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Business Forecasting: Get a Competitive Edge With These 5 Tips
By Quiet Light
Have you ever felt super pissed-off at your weatherman? Maybe he told you it would be sunny all weekend, so you planned a trip to the beach, only to discover it’s raining cats and dogs. Forecasting in the world of business can feel the same. The art of business forecasting often feels like more art than science, but when you practice it enough, you can avoid annoying gaffes like your poor weatherman. In fact, when you master the art of forecasting revenue for your Amazon business, you’ll decrease product costs, become more competitive, and put more moolah in your pocket. Get the how-to from Scott Deetz, founder of Northbound Group, to become your own weatherman.
IN THIS POST
Remember the saying, “When it rains, it pours”? In the business world, that means you’re either swimming in so much cash that you don’t know how to handle it, or you’re facing obstacle after obstacle to earning the fat stacks you deserve.
What’s in the forecast for your Amazon business? A much-needed rain or a torrent of misery?
Whether you’re ready to offload your business for greener pastures or you want to keep your biz for a while, you have to know your business’s value. That’s where forecasting comes in.
Now, don’t get me wrong. Plenty of folks have given business forecasting a bad rap. Some entrepreneurs use it as a way to artificially crank up their biz value and use not-so-accurate numbers to get there. For shame!
Forecasting is actually a reliable tool. The problem is that less-than-savvy entrepreneurs try to link weak data points to create a “forecast” that fits the narrative they want to see about their business. But real, true forecasts are based on data, experience, and a heap of logic. They’re a reliable way to understand your business’s value and communicate that value to a buyer.
Let’s ditch the wishful thinking, shall we? Instead of building a forecast on a hope and a prayer, you need a new approach that’s rooted in analysis and fact. After all, your local weatherman doesn’t lick his finger, stick it in the air and say, “Yup, I think it’ll rain all week.” He uses real, actual science to figure these things out, and you should, too.
The slam-your-head-on-the-table problem with Amazon businesses is cash flow. Your business is growing, so what do you do? You pump your earnings back into the business to fund inventory. With this business model, there’s always going to be some estimation happening when you’re forecasting. But your business doesn’t stand a snowball’s chance in hell of succeeding if you don’t forecast the right way.
Become your own weatherman by mastering forecasting 2.0: forecasts that are educated guesses based on, y’know, real numbers instead of guesstimations. When you become the weatherman, you decide whether it rains or shines for your Amazon business.
But chances are, nobody’s taught you how to forecast correctly. And yes, there is a right way to forecast. Quiet Light chatted with pro forecaster, Scott Deetz, to get the skinny on how Amazon businesses can not only predict their business’s performance, but change it using the power of good, old-fashioned data and forecasting best practices.
Scott Deetz is one of the few human beings on Earth who enjoys crunching numbers. But the one thing he loves more than crunching numbers is to see businesses succeed and grow. Scott got his start in 2013 as an Amazon business owner but soon realized other Amazon sellers were running their biz into the ground.
The problem? These suckahs weren’t forecasting right. That meant they were running their business roughshod, experiencing crazy monsoons of business followed by painful droughts.
“I realized I liked helping people,” Scott says. That’s why he created Northbound Group in 2016. Scott uses his background in corporate transactions, mergers, and acquisitions to help Amazonians with their strategic finance and corporate development. Translation: he helps Amazon sellers go from mere product-slingers to powerful brands.
Quiet Light partnered with Scott during the crazy-but-amazing Joseph Harwood transaction, an exceedingly complicated deal involving a UK-based seller and a US-based buyer. As it turns out, much of that deal’s success involved accurate forecasting methods, showing the buyer the business’s potential.
But let’s pause for a second. I know that business forecasting can be a … touchy subject. Many entrepreneurs treat forecasts like a Magic 8 Ball: fun and interesting, but not rooted in reality. That’s why buyers don’t want to rely on forecasts when they buy a business.
The neat thing about Scott’s process, though, is that it’s different than the wish-and-a-prayer forecasts that entrepreneurs have grown to hate. Scott’s approach (which we’ll dive into in a bit) updates your forecasts on a weekly and monthly basis, using hard data, seasonality, and trends to make conservative projections about your business’s future performance. When buyers take a peek at Scott’s forecasts, it changes the dynamics of a sale. Cough cough, that means the buyer is more enticed to buy, cough cough.
Before we jump into Scott’s forecasting method, it’s important to understand why in the world entrepreneurs forecast anyway. I mean, if buyers think that forecasts are a bunch of hoopla, then why the hell should you bother with them? The key is to first do business forecasting right, and when you do it right, you’ll see that it has plenty of applications for your Amazon biz.
1. Cash Flow Planning
Have you ever asked yourself:
- “Can I afford to hire an assistant?”
- “Do we have enough cash to innovate our existing products?”
- “Can I order more stock ahead of the holiday season?”
If so, you need cash flow planning. Cash flow is the number-one issue for Amazon businesses because your biz is all about inventory. Order too much, and your cash is tied up in products. Order too little, and you won’t sell enough to make ends meet. It’s a fine line that owners skirt all the time in a cycle of feast-or-famine that can drive you nuts. “Everybody is doing this dance between growth and having enough cash to grow,” Scott says.
Cash flow planning is good for all businesses, whether you’re planning an exit or whether you want to keep the biz for a while. To do cash flow planning that won’t put you in the poorhouse, you need business forecasting. “Forecasting helps you determine where you’re making your money and where you’re not making money,” Scott says.
It’s like measuring the tide: you can see how the money ebbs and flows, comes and goes. Forecasting revenue is the best method to give your business a sense of financial normalcy.
Instead of fronting too much or too little into your inventory, savvy Amazon sellers become their own weatherman with forecasting. They learn to read the signs of the market, their historical trends, seasonality, and more to ensure they have enough cash to meet their goals.
2. Spot The Profitable (And Not-So-Profitable) SKUs
It’s inevitable: some of your Amazon products are going to bring a torrent of cash into the biz, while others leave you high-and-dry in a drought. Unless you’re tracking your SKUs for margins and units sold, you have no idea where your money is actually coming from. More often than not, Amazon entrepreneurs think certain products are successful, but in reality, it’s another product entirely.
Don’t you want to know where your money is coming from? Use the right forecasting methods to see when a product is making a great profit, and under what conditions. For example, with forecasting, you can see that a product does great in the US market, but not so great in the UK market once you apply margin-devouring VAT.
Basically, business forecasting shows you how to focus on the right SKUs so you can pump money into things that are profitable. “Don’t put the gas pedal down on an area of your company that’s not as profitable,” Scott adds.
3. Score Better Supplier Terms
If you can make a deal with your supplier, you’ve got it made. This is an underrated business strategy, but boy, when you’ve got an in with your supplier, it’s a game-changer for your business.
But here’s the thing. Suppliers are wary of the people they sell to. You might think you can move a million units, but your supplier isn’t willing to risk that. That means they aren’t going to bust their ass producing that much product, only to have it pile up at the end of the conveyor belt, unsold. And that’s why many suppliers won’t give you a better deal: they don’t trust you.
Fortunately, good forecasting methods change that. If you don’t have the cash to front more units, but you’ve done the math and know they can sell, it’s time to have a chat with your supplier. Instead of taking a ton of risk by taking out a bank loan for inventory, you can ask your supplier for better terms, like payment terms after shipping.
If you can walk through the finances with your supplier, you can sometimes make a good-faith deal where they agree to front that inventory without upfront payment. You still pay them, of course, but it’s a little delayed, which gives you time to normalize cash flow.
So why do we care about supplier terms? You’re ordering more units at a lower price, which you pass on to the customer. In the uber-competitive hellscape that Amazon can be, you need every advantage possible. Wouldn’t you say that lower pricing is an advantage? “We eliminated the cash flow problem for one of my clients, which gave us a competitive advantage against other people that have cash flow problems,” Scott says.
4. Prevent Stock Outages
Did you know that, in Australia, they have such a thing as a fire whirl? It’s literally a tornado made of fire. That’s what is going to happen to your business is you run out of stock, especially if that happens during the year you plan to exit. It’s a flippin’ catastrophe that doesn’t even seem real because of how horrible it is.
You want to prevent selling out of stock at all costs. This is a general rule of thumb for any business, but especially if you plan on selling your Amazon business this year. That’s because, for every dollar of profit earned in the year you sell, it costs you 3-4 times that profit.
Let’s break it down: if you go out of stock, you’re out $10,000 in earnings. But you aren’t just out that $10,000 in profit. If you have a 3X multiple, you’ve actually lost $30,000 in profit, or nearly $100,000 off the sale price of your biz. And that’s just from one outage. Yeowch!
This is, by far, the most expensive and horrible way to run your business. You’ll demolish your value if you run out of inventory on the regular. That’s like having a fire tornado every month—and one fire tornado is one too many. “If you’re thinking about selling your business, you have to understand that every dollar of profit in the year you sell costs you three to four times that amount,” Scott says.
Business forecasting helps you say, “Not today, Satan.” You can prevent these outages with forecasting because it helps you order the right amount of inventory every time. It helps you address problems proactively instead of realizing, “Oh crap, there’s a fire tornado headed towards my house.”
So, yeah, forecasting is a big deal if you want to:
- Have more money in your bank account when you need it.
- Invest your time and money on products that win.
- Be more competitive on Amazon.
- Avoid running out of inventory.
Now, how do we make business forecasting happen? Scott recommends that you follow these 5 best practices before diving headfirst into the algebraic world of forecasting. This will help you build better forecasts that let the sunshine in, saying sayonara to rainy days.
1. Forecast Regularly, Not Just As A One-Off
Forecasting isn’t something you do one day in a panic and then set aside once things cool down. Forecasting is a business practice, not a tick-mark on a one-time checklist.
Business forecasting isn’t just a tool; it’s an ingrained methodology that you can show and explain to other people, like suppliers and buyers. Just like how your weatherman is versed in the science of meteorology, you have to learn the science behind forecasting methods and implement it regularly. I mean, the weatherman doesn’t forecast for the whole year in January, right? He’s doing forecasts at least once a week and updating as he goes. You need to do that, too.
When Scott worked on the Joseph Harwood transaction, he was putting numbers in every week. After some tweaking, he was able to do the forecast in 60 minutes a week. Over time, he learned more about the business and got the forecast more accurate. By the time he put the forecast in front of a buyer, it was a clean, logical forecast that facilitated the transaction.
But remember, you need clean books and clean data to get this done. Documentation is one of the four pillars of a sellable business (along with growth, risk, and transferability). Get that shit cleaned up so you can not only do forecasting right, but eventually exit from your biz with a wad of hard-earned cash.
2. Speak Your Buyer’s Lingo
Buyers are very, very wary of forecasts. Like your local weatherman who just can’t seem to get his forecasts correct, buyers have learned not to trust sellers’ projections. It’s your job as a business owner to minimize the buyer’s perceived risk in buying your business. “You need to speak the language of a buyer to build credibility,” Scott says.
Buyers only care about one thing: the buyer’s effective multiple. That’s the price the buyer pays for your business divided by the earnings they expect to rake in.
But wait a second. Doesn’t that sound familiar? This is actually a form of business forecasting! From the same people who don’t like forecasting! Like it or not, all savvy entrepreneurs do forecasting to predict the numbers.
So yeah, buyers are building forecasts; they just aren’t sharing them with you. In their case, their forecasts are all about sweet, sweet ROI. Understand that buyers for your Amazon business are going to be looking for ROI to speed up your transaction. That’s why you have to use the numbers to speak their language.
You can speak your buyer’s language in a few ways:
- Use conservative estimates: That’s great if things work out better than expected, but you always want to show worst-case or medium-case scenarios. “We show conservative numbers that tell the buyer they’ll be in a pretty positive situation,” Scott says.
- Show how you got your numbers: Buyers will trust your forecast if you explain how you arrived at your numbers.
- Focus on ROI: This is your way of answering the “So what?” question. The numbers should show how a buyer will make back their investment and then some.
Buyers purchase your Amazon business to make money. You can use these forecasting methods as a strategic communication tool that gives a buyer a good view of your business—so they’ll be comfortable paying a higher price tag.
3. Look For Seasonality
Just like the weatherman predicts the weather based on the season, you need to identify seasons in your Amazon business. And in the breakneck world of Amazon, your business probably has 12 different seasons—one for each month, baby.
Seasonality has a huge impact on your forecast. For example, if you sell 70% of your product from September – December, your forecast needs to reflect that. This will help you order the right amount of products ahead of a busy season so you aren’t caught off-guard.
4. Innovate, Don’t Stagnate
You probably have a few favorite “superhero” SKUs. You know, the ones that account for a bulk of your sales and fly off the shelves with ease.
Guess what? Those products are a ticking time bomb. They aren’t going to sell like this forever, and it’s short-sighted to assume so. “You can’t count on products always being the big winners that they are today,” Scott says.
Products tend to have a three-year lifecycle before they start to decline. Other factors, like industry changes, the economy, and your competitors can also be Kryptonite to your so-called SKU superheroes.
Instead, remember that you still have to innovate your products. Forecasting revenue can help you plan for R&D on new products, ensuring you sustain long term value and growth. “Look at every product, what it’s done historically, and implement what you believe it can do,” Scott says.
5. Don’t Mistake Tools For Wisdom
We’re about to dive into Scott’s forecasting methods, which uses a few tools. As fun as tools are, don’t get hung up on the tools alone. Helium 10 is great, but it doesn’t know your business like you do. Treat these tools as information that informs your decisions, not actual decision-makers. That’s your job!
Tools give you data, which leads to information, which leads to decisions, which then leads to wisdom. Tools cover the data and information part, but it’s up to you to transform them into decisions and wisdom.
Yeah, tools are kickass, but it’s about having a methodology in place to make sense of those tools and how you apply this information. For example, tools might say your product is growing, but you know that your 5-star ratings have decreased by 20%. So you lower your forecast for that particular SKU based on your experience and knowledge as a seller. Be malleable and don’t let tools distract you from the big picture.
Buyers don’t like forecasts because they’re often made on a wish and a prayer. They’re what you’d like to see in your business or in the market, but might not match up with reality. This happens a lot because running a business is hard. You already know that, but the stress and pressure can make you appraise the market in an inaccurate way, leading to inaccurate forecasts.
While there’s an element of risk in any forecast, Scott’s process gets more specific. In fact, the more specific the forecast, the more you can structure a deal around that forecast if you want to sell your Amazon business.
Scott says there are 4 levels of business forecasting and they get more complex as you level-up. You should, at a minimum, do level 1 and work your way up as you get more experienced. But first, you need to lay the groundwork.
Begin At The Beginning: Project Your Product Sales
The first building block of any good forecast is understanding your product sales. You’ve got to do this before you try any forecasting methods. This involves looking at each product’s:
- Historical sales
Once you know these two figures, you can start projecting sales for each SKU on a daily basis. Multiply that times 30 and voila! You’ve got a projected estimate for how much that product will sell in a month.
But what if you want to launch a new product? You don’t have historical sales for that. How can you forecast while you’re launching something totally new? Scott’s got ya covered.
You can still forecast for new products by:
- Accounting for your launch budget, where you build in the upfront cost to build or market the product.
- Work backwards. Use tools to help you set a realistic goal for your product sales.
- See where you are today, and make a plan to scale that product to meet your desired forecast.
Of course, keep it realistic. Don’t project that you’ll sell 1,000 units a day if the market doesn’t support that. Helium 10 is Scott’s tool of choice to assess the market potential of a product, which you can then use to forecast.
You can also look at your product trajectory rankings in Amazon. These tools will help you see how much competitors are selling, so you can set goals to overtake competitors in the space. Just like a weatherman won’t predict that it’s going to rain meatballs, this process helps you shoot for the stars while keeping things realistic. “Look at where you are now. Then build your forecast to the level where you’d like to be,” Scott says.
Okay, so once you’ve got your basics covered, it’s time to delve into forecasting level 1. Whatever you take away from this blog, it should be that you need to, at a minimum, do level 1 forecasting.
The goal of level 1 is to forecast your sales for the next 12 months. You can do this with the product data that you just compiled, as well as your ASIN report. Create a simple Google Sheet and start tracking your units and sales every week. Spend just 30 minutes a week to fill in this data.
Scott guarantees you’ll learn something valuable about your business with this surface-level work, as long as you do it consistently. “Build a very simple spreadsheet and commit 30 minutes a week to it,” he says.
Ready to level up? Great! In level two, you’re going to look at seasonality and new products.
For seasonality, you should look for time-based patterns for your product sales. Do you sell more during a certain month? Or season? Or maybe at the beginning or end of the month? Look for patterns and reflect them in your spreadsheet.
If you’re planning to roll out 4 new products in the next year, compare these to the performance of your current products. How are they similar? How should they sell in the market?
Don’t worry if your spreadsheet isn’t that accurate right now. As you collect more data about your business, you’ll notice seasonality and patterns. Over time, you’ll be able to build much more accurate forecasts for your products. You got this, boss!
In Level 3, you forecast on a percentage of revenue basis. In plain English, that means you’re looking at your costs as a percentage of each product.
So, if you’re forecasting that revenue will grow by 20%, does that come with an increased cost of goods? How do product costs affect your revenue? For example, are you spending 20% of your revenue manufacturing a product?
Every product will have a different cost-to-revenue ratio. “Know all of your overhead costs and percentages,” Scott says. If you’re sick of getting swept away by a surprise typhoon of expenses, become your own weatherman and forecast these things ahead of time, protecting your cash flow.
The final level of business forecasting is Level 4: scenario analysis. This is admittedly more complex, so Scott recommends partnering up with a pro to walk through this together. Basically, scenario analysis means you build worst-case, middle-case, and best-case scenarios for your forecast.
If you’re selling your Amazon business, you can present all 3 scenarios to your buyer. In an ideal world, this would show the buyer that, even in a worst-case scenario (like a fire tornado, for instance), they still stand to get some great ROI. This is a lynchpin for pushing through a sale with a nervous buyer, but you need to make sure your scenarios are realistic.
Forecasting methods are a big, fat, important component of selling your Amazon business. But even if you aren’t planning to sell, business forecasting helps you manage cash flow, focus on profitable SKUs, score better supplier terms, and prevent under- or over-stocking.
Forecasting also helps you know when it’s the right time to sell. Like a tornado warning, forecasts will tell you when it’s the right time to hunker down where you are, and when it’s the right time to exit. Business forecasting tells you when your value has hit a certain level where the buyer stands to get ROI and you stand to get a nice, juicy check for your hard work. “Forecasting is a simple thing that tells you when it’s the right time to sell,” Scott says.
But you can’t become your own weatherman overnight. It requires practice! Start now with these 5 forecasting best practices. It’s okay if you aren’t good at it. The best way to start is to begin and allow yourself to be sucky at forecasting. Over time, you’ll learn so much about your business, which is empowering for any business owner, no matter where you are in your entrepreneurial journey.
So what’s in your forecast? When you become your own weatherman, you’ll not only see sunny skies ahead, but also learn to roll with the punches. Start forecasting to create a perfect storm of profitability, sanity, and growth for your Amazon business.