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

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.

A day to Remember...

In Flanders Fields

In Flanders fields the poppies blow
Between the crosses, row on row,
That mark our place; and in the sky
The larks, still bravely singing, fly
Scarce heard amid the guns below.

We are the Dead. Short days ago
We lived, felt dawn, saw sunset glow,
Loved and were loved, and now we lie
In Flanders fields.

Take up our quarrel with the foe:
To you from failing hands we throw
The torch; be yours to hold it high.
If ye break faith with us who die
We shall not sleep, though poppies grow
In Flanders fields.

The poem In Flanders Fields was written by Lieutenant-Colonel John McCrae in World War I, and along with the poppy, have become the symbols to remember those man and woman who fought and died to protect our freedoms.

Today, November 11th, is Remembrance Day in Canada, and at 11:00 am I will offer a moment of silence in remembrance.

And I shall never forget.

iamgpe

#!@$... a spelling mistake! Thank you for letting me know.

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

I have been blogging in earnest for about two years now and my reasons are simple; articulate my expertise as someone who can solve Sales & Marketing problems and become a better writer. 

I will be the first to say I will never be a great writer, but I do believe I can be a good writer and maybe even a very good story teller; I've been encouraged to this end because when I look back at my body of work I can see improvement, and I've also been told by people I respect that I am getting better. 

With all of this said, the bane of my writing experience so far is proof reading, and by extension, spelling mistakes!

This point was illustrated in glorious fashion with a recent "re-post" on beBee entitled Never lose your sense of wonder, or in other words...  where a misspelled word slipped through... and worse still, the error was in the "title".  It seems that the word "lose", which means "to no longer have", changes to something completely different when you add an extra "o" and the word becomes "loose".

This is exactly what happened when I published the original post, and in effect asked people to Never "fasten tightly" your sense of wonder; I suppose the title would work if the subject matter was about never committing to a sense of wonder, but it wasn't... and worse still, I was oblivious to all of it. 

That was until two people let me know about my error. It was then I simply said to myself, "Ugh... I better fix this".

I have come a long way from internalizing this sort of thing, and using it to identify ability and self worth; I now just see it as a problem that needs to be rectified. I will admit it was really irritating and a glaring reminder to improve my proof reading ability, but three minutes later, with the rogue "o" removed and the proper meaning restored, I was happily back to my oblivious self.

With the mistake behind me, I could not help but turn to the fact that someone, more than one someone in fact, took the time to let me know that I had made a mistake. They did it with respect, and even a little concern that I may be upset that they had pointed it out; I was not, more to the contrary, I really appreciated it.

Is there a point here regarding getting better at proofing when you write or the value in learning from your mistakes... there sure is. However, what this experience has offered me was the opportunity to pause and appreciate those people who not only read what I write but take the time to engage, and help me become better at what I am doing. Maybe it is an aspect of beBee (the social media site I am on), or that people generally want to help, or possibly the "luck of the universe" was on my side that day... whatever the reason, I want to simply say, "Thank you".

And one last thing, until the end of my days, I will never confuse "Lose" and "Loose" again.

iamgpe

PS: Please let there be no spelling mistakes.