This is the full transcription of the Amazon FBA Podcast episode “Amazon Working Capital and Cash Flow Forecasting” with our CEO, Alan Chen.




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Today we’ve got a subject that is genuinely exciting to me. And it may not sound exciting to you, but stick with it and we could make you more profits and stop your business going bang, as in completely going under from lack of cash. And that’s a reason to stay listening, I think so, today we’re gonna talk about increasing your profits with cash flow in sales tax planning with Alan Chen from freecashflow.io.

Alan’s a Certified Public Accountant as a chartered accountant equivalent in the US and one of the founding partners of freecashflow.io. And they are focused on online and e-commerce business owners.

They get a combined 20 years of experience and have worked at Ernst and Young. So the real deal is seriously clever people. So, fantastic topic as well. So Alan warm, warm welcome to the show.





Yeah, thank you so much for having me on. It’s great. Thank you.




Yeah, I’m genuinely excited about this.


Do you know why? Because I just think this is the missing piece. There’s so much noise about PPC, Facebook ads, and branding. And those are really important topics. Of course, they are. But this is so neglected. I don’t even know why. Because the most important the serious business owners, I know obsess about cash flow planning. And the ones who are struggling, have no clue about the numbers. And I think there’s a big clue there.   

So first thing, just give us a tiny, quick intro to yourself. I mean, we’ve said the basics, just fill that out in a minute if you need anything.  




Yeah, yeah, of course. Yeah. Thanks. Thanks so much, Michael, for the great introduction.


And like my name is, My name is Alan, as I’ve mentioned, I’m a certified public accountant here in the States here located in Los Angeles, California. And our agency basically, we’re very focused on one niche and one niche only that being online business and e-commerce owners, right? where we’re laser-focused on these guys. And that’s an advantage for our clients. Because it gives you the feeling of confidence that we know what we’re talking about everything we do our knowledge bases on just this topic.   


And we basically offer what we call an all-in package where we take care of all your sales tax, tax planning, your bookkeeping, and any kind of compliance and back-end valuation financial planning needs. And we call it all in the package because I think the typical, I would say, tax accountant, right, hoarders is someone you hire, we’re just through your taxes around April 15. deadline and they kind of disappear. But for us, we see ourselves more as your outsourced CFO, where we’re always there in the background.   


If you ever have a question, you come to us instead of Google, right, you don’t have to Google and name any more answers and get confused. You come to us and we’ll give you the right answer. We don’t know it, we go and research it, we have a great network of you know, professionals in this field that can really step in and help you guys out too. So that’s where we see ourselves and and and it’s I really think, Michael, it’s a really needed thing in the space. Right?   


I actually feel a little bit Shopify last year, I started a store. And it was eye-opening to see a lot of these questions about these guys, who are, you know, doing business doing? Well, right, six, seven figures. And they were just asked very simple questions in the forums about no taxes, and hey, I’ve been filing a couple of years old, I do, hey, are there penalties and they all it’s like a, it’s like a nightmare to them that they haven’t thought about it. They just scale so fast. So we thought, wow, you know, these guys, we really need to need to help these guys out and educate them more.  




And it makes total sense. And I think you’re right that I’ve seen in the Amazon space. So you were in a sort of parallel but very, very similar space that there again, there are people can ramp up the sales figures, particularly in 2020 was a crazy year for e-commerce. 


At any time in the last few years. I’ve been in this game since 2014. At any point, you could say you can see massive revenue growth. But revenues just won a whole host of numbers right and been very, very focused on just one number for a way to focus.




You see like little screenshots right where they say I cracked this number, but how much profit did you make?




Yeah, yeah, exactly. And the thing is that I think at some point, people realize it, but they kind of realize it in a panicked emotional kind of bad state of mind, as opposed to seeing that coming. And I really, I really, really think that you guys are right to observe this problem. I just think it’s the biggest problem out there is people with revenue and no idea what’s going on in their business actually.   


So let’s get into this.


The first thing I want to talk about is working capital, which is a very technical kind of sounding word, and cash flow planning. And those aren’t sexy words to some people they are to me because I believe massively. I didn’t use to I know from experience working with some amazing sellers and some mediocre sellers and some downright terrible car crashes. The difference is understanding this stuff doesn’t dig into this, I think is seriously important. But first of all, what on earth is working capital in the first place? And why does it even matter? Any commerce?  




I mean, working capital by itself is a very, I would say simple formula of calculation, you may be right. It’s just the amount of money needed to finance the gap between your disbursement which is the money you pay to a supplier, whoever, you know, gives you inventory and receipts, which is paid from your customers. And why it matters for a lot of e-commerce owners is they have this gap, right?

Especially, I would say, on the Amazon FBA side where you need to, you know, bring in a large amount of inventory, right. And that inventory usually comes from, from my experience from overseas, some somewhere like China, or maybe wanted south-eastern countries over there.

And the problem is, and I also faced this last year, when I was doing it is your money gets your cash gets tied up in this inventory, right? Think about it, how the slow freight system works from China like I remember when I was trying to ship like rose berry, there’s one more like more popular pause, and I was doing Shopify, and I would but I think it was like 5000 units and my money weapon tied overseas over two months.

So that’s money you can’t use for any other purpose, because it’s literally on a boat, and it’s slowly coming across the ocean to you. And that’s a problem, right? That that is work that is negative working capital for you, because that’s cash, you can’t use to, you know, carry out other obligations that you have in your business. So, you know, companies that don’t manage this very well and have poor management of inventory and receivables, face a very stagnant growth in their business. And some sometimes they may be in more negative consequences where they really just have to shut down the business because they just don’t have the cash flow to keep keep keep the business going. Keep the buses going.

So it’s something like Michael just mentioned is not a very well-known term. And he can’t I have never heard anyone mention it, any kind of forum or any kind of setting. But it is just so important to be able to calculate and to know to financial help your company,




One of the questions you get every five seconds on a Facebook group somewhere in Amazon world anyways, absolutely, you can put money on this. In fact, if I had a pound or $1, for every time I’d seen this, I’d be a rich man already, which is how much money do I need to start a private label business? And the answer, I believe, is the working capital requirement is how much money right? Because if you just if you do drop shipping, we can talk about the cash flow of these things in a minute. But if you dropship, the answer could be zero on I guess a little bit to set up your Shopify store.   


But you know, if you’re going to order something that costs $10,000 per shipment from China, and it’s going to be on a boat for three months, and it takes you seven months to set it through the odds, it’s going to be much, much more. And this is it’s weird, isn’t it that on the one hand, there is a very, very, very common question. The common question is extremely good questions. And then there’s working capital on the other side. And somehow people just don’t put those out there. And it took me several years to dig. I hadn’t even heard the word working capital. And so I was working with what is now the owner of an eight-figure business was seven figures when I was working with him. And that was the first time I even heard that term. So it’s obviously yet much needed. So if all you take away from this, this podcast, and his obsession with the word working capital, folks, I think you wouldn’t be doing well.   


But let’s go a bit further. So how do we calculate it? That was the thing that also took me about two years to get the answer. So let’s not give that horrible experience to anyone else. How do you calculate the working capital requirements for our product line or even the whole business?  




Yeah, so so working capital, as I said, it’s very simple for it’s really taking what you have what you call your current assets, right? And minus your current liabilities. So for an, I was saying an e-commerce or online business that can be your, your trade receivable, plus your the amount of inventory that you have, minus whatever you owe your outstanding trade payable, which could be you know, the amount that you owe to say, your supplier or your vendor, right?   


And a lot of time, what you have to do to manage this formula, I would say is basically how fast can you collect? Right?


How fast is the payout of whatever, you know, whatever platform you’re on was being Amazon payout or with Shopify or we call e-commerce I know some people are on and how, how, what is the obligation of your trade receivable? Right?   


Can you work out a good deal with your supplier?


Or do they need you to play immediately right a lot of cases that may be the case where you have to prepay your inventory, which means like, like scenarios, I was going into Michael, where my money was tied up into it, right?   


But then was the job growth, you may not want that case to be all the time. You know, as you enter the seven eight-figure mark, you may have more, I would say leverage over your supplier where you can say, hey, I need more time to pay, right?  


I need more financial leverage, where can I do net 15 which means you have 15 days on the invoice, the invoice they may send you to pay for net 31. net 45 The longer you can push and get that gap of times we will you where you need to pay your finance application. It’s just gonna be a better scenario you’re gonna be falling under. So you kind of want to look you got to want to look at sighs your payout plus your obligation timeline to really determine how healthy of a business you have, and how long you can last, your cash flow, you know, do two months. And that’s, that’s part of the reason why you do financial planning and forecasting.  




Amazing. So let’s just make sure that we’ve nailed any of the technical terms because we’re throwing a few around there. So receivables, assets, liabilities, and payables. So let’s just make sure we’ve nailed those. For those who are a bit unfamiliar with financials. receivables mean what  




We see will mean any kind of money that you expect to receive in like, enter your business. But you don’t have it at the current moment, right? You can think of it as your invoice.   


If you’re running an agency, you invoice a client, hey, you need to pay me $2,000. But then they widow news, I’m gonna I’ll give it to you next month. Don’t worry about I’ll give it to you two months later, right? Well, that’s not good for your business. You don’t have to cash yet. You may be like, Oh, man, I’m gonna report this as my revenue I made $2,000. But is it a cache? Hit your bank? No. Okay, that’s, that’s what you got to see. Right? You haven’t received the cash. So  




For anyone who’s selling on Amazon, that’s basically going to be 14 days’ worth of cash maximum, isn’t it before they then pay it out to you? Okay, then payables? I’m guessing is the opposite. Can you give us the simplest definition in the world of payables as well? Yeah.  




Payable is any liability, you have anything that you owe money to another person or another vendor for? So it usually is, say if you’re bringing an inventory as part of your bill, right for that, that cost of that inventory?   


You know, if you’re doing a lot of shipping and maybe the postage, or does the posters that you have to owe to the shipping company, right? at any money you owe? That’s on the books that you haven’t paid yet. You haven’t paid yet, which is, in a way a good thing? Because that means the longer you can hold that payable is it’s better for your business, right? Because your cash actually physically hasn’t gone out the door. Yeah.   




So this is one of those counterintuitive things that I’m realizing with the working capital requirement, that debt is good, which is kind of one of those things that most of us I know that in America, this seems to be a very big, religious thing. And I’m not going to discuss religion or politics on a podcast, because then it goes off the rails. But it does feel like there’s a strange resistance around debt. This is a sort of moral thing. There’s a fair thing, but actually, it seems to me that working capital implies that you want to actually owe people money because it means you have more cash in your bank.   




It does, it does surprisingly, it does you, you can think of it as just, you know, Wall Street’s right, or any anyone that’s, you know, made a really big and they talk about how much cash to hoarding, because really, really, no matter what period of time, cash is king, right? cash is king, you want to hold that cash as long as possible, it’s no reason why people would think real estate is such a great investment, right? It is, in a way if you if you’re able to leverage someone else’s money to buy this house, right, like here in California, housing prices went through the roof these days, right, especially post post-pandemic, so a million dollars by like the standard where you can buy a house here for and but what you can do, right, you’re not actually putting a million dollars down to buy the house, what you’re doing is maybe doing a down payment of $200,000, and you’re borrowing the rest of money to a bank if they’re willing to give you that money.   


And that’s part of what ballpark financial leverage is, is you’re using $200,000 to buy a million-dollar asset, right? And you’re doing that because you’re able to use that financial leverage, and you’re saying, you got to give me 30 years to pay that back to give you a 30-year mortgage. And that’s a great deal in a way, right? As long as you can keep the interest rate under control, which right now and with the Federal Reserve, and the way to grow is it’s very, very low, which is why the housing market is so competitive in the US I’m sure it’s having slipped this on that affecting UK too.  




Yeah, well, I guess you know, LA and London are probably some of the most expensive Yeah, and the wealth of real estate I mean that the houses around me here that they’re probably going for, I guess in dollars, I don’t know $4 million or something. I know that 1 million people but yeah, that’s not typical for London that is the area that I’m in but yeah, it’s Yeah, so Okay, good, good hidden for people that should don’t run off and do property and leave e-commerce but going back to e-commerce, you got to diversify but like going back to e-commerce it’s just making sure I’m very wary of leaving technical words out that without explain them, those who are more sophisticated business operators will begin okay, but if we need to if let’s be honest that some of us don’t know what these words mean even though they fling them around at drinks parties, assets, liabilities, this just define those as well. Let’s make sure we clear what is an asset in this?  




Yeah, it’s an asset I would say use anything that’s of value to your company, right? So you can think of it as course cash, right? inventory, and of course any kind of accounts receivable which you as you mentioned, is money that someone else owes to your business, right? is usually the common category of that is but then there’s also things like fixed asset right, which is any, you know, tables, chairs, furniture, anything that you always ask for value usually put on the books and sometimes it will involve intangible things right. If your business is very popular, and you have a trademark or logo was something that else is worth money, you will also add that to your assets.   


Liabilities are the complete opposite of that is everything that you owe, you owe someone else right to that you have obligation to pay someone else for so you can think of that as, of course, your trade payable or any money that you owe to a vendor, right any kind of vendor, any money that you owe because of a software that you owe to someone else, any loan that you took taken out from a bank, right, like a loan payable, where you had to pay back a loan. So it’s typically any kind of money that you have a future obligation for, to pay down for a business.


So you get into the working capital formula is simply taking your current asset with current meaning anything that’s you have a year or less in, life on and minuses by current liabilities, which anything that you owe money to someone else in that one year, right, we’d have a one year term, and then that will get you a number. And usually, it’s a total zero, right, sorry, your exit, I was perfectly zero is usually going to be you know, above water was positive, or you’re going to have a negative number, right? Where your asset doesn’t cover your liabilities, which is, which is not good. Which is something you need to evaluate your business. That’s the case of, well, why is that the case? Right?   


So you kind of need to look at that as a good, I would say a status check of your business to see that Where are you? Are you in a good financial help on your business? Or are you more in more trouble? And you need to really dig deeper and say, in the next 12 months, am I gonna stay this way, which is a temporary state of being because my business is seasonal, right?   


Where maybe in q1, q2, this is what happens. But I will always be covering q3 q4, and then but that’s just my cycle. But it’s something you got to look at. And not that, oh, I think that’s the case. But I may be in queued up for you all, you’re still in that same, you know, red state, right? You don’t want to you want your screen to be blinking red, that’s usually not good.  




So I guess we’re talking about items on the balance sheet, right? So if you’ve been trained like, this is the other thing, a lot of profit and loss is the only financial thing that if you’re lucky, you can get talked about in Amazon world, normally just revenue, but really sophisticated profit loss, what you’re just mentioning, I guess, a balance sheet items, right? So that kind of implies you probably need to sit down with an accountant and get a balance sheet made, I guess, right? Is that a fair statement?  




It would be and I would just caution it depends on what stage of business you are at, right? If you’re just starting your Amazon business, I would say just focus on growing your business. That’s always the number one go-over founder or CEO, the right doesn’t don’t focus on tax and client yet.   


But as you approach six figures, I would say you know anything above 250 300,000 a year in revenue, you should probably pay a little more attention because there’s a lot of obligations. They’re not just with, you know, the bookkeeping side, of course, there’s also a lot of tax implications there, where you know, you have this obligation you have to the government which a lot goes don’t focus on the right, they don’t see it, they just see their bottom lines out.   


That’s why the money I’m getting I’m keeping a lot of keys, that’s not the case, there’s a whole tax piece, which is actually one of your biggest expenses, if you may, right, that can be in the US as much as 35% of your profit possibly of your revenue really, right, depending on how you how well you do your tax planning.   


So something to always keep in mind. And then, of course, you want to kind of just also focus on the business side, right, the whole thing about the working capital requirement, and holding about cash flow forecast is not any, because anyone requires you to do so maybe during an exit. So it may require a user but it’s for your own purpose, you got to be the master of your business. And you got to have the grass to know that, you know, you got to know if your business is gonna last right? If you’re serious about e-commerce, we’re serious about growing an Amazon brand.   


These are just like the baseline numbers you got to know and if you’re not someone that’s very like I’ll say, financially astute. Yeah, I would hire professional. I mean, I think part of being e-commerce, what I can do is you kind of go you kind of do everything right when I was just a one-man show, I was the website guy, I was the product ordering guy, I was the customer service guy, right? And then you get overwhelmed because you’re just kind of involved in everything.   


And I think the last thing you want to do is also be the tax guy for your own business right? So sometimes and I’m sure a lot of people who have made it made sense if you could do this, they go and hire someone very talented who’s very good at say I don’t know email marketing, right? Or really go running Facebook ads and they said you go do this I’m gonna keep focusing on growing my business discovering new product lines like a CEO should and you go do that and because you’re good at it and that’s what we what I want to caution.  


A lot of you know guys who are doing seven eight-figure is you may want to also do that for your financial planning and your tax stuff, right? go hire someone, really understand your business, who can really help you, you know, get back like call some your tax revenue is tax profit from it because it is another stream of profit to maybe not paid 35 to 80% and only pay 15 to 20%. That’s another 10% you’re keeping your business and that’s those that are no small dollars might go out seven eight-figure guides, right? Like you can do some mental math your head that’s, that could be a good 50,000 more that you’re keeping an end of the day.   




Yeah, that’s huge. And the other thing to say is that when it comes to percentages, again, people get extremely confused that you add 10% of your revenue to your profits. Okay, but if your profit was only 20%, your pre-tax profit was 20%. Let’s say your net profits are after everything. including tax, let’s say that ended up about 15% of your revenue. If you add another 10%, you’ve almost doubled your profit, the money that actually goes into your pocket.  


So, yeah, that it’s these are huge savings. I think that the difference between 15, 20% sort of effective tax rate versus 35 is just monstrous. That that could be the difference between you getting your Ferrari and just living in a house. I mean, it’s really quite big. So going back to the tax needs aside, which is huge, but we’re going to talk about it in a minute, let’s talk a little bit more about the financial planning piece.   


So just to reiterate what you were just saying because nobody forces you to do financial planning. Whereas tax at least, it sounds like a funny thing to say the good thing about taxes were at least forced to do it. If we didn’t have that tax. I mean, nobody wants to pay tax. But if we didn’t have a tax return, we wouldn’t be forced even once a year to look at the numbers. And if you’re like me, you know, naturally, what you do is once a year, a counter gets in touch with you, you do your numbers, and then for the first time, possibly months behind, you go, Oh, I’m spending way too much one on x, where x is normally something like PPC or advertising often. And then you realize very late, but what you’re saying is I guess you have to actually take responsibility to get ahead of it and stay on top of it.   


So I guess the basic thing, which people probably talked about is, is bookkeeping. I’m not going to get into that there. Because I don’t find that personally very sexy. But I guess it’s got to be done. Right. Let’s talk about how do we project forwards, though, for me, the interesting thing is, when I’ve even with a new business where there’s no revenue yet, how do I try and see forward to answer questions like How much money do I need to run this business? Or how much money I’m going to have at the end of next year? Can I afford to take an owner’s salary and quit my day job or go part-time? Questions like that? So how do we do the basics of projecting forwards and answering questions like that?  




Yeah, that’s a great question, Michael. And that’s kind of part of the cash flow projection that needs to be done. Right. So you know, part of the e-commerce is. I know, I know, Michael, you mentioned bookkeeping is not very sexy, it’s not and I get it. And that’s why, you know, we kind of take the boring part away from the business owners and our client is, but thing is, it has to be done. Right?   


If you don’t have clean bookkeeping if you don’t have a chart of account, which is what a charge account for those who do know is basically a way to categorize all your expenses, and to the right bucket, I would say, right, so then you have you know, all your meals in one place all your office supplies in one place, all your PPC PPC expense in one place. So then you can kind of categorize and know how much money you’re spending on each of these categories. And how much of it is affecting your revenue? And how much are affecting your bottom line, your profit, right, because and a profit key. And well, knowing all these facts of your current state, it’s very difficult to have any kind of accurate forecasts going into the future. Right? If you don’t know that you can depend on your current bookkeeping this month.   


But keeping with this quarter, you’re not going to have very good data, right? It’s forecasting is all about having the right inputs, and the right data points to know what’s in the future. Right? What forecasting really is, it’s just a game of using your historical context. So however much longer long you have, you have been your business is better, right? You, you have been at least a year, that’s great because you only have to have a year of cycle changes, right? going up and down your business to kind of look through and say, Okay, if my business grows by x, right to x, then what my Well, my expenses are the status same because as I said, a fair assumption, if my business grows by 2x, is my bottom line Give me the same port, is there are some increases, I’m not going to be aware of when I’m like I’m not going to catch, right, because you know, my inventory costs could be a lot higher, because shipping, shipping, you know, two tons of goods, it’s a lot more than one time, or maybe the opposite. Maybe I’m getting a bulk discount.   


Hopefully, you guys are if you guys doing even more busy, you’re getting an even better per-unit cost on your inventory. And same inventory. Same way, like doing ads, right? Pay ads, paid ads as it gets, it gets out of control, sometimes, right? You do a lot of testing, you test this one, you test this one, and then you see which one works for you. But it gets that one of the highest causes on a lot of e-commerce that we’ve seen is going to be that piece, right? And we do a lot of what we call Metro ratios. And but then we don’t only do Metro ratios because we only focus on online businesses.   


We compare your books to other similar e-commerce businesses in the field. And what that does is you get that advantage of knowing our as your books in line is your margins looking good. And if this person is getting x x deduction or tax credit, why can’t you if you’re in a similar industry, so you get that big data, look of businesses, because you’re able to do that comparison. And with that, you could do even more of an accurate forecast.   


I was saying Michael, where you can look 12 months and say, you know, I have all these other businesses who similar to mine, who can also forecast these numbers out and say this is what I need to be made also right? But then you also know that if you’re falling behind at any point, right, so then you’re able to see that you know, every month, my ending cash is that what can What do I need?   


First of all is going to survive in this business as operating, right. And whatever is remaining outside operating, hopefully, that is your kind of your cash reserve where you can do anything you want with, right, that’s what we call the owners’ treasure, you can take it out to be your owner’s draw, right, you can go buy that Ferrari dumpster Michael wants to. And you can also, you know, reinvest in your business or diversify. As we mentioned, buy real estate, if you want to buy stocks and bonds, right? Or buy a different business even though right? Like if you wanted to get in if you’re in the nutrition field, and you see the fitness of the next hot thing, you maybe want to use that cash to do that.   


But you got to know that’s a fact that you can use that cash, right? Without knowing that value. And just, you know, see several Michael in your bank account. Oh, I think I have 100,000 left. Don’t don’t don’t do that. Don’t do that money and buy another business. And then you realize you can’t support your next year’s run and your business. You didn’t do any forecasting. You didn’t know that you need to keep at least 30-40,000 to buy the next round of inventory. Yeah, right. Because your payout isn’t fast enough to catch up to it. You never want to be in that deposition. It’s I feel like a lot of movies like they play does upright. Have a business was very successful. And then they just burned down and living on the streets. Yeah, don’t Don’t be like that movie scenario.  




Yeah. You know, that person. No joking apart. I mean, I’ve been around this space for pretty much seven years now. And there’s a lot of people that have come and gone in that time with businesses and the ones that talk about revenue a lot. Generally, they kind of calm, and then they go on because there’s a degree of luck in this thing as well. But there’s luck plus skill is you know, real entrepreneurship, right? I think the luck without skill generally goes up dramatically, and then sometimes very dramatically straight down as well. So I guess we’re sold on the idea, of needing to project things. So I guess like property, you because most of us the property or real estate, as you call it in the state. So I guess it’s more familiar. It feels to me like the comparisons thing that you mentioned is interesting to me, because most people tend to project forwards based on their own data. And, and that’s a good thing to a degree.   


But obviously, if somebody has been in business for like one year, and they’ve sold maybe three whole product lines, and the thing with Amazon, particularly I mean Shopify, harder to do but possible, I guess you could probably sell three, four or five product lines, I was speaking to somebody the other day, he’s getting ready amazingly well. And I think he just mentioned maybe it was off-air, it wasn’t really a discussion point, he’s only got eight product lines, I’m like, well, you get into $4 million runway with eight product lines. That is not a very big spread of products, which to then, you know, extrapolate data. So the idea of comparisons to similar businesses. Makes a lot of sense to me. I’m not obviously you guys do this in a very sophisticated way for your clients. Is there a way in which people can do that for themselves to some degree?  




To some degree? Yes. I mean, I guess there are two levels to this, Michael, right. The first level is if you, if you’re a guy who’s, has a product line, I would actually just try to do a breakdown of those eight product lines. Right? That’s also what we help our clients do is that we look at each product line as his own profit and loss statement as his own P&L because we want to see that profit line How much did you did it cost for you to buy it. How much did it cost for you to get this item in? What are the packaging costs around it and all those other things why were your Amazon watch Zack Amazon fees, storage fees, if you may relate to that product? And then how healthy is that product going and we look at you know your inventory turnover for that product we look at the health of that product is it going to be something that a market demands over the next 12 to 24 months, and then we take each of these as his own kind of entity, and we say look you have a product but actually let’s say you only have three winners from here right?   


You only have three products that we feel like the market is going to keep accepting and keep growing and maybe it’s also your strongest because your profit is actually the strongest one three and the other five is actually dragging your business down in a way where it’s actually pulling down your net profit and you actually don’t want to keep those going you maybe want to go and discover other five products and maybe better right you’ll never want to be in a situation where your business is not doing healthy. After all, you have you’re selling a certain product actually not profitable we just breaking even like why to spend effort doing that right and then on the second level, of course, the comparison part that I think you just need to if you’re just a solo you know Amazon FBA seller, maybe go in the network right what other Amazon FBA guys right. I think last week, I just attended an e-commerce conference. And it was a great opportunity to meet other e-commerce owners and you kind of just chat and talk about your business, right? You can kind of say, hey, how many products are you selling? how profitable are you? You know, what do you know your profit margin is? And there was a little question you can tip you can kind of gather and be like, oh, they’re doing 20% Why am I only 15? What am I doing wrong? How can I improve right so that I think networking is a big key and dad But otherwise, it’s easy. It’s not you know, the most public topic I would say my go-to say hey, how much money are you making? even ask that right? And then they might not be willing to challenge that they’re good buddies with you or something.  





Yeah, I mean, one thing I would say just on that point is that I something I do know about a quiz I suppose at this point experts an overused word, but certainly have done A lot of masterminds that I’ve run now over the years in the e-commerce space and one of the reasons for being in a mastermind is so that you can actually share information like that’s that’s very commercially sensitive information.   


If I weren’t networking event, I would not talk to the guy twice, you asked me what my profit margin was, what my gross margin was, whatever. But actually, these are critical questions, I want to know the answers. So having a trusted space within which to do that I’m in the tank, a collective mastermind is what we have as it’s sort of hidden by the microphone, but we’ve been reading that for three and a half years now. And it is really valuable for somebody to sit there because we had in most one in the past have had somebody very similar revenue, maybe like $1.2 million, the team two businesses, one of which has got a 5% Mark before tax, which is before tax. And the other one is 29%. Unlike its really striking difference. Huge difference.   


It’s really important. I mean, I’ve sat there and literally kind of tried to point out to the guy the 5%. Like, yeah, this is possible. This is what you’re doing. Hint, like,




Go make it. That’s exactly it, Michael. Yeah, that’s exactly it. You, you that’s the kind of hint we give our clients to it. Everyone thinks they’re running a very successful business, everyone thinks that they’re doing well at the moment. But until you do that market comparison or to your peers, you don’t actually know if you’re doing industry standard, right? Yeah. And you got it, you got to cut, you got to cut the fat, right?   


If you have five product lines not bringing into the profit like they’re there to five to 5%. Right at a 5% net profit, guys. You don’t want to keep that inventory like Amazon’s storage fees expensive, right? Yeah, it’s, you won’t have this is sitting there and burning your money burning your operating expense now?  




Yeah, absolutely. Right. And I would say, by the way, I’ve worked with some businesses that have more like 1000 skis on Amazon. And in that case, you need to do a series but in analysis, and but some of them do, like, I have clients, it’s very rewarding when I have clients and I say go and do X, and they go and do it, they do an 8020 analysis.


And normally, I found that you know, if you have, say 300 products on Amazon, and only 10 of them are doing most of your profit, it really is exactly five, five a lot of the time. So absolutely cut the fat. A Yeah, here here, as they say, in in the UK Parliament here, here, cut the fat for goodness sake. So let’s talk about the cash flow projection thing. So we’ve got a listing here, a list from our, our conversation before when we planned these three things to look for operating, investing, and financing. What does that mean? In ordinary English? How do we start to get our head around that what we’re trying to  




Yeah, and I just want to to a premise where like, most companies starting don’t need something, this is a complex, right, there’s one I just want to run that most companies out there, they only need the operating part, the operating part is like, like the kind of word is basically your operational cash in your business, right? What keeps your business going. And you can think of it like this in simplest terms as we have mentioned is just cash coming in from your, from your customers, and the payout from Amazon, and the timing of that, and any kind of money that’s going out of your business, right.   


The other two are things that you as you get to a seven, eight-figure business you may have and maybe signed, invest in your business investing, that investing category. And a statement of cash flow is basically any kind of investment that you have taken on right if your business grows to a point where maybe you start you know, later branding your product, or just creating your own product line and you have a manufacturing line or assembly plant. And you’re actually investing money into our say like capital assets right into property plant equipment, when a call categories call, that’s the that’s where you put into investing and financing is any money that you have where you know, you know, your business growing, you have done the bookkeeping, and you know, you have a very good profit margin, very good gross margin, and you know that you can, you can do more, right, it’s just that you don’t have the cash flow to do it.   


So a lot of time, what businesses do is they go take a business loan out, which in this way is actually a great tool for you to expand faster than ever, right? If you imagine if your business is doing very well, your inventory turnover is through the roof, you just can’t keep up with it, right. And then what you do is you just go and take out a loan, and you able to supply an even greater inventory count and Amazon, for example, then you can grow your business even faster, right, because you know, your business is healthy, you know, all your ratio is positive, then why not take out that loan. And that’s where you kind of keep up and you’re in the financing portion of your cash flow.


So with those three combined, if you were to do a complete cash flow statement, you get to a bottom where it basically it’s just a very simple thing, cash, cash that you’re starting with, and cash you have at the end of the day, whatever it may be, you’re doing a year-end maybe 1231 right 2020 and cash you have to remain and that number is hopefully have accounted for everything that you possibly can pay in and out your business and what you really truly have as far as cash that you can use for other things. It’s and it’s kind of the name of our business name, our agency I should say. free cash flow is money that you freely can use liquid cash that you can use for anything you want and yourself you spend on yourself, spin on inside and back into your business. reinvest, right, if you have any left, sometimes, businesses, when they grow really big, they actually don’t want liquid cash. And I understand that because they’re just hungry and they want to keep growing.  


But I do want to caution, things go wrong all the time. And e-commerce and Amazon FBA clients change climate change, you know, maybe they don’t, they don’t like washer tablets anymore, right? Can people just change their tastes right? Or people are becoming more vegan, I don’t like meat Polish anymore. Like, you really want to know the market demand, also the trending of your product. And that 1218 month forecast you’re doing that has to be a factor, right? You can’t just say, I think I’m doing x y. Now, I’m always going to be doing x. If you do that, you’re gonna you’re going to get yourself in trouble, especially if you’re in a high cash flow business where you’re just using tons of cash every month to supply your business.   


It just, doesn’t work, right? I see. I see a client’s bank statement where it would be like six, seven-figure going in six, seven figures going out. So just so much cash moving in and out. And now you’re left with a smaller number and, and you don’t want decimal and as we shrink even more because you got to keep those two numbers in balance. It’s really scary when you don’t know them.  




Yeah, yeah, absolutely. So so just to kind of summarize, I mean, it sounds like the three things operating, investing finances. I mean, I take your point that operating cash, maybe the most important focus and investing actually, like, you know, buying property or plant is unusual for most people that are doing, where they outsource their manufacturing, which is nearly everybody. Right.


But I think financing is pretty common. I’ve seen quite a lot of early-stage businesses that are only doing, say 10,000 $20,000 a month that have substantial loans. Now whether that’s advisable is a different question, but they certainly use it. And I would say that the amount of as somebody pointed out to me last year, okay, if you got a 30% gross margin on your profits or products after ads, which is quite good, that sounds good.   


But if your market is growing by over 30%, a year, as it did last year, in 2020, you’re going to be short of cash, even though you’re profitable, and you’re going to have to get money either invested or borrowed. Right. So I think you’re right, that there’s not an area that we can just neglect for very long the finance side. And so let’s talk a little bit more about I know that let’s skip over.


So there are some juicy, juicy topics that I outlined here, but I’m gonna skip over them because I want to talk about tax. After all, obviously, it’s not a lovely topic we always think of it is something you have to do what you want to get it out of the way quickly, like in the today I went through vaccination for COVID. I don’t want to know about it, I just want it to be done and over. But actually, from what you’ve said already, there are huge amounts of profit we could take from this.   


Hey there, folks, thank you so much for listening to today’s show with Alan Chen, of freecashflow.io. I remember Jerry Maguire years ago, and when the great lines were a can’t remember the name of the hero, the heroine rather, but she says to Jerry Maguire, you have me at hello. So he comes in and tries to persuade her that he loves her and that she should be with him. And you had me at free cash flow really, to be honest, free cash flow is I think the most important thing in business. It is basically the number that gives the value to a business people talk about profit and multiples of profit.   


But really speaking, as the great Jeff Bezos himself said, the most rational way to value businesses is discounted future cash flows. In other words, how much money can this actual cash, this asset these business products in the future that is the value of the asset now that’s why people buy properties? In the end, I think it’s about value growth. But the value growth is really driven by the cash flow entity.   


So I think cash flow is everything. I’m really delighted that we’ve had a final sort of deep dive into the topic, it’s been really on my mind for a long time as a really critical topic. We haven’t had a guest who’s really focused on that, to the same degree that Alan and Stanford his business partner has. So I think this is great stuff to go back over and just get your head around.  


First of all this thing of working capital requirements, how much money do you need in the business to run the thing, a little bit of balance sheet, the idea of assets, liabilities, receivables, and payables? Just go back and listen to it, get your head around it. And especially in the Amazon, or e-commerce context, why it matters so much.   


We talked about the cash flow projections and just basically be able to see what’s going to be happening in your business. And the fact that clean books are really critical if you’re going to sell your business, but also if you’re going to manage it and actually understand what on earth is going on in your business as well. So this is real stuff that’s going to require you to get your head around a few concepts, I suspect. That’s okay. I’m okay with that. Because I think we’re going to serve you the best as the listener if we really persuade you to take that trouble. And instead of just looking at revenue, look at profit, of course, but instead of just looking at profit, we look at the cash flow. And the working capital requirements.   


Those two words are concepts I think you should become friends with Alan’s a fantastic person I learned from it in this space. So freecashflow.io is their site. And there are two ways that they can help you if you’re doing under $300,000 revenue year, roughly. You’re based outside the US, as many of our listeners are, then they have an amazingly good course that clarifies a lot of this stuff you in the e-commerce context. And you can get to that if you go to amazingfba.com/freecash. That’s amazingfba.com/freecash, they have a course there, it’s paid for, it’s pretty affordable, really, really useful course.   


And if you are above, the number of $300,000, and you’re based in the US or you have a US-based entity, I should say, then the best thing you can do is go and book a call with them. That is at a freecashflow.io/book that’s freecashflow.io/book. And that’s definitely a very useful thing to do.   


I would just say this, you know, as you can tell that Alan is not a hard salesman. He’s very detail-oriented and very service-oriented, I would say, like many accountants to be fair to the profession. And in that case, what you should be doing is just educating yourself. I think conversations with experts like Alan are really educational. If nothing else, you’ll come away with the right questions to ask a future CPA or accountant should you choose to work with somebody else, though, if that is you if you’re doing over $300,000 a year and you based in the US really strong advice for me, go and book a call with these guys, you’ll learn a great deal as I hope you have already on today’s show.   


Thanks so much for listening, and look forward to speaking to you in the next podcast.


Thanks for listening to the 10k collective podcast for six and seven-figure Amazon sellers. I really hope you found the show helpful too. Please don’t forget to subscribe to the show. And if you’re on Apple podcasts, please do leave us a quick star rating. It will take you all of 30 seconds to do it but it does mean we can be found by ad help many more e-commerce business builders. I wish you fast and profitable scaling. And I hope you enjoy the process of building your seven-figure Amazon business. Thanks very much for listening.   


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