Finance Follows Strategy: Annual Forecasting With Drew Romney

Chris Ronzio (00:41):

Hey everyone. And welcome back to Organized Chaos Live. Now I've got some pumpkin spice coffee in my cup here. The holiday music is playing in the stores when you walk through the retail stores, and that means it's time for strategic planning and forecasting. So as we approach the end of this year, I thought what better conversation to start to surface here on LinkedIn and on the podcast than one about how we do forecasting inside our business.

(01:09):

So today I'm inviting in our director of finance, Drew Romney. He's going to be joining us in just a second. And we're going to talk through how Trainual does forecasting more generally, how you should think about forecasting in your business, what metrics and numbers you need to have in order to do the forecasting exercise, how to communicate it to your team. And I'm sure this'll spider off in five or 10 different directions. So if you are thinking about forecasting, about budgeting, about your numbers for next year, then you're going to get a lot out of this next conversation.

(01:40):

But before Drew comes on, I'd love to hear any questions or thoughts that you have. So put them in the chat, put them through on the comments, and we'll address those live, anything that we see coming in. Are you thinking about forecasting for your business? What questions or challenges are you thinking about when it comes to yearly forecasting? So get those started. And in the meantime, Drew, come on in.

Drew Romney (02:04):

Hey Chris.

Chris Ronzio (02:04):

How are doing? Thanks for coming on and doing this.

Drew Romney (02:07):

Yeah, this is exciting. I'm only let finance on things like this, so this is good to be on here.

Chris Ronzio (02:13):

Well, I know we've had a couple fun forecasting sessions together, and I've told you this seven times already, so you're getting sick of me saying this. But there was a comment you made last year when we went into this activity and you said, correct me if I'm wrong, "Finance follows strategy." We can make up whatever numbers we want, but until we have the strategy for the year for the business, it's hard to actually plug in all the numbers that are going to make sense. Did I get that right?

Drew Romney (02:43):

Totally, yeah. I think a lot of times in the world of finance, we try to overcomplicate things and we say, "This is what we have to do because this is what my spreadsheet says." But to have real success in a business, we have to make sure that finance is just one of the key players in setting that strategy and then making sure we have the resources in place to achieve those goals and that strategy. So I think it's just one component of it, but I think a lot of businesses can get caught up in just saying, "Hey, here's our forecast. This is what we have to do." Rather than in reverse making the forecast fit what the company actually wants to achieve long term.

Chris Ronzio (03:13):

So before you were here, my forecasting exercise was basically just putting numbers in a spreadsheet that seemed good, like a total linear growth, and then just dragging the Excel cell out to the right as far as it could go and saying, "Yeah, this is basically what the business is going to do." But it was so detached from reality. And I know to some extent we still do that for different assumptions, but there are so many more business insights tucked away into the spreadsheets that we use. And you don't just make those up. So how do you loop in the rest of the team in advance of us doing the forecasting? Where do you even start to make sure the numbers are right?

Drew Romney (03:53):

Yeah. So your approach of understanding the historicals and dragging them across is not a bad place to start, especially for smaller businesses, if you don't have a dedicated finance person and you're just trying to do this for the first time, the number one goal or the number one thing you should be doing is understanding your historical financials. So if you don't have those in good shape, it'll be impossible to forecast going forward where you're going to be spending money, where growth is going to come from. So you need to make sure that those historicals are in a good spot so that you can at least at the bare minimum, like you said, drag those forward and understand what the next 12 months of expenses are going to look like.

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Understand Your P&L Statement

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(04:27):

But beyond that, it's really just a practice of going line by line and understanding is this line item, is this expense that we have historically, is that a key driver to our success? Is that a big item on our P&L? Is that going to change dramatically over time? And if it's not, I would say just drag it forward that or at least look historically and say, is it going to be the same going forward? Yes or no? And move on. Unless you've got a huge finance team, a bunch of accountants working for you, and you can dedicate the resources and time needed to be perfect on every single line item. If you're a small business, you have to focus on the areas that are really going to move the needle.

(05:05):

So work with your sales and marketing team on understanding what the growth plan is. Work with your customer success team is on, how are you going to increase retention and what resources do you need for that? So it's going to be an iterative process where you're working with department leads individually, and then also as your leadership or executive team gets together to talk about goals, talking about those cross-departmental issues and goals that you have.

Chris Ronzio (05:30):

So you mentioned the P&L or the profit and loss statement. So if anyone's listening and is a small company just getting started, assuming you have some financial software, maybe you've got QuickBooks or something like that, you should be able to run a statement and be able to see a profit and loss, which is going to itemize all the different categories of spending and revenue in the business. And if you don't have a financial system like that, maybe you've got your receipts or you've got your credit card bills and you're plugging those things together yourself into a spreadsheet.

(06:05):

But I think it's a great suggestion to just start line by line all of the different streams of revenue and all of the different types of expenses. And then you walk through those conversations and say, "All right. Is our rent going to be the same for next year? Or are we getting an increase? Are we moving, are we downsizing? Or can I just drag this amount through the rest of the year? How about our insurance is a bigger company next year, do we need bigger insurance or is our insurance premiums the same this year?" So it's that exercise of just going line by line. And a lot of those things are just simple, basic expenses. But what do you think are the trickier ones that... You mentioned growth. Are there other ones that tend to take a lot more of your time?

Drew Romney (06:49):

Yeah. I would say that the biggest ones that are, at least for our business, the biggest drivers are going to be the costs associated with growth and acquiring new customers. And then the costs associated with building our software. We could keep growth costs flat and just assume that we're going to grow the same amount and move forward. We could keep our product and engineering costs flat and assume that the product doesn't change over time or just changes incrementally over time. But as a business, as we decide what our strategy is for next year, how much we want to invest in product and engineering and design versus how much do we want to invest in sales and marketing, those are our biggest line items if you include them together. So that's where most of the assumptions are going to come into play.

Chris Ronzio (07:36):

So for us, the product is like R&D. It's our advanced spending to develop a product that we think will generate a lot of revenue down the road, but we make those strategic decisions to invest money in that area before we're getting the revenue. And across everyone's business that's listening, they're probably making some of those leaps of faith themselves. They're saying, "I'm going to buy these raw materials that I need to try to supply this big order, or I'm going to hire somebody maybe that I don't quite need for today's business, but six months from now they need to ramp up and be able to be there for my business." So all those R&D expenses are where we're just guessing. Is forecasting just guessing in some ways?

Drew Romney (08:24):

In some ways I think if you're too loose about it, you can get into into trouble. The number one mistake I see companies make is that they spend based on their forecast, based on what they project for the year, but the revenue doesn't match what they have projected for the year. So they think our expenses are according to plan. But if your revenue isn't matching what you also projected for the year, you can get into trouble cash wise, cash flow wise, or cash burn wise depending on the stage of your business. And that's where you get into the biggest mistakes. So yes, there is some guessing going on, but I think you can put guardrails and do some scenario planning in place to make sure that as you check in monthly or quarterly throughout the year at how you're trending to your forecast, then you can make those adjustments as you go.

Chris Ronzio (09:11):

I want to come back to scenario planning because I think that's a great takeaway that everyone could work on for next year is a few different scenarios of your forecast. But I see a lot of people's budgets that are business pitch competitions or something. When I'm involved with things around town and I'll see people come in and they say, "Yeah, our sales this year were 50,000 or $100,000 and next year is going to be 4 million. And a lot of people have these huge leaps, these massive assumptions, and I don't know if they're doing that just because they're crossing their fingers and they're trying to raise money. But you're right, a lot of times the revenue falls short and the spending doesn't. So how on top of your forecast be? Is it weekly? Is it monthly that you're saying, "Hey, revenue's not where it should be. Let's cut back spending."

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Avoid This Forecasting Mistake

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Drew Romney (10:06):

I think monthly is the right cadence to really look at it. Especially if you're closing the books monthly, you might not have a great idea on what some of the expenses are until you close your books on a monthly basis. So for me, that's the right cadence to be looking at things. And then quarterly we do a bigger update. So each month we might do minor tweaks, minor updates. We might say, "Hey, marketing, based on our growth the last couple of months, let's cut back on spend or let's increase spend if things are going really well." And then each quarter we have an opportunity to sit down with all the leaders, and I work with you, Chris, on saying, "Hey, here's what we've done the last six or eight quarters. Here's where we're trending. Here's where we're projecting the next couple of quarters. According to what we've done, should we make any adjustments to spend going forward?"

(10:49):

So I think as long as you have that cadence of looking at it monthly or quarterly, you won't find yourself in too big of an issue. But what happens, I think with a lot of companies is they really do consider annual planning. And they say, "This is our plan for the year, this is what we're going to stick with. We've already got our head count and our hiring plan, we already have those job descriptions written. We already told the team that this is what we're going to do, that in nine months, we're going to have another squad of developers and product managers and designers, and then revenue falls a little bit short, but we've already gotten our mind that we're making this higher." So I think you have to be flexible, but at the same time understand that it's not going to be perfect going forward.

Chris Ronzio (11:28):

So part of that flexibility comes down to having scenarios like you mentioned, how many scenarios do you think are appropriate and versus overkill?

Drew Romney (11:41):

Yeah. I might have a little bit of not a super popular opinion on this. I like having one scenario that you truly stick to, but be able to adjust your assumptions very easily to where you can play around with it every month or quarter to say if this were to happen, what would happen? If this were to happen, what would happen? And I think some companies get in a habit of having three or four different plans that one that they present to the board, one that they have internally, one that they present to future investors that has that 50,000 to 4 million growth that you're talking about, Chris. And what happens is they're trying to serve too many people and they don't understand what their actual goal and plan is because they've got so many different plans floating around. So I like the idea of having one, but have what we call sensitivity analysis built into it.

(12:29):

So we have our base plan, the one we're going with. It's part forecast, part plan, part goal setting framework, and then have some sensitivity analysis built in to say, all right, so our assumption for churn is X percent. What if that went up 1%? What if that went down 1%? What would that do to the top line or to bottom line? And make sure that we keep an eye on that. And what if customer acquisition cost went up by 10% or down by 20%? What would that do to cash and to growth and things like that. So I like to have one plan put forth to the team to say, this is what we're going to do going forward and we're going to adjust it accordingly. But here's some sensitivity analysis to say if we're off track in these key assumptions, this is what it's going to do to the end result.

Chris Ronzio (13:14):

Yeah. I like having one plan too, but I think when we go into planning, we tend to put in some numbers that we think are best case scenario and worst case scenario because when you're testing those assumptions, you want to test the bounds of what's reasonable. Based on our business knowledge, we don't think that this metric is going to dip below here. That would be crazy. Or we don't think it's going to go above here, that would be crazy. So we know that if we're within those two guardrails, that this is the range for where we could be next year. So when we've got that range in mind, then we move forward with the single forecast, but we know that we're zigzagging or bouncing in between that range somewhere. We're going to land between the low end and the high end of that range unless something just crazy happens that's outside our control.

Drew Romney (14:06):

And I think that that's fair. It also makes you think high level, what could go wrong. This year, we've got this forecast. But if we have this worst case scenario forecast, or right now we might call that our macroeconomic or our recession forecast, if we think that something like that is looming so that we can keep an eye on those factors as we move forward. We suspect that if the economy continues this trend, that acquisition will slow down. So what does that mean if acquisition slows down? You can plan for. You can say, these are the first future hires that we will cut, we'll delay them by six months. These are the marketing opportunities that we may pull back on because we don't think it would be worthwhile.

(14:47):

So it is good to have scenario planning. I just think companies need to be careful about trying to have too many goals because then people get confused on what the ultimate goal is. Is it the one that we presented to the board or is it the one that we're presenting to future investors? Is it the one that we are looking at internally? So that can get confusing, but the scenario planning to make sure that we have the right resources depending on what actually takes place, is definitely key.

Chris Ronzio (15:12):

And there's a lot of news floating around right now about layoffs and companies that started spending crazy and now have had to make really dramatic spending cuts. And I think that one of the ways that we've always managed the business is to be conservative on our spending and not make that next hire until we're confident, until we get the revenue there. And frankly, a lot has changed over the last six months where we've said, "No, we're going to delay this hire," or "No, we're going to delay this initiative." But because we haven't done those things too hastily, we haven't had to make the cuts on the other side that a lot of other businesses are. So I think knowing your base plan can be really helpful for not having to retroactively cut things that you added and make these knee jerk reactions in the business.

Drew Romney (16:02):

Totally. And I think going into the year, having certain rules in place that allow you to be flexible makes a lot of sense. And this an example, you can tell R&D product design and engineering, "Hey, we'll add another five or 10 people in Q2 or Q3 if we're at this revenue goal." So you can set of those guardrails that you're talking about saying the plan is to do that, but only if we're at this level. If not, then you also need to have a backup plan on what the product roadmap looks like to know that, hey, you're not getting these five or 10 people at this point in time. So make sure that you're planning accordingly for that. So I think having some of those guardrails or those rules in place and not being super strict on, hey, the budget said we're going to do this, so we have to do this is really helpful for companies as they build their plan.

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What You Need to Have In Order For Forecasting

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Chris Ronzio (16:48):

Right. Drew random question, but do you cook at all? Do you bake at all or anything?

Drew Romney (16:54):

I do. Not a big baker but cooking, yeah.

Chris Ronzio (16:57):

You ever heard of the term [inaudible 00:16:58]? I think I'm saying that wrong, but it's like the stuff that's ready to go in order to bake.

Drew Romney (17:04):

Yeah.

Chris Ronzio (17:05):

What's the [inaudible 00:17:06] for forecasting? What do you need to have ready to go to do this exercise? And let's assume not everyone listening is in software. It could be any business. What should they be wrapping their heads around and go into the exercise?

Drew Romney (17:20):

Yeah. I think having a good forecast template is a great place to start. So there's resources out there where you can pull down, Excel templates or Google sheet templates if you're just doing this for the first time. There's also software out there that helps with this. We have kept things fairly basic around here and utilize Excel for the time being. So there's tons of resources out there. But having a good forecasting template to start with will allow you to make those changes to assumptions more easily because if you don't have a good tool that you're using, it's going to be really hard to be flexible and proactive when you're cutting spend or making changes to revenue assumptions. So make sure you've got a good tool that you're working with. And that can be something as simple as a Google Sheets template. That would be the first thing to have ready.

(18:08):

We're going into annual planning here at Trainual over the next couple of weeks as we think about these things. So I've got a good template to where while we're in annual planning live and we talk about some of our goals and initiatives, I can make quick changes to say, "All right. If we focus on this area and hit this goal, this is what our growth will look like." Or if we decide to invest in the product more, here's what will happen to cash as we increase expense in that area. So you can very quickly on the fly, make changes to it and not have to go back to the drawing board every time and redo your assumptions.

(18:41):

So that would be number one, I think this probably means everything in its place in French or something like that. So yeah, you have that and then you can... Yeah. I mean I've watched enough cooking shows to know a little bit about that. So that would be number one. Number two would be understand what your fixed costs are. So this is true in almost any business. In software, we don't have as many fixed costs, but if I'm a manufacturer and if I've got rent or multiple facilities or machines that I'm paying for, I've got a lease on certain equipment, those are probably not going to change over the next year. Because you're contractually obligated to pay those things. You've got your head count, which is close to a fixed cost that you're going to pay throughout the year. And you've got some other things like insurance, you already mentioned that you're just going to have those overhead costs no matter what.

(19:26):

So just bake those in. Those aren't changing. Put those in there and focus more on what your variable costs are. Your variable costs are going to be marketing spend, new initiatives that you're bringing up. If you're selling a product or a good, it's going to be your cost of goods sold that you've got. So understand your fixed versus variable costs because you shouldn't spend much time forecasting your fixed costs because those aren't going to change.

(19:49):

And then number three is really understand your growth levers and drivers. So understand what is going to drive revenue growth throughout the year and understand what those key assumptions are. Because if you don't have that in place, that's also going to be really hard to fix on the fly or make multiple scenarios based on that.

Chris Ronzio (20:07):

And when you say assumptions or growth levers, that would be the key metrics that tell you what is my cost per customer or something like that. Because people should know in really any business, if you're ramping up your marketing and sales spend, what do you expect to get in revenue for every dollar or thousand dollars or whatever that you're increasing your sales and marketing by? And if you at least know those ratios or those metrics that are based on your historical evidence, then you can use that as a best guess moving forward into what this next year will look like.

Drew Romney (20:44):

Totally. And this goes back to understanding what the keys and the goals of the business are. Maybe growth isn't your goal, maybe you just want to maintain the same revenue number, but your goal for the year is to cut costs. So spend your time on that exercise rather than the growth one. So understanding the goals of the business, super helpful in this. If you're a startup and you're running out of cash, what do you have to do to raise money in the next 12 months? That should be your goal and you should focus on your cash conversion cycle and reducing burn and things like that until you can raise those funds.

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Month By Month Forecasting With A Waterfall Chart

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Chris Ronzio (21:17):

Let's talk waterfalls. You know exactly what I'm talking about, but anybody that's listening. So when we first decided to raise money at one of our investors, he's on our board of directors, Troy Henikoff, he suggested this format, I guess it's called just a waterfall. Is there a different word for it?

Drew Romney (21:38):

No, I think that's right.

Chris Ronzio (21:39):

Yeah, waterfalls. All right. So I want you, everybody that's listening, put your visual artist hat on and just imagine a spreadsheet that has a long row across the top and then as it goes down, it's got one month less, one month less, one month less, something like that because it looks like a wave or a waterfall. But what you're doing is you're forecasting month by month what your revenue will be. And what I love about this chart is that every month you do a new forecast and you put in your actuals for the previous month and then you reforecast out what the rest of the year looks like.

(22:20):

So if you're scanning this document through the year, you can see exactly where your assumptions changed, how your projections are changing from the very beginning of the year through the end of the year. So we can provide a template or link to this in the show notes, but this idea of that waterfall for revenue for us for cash. So anyone that raises money and is spending through that money, you want to do it for cash. But I think generally any business could do this for forecasting their sales. And the important thing here is month by month by month, reforecast, put in the changes for the rest of the year to catch it early. This has been helpful.

Drew Romney (22:59):

Yeah. Because otherwise you have to pull up the full forecast to understand when we did this in January, we said that our end of year revenue was going to be X, and then you got to pull up your February forecast and say in February we thought that our end of the year revenue was going to be Y. But to have it in one neat place, you can throughout the year, say, "Back in January, we thought by now we would be at a hundred million, but we're actually only at 80 million." So what happened? Where did we go wrong? And it helps you strengthen your forecasting skills and understand the assumptions that you made throughout the year that were wrong so that you can be better or more accurate going forward.

Chris Ronzio (23:35):

So that is a tip that I think has worked really well for us. And I'd recommend to everyone else again, whatever business, make it a monthly habit to sit down and reforecast the rest of the year because then you don't find yourself in a position where you're three, six months into it and way off and now you've made decisions, you've made more hires, you've spent too much money, and you're just way off. It's a great exercise. So this relates a little to my next question, which is any other tips for approaching forecasting in such an unpredictable market? How do you build in that buffer or that margin of error?

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Forecasting In An Unpredictable Market

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Drew Romney (24:17):

Yeah. So a lot of it goes back to the scenario planning or the sensitivity analysis that we've talked about and just what levers or what assumptions would have to be true for this forecast to be right. So as you're going through the year, you say, all right. In our case, if our conversion rate from trialing customers to paying customers, if that's X, but it's actually two percentage points lower than that, what does that do to our growth? What does that do to our cash? What does that do to all the other line items on the sheet? Understanding that going into it, then you can keep an eye out for it and say, "Hey, it's trending towards that, so it looks like we need to make some changes to either our spend or our headcount or things like that."

(25:00):

So it's understanding what those drivers are so you can catch them early. Because let's say that churn in these economic times, if churn increases and more paying customers are rolling off, that might impact your cash or your revenue in the first month. But if that continues, if that compounds for the next 12 months, that's going to be a huge impact to your goal and where you want to be. So catching those things early on is really important.

(25:29):

Another thing is just being realistic. Sometimes in finance we get labeled as pessimistic or the Debbie Downers, like we're saying marketing, I know you say we're going to grow five X this year, but maybe let's just plan on three X this year because if you get too optimistic, I think that's where a lot of companies get in trouble. And frankly, we saw a lot of SaaS companies over the last 18 months raise money at super high valuations, assume that everything was going to be rosy going forward, and they hired hundreds or thousands of employees that they've since let go. So we never want to be in that position as a company. So we try to be as realistic as we can, but also optimistic, but with some guardrails.

Chris Ronzio (26:12):

Yeah. So what are the other practices we've put in place to stay on top of our financials? Maybe could you talk about the dashboards or the monthly meetings that we have or the weekly meetings? Just anything that could be helpful for someone listening.

Drew Romney (26:28):

Yeah. So one of my keys to success is get a really, really good accountant. Here at Trainual, we have an awesome accountant. She is the reason that we have a lot of this stuff. She's the reason that we're able to forecast going forward is because we know that our historicals are perfect. So have a really, really good accountant that really helps, especially with your expense management and being able to forecast those in the future. That would be my tip number one.

Chris Ronzio (26:56):

And before people start commenting, can you recommend your accountant? It's like an in-house accountant for us. So shout to Kelsey, she works here, full-time knows she can't help your business, but you should find one too.

Drew Romney (27:07):

Yes. Find your version of Kelsey, she won't be as good, but ours is great. So have a really good accountant. And then number two would be understand the drivers of your business. Again, we've talked about this a bunch, but understand what actually is making those changes. And here at Trainual we have analytics reports up through finance as well. So as a software company, as a high growth company, we have to understand our analytics, our number of trialers and how they convert and what they're doing in the product and what they do in the product converts to being a paid customer. And then once they are a customer, what are they doing in the product and what does their retention and churn look like moving forward? So having analytics so close to finance is very helpful for us because then we can have those dashboards that you talked about and understand what does churn rate look like week over week, day over day, month over month. And keep an eye on some of those performance metrics that we can then dig into later and make adjustments as needed.

Chris Ronzio (28:06):

So I always had dashboards, even for my consulting business, for my video business, there are just certain metrics that whether you do it yourself in an Excel file or a Google sheet or something, or you use some software, you might want to plug into your Google Analytics and see what your traffic is on your website. You might want to plug into your credit card processing account and see what your monthly transactions month to date are looking like. There's certain just metrics that having them front and center top of mind increases your financial literacy in your own business. And I think that, that's part of what keeps us honest with our forecasting is that we all know the numbers, we look at them on a weekly basis in our leadership meetings. We share them at our all hands. We have our weekly operations meetings. So I think having a dashboard and having a planned cadence to review the dashboard is really important.

Drew Romney (29:01):

Totally. It hurts my heart sometimes when I hear leaders when I share a metric or a financial nugget with them and they say like, "I had no idea that it was that good or that we needed to work on that." I'm like, 'Dang it. That means that we're not doing our job sharing that information with them or they didn't have easy access to it." So it's definitely something we're always working on, making sure that people have the right level of transparency and visibility into the business because people need those numbers to make decisions.

Chris Ronzio (29:33):

All right. We've got dashboards, we've got the cadence, and then we also have a monthly meeting that we send out a snapshot to all of our people leaders. So for companies that maybe have more people, this could be a tip that include an update on your budget, on your forecast, on your P&L for anyone that's managing people so that they can be setting the right expectations, making the right decisions about how your company's spending money on a monthly basis.

Drew Romney (30:01):

Yep, totally. I think that employees, that's like the number one way that you can build trust with your employees is to be transparent about some of those numbers, especially during difficult economic times like we're going through now, people naturally are going to assume the worst, the company is not performing as well as we thought and other companies are having layoffs. Does that mean that we're going to have layoffs? And being as transparent about where the company is financially with your employees is huge to maintain that trust, to build that trust and get everybody into the mission and vision going forward.

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How To Have An Unlimited Marketing Budget

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Chris Ronzio (30:33):

Yeah. Now there's been times at Trainual, I think I've shot a video on this in the past where I've said we have an unlimited marketing budget. And I know from a putting a finance perspective, you don't like unlimited budgets or anything. But can we talk through just a little bit of the investment versus expense mindset and how it could be true in some businesses to have an unlimited budget for some areas?

Drew Romney (31:04):

Yeah, absolutely. So in our business, in software, it is almost most companies that grow to be big successful software companies have had to raise money at some point. And the reason they have to raise money is because it takes a long time to build software. And historically, when you build a software custom for a company and you go install it on OnPrem, and you'd have to keep it updated, those companies were paying millions of dollars a year for that software. But being able to, as a software, as a service charge so little for your software, it's going to take some time before you can become profitable. So you have to raise money along the way. But there are certain financial metrics, especially in the SaaS world where you can know that you're on track and that you're building a healthy company. A lot of these are called unit economics.

(31:50):

So what does it cost you to acquire a customer? How much do they pay you? And how long is it going to take you to repay the cost to acquire that customer? And then what's the lifetime value of that customer? What's the estimated lifetime value of that customer? Are they going to pay you more overtime? Are they going to turn and only be with you for a few months? And if you can understand those, then you can set these unlimited budgets saying, "Well, we know that if we acquire a customer for $1,000 and they pay us 100 bucks a month, that we will pay back that cost to acquire them in 10 months. And we know that on average they stay with us for five years. So if we can do that, then our marketing budget is unlimited. We can spend as much as we want because while we may lose a little bit of money in the short term, we are building a huge business for the future because the unit economics makes sense.

Chris Ronzio (32:36):

And let me give-

Drew Romney (32:38):

Don't make sense. No unlimited marketing.

Chris Ronzio (32:41):

Yeah. Let me give an even simpler example, a non-software example. Let's just imagine that you had a bakery and you could stand out on the street and offer people a dollar to come into your bakery. And anybody that you hand a dollar to, they come into the bakery and on average they spend $5, they buy some muffins or cupcakes or whatever, and you did it all day and you handed out dollars and they bought. And you saw that you've got that same one to five ratio. Now imagine that you exhausted all of the people that are walking through the streets, but then you could start advertising on Facebook or something, the same dollar, and people spend $5 on your website, plus shipping and you make the same equation. And now you've got this massive pool of customers that still you can acquire profitably.

(33:32):

They come in, they buy your product or service, and you come out ahead on that transaction. In those scenarios, that's what you're saying, Drew, that you have an unlimited budget to invest in acquisition until you start to see those unit economics changing. And I think a lot of businesses are not clear on those unit economics. I'll give another example in my consulting firm, when people would come in and spend five or 10 or $20,000 on consulting services and they found out about me through a referral and wasn't coming out of pocket on Google ads or something, you just can't even compute what your cost of acquisition is.

(34:17):

So I had to really work at this, but I started tallying up the time I was spending networking, going to coffees, whatever, what portion of my salary is that time that I'm spending? Any materials that I'm printing or handing out or sending to people. I had a book that was up on my website. You include that in your cost of acquisition content that you're creating. So you can get creative, but everyone that's listening needs to somehow figure out what am I spending to get customers and what are they paying my business over their lifetime with us to start to dial in that metric? And if you have a healthy metric, then you can really turn up your marketing.

(34:59):

I had a friend that used to put together these gift baskets, and he realized that if he put together a gift basket that cost him about $100,000 and dropped him off at 10 different ideal customers, he would get one out of those 10 to buy with his business. So one out of those 10 people, it would cost him $1,000 in these baskets, but then they'd end up spending something like $25,000 at his business. So he said, "I'm just going to give these out all day to everyone." And his business skyrocket. It's a millions in revenue because he figured that out.

(35:38):

So this is something that I think plays into forecasting because you need to understand those unit economics and then you test them at different assumptions. You say, "Can I do this with 10 customers? With a hundred customers?" And watch how they change?

Drew Romney (35:53):

Yeah. Watching how they change is key because those unit economics may not scale at the same rate. The first few customers at your bakery are going to come in without you giving them a dollar. And they might spend the most, they might spend $10 each. So then you start spending to get them into the bakery, but those aren't spending as much. And if you were to go too high, then you're just going to get people taking dollars or taking the free samples and not spending anything. So understanding that is the key to the unit economic discussion. How does that scale and where are you spending money most efficiently?

Chris Ronzio (36:23):

Love it. All right. So assuming everyone goes through this forecasting exercise, which we have been going through, and we'll finish up here in the next few weeks, let's wrap up by just talking about the communication of this. So we have an annual kickoff meeting we do every December. You'll stand up and you'll paint a picture for everyone. So can you talk a little bit about how we communicate this to the rest of the company?

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Communicating Forecasting With Your Team

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Drew Romney (36:48):

Yeah. So going back to my first point, the most important thing that we communicate is what is our company goal or objective or purpose for the year? What are we trying to accomplish as a company? Who are we serving? What problem are we solving? How are we solving that problem? And then finance can come in at the end and say, and this is what we think it's going to look like numbers wise. We think that this is the growth that we need to achieve to get closer to what our mission is as a company. This is how many people we think that is going to be. This is where we think the product is going to end up and how much we're going to spend in those certain areas. And we'll review this company wide, at least on a quarterly basis with the leadership team, at least on a monthly basis. But that's the intro to that transparency that we talked about earlier of having a big picture kickoff to let everybody know where the company should be in the next year and what their role is in building that.

Chris Ronzio (37:39):

Because everyone has a role. Everyone is part of this. They are a line item on the P&L. They have a salary, but then they also have the ability to impact the customer or to sell some product or to improve some of our metrics. And if everyone knows in some way where they fit into the forecast and how they can help the company hit their goals. And I think everyone's more unified going into the year. All right. Drew, anything else on forecasting? Any last tips or words you'd share with everyone?

Drew Romney (38:11):

No, I would say it is worth it. It's worth the exercise. If this is your first time doing it, may feel like you don't know where to start or you don't know what the future looks like, so why even spend time looking into it? But I promise it will give you a more holistic view of the business and help you understand where you need to be at certain points in the year to achieve whatever your company goal is for the year. So totally worth it, but go into it knowing that you're not going to get everything right the first time or ever. But it'll at least give you an idea of where you need to allocate resources and how to grow your business.

Chris Ronzio (38:44):

Awesome. All right. Drew Romney, thank you for being here again. Drew's our director of finance and operations over here at Trainual. He's affectionately known internally "Drewpe-fiasco" for all of his antics, but he adds a lot of fun to our meeting. So Drew, thank you for sharing some insights there. Everyone else, such great tips. Make sure that you're doing this exercise for your business. Every business should have at least a simple forecast. You should do a little scenario planning, even if you move forward with one forecast, one plan for the year. Know your guardrails, know which metrics will be potentially on the high end or the low end, and what that means for your year as you go.

(39:27):

You should have a good template that's ready for forecasting. So as you go through annual planning, you can put in plugin, whatever numbers or assumptions are coming from your team's strategic goals for the year. You should have your fixed costs really well understood. Know which cells you're dragging forward for 12 months and which ones maybe have to change. And then you should know what the biggest assumptions are in your model. And we talked through some of that with your marketing, your growth assumptions. How much does it cost you to get a customer? How many people do you need to serve those customers? And what are we going to invest as a company on our R&D discretionary spending? So all of those different things weigh into your forecast.

(40:09):

And once you have a forecast, make sure you're using it, measure it, watch it. Set up those dashboards. Do meetings with your team on a weekly basis, on a monthly basis, and tweak it as necessary. You can use the waterfall chart like we mentioned, which is a simple spreadsheet that reforecast every month through the rest of the year as you go month by month, locking in your actuals for the previous month and forecasting the remaining months in the year. And it's a great tool for showing you how your assumptions change to the year and where your revenue's going to end up at the end of the year so that you don't get caught off guard. That's what's happening to a lot of companies right now, is that they're getting caught off guard by this market, and we don't want that for you. So please go through some of these exercises and set up and forecast a healthy forecast for your business.

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