My Amazon Guy Profit vs Growth with Tyler Jefcoat Seller Accountant #136
"For me, it all comes down to trying to measure annual return on working capital. Measuring profit (either via Post Advertising Gross Profit OR via Return on Inventory Investment) and then measuring velocity are the two key variables: I'm equally happy with either of the following two scenarios depending on my strategy:
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- Product A has an after advertising margin (PAG) of 20% and a 50% ROII but I can turn inventory 4 times per year. Annual ROII = 50%*4 = 200%. In other words, I get my working capital back plus 2 dollars of profit for each invested dollar each year.
- Product B has a PAG of 40% and an ROII of 100% but I can only turn inventory twice per year. Annual ROII = 100%*2 = 200%.
I would prefer option A if my greatest strength was improving advertising performance because I could generate better Annualized ROII by getting better at ads. I would prefer option B if my greatest strength was supply chain management because I could use my vendor negotiation skills or my ability to forecast demand better in order to improve Annual ROII. But as they currently stand they are equally profitable.
The other really critical consideration is what is my competitive advantage and what is my vision for my company? If I have the ability to generate lasting relationships with customers where repeat purchases justify a higher customer acquisition cost then I pay to get my brand out there in order to harvest later. On the other hand, if strategy is primarily a cash flow play then should zealously work to protect that Annualized ROII metric described above but I am not sure if they have a clear handle of how the products are performing in that regard. Meaning if lowering the ad budget is causing them to carry more inventory then even though margins appear to be higher than fact that your cash is tied up longer may make you sadder that you made the change. Not sure if that makes any sense. In other words, understanding the impact of velocity on his working capital, debt load, etc... matters big time in this decision.
Obviously if we had the crystal ball and could optimize perfectly for profit relative to working capital we would but most sellers have to prioritize their strategies based on their strengths. "
How do you start creating vision?
If you add more money into a problem, the problem can get worse.
- Refinance
- Liquidate trash to cash
- Cut expenses
Clean the mud on the windshield. Where is the money go?
2021 great year to be an Amazon Seller.
Track all expenses, look at financials daily.
Businesses going to gain 30% value YoY from being sold EBITDA.