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Introduction
Hello, e-commerce friends. Today on this show, I have an old friend of mine, it’s Ben McAdam, who used to be one of my first coaches in my beginnings when I just started out as an entrepreneur. Ben is the founder and owner of Profits Collective. He is a profits coach and a fractional CFO. He helps business owners to earn more profits without confusing jargon, and he has been advising a lot of other business owners in the online space across all industries for more than a decade. Ben, welcome to the show.
If you want to connect with Ben, we have a Facebook group. Ben will be also part of that group. And this is only for e-commerce owners so feel free to join us.
Highlights
I call it the 80/20 of profitability. What we’re talking about here is not net profit margin after all the expenses, it’s the gross profit margin. We’ll go into details of how to calculate it later, but basically the idea is, somebody’s paying you some money for a product and then it costs you a certain amount of money to create the product and ship it around the place and fulfill the order. And if you don’t get the ratio between those two right, it’s not the dollar difference between them, it’s the ratio, if you don’t get that right, you can’t grow. It slows your rate of growth, getting this wrong, and it also caps how high you can grow. Because with that gap in between, you pay for marketing, you pay for a team to help you, you pay for managers to help you manage a big team. It also helps you fund more inventory purchases. If you want to grow really fast, then you need good margins in order to self-fund the inventory, otherwise you have to go get a loan from somewhere or investors. (12:07)
Being the cheapest is a nightmare. It’s really, really difficult. Everything has to go right, you have to do a lot of the work yourself because you can’t pay amazing people because you don’t have the margins to do it. There’s a lot of volume, and if something goes wrong and you can’t make that volume, like there’s a supplier delay or shipping challenges or your factory closes for a bit and you can’t make that volume, things can suddenly be very bad in the business. So it’s a very stressful position to be. (28:51)
Introduction: Who Is Ben McAdam?
I’m Australian, so g’day, mate. Live in Sydney, Australia with my wife and four kids, but we travel a lot, and I’ve got clients all over the world, mostly Americans, it turns out.
Speaking about doing this stuff for over a decade, I realized the other day I’ve helped over 1,000 people. I’m like, wow, really? Again, feeling old, but also that feels pretty cool. It’s a large sounding number.
I normally help people with growth, profits, and clarity around the numbers, either profit coaching or virtual CFO, particularly online businesses, and a lot of my clients are e-commerce.
And I tend to find that people in the online business world think a lot like I do in terms of, we want to write our own script, we want to travel, we want to see the world. Lifestyle is important, but also growth at the same time is important. So I love what I do. I love who I work with.
Online Business: The Begginings
Yeah. So the online business world… When I was young, I heard about these things called jobs and careers and corporate ladders. And my dad had a job as a programmer in a fairly big business, and he’d commute by train into the middle of Sydney every day, and he’d get home late, and he wasn’t particularly keen on his job or the fact that he had to have one.
I’m like, so I’m supposed to do this job thing, but I’m not really all that interested in… And so I was always looking for something else. And I heard about… I was training in classical piano. That was something that I was interested in, and I thought, if I get really good at this, I don’t have to have a job. There’s ways to make money from that. So okay, I’ll do that. And I was dedicating myself to classical piano playing.
And did all right. I studied at the Sydney Conservatorium of Music for a little bit, and then someone handed me the book, Rich Dad, Poor Dad by Robert Kiyosaki, and that gave me another option. There are actually three.
Real estate, stocks and paper assets, and business, were his three big categories of ways that you could make money that wasn’t a job. And business really fascinated me, because everything around you was because of a business. It was a group of people working together, earning money.
There was a lot of opportunity to be creative in the way that you did it, not breaking the law or being unethical creativity, but you could make quite a lot of money being the business that does the paving stuff on the road, the bitumen, or actually technically it’s called macadam. Interesting bit a trivia there for you.
And I thought, yeah, business sounds good. And so I got a job as an accountant so that I could see… Because the book, Rich Dad, Poor Dad, had one line in it that said, the lawyer and the accountant see everything.
So I got a job as an accountant in a tax practice, started an accounting degree, switched over from the classical piano.
And I found out their way of doing business was really, really boring. But I kept at it, kept reading more about it, knowing that the thing that I wanted, or a better thing, was out there.
And I eventually stumbled across the Tropical MBA podcast and joined the group Dynamite Circle, which you and I are part of, learned more about online business.
I’m like, this is better than offline business, because without the need to rent an office and deal with long office leases, and without physical equipment to have to buy, and with the ability to offshore a lot of stuff, suddenly you could do business a lot better. It could be more profitable, it could be more fun, and you could travel. I’m like, yeah, let’s do this.
The Basics of a Virtual CFO
Yeah. So profits coach, virtual CFO. Fractional CFO is another way of saying it. That’s a bit more popular these days. Basically the idea is someone that gives strategic advice around your numbers.
Some people think… There’s a lot of different things that people think a virtual CFO does, so I stopped using that and started doing profits coach, just so that I didn’t have to explain so much every single time that no, that isn’t actually what a virtual CFO does.
But the idea is that there are a lot of numbers that flow around through the business, and they tell you what’s going on, like the dashboard in your car does. And a skilled driver uses what’s going on in the dashboard and listening to the sound of the car and how it feels to just steer it. A professional driver uses all those pieces of information in order to drive better.
And what I’ve noticed with a lot of business owners is that they’re listening to the car, they’re looking, but they’re not looking at the dashboard. Sometimes they don’t know the dashboard is there.
Sometimes they got a terrible dashboard, somebody else designed it for them and did a poor job. And so they’re missing a really crucial piece of information, objective, reality based information that tells them what’s going on and what’s going wrong.
And so that’s what I wanted to start helping people with, because I have a bit of a background, apparently being good with music and good with maths sometimes goes together, and I know how to mess around with numbers and understand what they’re saying. And when I would help people with that, they found it really helpful.
So a profits coach, virtual CFO. A virtual CFO, what they do is they’re like the… There’s two parts to the virtual CFO role. One part is manager, they manage your finance department and the bookkeepers and accountants and whoever working underneath them.
And then the other part is the strategic advice part, which is what I also include in the idea of the profits coach. If you have a question of, what if we invested more in marketing and bought more inventory? Are we going to go broke? Or what are the best case, worst case, most likely scenarios? You would talk to a virtual CFO or a profits coach about that.
If you’re thinking about acquiring another company or selling a company, or you’re thinking about launching a new product and you want to crunch the numbers on it, that’s the kind of advice that a virtual CFO or profits coach would do.
Profits coach goes a little bit one step further. It’s a bit more blended with business coach, where it’s not just finding the problems and talking about the numbers stuff, it’s also, what are the nitty-gritty steps?
Now that you know what needs to change, how do you change it? So some of my clients, I talk to them about management, I talk to them about mindset, I talk to them about tweaks to their marketing, I talk to them about how to write a job post or how to tweak your job description. Because the numbers are more of a diagnosis tool, and then what you do about it is the important thing.
Companies He Works With
Usually a six or seven figure annual revenue online business. Marketing agencies I do as well as e-commerce. E-commerce businesses, I find there’s definite difference between the ones that are mainly Amazon based and the ones that have their own websites or online store and marketing channels. I hate Amazon a little bit, because they suck so much of the profits out for themselves, and they present competitors and all that kind of thing, but there’s some people who do very well on it, or some people who want to do very well on it, and I’m on their side, happy to help them with that.
I also have a decent sized portion of my client base is coaches and course providers, people that do some form of teaching in their business. But any kind of online related business is interesting, partly because like I said, the people think like me, and it’s an interesting space, and an expanding space, the online business world.
The Importance of Margins
Very, very important. I call it the 80/20 of profitability. What we’re talking about here is not net profit margin after all the expenses, it’s the gross profit margin.
We’ll go into details of how to calculate it later, but basically the idea is, somebody’s paying you some money for a product and then it costs you a certain amount of money to create the product and ship it around the place and fulfill the order. And if you don’t get the ratio between those two right, it’s not the dollar difference between them, it’s the ratio, if you don’t get that right, you can’t grow.
It slows your rate of growth, getting this wrong, and it also caps how high you can grow.
Because with that gap in between, you pay for marketing, you pay for a team to help you, you pay for managers to help you manage a big team. It also helps you fund more inventory purchases. If you want to grow really fast, then you need good margins in order to self-fund the inventory, otherwise you have to go get a loan from somewhere or investors.
Companies He Works With
So one of my clients from many years ago, they had a product, which I won’t say what it is, but it was a consumable product, and it had exceptionally high margins.
It was something like it cost him 10% of what he was selling it for, to pay for the product and ship it around the place and fulfill it. And because of that, his annual revenue went like this over a four year period. $30,000, wasn’t a full year for the first year, it was $30,000 for the first few months.
Then the second tax year, it was $120,000. Then it was like $1.6 million, and then it was $4 million the following year. Completely crazy trajectory, didn’t have any outside funding, because he got this right. And I’ve never seen a seven plus figure e-commerce business that doesn’t have great margins.
I ran a meetup once where we had a whole bunch of people coming to ask numbers related questions of the experts, and me and a couple of other people would sit down at the tables and answer questions.
And we grouped the tables based on size and industry, and there was one table of seven plus figure e-commerce people. And I took the opportunity to ask them, tell me about your margins, and they were all great.
And I sat at the other tables, especially with the five figure ones who were struggling to grow and the low six figure ones, and I asked them, and their margins were terrible. It was the only thing they had in common. They had wildly different places where they sold it.
Some were on Amazon, some were on a Shopify store or something. Some different types of products, different sizes of products, suppliers are in different countries. Some were private label and some weren’t. And the only thing that made a difference between those two revenue sizes was margins. It’s really, really important.
And I could keep talking about this all day, so you might need to shut me up occasionally, because it’s just something I’m very passionate about, not enough people talk about it.
How To Calculate Margins
Yep. There’s lots of different ways of calculating it. Depending on which expert you listen to, they’ll have a different way of doing it. My particular way that goes with the ratio I’m about to tell you is usually the one that people find it easier to do off the top of their head without having to look up any numbers, or without having to spend ages looking up numbers. So the margin, it’s a percentage.
What percentage of the price of a product, or what percentage of the revenue, do you keep after paying for a few particular costs? So you could look at a product level, this is the price of this particular SKU, this particular product, and this is the particular cost associated with that product, and what have I got left over, and what percentage of the price is that? Or you can do it on an overall basis across a category of SKUs or across your whole business.
Here’s my revenue, and what percentage of that do I keep after paying for these specific costs? So it’s useful to do it both ways, because some products might have great margins and they’re hiding the effect of the crap products you should stop selling, if you just look over the revenue level. But it is a bit more time consuming to figure it out on the product level.
So the price or the revenue, that’s the easy side. The other bit is, what are the costs you’re including? And this is the bit where a bunch of people disagree.
My particular way, just humor me, is what’s the cost of the product? Manufacturing cost of the product or buy it from the supplier. Also, what’s the cost of shipping it all over the place? So shipping it to your warehouse or to Amazon, and shipping on to the customer, so all the shipping. Again, keeping it simple, you don’t have to separate which type of shipping. And then the third piece is the fulfillment costs, so your warehouse costs or Amazon 3PL fees or whatever. So product, shipping, and fulfillment.
Those are the three costs. So what percentage of revenue or what percentage of the price of a product do you have left over after taking out those costs?
You can back of a napkin, calculate that, if you know some numbers off the top of your head, or you can look at your bookkeeping.
But once you’ve got that and you can see where you are, that will give you an idea about why maybe it’s been a bit hard to grow and hard to get to seven figures, no matter how hard you work or how much you try and improve your marketing, you just can’t seem to grow.
Some people include credit card processing fees in cost of goods sold. So again, like with virtual CFO, a lot of people have their own definition of it about what should be in there. So yes, it’s COGS, but my version of COGS.
The Problems Of Calculating COGS
Yeah. The problems that usually arise is when a bookkeeper or an accountant or a piece of accounting software has suggested that certain things go in the cost of goods sold, and it can vary.
And if I in a moment give people the ideal margin percentage to aim for, some of them might go into their bookkeepings to go, oh my God, I’m way off, because their bookkeeper has included marketing expenses in the cost of goods sold. And other people might think, I’m doing great, because the bookkeeper has only included the product costs but not the shipping or the fulfillment.
So in order for me to give a percentage without looking at somebody’s numbers right in front of me, I need to say, these are what’s included. If you do it this way, this is the ideal you’re aiming for. Does that make sense?
Ideal Margin
So what I’d normally see with the smaller e-commerce sellers is they take the product cost and they double it, in order to get their price, which means that the gross margin, they think, is 50%. As in, 50% of the revenue they keep, 50% of it is that product cost. When you add in the shipping, when you add in the fulfillment costs, especially as you get bigger and you stop fulfilling the stuff out of your garage or your spare bedroom, and you have to actually pay someone else to do it, then your margins are suddenly not so good, and you find that you can’t grow because you have to suddenly start selling a lot more, a lot more, to be able to afford the extra fulfillment costs.
So normally I see double. People take the costs, even if they calculate the costs the same way I do, and they just think, just double it, that’s pretty generous. What I actually want to see them doing is four or five times their costs. Or to look at it the percentage way, it’s a quarter or 20%. So 20% to 25% of the price of the thing, or 20% to 25% of the revenue.
And there are some people hear that and go, no, he’s dreaming. Can’t possibly do that in my market. There’s price sensitivity, my manufacturers can’t do it for that price, whatever. There are some people who say that, and I’m like, yep, it probably is true for you for what you’re currently selling and where you’re currently selling it. I’m not arguing that fact. I’m just saying business life will be painful if you try and have 50% margins or worse. Aiming so that you keep 75% to 80% of the revenue after those 20% to 25% of costs, or take the costs and 4x or 5x them, if you can do that, they’re the e-commerce businesses that seem to take off from the very beginning.
We’ve all probably heard of people who’ve done that, and it’s because they’ve done this. They haven’t necessarily known the power of it, but they’ve done it. I’ve worked with a lot of e-commerce businesses, and the ones who have that 4x and 5x ratio between cost and the revenue, or who keep 75%, 80% of the revenue after paying for the product costs and shipping and fulfillment, those are the ones that grow really fast.
People take the costs, even if they calculate the costs the same way I do, and they just think, just double it, that's pretty generous. What I actually want to see them doing is four or five times their costs. Or to look at it the percentage way, it's a quarter or 20%. So 20% to 25% of the price of the thing, or 20% to 25% of the revenue.
Tactics To Increase Margins
Yeah. Absolutely. So there’s a few… Actually, there’s quite a lot of things. We don’t actually have time for all of them. But a product that people are happy to pay a premium for that doesn’t actually have such a huge cost is basically what you’re looking at. And so, what are people willing to pay a lot for, for good quality or brand value, that doesn’t actually have so much of the physical costs? Choosing that kind of a product can be one thing, but the main thing is pricing. Pricing is the really powerful thing, and walking away from a product where you can’t get this ratio.
There are a number of cases where people have a good product, and they just need to raise their prices a little bit. And so one of my most common pieces of advice is, you need to raise your prices. And I know that over the years that’s been a catchcry the internet and in online business groups, anytime someone says their price, there’s bound to be someone that just chimes in and says, “Raise your rates.” It’s a reflex.
But it’s one of the tactics and it’s one of the most important tactics for being able to get your margins to a good place, and to maintain them over the years. Because your costs are going to go up, you’re going to have to raise your prices sometime. So the main piece of advice I have for people is a little mind trick, a little exercise I walk through, so that they can be a little bit more comfortable raising prices.
Raising Prices: The Benefits
So the main fear that people have that stops them raising prices is they think they’ll sell less, or their existing customers won’t come back any more. For those people who sell their products on a subscription or they have repeat buyers, there’s a fear that they won’t be able to sell as much to new customers, and they won’t be able to get people back as well. So dealing with that fear is the main thing that I can do to help people be comfortable raising their prices. And I have a little mental exercise that means you can be happy and more profitable, even though customers have run away from the price rise.
And it goes something like this. Imagine that you’re charging a certain price for your product, let’s say 50 bucks, and you’re selling a certain amount of them per day, per week, per month, whatever. Let’s say it’s $10,000 is your revenue for the day or the week or the month, whatever. $10,000. And then I tell you to double your prices. Very, very dramatic. I normally don’t say that far, but let’s say you humor me and you do it. You win the gold star for being my favorite client, for doing something hard just because I said so. $10,000. So in theory, your revenue would go from $10,000 to $20,000, except that all your repeat customers run away. They don’t want to buy from you again. A lot of your repeat customers run away and they don’t want to buy from you again, and you find it’s much difficult to sell to people, and so your revenue drops back down to $10,000.
And you shoot me for sending you on an unnecessary emotional rollercoaster, and possibly consider firing me as your coach, until I point out that your revenue’s the same, but your costs have just halved, because you’ve got half as many customers, half as many products being sold. Your costs have just halved. Potentially less than halved, if it takes you to below a threshold where you suddenly don’t need to rent that enormous warehouse any more, because your volume is so low. So your costs are halved, even though you did something really dramatic, you doubled your prices, and something horrific happened to you, your quantity dropped by half. You can still be more profitable.
That’s a fairly generic example. I’ve got a blog post, if you just search Profits Collective lose customers, the greatest search term ever for a profits coach, if you just search that, it comes up and there’s a little table that, depending on what your margin currently is and the price rise percentage you’re increasing by, you can look up what percentage of your quantity can drop and you’ll still be as profitable as you were before the exercise. So walking through this usually deals with the fear for many people, and they’re happy to at least test a higher price, if that’s what’s needed to repair their margins and make them more profitable.
Brand Value VS Raised Prices
Yeah. So there will always be someone that’s cheaper than you. Being the cheapest is a nightmare. It’s really, really difficult. Everything has to go right, you have to do a lot of the work yourself because you can’t pay amazing people because you don’t have the margins to do it. There’s a lot of volume, and if something goes wrong and you can’t make that volume, like there’s a supplier delay or shipping challenges or your factory closes for a bit and you can’t make that volume, things can suddenly be very bad in the business. So it’s a very stressful position to be.
And also, there’s an assumption we make when we think that way. We think that our customers are always going to want the cheapest. But I’m not the cheapest profits coach out there. There are people that you can pay 40 bucks an hour to give you advice. But the right kind of people want quality rather than cheap. Like the old triangle of speed, quality, cost, pick two. You can’t have all three. And there are some people that don’t care about the cost. They want to get the product fast, and they want high quality. It definitely helps if you choose the right products or the right target market, where they’re not so price sensitive. But even still, even choosing price sensitive customers, you can still have really, really good margins. You’ve just got to be much better at keeping your costs low.
Being the cheapest is a nightmare. It's really, really difficult. Everything has to go right, you have to do a lot of the work yourself because you can't pay amazing people because you don't have the margins to do it. There's a lot of volume, and if something goes wrong and you can't make that volume, like there's a supplier delay or shipping challenges or your factory closes for a bit and you can't make that volume, things can suddenly be very bad in the business.
Cash Forecasting
Yeah. One of the really critical things for an e-commerce business that can make the difference between success and going broke is making sure you don’t go broke, making sure you have enough cash for what you’re planning to do. And it’s very, very tricky with a product-based business, because there are some things that we commit to on a regular basis, like employing somebody, where we’re committing to that expense and we can’t immediately turn it off. And there are lots of other things like that. There might be you sign up with a marketing agency to help you promote your products all over the internet, and they have a minimum 3, 6, 12 month period. It’s like you’re committed to an expense that’s going to happen regularly.
And then there’s inventory costs, and they’re just these suddenly huge amounts of money that come in and go out, whether that’s you pay your supplies once a month or you have three or four seasons in the year. There’s these big mountains of money that you need to part with, and you need to have those mountains of money at the right time, otherwise supply won’t release your goods, you can’t get revenue, unhappy.
So balancing those two things and making commitments to your supplier about a certain order quantity, and making commitments to employees and contractors and 12 month sponsorship deals, for example, managing both of those commitments and making sure that you’re not going to run out of money during it is very, very important. If you know you can afford to do something, you can take on opportunities, you can be more aggressive, grow more aggressively, grow faster, but if you don’t know for certain that you’re going to be able to afford this over the coming 6 to 12 months, then you might either make the wrong decision and go broke, or you might not make this decision, and you’ll hold yourself back. So really, really important to be able to forecast your cash and see what’s going on in the future for you.
How To Finance A New Role
Yeah. So there’s a couple of different names for it, and there are a couple of different things you can do. Budget, cashflow forecast, cashflow projection. I prefer projection. I don’t know why. I think because everyone else uses forecast, and I want people to think differently. So when it comes to a cash flow projection, there’s the small battle station, things are going really terrible this week or this next couple of weeks version, which I call micro cash flow. And then there’s the full normal cash flow projection. We don’t have a huge amount of time to go into the micro cash flow, but if you just search Profits Collective micro cash flow projection, I think I did a training video on it.
So full cash flow projection is, you have columns on it going out into the future, 6 to 12 months, even further in advance, and you have different rows of the money coming in and the money going out. This is different to revenue and cost of goods sold and expenses, because it’s only when the money comes into your bank account or leaves your bank account. And sometimes depending on how your bookkeeper does the inventory expensing, they might show the cost of the inventory you sold this month, whereas on the cash flow projection, we want to see how much did you actually pay your supplier this month, which can be a different number.
And if you then fill out each of those months into the future, with payments coming in from Amazon or Shopify or your affiliates or whatever, if you show those payments coming in and all the payments you have to make including inventory, marketing, shipping fulfillment stuff, paying that handsome Australian profits coach that you’ve signed up with… Sorry, it’s always good to insert yourself. Anyway, product cost, marketing, your team, software, other random expenses, tax payments, your own payments, loan repayments, money coming in from loans, anything that changes the balance on your bank account or your credit card, anything that actually changes there, that’s what you want to put in. You want to put it into the future. And then right down the bottom you’ve got this special row called net cash flow, which is what’s the total amount in or out, out of all those different rows? You want to make sure it’s mainly positive. And then you have another row at the bottom, which is the bank balance.
So if all these things you’ve predicted are true, this is what your bank balance will be at the end of that month. And that allows you to see approximately, do I go broke that month? If you want to get really granular, you might do it week by week instead of month by month. Then you can say, do I go broke this week or not? But that’s the basic idea is you have this spreadsheet. Doesn’t have to be super complicated. It can start out very, very simply at first.
But then with that you can run some what if scenarios. What if I hire more people? What if I spend more on marketing and it doesn’t pan out to more revenue? What if I buy more inventory and it does or doesn’t get sold? What if I take on a loan and then spend more on marketing and inventory, and I do hit an okay amount of revenue that I expect from that? Am I going to be able to pay off the loan? Or if I take on investors, am I going to be able to pay them some money? There’s a lot of different what if scenarios you can do, as well as just checking, am I going to go broke or start stressing about money in the next 6 or 12 months?
Resources For Financing
Yes. Profitscollective.com/cashflow, all one word. There’s a training I did a little time ago that has the basic thing.
Actually now I’m thinking, wow, it has been a little while ago. I will look before this episode goes live and just double check.
Resources For Financing
I have a podcast. I have been taking a little break between seasons, starting season three this week or next week. It’s called Business Numbers Podcast. Easy to remember. Also the blog. And I have a resource as well on my website called the quick profit hunt exercise. It’s a exercise, takes about 10 or 15 minutes, saves [inaudible 00:39:14] thousands, ten thousands in extra profit. And that’s at profitscollective.com/qph.
I am actually planning on running this live sometime in the next couple of weeks, depending on when this podcast goes out. Sometime in March I’ll be running this live, and if people go to my website or send me a message or something, I’ll let them know when that live thing is happening.
Contact Ben
I’m on Facebook. I’m technically on LinkedIn. I don’t really do much on there. Too many people spamming me, wanting to sell me marketing services. I’m like, did you know I coach marketing agencies? I have a Twitter account. I tried to see if it was still active the other day, and it isn’t. But mainly Facebook or through the website.
