Why Optimized Products Can't Lose

If you're a fractional cfo, if you own a product based business and you want to optimize it and make more money as soon as tomorrow, here's what you could do. I have the three things that you can do to optimize a product based business. Hi, my name is Charles Laikoff. I'm a fractional cfo. I've helped hundreds of clients as a fractional CFO and I've also trained hundreds of accountants and bookkeepers and corporate finance professionals to become a fractional cfo. And these are the three ways you can make more money as a product based business. Now, a product based business is simply someone who sells widgets, someone who sells things, be it an E Commerce store or Shopify store or a retailer, there's really three main levers that you can pull. I'm going to walk them through here. Three is product probably the most important, but it builds upon the foundation of the first two. So let's go ahead and cover the first one. The first one is margins, right? So what is a margin? Typically you have a whole bunch of different types of margins in a business, but we're going to focus on the cost of goods sold or the gross profit margin. The gross profit margin is defined as this. If you sell an item for $100 and the item cost you $20, your cost of goods sold is $20, right? The item costs you $20. Your revenue is $100 because you got $100 for selling the thing. And your gross profit, which is revenue minus cost, is $80. So your gross profit margin would be considered $80. So there's revenue, right? So revenue minus cogs, that's a V, C O G S revenue U minus cogs equals gross profit, equals gross profit margin. Gross profit margin is that number to percentage, right? Percent here. Now when you're selling something online, I'm going to talk about specifically for Shopify sellers. This numbers may change for other sellers all over the Internet. But I have a fractional CFO for E Commerce. So I'm going to talk about specifically for shop. So specifically for Shopify, if I'm selling stuff on the Internet here, I want my cost of goods sold to be 20% or lower. Now you might think, Charles, dang, if I'm selling widgets to people for $100, like I'm selling $100 skincare kit, it should only cost me $20. You're like, oh, that, that sounds like that's a really big margin. Does it really need to be that high? It does, because you need to pay for Facebook and YouTube and TikTok and all the other ads and you need to pay costs and you need to pay shipping and all that. So your margin needs to be pretty high because the cost of the product is not the main cost. Getting it to the customer and advertising it to the customer and like paying for your oper significantly more than the product. If we could remove those things, you could get a lot more value, but it makes a lot harder. So you want at least a 20% here. So I'm going to do, I'm going to do cogs cost of goods sold 20%. You can do better, right? You can get lower than that here, but you really want to lease that. If you want to scale 25% of the highest, that's number one. Number two, because that's going to leave you in a margin to scale. If you don't have that, you're not going to be able to scale. I've seen it time and time again. I work with hundreds of clients and they usually come to me like Charles, I can't grow past the 2 or 3 million mark. I don't know what's going on. I can't spend more money on ads. What am I supposed to do? And I find out their cost of goods sold is like 40%. And I go, oh, you can either get it cheaper or you can sell it for more. Those are your two options. And so we're trying to improve our margins. If our cost of goods sold is 20%, if it cost us $20 for the item and we sell it for 100, if we want to improve that number, improve the margin, we can either sell it for more or get it for cheaper. Those are your two options here. So when we're thinking about a decision tree of do we go left or do we go right? For margins, it's can we raise the price or can we add more value or change the offer to increase the price, which I I'll make more videos on. Can we get it for cheaper? And do you have a commercial negotiation? Do you have a bid process or a buying process to get it cheaper? There's topics of different videos, but this would search you down that decision tree path. Now let's go to number two. Number two is our favorite thing in the world, which is inventory. Now, inventory, if you're a small business owner, it can be absolute nightmare. What do I mean by that? Because people either have too much or too little or whatever else. So inventory, there's multiple components of inventory. There is how Much do you have? There's how much do you need and when will you run out? And so there is a very different things, right? If I think of inventory here, and I'm going to, I'm going to write this here, we have stock, right? So how much do you currently have? We have the forecast, right? So I'll do FC for forecast here. And then we have. Those are the two main things. And then I guess we'll do payment terms, right? Bmt. So stock forecast, payment terms. Oftentimes when people are buying inventory for their small business, they think about we sold XYZ dollars last month and I have a question to you. If you're watching this. If you have an item that sells really good for Black Friday, really good for Christmas, you sell a ton. But as soon as it stops getting cold, it stops getting gifting, your productivity slows down. Like what happens if you sell skiing socks? I'm assuming your revenue is going to be really high from November, December, January, all the times where people are skiing, when they start to get skiing. Are people in North America buying skiing socks in the middle of summer? Probably not. So your revenue is probably going to go down. If you're placing a January order and you're going to get it in 90 days. So January, February, March, April, right? If you're getting the order in March or April, but you're placing it in January, are you going to base your purchase off the sales that you did in December, November, which are some of your busiest times of year? If you do, you'll find that you don't have a lot of money, right? You'll find you don't have a lot of sales in the slower months. So when you are purchasing stock, you want to do it off of how much you have forecasted, right? How much you are going to sell, not how much you sold. That is a very different. So if you're growing month over month, if you're getting larger, if you're selling more, you don't want to buy the same amount that you bought six months ago. If you're selling three times the amount six months from now, so you need to buy how much you're going to need, not much, how much you needed, past tense. So that's the forecast stock you want to make sure. How much do you have? Do you have 30 days of supply at the amount that you're going to sell? Or do you have 20 days of supply? Or do you have six months of supply at the amount that you have 40% of all lost sales in The United States come from not having enough stock, from not having stock outs. So if you're able to delete or fix stock outs as a fractional CFO or a small business owner, you can make so much more money for you and for your clients by making sure you have the appropriate amount of stock, like 40% of all sales in the United States. That's crazy. So here, right? Because the idea is if you sell widgets and you don't have the widgets to sell, you making any money. That day, I was a CFO of a skincare company and we sold a lot. We were growing really quickly. We grew 400% year over year. And I turned up a sign and it was a train. And I put the logo of the company on the train. I said, this train has no brakes. And I taped it to my office door because someone always asked me, charles, we can't make production capabilities. We can't order things on time. We're gonna have to turn off the ads and turn off the marketing. I was like, cool, so you want me to go and take the little spigot that pours. Pours money into all of our mouths, our paychecks, right? And you want me to close that spigot, which is marketing. If I have to turn off that spigot, someone's losing their job. Figure out how to get made and how to get it done. Because we are not having stockouts. And that's a very intense thing to say. But as you're growing as a small business, stock outs are not acceptable. And that's the number one thing that's most important. So we've got the stocks stock here. You don't want to run out of stock. There's a calculation you can look up online called safety stock, which is how much do you need to buy if you sell more than you ever sold, the most you've ever sold with the longest amount of lead time. So you can look at the safety stock calculation here. And then there's payment terms for inventory. Bring me to number three, which is cash flow. If you are growing a business rapidly, that is a product based business. Here are examples, like a Shopify store. One of the things that you need to look at on is cash flow. If you are scaling aggressively and you are growing month over month and you are doing bigger numbers, which means you are going to sell more in the future than you sold in the past, which means your inventory orders need to get larger, which means you have to pay for them in advance. Right? Because you buy the inventory Today, but you get 30, 60, 90 days from now, and you're going to be selling more. Your inventories are going to get larger faster than your revenue is going to grow. And so you can find yourself revenue rich and cash poor as a fractional cfo. Actually, lots of clients come to me with this specific problem. They're like, Charles, I do a million dollars a month and somehow I don't have any money in the bank account. Because you did 600 grand the prior month of sales and you ordered $100,000 more of inventory. Things are getting more expensive as you scale because you have diminishing marginal returns when it comes to advertising. So your margins are shrinking. It's a very specific problem to fix, by the way. And if you're a fractional cfo, it's a million dollar month problem that you can solve and you can earn significantly well from that. So how do you fix cash flow problems? There's three ways, right? You can manage inventory margins, which are part of it. But the third is how long does it take to get paid? Usually with a Shopify store, it's pretty darn quick. Shopify processes the transaction. You get paid the next day. The next thing is how long does it take to pay other people? What are your payment terms on your inventory? Are you paying it when it's due? Are you paying 30% now, 70% when it shifts? Do you have creative payment plans set up with your vendors? Do you have financing like a line of credit? Do you have other things? There are different, multiple things you can do for cash flow. A couple of things that I like is a line of credit here that's from your bank or it's a credit card. So line of credit. And there's payment terms, right? Payment terms here. And then there's a good forecast slash budget. So line of credit here, you can go to your bank and get a 10, 12, 14% line of credit. Sometimes cheaper, right? Depending upon the time. If you look at this video in a later time, interest rates may have changed, but you only pay on the amount that you're currently using, not on the whole line. So if you go get a $250,000 line of credit, but you're only using 100 grand, you're only going to pay 8, 12, 10, 10% of interest on that 100k, and as soon as you pay it off, it's gone. Whereas a credit card is 20, 25, 30% interest rate. When you look at those line of credits can be a whole lot cheaper. You can tap it just like cash. It's like a bank account you can withdraw from. That's number one line of credit. Two is payment terms. If you pay all of your suppliers immediately, we'll go back and call all of them and say, hey, can I pay you guys in 15 days when I make an order? Can I pay you in 30 days when I make an order? That's the next thing that I would look at is payment term. Go do a vendor optimization single vendor you have for better payment terms. I can make a whole other video on how to do that, how to go about it. If I do, you'll see it in my channel here. And the third is, do you have a forecasted cash flow? Do you know how much is coming in every month? Do you know how much is going out and how are you planning for that? When you look at large businesses that make big inventory orders, your cash flow can be rather lumpy, right? You do a big sale, bank account goes up, you maybe do a big inventory order, bank account goes down. It's not about how much you have in the account today, it's about the flow of the account in and out on a weekly basis. And so if you can build a 13 week cash flow statement, which your fractional CFO should be doing for you or you should be creating, if you are the fractional cfo, you can get a whole lot further because you can plan for those big ups and downs. Your finances as a product business owner are like a roller coaster. I'm rich, I'm poor, I'm rich, I'm poor. That's more noise. You want to look at the average over time, not the in and out fluctuations. And if you do go up and down big, that's where you can use line of credits and things like that to sort it out. But it's all about good cash planning. So these have been three ways that we can optimize the business. We've covered margins, right? We've covered inventory, we've covered cash flow. If you do these three things for small businesses that are product based businesses, you can make them significantly more, they can grow significantly faster here. So if you want to learn more about all the stuff we put together, go check me out@profitsearch group.com where we have all of our information on financial training, how to do this for clients, and including our fractional CFO certification. See you guys.