer that question for yourself which is a very powerful enabler for your business. So that’s why I’m so passionate about the topic because it ultimately answers the question what should I do with this business and when; should I keep it or should I sell it and if so for how much.
Mark: And even on top of that I mean Joe says all the time he says don’t decide to sell your business plan to sell your business, right? Don’t just wake up one day and be like I’m done because you’re leaving money on the table; guaranteed you’re leaving money on the table if that’s the way that you go about it. If you say my goal is to get here to this number then like you’re saying you can work towards that goal, you know how to get there, you have a roadmap to get there as well and you know that you’re going to maximize the value of your business at the time of the exit which is frankly what most of us want to do. That’s usually the goal. Scott, we could talk a lot on this and really get more in-depth. Thank you so much for coming on. I hopefully can have you on in the future we can spend less time on why and more on the how because it seems like we just started to scratch the surface on this but I really appreciate it. Where can people find out more if they want to ask you questions about forecasting or frankly anything else that Northbound does and I’ll just make this quick plug; you guys do great work. I love working with you guys. Where can they find out more about you and your group?
Scott: Yeah so I’m always happy to answer questions so people that want to get a hold of me individually ScottDeetz@NorthboundGroup.com or if you want to get in contact with us just in general do Info@NorthboundGroup.com and I’m happy to answer any questions. You’re right there’s just so much to this but it’s to me the most powerful thing that can put you in control of your business. So if there are people that are out there that feel like they’re kind of bouncing along and they don’t really know where their business is going or what its true potential is, forecasting is the thing that gets you back on the horse where you’ve got the reins firmly in control and you can see your business as opposed to just feeling like you’re reacting to what’s in the rearview mirror. So thanks for having me on. I look forward to obviously working with you on [inaudible 00:45:28.5].
Mark: Thanks, Scott.
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