Happy Sunday! I'm wheels up after a long weekend in Nashville, TN and excited to be back to my family in a bit. Today I want to talk about a few finance topics that every founder in DTC needs to know. Special thanks to today's sponsors Parker and Insense.
One exciting announcement, I have a new podcast! Last week we launched episode 1 of Marketing Operators. It's me, Connor Rolain from Hexclad, and Connor MacDonalf from Ridge. These are two growth minds I really respect and look up to, so I'm excited to chat with them every week, Check out episode 1 all about attribution and measurement here. Episode 2 drops this Tuesday all about Creative Testing.
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Some of these tips I've shared before, but have gotten some questions about that or have new ways I am thinking about them as I learn. There are two things you want to focus on as you grow, which are cash flow and profitability. You need the tools, as well as the operating systems to act on what you learn.
Measure Contribution Margin Daily
I can't stress this enough, and I will never stop talking about it. There is so much data you get on a daily business in DTC, so you need to be able to find the signal in the noise. You could literally spend 8 hours looking at data of how your ads performed the prior day, but you don't need to. You need a hierarchy of metrics, and you need KPIs that sit above all of the other data points. For me at least, on a daily and weekly basis Contribution Margin is the top KPI I look at. It is a measure of the profit that is left over alfer all variable expenses, which looks like this:
Net Revenue (Gross minus discounts and returns) - (COGS) - (Shipping) - (Shopify Platform Fee) - (Payment Processing) - (3PL fees) - (Merchant Processing) - (Ad Spend).
Once you find that number, you only have to pay fixed costs like rent, insurance, payroll, etc and then the rest is profit. Now one question I've seen recently is why do we care so much and talk so much about contribution margin, and not net profit?
It's not that we don't care about net profit. We do, and that is the overall end-all-be-all-be-all all outcome for a business. But there are three reasons why I track contribution margin daily and weekly and don't bother with net profit.
1. You can easily track all variable expenses daily if you have the right infrastructure. You can know how much revenue you made, what payment processing fees are for that day based on a % of revenue, and what ad spend is. Those things can be seen daily and accrue daily. Most fixed costs not so much. For example, you likely pay rent once a month, payroll twice a month, etc. It just wouldn't be feasible, or even accurate to try to measure all of your fixed costs daily.
2. While I am a marketer first and foremost, I do have responsibilities outside of marketing and am responsible for whole p&l. However, most CMOs or growth marketers do not, and their responsibility ends with Contribution Margin. They don't influence rent, payroll, etc. But they do oversee the largest piece of the variable pie, which is marketing costs. They should be tasked with maximizing contribution margin, and a CFO, COO, or CEO handles the fixed (and overall) part.
A company I am advising came out of stealth last week called Iris, and it's personally what we use to measure real-time Contribution Margin. It pulls in all marketing expenses and real-time COGS to give me a daily number against our goal or forecast. Check it out here, it's been a real game-changer.
Have Multiple Scenarios
DTC, with our reliance on algorithmic ad networks, can be pretty volatile. It's hard to forecast, and there are often challenging things that happen that are beyond our control, like recent Meta performance issues. You don't know what will go wrong or when, but there is high probability that something will go wrong. So it makes sense to plan for it. Don't just build out a forecast that has a rosy picture. I now like to keep at least 2 forecasts running at all times, with an occasional third.
I want to make sure that all of them will produce acceptable outcomes. What is acceptable may vary from brand to brand, but I want to de-risk things by making sure that even if and when things go wrong, we can live with the outcome. If not, we have work to do to make sure we can. I don't want to just pray for above 50th percentile outcomes, I want to make sure we are still doing ok if under that. That might mean keeping fixed costs on the lower side, or having more cash in the business than what is needed on paper. Sales slowdowns can and will happen, we just don't know when so we want to be prepared.
We of course also need to be prepared for 80th and above percentile outcomes. They may happen less often, and create "good problems" but it still means we need to be prepared for it if they do. This may mean holding extra inventory if cash is good, having ways to flex up some team support in key areas like CX if needed, and more. Champagne problems are still problems that can actually ve very costly if not prepared for them.
Manage Cash Tightly
One of the reasons we need to be prepared for faster growth than expected is because it can be really challenging on cash flow for many businesses. Mo money mo problems certainly apply in DTC. When you forecast higher growth scenarios, you not only need to ensure profitability (if that is a goal of yours) but also positive cash flow (applies to everyone unless you are fundraising). The first step is to have your CFO or head of finance do a 13-week cash flow forecast based on your scenarios. If you have any cash flow issues, there are a few things you can do. You can and should always ask your vendors for terms and seeing what can be done. But you also need the right fintech tools for a modern growing brand.
Most people don't know this but you can really improve cash flow with the right fintech stack. Meet Parker. if you are not already familiar. Parker is the necessary financial stack for fast-growing brands. With Parker, you can get a stack of finance tools that will ultimately help you extend runway and improve cash flow so you can take the stress out of scaling. First, they have credit cards you can use for ad spend and more that have up to 60-day rolling terms, which beats everything else I have seen. They are tailormade for e-com so they give you fast approvals with higher credit limits than I've seen elsewhere too. With most cards, you have to pay every 30 days, with Parker not only is it 60 days but you also have it rolling, which is a huge plus. Parker is the cheapest form of working capital an ecom business can get because the capital is subsidized by their own vendors paying the interchange fees.
Parker has other great products to help improve cash flow, like bank accounts that help you get faster access to credit, and an analytics suite to help you stay on top of cash in real time. Get started with Parker here to help you scale your business. Sponsored.
That all for this week, I'm about to land and I'm excited to hydrate and rest this afternoon before the week. Hope you enjoyed this, and please please give me any feedback on Marketing Operators.
Thanks,
Cody