E-Commerce Growth vs. Profit – Drew Fallon's Insights

How do you typically model revenue?

There's three different components to what I'll call like a consumer brand with regards to revenue. To me, the financial model is the guiding light for all business decisions and roadmap AI is going to be a massive impact on this industry. We're using AI to automate financial modeling and analysis effectively. I'm drawn to startups specifically just for the creation aspect of it.

In your view, what's the key to building a good E commerce model?

I think the number one thing that you can basically mess up and the number one thing to focus on with these e comm businesses is if you mess up the forecast for your returning customer. It's the easiest way to mess up the gross profit forecast. I see. The biggest mistake that I see a lot of the times is basically inflating a returning customer forecast which then inflates the gross profit forecast which then sort of throws off your unit economic targets.

Why would a tool need a platform in E commerce versus just using a spreadsheet?

I would never use Google sheets just because I know how to use Excel. One of the things that people oftentimes get wrong is sort of like the retention decay curve in modeling for.

Welcome to Financial Modeler's Corner where we discuss the art and science of financial modeling with your host, Paul Barnhurst. Financial Modeler's Corner is sponsored by Financial Modeling Institute. Welcome to Financial Modeler's Corner. I am your host, Paul Barnhurst. This podcast is where we talk all about the art and science of financial modeling with distinguished guests from around the globe. The Financial Modeler's Corner podcast is brought to you by the Financial Modeling Institute. FMI offers the most respected accreditations in financial modeling. I'm thrilled to welcome this week's guest to the show, Drew Fallon. Welcome to the show, Drew.

Thanks, Paul. Happy to be here.

We start every show with this question because if you've modeled, you have a horror story. Just the way it works. Tell me about that worst financial model you've ever seen or that you've worked with.

So when I. Yeah, I. I know exactly. It comes. It's. It's very clear in my mind and I wrote. Yeah, yeah, exactly. Ironically, it's for. It was for one of the most well run businesses I've ever seen, the most profitable business I've ever seen. Which sort of called into question whether or not I thought financial models even matter at this point because I was like if these guys don't know how to do it then. But of course they do. So it was literally And I struggle to even call it a financial model, honestly, for a lot of reasons. There was no like driving schedules, there was no real inputs. It was, there was like a sensitivity table that was literally just like hard coded like all the way down. And they would literally say, if we do this much revenue and we spend this much money, this is where our profit is. There was no balance sheet for it. And I was astounded by that because I was like, this is a really well run company, eight figure company. And to me, the financial model is the guiding light for all business decisions and roadmaps. Right. So it was, it was pretty incredible to see just like the lack of effort that was put into, you know, the roadmap for the business, basically. But yeah, I, it was, it was very poorly, Very poorly made.

It sounds that way. As I like to say, sometimes I think companies make money in spite of themselves, not because of themselves. You know, you just, you have to.

Wonder, I mean, sometimes you're making so much money that you don't really need it that badly, I guess.

Wouldn't we like to be in that situation? Sign me up.

Yeah, right. I mean, if you're making that much, it's like, okay, well until that stops, then who cares?

Yeah, Like I was talking with the guy the other day and just the difference between small and large company modeling, you rarely build a three statement model like Apple. Right. They may do it for an M and a deal, but they're not doing it for the company. That's not how they build their plan. And we're talking about. Yeah, I don't think they have to worry about their cash flow. We have at least five year Runway and the one guy's like, yeah, five years. If they don't sell a single product for five years. Right. And so it's just so different versus the small company where every little dollar matters. Because you're like, I got a 12 month or 18 month Runway.

Yeah. And a lot of times in a, in our industry, it'll be paired with a 13 week cash flow model as kind of like a bottoms up feedback into the balance sheet model. Because E Comm. Is, is, you know, it can be a tough business on working capital.

Yeah, no, I know. It's definitely a heavy one on working capital. I did do a retail e commerce model for a company a couple years ago and saw that challenge on their working capital.

Yeah, it's, it's not fun.

Oh, I, I can imagine. So tell us a little bit about yourself, your background, what you're doing today. So Give us the.

Put you on our shelf if you can bring customers in, you know. So like, I think Mad Rabbit, when we got into Walmart, you know, we already had like a million followers on social or whatever. And so that was a big part of the pitch. Right, because they were like, we were like, we can drive traffic to your stores.

Yeah, I could imagine. I actually, I was just in Canada a couple of weeks ago and we did training with Walmart. Oh, cool. Yeah, speaking of them and a little bit of the, you know, kind of their reputation and different things of the challenge of getting in with them being such a big retailer.

Yeah.

So I'm sure that had to be a huge moment for you guys.

It was, yeah.

Next question. This is your third startup. Why? Why startups? What is you love about them? Obviously you like E commerce, but what is your thing about startups? You just like pain or.

You know, that. That may be the answer, Paul, because when I left Mad Rabbit, the brand was doing really well. We had just launched Walmart. We raised $10 million in Series A. And I think I just like pain because like, you know, I went through all the pain part of Mad Rabbit and then the brand finally is like, you know, on its like real legs. You know, we kind of like made it in some ways, you know, not that, you know, not that like we was a, you know, massive billion dollar company or anything like that. But you know, it was, we kind of, we did, you know, what we were, you know, mostly setting out to do. I think I'm drawn to startups specifically just for like literally like the creation aspect of it. Like I, I'm somewhat addicted. Going like 0 to 1, like it's, there's nothing that motivates me personally more than like being able to wake up on any given day and like that day you can actually make a difference within the business, like Iris, you know, extremely early stage business. If I go out there and I hustle today, I can literally, you know, add 5% to the business or whatever, you know what I mean? Or if I go and I hire, make a great hire or I go and I try to find somebody, you know, that's going to be a real needle mover and eventually you kind of, you know, you run out of, out of that and your role changes. Right. But I do think it is kind of like an addictive motion and it's a little bit of like a calling, which sounds like kind of cliche, but I, I loved my, my banking job, I really did. But I didn't love being in like the corporate environment.

You love that startup and making the difference in building something. It's those early days to get you excited and there are a lot of people like that. Serial entrepreneurs. Yeah, they always want to be starting that next company because they love the building. And then as soon as it gets to a certain size, they're like, I'm out. No longer interest me. I'll go find my next project, so to speak.

Yeah, this one, this one might be a little bit different for me because Iris really does sit at sort of the. I could do this stuff for the rest of my life, you know, I really do love as you know. So this is probably the right place to say it, but I really do love like building out models and like performing analysis and all that stuff. Like I could, I could do all this stuff all day. And the technologies that we're using to do some of this stuff are really, it's really incredible. I think, I think, you know, AI is going to be a massive impact on this industry.

Yeah. If you say you love modeling, you're on the right show.

I was gonna say, like, I would normally. That would make me normally sound like a nerd, but I think this is good for it.

This is the Nerd podcast. I have three podcasts and they're all nerd podcasts. I only invite nerds to the show. So you're all good, you're in good company. Why don't you give us maybe just the 12 minute overview. What is Iris? For those who are listening, we'll get into it a little bit more, but give us a quick overview of what Iris does.

Yeah, so Iris, like I said, sort of like a fourth generation FPA tool in the sense that we integrate with all of your existing data sources that would originate any transaction. Right. So let's think about a brand like Mad Rabbit. Right? Because that's a good example of an E commerce brand selling on Shopify, selling on Amazon, selling into Walmart via SPS Commerce, which is a cloud based EDI system. Advertising on Facebook, advertising on Google payrolls, on Gusto or whatever that's all Internet based on. And so these digitally native brands, theoretically you can understand the financial performance in real time of these businesses if you can orchestrate and centralize all that data. Right. Because it does exist on the Internet. So we connect into all of your revenue and expense lines. Anything that would fall into a ledger, like a QuickBooks or NetSuite ledger. We create a data warehouse for you where you have financial A, P and L, effectively financial data in real time. So you can understand like you know, on Tuesdays, you know, my contribution margin or my sales are 10% higher than they are on Wednesdays. Because in E commerce that matters. Like we literally have like daily marketing calendars, right? Because like I said, it's very high velocity. Like you're in that, you're in the ads manager. Today could be 50 grand, tomorrow could be 100. And so we centralize and structure all that data and then we train the ML and the AI on like a structured data set. You know, we have couple billion in GMV at this point and so we use that to basically help them create better financial forecasts, right? So if you're a, a winter apparel brand, you sell winter coats and you think that your CAC is going to go down in the summertime, IRIS can be like, hey, like that's not likely, right, like based on like our category data, right? Because we, we, we've structured everything sort of apples to apples, so we basically run the ML to help people with the inputs of their model, right? So if you have like a CAC driver in your model, we can help you sort of define the parameters around, hey, you know, really based on your historical data and category, you know, tailwinds, headwinds. We think that this, this driver should really sit here. And so we automate the construction and facilitate the forecasting of the actual financial models themselves based off of all of that structured data that we're also performing analysis on.

Makes sense. So let's get into the meat of this financial models for E commerce. In your view, what's the key to building a good E commerce model? Like what are some of those things that are most important to get right?

So I think the number one thing that you can basically mess up and the number one thing to focus on with these E Comm businesses is the returning revenue number. So there's a couple things here, but number one, Amazon has always been a traditionally opaque API or they don't share much data until recently. And so now you can understand new and returning customer analytics from Amazon. You have to have a certain tool like IRIS to actually do that to see cohort analytics. But basically if you mess up the forecast for your returning customer, it's the easiest way to mess up the gross profit forecast. And if you mess up the gross profit forecast, the gross profit forecast is what dictates how much money you should be willing to spend on a cac. Right? Because like if I, you know, because there is no cac, the second purchase, right? And so if I think I'm going to get $2 out of my returning customers in gross profit. I only get $1, but my CAC is $1. Now I'm burning into the red, right? And I'm losing money because not because my CAC is too high, but because my returning customers is too low. And so, you know, one of the things that people oftentimes get wrong is sort of like the retention decay curve in modeling for returning customer revenue. Founders are generally pretty optimistic and they like to look at their subscriber retention as opposed to their overall customer base. And it's like, well, only 20% of your customers are subscribers, right? Like, not everybody's buying your coffee every single week. And so I see the biggest mistake that I see a lot of the times is basically inflating a returning customer forecast, which then inflates the gross profit forecast, which then sort of throws off your unit economic targets.

That makes a lot of sense what you're saying there about customer retention. Right? You get that wrong. You get that curve wrong and it just throws off all your unit economics, your gross profit. It changes everything. Especially like you said, hey, well, we got really good subscribers returning. Well, yeah, but subscribers are generally a small part of your overall business, unless you're some kind of only subscription in your E Commerce, which most aren't. There are some, but that's generally not how you see E Commerce. It makes a lot of sense. So speaking of that, how do you typically model revenue? How do you think about it? Is it mostly by those different cohorts you talk about or if you're building a financial model for E commerce, walk through the revenue piece a little bit for us.

Yeah, so it's actually a pretty hot topic right now in the industry. I've seen a lot of people sort of turn to this idea of cohort forecasting, which I didn't know it wasn't. Wasn't popular, honestly. But so basically there's, there's three different components to what I'll call like a consumer brand with regards to revenue. You have like your Shopify revenue. Right. And under that, you have new customers that go to Shopify and returning customers that go to Shopify. You have Amazon revenue, which is new and returning as well. As long as you have a tool to help you understand that. And then you have the wholesale component. Right. And so with the new customer revenue, we, we model it off of, off of a CAC, right. And off of a new customer AOV. So if I'm going to spend, you know, $50 in marketing next month. And my CAC is going to be $25. I'm going to get two customers. If they each spend 50 bucks, that means that my revenue is going to be a hundred dollars. Right. And so those two customers that make up my $100 in new customer revenue, those are now my, you know, that's my cohort for July, call it. Yeah. And then, so, and then you do like a retention curve, you know, based off of historical and seasonal data and whatever sort of adjustments you think are appropriate. And then that's how you come up with like the returning customer number. And then there's a returning customer AOV as well. Because in our industry in general, people spend more the first time. So I might go to cotopaxi.com and buy four or five items and then decide that I really like the shorts more than I like the hoodie or, you know, whatever it is, and I want another pair of shorts. And then I come back and I buy one pair of shorts. And so you have to account for sort of that, that downtick in a returning customer aoe, and then all of that gets rolled up into the actual LTV itself. And so effectively what you're doing is modeling ltv because you're modeling the first purchase and then you're modeling the subsequent purchases. And so you're modeling all in a lifetime value. And then you do that for Shopify, you do that for Amazon. And then we don't have to get into the weeds on the wholesale or retail component. But it's usually a consumption based model around units per store per week, where, you know, you say I have five SKUs in Target and they want me to sell two units per store per week in 2000, 2000 stores or whatever. And so that, that's, that's, that's generally how we're doing revenue forecasting.

So it sounds like that cohort being able to break it out group, it is really critical to getting your revenue forecast right. Because it has a huge impact on how you model your expenses.

Yeah. So I think, you know, worth noting, there's this idea and it's a little bit less popular now than it used to be. Kind of in the, when, you know, we were all trying to grow a little bit more than we used to or maybe than we are now, people were very oftentimes trying to break even on customer acquisition. Right. So if my, you know, AOV for new customers is $50 and my cost of goods sold is half of that, so 25 bucks, I'm willing to spend $25 on CAC have a 0% contribution margin ratio because I know that those returning customers are going to lift my contribution margin into the green. So that was a good way to, that was actually a fine way to scale a business. Right. Because you're not losing too much money. You're, you know, acquiring customers about as aggressively as you can.

Yep.

Without, you know, without, without literally losing money every time you spend a dollar on Facebook or whatever. And so if you, if you lose hold of that returning customer cohort that's supposed to push you into the green and cover some of the opex, you will start slowly dying. Right. Like, you'll just start to, you know, your burn or your income will be negative and you'll, you know, you'll have to get onto some sort of like equity or debt, you know, treadmill that like, by the way, those are pretty much dry these days for, for E Commerce. And so, yeah, that's, that's pretty much the, the, it's, the, it's the number one thing that people mess up that I see.

Yeah, I mean it's, it sounds in a lot of ways, obviously, it's, it's different. Like SaaS subscription. Right. You, that churn rate has such a huge impact on that lifetime value of that customer. Helps you determine how much can I spend to acquire the customer. And if I get that churn rate wrong or I get the average order value wrong, it makes a huge difference on how much I can spend. If you overspend on acquisition, you're going to die at some point, right?

Yeah, because you're saying like, you're, you're saying like, okay, like my model, right. Is going to spit out LTV to CAC of 3, 0, but if it's only 15 on the first, you know, purchase, then it's 2. 0. Like, you know, that's where, like, you know, the, the 3o LTV to CAC is where the hockey stick kind of, you know, happens. If you can't achieve that escape velocity with those unit economics, you should probably stop scaling, honestly, you know.

Yeah, you're, you're gonna, you're, you're gonna die at some point if you can't make the economics make sense. So stop scaling and wasting money till you figure that part out. Either find a way to lower your cac, increase the order value, whatever it might be. But there's ratios that have to make sense for long term growth and long term sustainability.

Yeah. And you know, there's, there's one thing that people the defense to that would be I'm going to scale these poor unit economics as much as I can until I can get into a retail partner. So like, because you know, back in the day, and I've written pretty extensively about this, the idea to like, you know, DTC used to be margin accretive compared to retail. Right? Because we were cutting out the middleman and we can pass out our costs and we don't have to pay Target or Walmart for, for this stuff. Now on like a contribution margin basis, retail is actually accretive. Right. And so you could a lot of. I've had conversations, I'm not advocating for this necessarily. But if you build a model and you say hey, like I am willing to scale this, you know, 2.0 LTV the CAC to 20 million because that's when I know that Target's going to pick me up, then I can basically model out revenue and Target that has like a better contribution margin and then at some, at some point those lines will cross and it was all worth it in the end kind of a thing.

No, I get it. If you, if you have a plan to where you could change those economics at some point, whether it's the volume or whatever, I get it. You're willing to spend it. It's like when money was free, just get growth at any cost. And then as money became more expensive, now it's like, oh yeah, we probably should balance the cost side of this versus growth. It's interesting how we go through those cycles and we keep learning the fundamental lessons that at some point growth is not the priority. Doesn't matter when just at some point it has to make sense. FP and a guy here. And as you know, I am very passionate about financial modeling and the Financial Modeling Institute's mission. I have been a huge fan of the FMI for years and I was super excited when they decided to sponsor the Financial Modelers Corner. I recently completed the Advanced Financial Modeler certification and loved the entire experience. It was top notch from start to finish. I am a better modeler today for having completed the certification. I strongly believe every modeler needs to demonstrate they are a qualified financial modeler. And one of the best ways to do that is through the FMIS program. Earning the accreditation will demonstrate to your current and future employers that you are serious about financial modeling. What are you waiting for? Visit www.fminstitute.com podcast and use code PODCAST to save 15% when you enroll in an accreditation today.

This is the first time that's ever happened to e commerce, e commerce network wasn't a thing. 20, you know, it wasn't a thing.

Yeah, yeah, good point.

Yeah. So, so this is like people, they, the participants in this industry don't, they can't fathom that idea. Like they don't know what's going on. They just know that their friends are dying left and right. Because as far as long as E commerce has been in existence, it's always grown until 2022.

Yeah, it's, it's, it's been a fast growing industry. It's mostly had low capital during those 20 years. Very cheap money.

Yep.

And it's like, yeah, why not just keep spending? We'll figure it out. We just need to get into this retailer or do this or turn this corner. And it becomes very easy to always think, I will take care of itself later, just get the revenue.

Exactly, exactly.

Yeah. No, that makes a lot of sense. And it can be a dangerous game. Sooner or later somebody's going to get burned. You just hope not to be one of those companies that you got your, your, your hockey stick before the change. All right, so I have a question for you. Just what are the kind of the key assumptions, operational metrics beyond the revenue stuff. We've talked about wanting to look at CAC and LTV and all those things that you should be looking at when building an E Commerce model. What are some of those other key assumptions and operational metrics?

So one of the biggest ones I think in terms of like driving costs and also driving insights is whatever sort of like drivers you're using for the fulfillment costs. Right. So when we think about shipping these, I'm going to, I'm going to sell you, you know, this water bottle. This is a, it's, you know, it's not that light. It probably weighs a pound and a half. And if I sell it to you for, for $20, it may cost me $15 to ship it to you. And so having a good data model around, how am I actually going to forecast these fulfillment costs? Right. Whether it's postage, pick and package, you know, other three pl fees. You need to have a pretty sound data model in terms of like predicting, okay. Like if I send out this many products that weigh this much to this, to these zones. Right. Because if I ship to California, it's going to be a lot different price than if I ship to New York if I'm in California. And so it becomes this like pretty multifaceted, multivariable equation where you have to understand your product mix. Right. So that's another one. Right. So now, you have to understand product mix because if I, if I am a, you know, a men's grooming brand and I sell a beard shaver, and then I also sell fragrances, the beard shaver weighs three times as much as the fragrance does, and it's way more popular with people in New York. And so I spend way more money shipping, you know, the, the shavers that I do, the fragrances. And so if my expected product mix is going to change, you know, let's say in Q4, Black Friday, Cyber Monday, I sell way more face shavers than I do in any other season, well, then, like, my, you know, cost per shipment is going to go up as well. And so I'm taking gross margin hits on shipping and on product costs. You know, you got to be ready for that stuff because that, because again, the gross, that's the gross profit that dictates the cac. And so if you get the gross profit wrong, then you get the CAC wrong, and then all of a sudden you're losing money and you die. And so I think on the, on the, on the sort of expenses side, because these, these, these businesses have very low OpEx. Right. I mean, you're spending maybe 10% of revenue on, like, personnel, 15, 20 if you're, you know, overstaffed, probably just because, you know, the operating leverage is so low. And so I would say a lot of that attention on sort of the cost side is concentrated in the cost of goods. And there are a few moving pieces, including product costs and shipping costs basically.

Makes a lot of sense. So it sounds like the big thing I'm hearing there on the expense side is really understanding your product fulfillment, how your mix, how your different assumptions impacts that and being prepared for that.

Yeah, for Mad Rabbit, it actually costs us more to ship our products than to make them.

Yeah, I could believe it. Yeah. I mean, and so that, that shipping cost, obviously your cogs are important, but that's usually pretty stable. Shipping, obviously, depending on your product mix could change pretty materially depending on what type of products you offer. Think of Amazon, I'm sure someone who's ordering a couch versus somebody who's ordering some groceries. Right. There's a very big difference in shipping. There's. And that mix. And they're covering all that under prime, so they're sure there's a lot. There's a whole team running all those numbers and scenarios to understand how they'll impact gross profit.

Yeah, exactly. And I think, you know, on that note, like with Shopify and Amazon, so, you know, Shopify gross margins, including shipping. Right. Are generally going to be anywhere from 20 to 40% higher than what's on Amazon because like you have, you know, Amazon's going to take 35 cents off the dollar every time. And so you can hit a revenue goal. Right. Like let's say my revenue goal is $2 million and I want to do a million in Shopify and a million in Amazon and my marketing budget for that is 500k. And so I want, I want to make, you know, 200 grand or whatever the contribution is. You hit that $2 million spending 500k on ads. But Amazon is 1.5 million versus 1 million. All of a sudden you're going to see gross margin compression from the channel mix, which is going to cause you to miss your gross or your contribution margin target, despite the fact that you hit your sales goal and your advertising budget. Right. So that's, that's the sort of devils in the details type, you know, part of the PNL that I certainly have missed in the past as well.

Sure, right. You could have been 20% better on your revenue and still been worse on the bottom, depending on that mix shift 100%.

Yeah, it's like, it's, it's nuts. Like.

No, and I've seen some of that in different businesses as well, where, you know, we had a mix of subscription and transactional. And it was a business where we sent out a ton of mail, you know, 50, 60 million pieces of mail a month. If we had a lot higher mail but had some big miss on subscription, we could beat on revenue but get hammered on the bottom line.

Yeah.

Because cost of goods sold, you know, postage, paper printing, all that is huge for math.

Right. And that's why it's not enough. You know, there's a lot of people who only model the revenue and it's not enough.

I, I would 100 agree with that. I, I learned a ton about all our different programs and how much Mel went out to try to really start to understand our business. And so not E Commerce, but similar type principles of understand mix and your cost and all those type of things. Things. That's what I think of when you mention that.

I was gonna say, like, I spent the last couple days building a model for my new company and it's software and it's, it's a lot easier.

You're like, this I can handle.

Yeah.

I don't have this returning customer thing. It's how long does the customer stay? And I know what the monthly revenue is.

Yeah, exactly. It's really? And it's. Yeah, the costs are almost all fixed. Like it's, it's pretty, it's pretty simple.

It was pretty nice to model that way versus when you had to do before in the sense of easier, maybe not as challenging intellectually.

Yeah, I would say, you know, because you build. I actually built it in almost the same way with a revenue model. The only difference with software is that there's going to be like an expansion type schedule in a lot of cases. Right. And you probably honestly know more about modeling software than I do. This is the first time I've ever done it. But the sort of cost schedules are like, you know, it's just like staff and then it's like, you know, until your revenue is larger than that number. Like the difference is the burn. And you know that. And actually, you know, modeling software has made it very clear to me why venture capital is actually a very fitting tool for this business model. It's actually been a pretty eye opening experience.

I, I could imagine. Well good. I'm glad to hear it. I'm glad you got that opportunity to do something a little different and just see that inside to that window because yeah, it's definitely different. So let's get back a little bit to Iris Finance. We've talked about those E commerce models. Why, why would a tool need a platform in E commerce versus just using a spreadsheet? Like why Iris or any of the others out there. I know there are others in the industry as well, but why would they want to have a modeling tool?

Yeah, so it kind of goes back to my, my earlier point which is like there isn't much financial talent in, in these businesses and I see a lot of it getting done in like Google Sheets. The, the problem with that is that like if any like anybody who like knows how to like use Excel, like doesn't use Google Sheets. Do you agree with that?

Not a hundred percent. Most of the time I'll agree with that. I know a few like I would.

Never use Google Sheets just because I know how to use Excel. And so like these, these, these people, they end up using these Google Sheets in just like the worst ways. Like they need to be told what to do. They really do. Like you know, even like there's several hundred million dollar brands on Iris that don't have CFOs. They don't even have like finance teams. Like they literally, you know, just have their Google Sheet and they try to forecast it and there's no like method to the madness. And so again Iris takes This vertical approach, because our model is templated in the exact way that you and I have just spent the last 15 minutes discussing. And so you basically plug and play Iris. You just connect into all of your integration sources and you have a financial model a day later with like, you know, all the schedules that we've spent all this time talking about. And so number one, they don't, they don't know how to do it generally speaking. Number two, they aren't necessarily familiar with all the moving components. Right. So like that channel mix that we talked about, like part of what Iris does on the analytics side is a lot on the cost stuff, right. And so you, you cannot miss, you know, that Amazon fees forecast. If you have the Amazon revenue forecast in Iris, like it's, it's unbreakable in some ways. And so, you know, and then third is just sort of what I talked about a little bit earlier, which is like just the sort of the guidance of the inputs, right? So because we're, we have access to significant amount of categorical data, we're able to help people understand like what's a reasonable expectation. Right. 99% of brands on Shopify are below $10 million in sales. And so like it's very high volatility. It's hard to know good inputs for a two year old brand that's done $9 million in his life, you know, and so if they can get any sort of direction based off of like what we've seen, it actually is pretty valuable. And the other thing is like we have the financial model within Iris. We have a cash flow model and a strategic three statement model. Those are two of like seven features that we have. So we have like a metrics library, we have like a real time plan to actual. We have a host of other sort of what I call like BI tools. And so it kind of marries the two in one place, which I think is advantageous as well.

Makes a lot of sense. Appreciate giving a little more detail there. And kind of when you mentioned nobody chooses Google over Excel, I would have almost agreed with you. But just last week I interviewed someone who's an Excel MVP and he gave all the times he uses Google Sheets over Excel and why Google Sheets is better data entry. He says for data entry it's a better tool. He goes, if I need power query, I'm going to use Excel. It works better for importing ranges, using queries in his mind in some areas. And there's other things he really likes about. It has a number of functions that Excel does not have he's done an analysis of every single function between the two.

Okay, well, he probably knows better than I do then.

So, yeah, he's probably the foremost expert of the two tools. So it's a really interesting discussion because most people say, hey, collaboration is the only situation. You should use Google Sheets. And he's like, I 100% disagree with that and here's why. So it was an interesting discussion before this interview. It was just last week. I probably would have agreed with you. That's why I was like, okay, yeah, it'll come out in a few weeks. I recommend listening to it. It's. It between, definitely. But as for me, I use Excel 99 of the time, so I'm with you.

Yeah, yeah, yeah.

I, I just, I, I get it.

Yeah. It's like a stuck in my ways thing or something. I don't know. But like, I, I also just don't know the Google Sheets shortcuts, admittedly. So, like, I can't leverage it in the same way.

Yeah, that's another challenge. A friend of mine, because this company only uses Google Sheet, is there's a add in called Sheet Wiz, where you get all the major Excel shortcuts in Google Sheets, like $50 a year for it or something. And he's like, since I can't use Excel at this company, I'm gonna do that. He's starting to become a big fan of Google Sheets. He still, I think he still prefers Excel, but with that, with their import range and some like, I'm actually starting to like it. It has some real advantages. It was kind of funny, like, okay.

Yeah, yeah, it's, it's 50 bucks a year. That's a pretty good deal.

Yeah, I mean, right? Especially for a company, you're working for a big company, they're gonna not bat an eye at $50.

Yeah. Trace.

If it makes you more productive.

You can trace precedence, independence. That's a big one.

Yeah, I can see you probably pulled it up there and looked at it for a second.

I did blow it up. Yeah. There's like, there's only like 10, though. There's not like that many.

Yeah, I haven't looked at it at all. I just know he said that helped.

It's a great idea.

Speaking of shortcuts, what's your favorite Excel shortcut?

So one of the, like, I, I, I'm a, I'm a formatting geek, so I, I, like, I think honestly, like half of a good spreadsheet is the formatting and presentation of it. And so I Love all the formatting shortcuts, like the borders, you know, alt, hbp, hbo, HHN or whatever, you know, the hhf, hfc. Like all, basically all the colors. I. I love it.

I love everything on the whole menu.

Yeah, yeah, yeah.

Alt H. Yeah, that's your friend.

That's where I live. Like, I think it's, it can, you can really change credibility wise. You can really, you know, make people think that this is a better model just because it's formatted more beautifully. So I live, I live in there. Honestly, I think alt ass is probably the funniest one, but it's also pretty useful in a lot of contexts as well for just like sorting things.

Oh, yes, it took me a second. I'm like, alt, that's data. Oh, S is sort. And then. Yeah, yeah, sorting it.

Yeah. So if you wanted like sort of range alphabetically or whatever, you type in ass into your computer and.

Yep, there you go. I'll. I'll never think of it the same now. I hadn't quite put it together that way. Thanks a lot. All right, we're gonna move on to our rapid fire section. So I'm going to lay the ground rules of how this works. You get no more than 10 seconds to answer. So the goal is to just pick a side. Then at the end, if there's one or two you're really passionate about, you're like, there's a lot of nuance. I want to add some context to why I chose the site. I did. We'll let you do that because I recognize on many of these you could say it depends. So I'm kind of having a little fun here and just trying to put you on the spot. So you ready?

So we going for just yes or nos.

You're just picking a side and then at the end you can elaborate on one or two.

Okay. Okay.

Circular or no circular references?

No circular references.

VBA or no vba?

I can't do it. So no.

Horizontal or vertical model? Horizontal dynamic arrays. Yes or no?

I'm not good with them, but yeah, I mean, I should be.

External workbook links?

I would never do that.

Yeah, that's a pretty common one at named ranges in your model.

Yeah, if you feel like it.

When you build models, do you follow a formal standards board like FAST or SMART or some of those that are out there?

You know, I don't, but I would if I knew of one.

Okay, makes sense. Do you think Excel will ever die?

Ever? Yes.

In your lifetime?

Yes.

All right. I had to put you on the spot there. Put you on the record.

Yeah.

Will AI build the models for us in the future?

100. Yes. Okay.

Should you use sheet cell protection in your models?

Yeah.

Alrighty. And do you believe financial models are the number one corporate decision making tool?

Without a doubt.

You know, somebody told me, no, it's politics. And I was like, it's hard to argue with.

It'S. Financial model is the second most important.

Yeah, exactly. I was like, I can't really argue with that one. I've seen too much of that. So it really made me laugh. It's like, that's a good answer.

Yeah.

All right, so look up function of choice. And I realize there's more than four, but I'm not going to list all the different ways a lookup can be done in exchange, so. So I'm going to list some of the most popular and you can tell me which one you like. Choose Vlookup Index Match or X Match.

Xlookup Index Match.

All right, that's what I figured. You've been modeling for a while. That's usually the favorite if anyone's been doing it for a while.

Is there a different one for new. For newer people?

XLOOKUP with 365 is very common. You could also do nested XLOOKUP. So two way similar to Deck Match Match.

See, I could, I could probably take one of your courses.

You could take my Excel one. We could talk after. It's not very expensive. I have dynamic arrays, power query and tables in there.

Dynamic arrays would be a cool one. I would, I would love to learn more about that.

Yeah. So we could talk after we're done here. Alrighty. Let's see. Which one would you like to elaborate on? There are one or two of those. You hesitated for a minute.

I think the will Excel ever die? Question ever? Maybe. Probably like in the next, like 40 years. Like probably not. I think like the use case for Excel will diminish. It's hard for me to imagine a world where AI doesn't basically just do all this stuff pretty automatically for you. And of course, like, I basically just bet my career on that fact or that idea. I just don't think that the operations that are performed in Excel are more generally more complicated than what can be done in a web app. And once the sort of, you know, natural language catches up to a point where you're just going to talk to it, you're just going to talk to the Internet and it's just going to build the models for you kind of a thing. That's, you know, the direction that we're going with Iris. So I think it's going to take decades to actually obliterate Excel. That's why, you know, I don't, I don't even necessarily understand some of these, like, more enterprise tooling in terms of their target market. Like, I would never want to try to unseat Excel out of a, you know, a real big company. That seems like a crazy task to me. Not that there aren't plenty of tools that have done it, but it seems really, really hard. And Excel is the most bulletproof piece of software ever, so it's not going to die anytime soon.

Yeah, I would not bet my business on having to on seed Excel. It's one thing to say, hey, for this use case, use my tool, it's better for this use case. But continue to use a spreadsheet for other stuff for edge cases.

And that's what ends up happening with Iris is like, Iris is a data warehouse more than anything. And so people will generally, will generally export data into Excel if they want to manipulate it in a way that they haven't found, you know, doable.

Yeah, I mean, the three most common buttons in all software. Okay, cancel export to Excel. I didn't know it might be export to Excel first. I'm not sure about that.

Yeah, it probably is. Yeah, it probably is.

Right. Alrighty. So I appreciate that. So we're going to wrap up here. Just have two more questions for you. Just another minute or so. First one is if you could offer one piece of advice to our audience that would make them a better financial modeler, what would that advice be?

This is going to sound drastic, but, like, start a business, or at least like start like a fake business that you have to think about. Because once you have to, like, think about actual actions within a business, it makes it a little bit more intuitive to actually build the model. Right. So if you're building a model and you're saying it can be an imaginary business, let's say, you know, we're going to launch a product in Q3, and so therefore I need to adjust my marketing spend in Q3. Oh, crap. When I adjust my marketing spend in Q3, you know, my cat goes up or whatever the output is. And so it forces you to think about, you know, the actual roadmap of the business. And so I think if you can put yourself into an operator's shoes, you know, whereas before when I was doing it on Wall street, it was way harder for me to sort of like conceptualize the actual drivers of these models. And so I think when I started my first business and I was sort of building out models, you know, not for exactly like the most practical purposes, but it does really make you kind of think through it. And so if you can try to put your shoes into, you know, sort of like the CEO role and because like you said, like, you know, financial model is the roadmap for the business, or maybe I said that, but whatever. In terms of like, understanding, you know, different levers of the business, when are we going to make hires? When are we launching product products? Like, how do we think seasonality is going to look? It's all these qualitative aspects that I think really help inform the quantitative deliverable that is the model.

I would agree with that. And I've had others say, like one person's like, start by modeling your life. Build a 3 statement with a budget so it's something you can relate to. Similar, like a dummy business. Understand how cash flow and the things interact in a real world scenario. So you can start relating that to different businesses and how they operate. Makes a lot of sense.

I think modeling your personal finances would be a great. Because you are a business, right? You have income and expenses.

You have a balance sheet, right? You have equity, you have debt, you have all the. You have cash flow. Are you using a credit card? Are you putting things on credit, whatever.

Yeah, exactly. That's a great example. I like that.

Yeah, I really like that one too. When he shared. I mean, that makes a good point. Like, that's how I learned to model. As I started to build my own budget, my own life and modeled it all and, and practice new things in Excel to get better. That's a good way to do it. All right, so if our audience wants to learn more about you, what's the best way for them to do that, to maybe get in touch with you?

I am most active on Twitter, Drew Fallon, 12. I'm tweeting, you know, mostly about those things that we talked about today. So definitely, if you find it relevant, then give me a follow. I also started doing more on LinkedIn. I think, Paul, we talked about this last time a little bit. I'm trying to get more into the LinkedIn game. So Drew Fallon, there, I guess is just your name. And yeah, that's. Those are. Those are my socials. And then Iris Finance Co is our website for anybody who wants to check us out there too.

All right, great. Well, thank you so much for joining me today. Drew, you're the first guest. We've had to really dive deep into E Commerce, so I appreciate you taking time and sharing your knowledge there with our audience. Thanks for joining.

Of course. Thank you for having me.

Financial Modelers Corner was brought to you by the Financial Modeling Institute. This year I completed the Advanced Financial Modeler certification and it made me a better financial modeler. What are you waiting for? Visit fmi@www.fminstitute.com podcast and use code podcast to save 15% when you enroll in one of the accreditations today. Sam.