The "black and white" art of forecasting...

in

It wasn't too long ago that I was working with someone who was interested in becoming a distributor, which in itself is a very workable idea, but the strategic reasons were reflective of someone who was losing their way and trying to solve a problem with the wrong solution.

There came a point in our conversations where it was time to get very "black and white" with all of it... we needed to literally put pen to paper (or the modern version we affectionately call excel) and build out "the numbers for this idea". We needed to forecast the revenue this idea would generate, how much it would cost to run, and understand what the operating income would look like*.

We needed a financial picture of what we would be getting into.

Forecasting, in this context, is defined as a planning tool that helps management in its attempts to cope with the uncertainty of the future, relying mainly on data from the past and present and analysis of trends.
Forecasting starts with certain assumptions based on the management's experience, knowledge, and judgment. These estimates are projected into the coming months or years using one or more techniques such as Box-Jenkins models, Delphi method, exponential smoothing, moving averages, regression analysis, and trend projection. Since any error in the assumptions will result in a similar or magnified error in forecasting, the technique of sensitivity analysis is used which assigns a range of values to the uncertain factors (variables). Source: http://www.businessdictionary.com

After creating a simple spreadsheet that had twelve months across the top and rows assigned for Units Sold, Revenue, COGS (Cost Of Goods Sold), and the various expenses down the left hand column (with all the formulas in place to make addition and division easy), we began to fill in the blanks with numbers that would represent the first year of the new business.

When you are looking at this for the first time, the numbers that find there way onto the spreadsheet are based on experience, working knowledge, guts, glory and wishful thinking. Initially this is your best educated guess and something you have to challenge as you work through the process; as the numbers begin to take shape, the discussion that comes with the process will shed light on the considerations to make the idea (or in this case "distributorship") viable... it will also uncover the risk(s) associated with it, and for that matter, the tolerance for that risk.

Units sold:

  • Looking at units sold offers consideration regarding your product, what it looks like, how it is stored, the space needed, how it is shipped, handling considerations and the process flow from order to cash. (Distribution)

Revenue: 

  • Revenue is a big one because you can walk back from it and begin looking at the customer, where the opportunity will come from, the process used to engage the customer, manage the customer, and influence them to buy your product; as well as considerations to the price you set. (Customer Service, Sales and Marketing) 

COGS: 

  • COGS gives you insight into the cost of your product (or service) and more importantly allows you to give thought as to how to reduce it; it is here you can increase your Gross Margin by reducing costs.
  • With regards to being a distributor, COGS is something that is negotiated, which more often than not means it will be what the manufacturer says it is; unless that is, you happen to have established customers and unit sales to use as leverage. (Manufacturing)

Expenses: 

  • This highlights all the money you will need to spend to make the business viable. Some are obvious, but some are identified when you work through the considerations of Units sold, Revenue and COGS. Don't underestimate how important this is and over estimation is always prudent.

This is by no means a definitive process for identifying the financial viability of a business or encompasses the other complicated financial considerations that come with trying to get someone to buy your product. What it can do though is offer a "black and white forecast" for the direction of the business over the next twelve months, and more importantly, give you a financial reference point to work from as you identify areas of opportunity and concern.

In the end, the distributor idea was put aside because it simply was not going to generate enough money for the effort. All in, this process (including spreadsheet development) took about four hours, and in my opinion was time well spent because it ensured we were looking at the situation with eyes wide open, and without rose coloured glasses.

Over the years I've found getting it down on paper, in black and white, is a very good process for making better decisions... and that day we looked at the viability of a distributorship, was no exception.

iamgpe

* Let's not get into EBITA (and the like) for a number of reasons, which include the most obvious one, I'm not a finance guy. I do know a couple of good ones though.

Thoughts on a business in transition... the first of many it seems.

in ,

The following is the original and the rewrite can be found by clicking here.

Recently I have been having in depth discussions with a colleague of mine regarding businesses in transition, what it means, its impact, and how our backgrounds offer a unique perspective on this topic; particularly on the commercial side (Renee is quick to remind me that Sales and Marketing is much clearer than saying "commercial"; this is another point of discussion). Call it Commercial or Sales and Marketing, we definitely can offer insight.

Transition (the noun) is defined as the process or a period of changing from one state or condition to another*, and with respect to business, I will say this is a constant state... the exception I suppose is when a business is stagnate (showing neither growth nor decline). Even this stagnation though will tip either towards growth or decline in time and return the business to its natural state of change. BY DEFINITION, A BUSINESS IS ALWAYS IN TRANSITION... sometimes fast and sometimes slow, but always transitioning one way or another.

There are four considerations that come to mind when it comes to transition that frame up the real world aspects of dealing with it:

Transition due to internal factors - Transition and change in the organization driven by internal activities and initiatives by leadership and employees to build a more viable and successful business. An example of this would be the implementation of a new CRM system for the sales force to manage customer opportunities and increase revenue.

Transition due to external factors - Transition and change in the organization driven by external forces that impact how the company conducts business. Examples of this can range from new government regulations, through new competitive products, to the countless changes that can happen with the customer's ever changing expectations. 

Transition by "evolution" - Transition and change that occur at a controlled pace as part of long term strategic planning, the companies goals, and market considerations. 

Transition by "revolution" - Transition and change that occur because of a dramatic event... either externally or internally. A merger or leadership change (with very different philosophies) represent the more colourful examples of transition by "revolution".

It was at this point I literally looked up from my computer and asked myself, "Do you really believe you can tackle this topic with a 500 to 700 word blog post?"  I will definitely need more words and future posts, and with that said, I will lay the foundation regarding a business in transition by saying,

"Transition in business is a natural state that is under constant influence by external and internal factors, and it is the responsibility of leadership and employees alike to manage this as proactively as possible... ever prepared to deal with the change of revolution" 

The gauntlet has been thrown down... I will organize my thoughts on a business in transition, particularly with the commercial function, and tackle it with gusto 500 to 700 words at a time. I invite my colleague Renee Cormier, as well as anyone else, to offer insights on a business in transition.

Because in a very practical sense, it will touch us all throughout our careers.

iamgpe

* Thank you internet for one of the many definitions.