ON TODAY’S EPISODE:

About the Proof to Product LABS program [0:29]
Forecasting for new product releases [2:01]
Considering our recent supply chain issues when ordering [3:54]
Budgeting for products you’re making in advance [10:19]
Why annual forecasting and budgeting is so important [12:30]
Turning a limited supply into a marketing win [13:47]

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KEY TAKE AWAYS

“I typically recommend that you buy the minimum quantity available, that way you can see how quickly you're going to sell through it. When you order the minimum, you're also lowering your risk of not having so much cash tied up in that inventory when you're not sure what will sell.” [3:17] Katie Hunt

“When we're starting out with a brand new product or we're doing a new release or new launch of something… the two things we’re balancing are our cash flow and our risk tolerance and finding where you fall on that spectrum. Finding a middle ground that you're comfortable with is going to be the answer here.” [04:38] Katie Hunt

“When you sell through your minimums, it's going to give you data points. It's going to tell you how fast things are selling and what customers are drawn to.” [5:08] Katie Hunt

“That's what forecasting is. It's setting a budget based upon what we want to spend and what we have available to spend on different things.” [6:01] Katie Hunt

“You could make it a limited time edition product to start. Then once you see what those data points are, you could bump up your ordering for materials and roll it out into your regular product line.” [13:52] Katie Hunt

“Forecasting is a guessing game. But you can make educated decisions based upon these data points.” [14:56] Katie Hunt

RESOURCES

Profit First by Mike Michalowicz
Paper Camp
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Connect with Katie Hunt

Katie Hunt is a business strategist, podcaster, mentor and mama to four. She helps product based businesses build profitable, sustainable companies through her conferences, courses and coaching programs.

Website: prooftoproduct.com | Instagram: @prooftoproduct

Transcript for Proof to Product Episode 223

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223 | Budgeting & Forecasting for Product Development with Katie Hunt [LABS sneak peek]

We're taking you behind the scenes with entrepreneurs that run product based businesses. There is so much information out there tailored toward service providers, so we have carved out a space just for you, the creative entrepreneur making and selling physical goods.

Whether you are just starting out or are a seasoned business owner, this podcast will shed light on new strategies, inspiration, and action steps to help you grow your product based business.

Hey friends, I'm Katie Hunt, and welcome back to Proof to Product. Each month inside my Proof to Product LABS program, I host a group coaching call. Members submit their questions ahead of time, and I also like to take live questions on the call. And these are actually my, because members will unmute themselves and ask their questions and we can go back and forth a bit and really hone in on solutions tailored for them. During these calls, we talk about a wide range of topics - things like Shopify Shipping Settings, wholesale outreach strategies, hiring virtual assistants and how to deal with copycats. Those are a few of the topics we've tackled recently. And recently we talked about budgeting and forecasting for product development, which is what I want to share with you here.

Today's episode is a small excerpt from our LABS Group coaching call where I talk about planning for new product releases. Specifically, we talk about how to balance cash flow, your personal risk tolerance and sales data when determining how to budget for new product releases. As you'll hear, I offer recommendations for companies entering a new product category as well as suggestions for seasoned business owners who have sales data and manufacturing systems to lean on.

Before I share the sneak peek into our LABS program, I should mention here that you can get more details about this year-long coaching program and community. By going to ProoftoProduct.com/LABS, we would love to have you join us. All right, let's dive in.

“How do you recommend businesses better forecast in ordering supplies for a new release or new product launch?” She says she can't get fabric or supplies quickly enough, or she says she can't get them super quickly, and, “I run the risk of items being out of stock or back ordered if I don't order enough. But I don't want to tie all my cash up in inventory, either, if I'm not going to sell through those products. I never know how well a new print or offer will do. Either ordering too much or too little materials is stressful.”

OK, this is a common worry. It's a common fear. So, Nicole, you're not alone there. So I want to talk about this for new products, and then I want to talk about it for those of you that are doing general forecasting for your product releases and you already have some data points to work with.

So for new products, specifically to what Nicole is asking for, I do typically recommend that you buy the minimum quantity available and that way you can see how quickly you're going to sell through it. So when you order minimum quantities, you will pay more per piece for each item. So in your case, you know, you'll pay more for fabric if you're purchasing it in bulk. But when you order the minimum, you're also lowering your risk of not having so much cash tied up in that inventory when you're not sure what will sell.

So again, buying the minimums is kind of a good starting point for any new product categories, and this method will again give you data points that you can then use to forecast later on. So if you sell through everything super fast, you know that the product is resonating with customers. It's selling well. You might run out of it, and that might stress you out, right? Because you don't have enough of it. But it gives you those data points. It's less of a risk than ordering in higher quantities and having your cash flow tied up in inventory that's not selling. So if we start with that kind of bare minimum that you have to order to get the materials the next time, you can then make adjustments.

So I will also mention to you that we're slightly in uncharted waters right now with all of the supply chain issues and also the shipping delays that are happening. So I would consider a couple of things to help you forecast. So one is, How quickly can I get more of this product if I run out? There are certain products we can turn around really fast. A lot of paper products, printed products we can get that turnaround fairly quickly. But fabric, that's a little bit of a different story, right? So thinking through what the turnaround times would be to get those materials, which then you would then use to create your products.

So then the second piece is, Do I have the cash flow available to invest more money in inventory, knowing that some of these things may take longer for me to sell? So when we're starting out with a brand new product or we're doing a new release or new launch of something, the two things you are balancing are cash flow and risk tolerance and finding where you fall on that spectrum.

Finding a middle ground that you're comfortable with is going to be the answer here. Some of you guys might be like, "I go big and I'd put more cash into it, and I hope it works." And some of you are like, "Nope, I don't want to put that cash out." So it's going to kind of really depend on you and what your risk tolerance is.

Also, when you sell through those minimums, it's going to give you data points, right? It's going to tell you how fast things are selling, what customers are drawn to. It's just going to give you some things that you can then work off of.

So looking at this question from the standpoint of those of you that already have data points, you have sales data, you know what your expenses are. I want to talk about budgeting for product development in general and how you do that.

So for example, let's pretend, well, let me back it up. I want you to budget for product development just like you would budget for any other expenses in your business. So for, you know, it may be professional development, it may be for marketing, any and all these different things that we do in our business. We should have budgets so that we know how much we're planning to spend and we can keep an eye on if we're on track or if we have more money we can spend or if we need to cut back on certain things, right?

That's what forecasting is. It's setting a budget based upon what we want to spend and what we have available to spend on different things.

So looking at product development specifically, let's pretend. I made a little example here, but let's pretend that last year you spent $24,000 on your cost of goods sold. So that's materials, your supplies, your manufacturing, if you have somebody else create things for you. And let's also pretend that you did three releases that year, which would break down to roughly $8000 per release. We're just ballparking things here, right? Just to keep things simple. So as you're forecasting, you can then use that as a benchmark for what you budget for upcoming releases. Whether you're doing that on a quarter basis budget or an annual budget. I usually like to budget annually. And so, you know, you could say, “I'm going to budget hypothetically twenty four thousand, but I'm going to try to allocate that in thirds of eight to each.”

But digging further into this, let's say that you are planning, you know, like we're forecasting for next year, right? And you know that you want to keep things kind of status quo. You're going to release new SKUs in existing product categories that you already sell and you're not doing anything new. You're going to create new SKUs, but you're not releasing a new product category or launching anything brand new that will be very different. So in that case, you know that your costs are going to stay kind of in alignment to what they were this year, probably.

So in that case, I would probably budget eight to ten thousand dollars for each release that you're going to do. Again, using our hypothetical situation here, but I would probably budget eight to ten thousand dollars for each release so that you have wiggle room for price adjustments or inflation or whatever. However, I know a lot of you guys like to do new stuff. So if you're planning on rolling out, let's say, a new product category, then let's say we want you to do six SKUs within that product category, right? You may want to allocate a higher amount for that single release.

So maybe for that one release where you're going to go big and you're doing a new category and you're doing at least six SKUs, let's say we hypothetically want to allocate twelve thousand dollars to that release. But with the other releases, we want to do eight thousand because those are kind of going to be things we're already running and we know the numbers for and we know that that's plenty of money. So in that case, you'd budget 12 plus 16, so twenty eight, twenty thousand dollars for the year, but you'd be splitting up that budget based upon what you're doing in each release a little bit.

So I want you budgeting, having a whole bucket for product development, and then we can split that bucket of money in whatever way makes sense depending on what your plans are for that release. So I hope that that is helpful.

But basically, we're going to forecast how much product we produce based upon those dollars, too. If I know that I've eight thousand dollars to create new product with, what can that eight thousand dollars get me, right? Again, these numbers are hypothetical. It may be a couple of hundred dollars, it may be, you know, twenty five thousand dollars for each release, depending on what your business sells and how much money you have allocated towards it. So, you know, make this work for you. But once we know what that budget is, then we can make decisions of like, OK, for eight thousand dollars, I can get this, this, and this, and I can order this amount of fabric, and I'll feel good about it because I know that I've earmarked those dollars for that release.

I hope that's helpful, Nicole. I know I went off on both a beginner option and then also more of a longer term option for people that have established. But that's how we forecast. We forecast based on the data points that we have as well as our plans for the future. We want to allocate it when we do budgeting. I know a lot of you guys avoid it. I know a lot of people are like, I have this much in the bank, so I'm going to spend that on a new release. And when you can plan ahead and actually earmark certain amounts of dollars for different things, whether it's marketing or product development, it frees you up a little bit because you're like, okay, about eight grand or whatever number it is to spend on this. How do I want to spend that, you know?

Like pretend you're going on like a shopping spree or something and you're getting clothes, and it frees you up to know, OK, I've dedicated this money to this aspect of my business. Now let me figure out how best to spend it.

Shay says in the comments, "How do I balance my budgets when I'm ordering product during a season I'm not selling it. For example, I'm creating and purchasing my 2023 planner covers in December of 2021, but I do not start selling them until September 2022.”

So Shay, I experienced this quite a bit in my own business. It's different, but we would sell Paper Camp like in November or December for people coming in February. People would start registering then. And so I had a lot of income coming in at different times, as well as expenses going out later. So then it's not more of a consistency thing, but I would just kind of know that certain expenses are going to roll.

So like, let's say you're creating your planner covers in December of 2021. Well, you know that your covers for 2024 are also going to be done in December of 2022, right? So even through that release, you know that during the course of one calendar year, January through December, you will be designing and paying for a cover. It may not necessarily be the product that's selling right then and there, but it can still come out of that same budget because you'll have that same type of budget for the following year. Does that help and makes sense? Yeah, I had to start looking at things a little bit different and look at like, OK, within this calendar year, I know that I'm going to be selling these things and paying for these expenses, and your budget will still be consistent. It just may not be in alignment with what is actually being sold that calendar year or what's being paid that calendar year. So yeah, it'll balance out, but we just have to kind of get our mindset around it, like, I'm going to be buying one cover every single year. It won't be in alignment necessarily with what I'm selling at that time, but every year I'll have that expense.

Yeah, it is a different way of thinking about it, for sure. I agree with you, but it makes sense too, right? Like every year you're buying a cover because every year you have a new planner. So when we think of it that way, it does make sense. It's just when it doesn't align with the books, it feels a little weird.

Let's see. Christie says, "Profit First really helped with that for sure. Profit First helped with getting categories for different spending.” Yeah, yeah. Profit First. I feel like Profit First was really good about helping for saving with taxes and saving with the cash cushion accounts that I've talked with in the past.

The forecasting and budgeting that I'm talking about right now, though, guys, is something that I really want you to be doing annually, and I want you to be looking ahead. So every year I'm planning out when we're going to run different programs, just like you would plan out when we are going to have different releases. And then I look at, what marketing are we going to do? You would look at what promos are you going to do, or what trade shows maybe, or what online markets are you going to do, or whatever? Like we plan out the timing of things, but we also, with that, plan out the budgeting of it.

And too, one of the things I look at is not only the income coming in and what we're trying to forecast and what we're trying to earn, but also the expense side of it. And you can run your profit and loss statement to for the end of December and see, OK, we spent this amount on this and that. Then you can decide, do I need to allocate more money to that for the next coming year?

For example, when we had a big legal year where I was doing copyrights and stuff, I knew I needed to give our legal bucket like a bigger chunk of cash because we'd be spending more in that area. But that's not something we spend a lot on every single year. It's just a one time kind of thing.

OK. I hope that was helpful for you, Nicole. I think, too, where you are with the fabric, we are in a tricky spot with the supply chain stuff and the shipping. So look at what your cash flow will allow you to do and look at what your risk tolerance is. The other thing is, too, you can also make it kind of fun, like if you're not comfortable investing in a whole lot of inventory, you can also always tell customers, “We have 50 of these available, and once they're gone, they're gone.” Like, you could make it like a limited time edition thing to start. And then once you see what those data points are, then you could bump up your ordering for materials and roll it out into your regular product line. But the first run of something could be marketed and couched as a limited edition or limited release that you could do that.

Sadie says, "are there any other recs or books for understanding budgets deeper?" You know what, Sadie, let me flag that and I can come back to you with some ideas in our community. And if that's something you guys want to learn more about, too, I can kind of walk you through what I've done in the past and how I budget and how I forecast and all of that.

A lot of it is based, as I just shared with you, on previous data points. So looking at what I spent last year on certain things and thinking through, do I need to allocate more money to those areas this year or is it something I can scale back on looking at my income streams and thinking, where do I want to focus? Where do I want to put my time and energy? And kind of thinking, OK, well...

Forecasting is a guessing game. It's like, if things stay the same, then this will happen. If things change, then this will happen. But you can make educated decisions based upon those data points that we talked about. But let me make a note to myself about budgeting and books. OK? You're welcome.

All right, friends. I hope that sneak peek into our LABS Group coaching call was helpful for you, especially as you start to think about planning for the year ahead. Budgeting, forecasting and using past sales data will make your planning easier. You'll make stronger informed decisions for your business with confidence. And if you don't have these data points yet, it's OK. Manufacture small runs of your product and test the market, see what sells well, and then when you run out of product, you can order a larger amount. If you want to join us live for our next LABS Group coaching call. Head to ProoftoProduct.com/LABS and enroll in our 12 month program.

Also, a fun fact here. All of our video trainings, masterclasses, and group coaching calls are searchable by keyword. So let's say that you want to go back and find more information about budgeting. You can type that into our video search bar and it will show you all of the videos within our LABS archives that talk about budgeting and it will take you to the exact location in that video where the word budgeting is used. It's bananas, and it has made our archives such a valuable resource for our members.

Again, you can join us at ProoftoProduct.com/LABS. Thanks so much for joining me today. I'll be back next week with a new episode.