đź’° Know Your Numbers

Issue 7 - Growing your DTC Business

Author

The DTC Times
April 1st, 2024

First-order profitability. Contribution margin. Sustainable growth.

If you’re in DTC these days, you’ve probably heard that “net” is more important than “gross”. Cost of acquisition? Up. Cost to borrow? Up. Cost of shipping, freight, warehousing? Up. Frothy VC dollars and valuations for consumer brands? Gone. 

Understanding your unit economics and managing cash flow has never been more important. Of course, that’s much easier to say than to do. 

In this edition of DTC Times, we're going to look at the unsexiest trending key unlock for your business. Finance. 

This week:

  1. Know your numbers 

  2. How to fund your business

  3. Valuing your business

Let’s dive in → 

Know your numbers

If you’re fighting for product market fit, having a comprehensive chart of accounts seems a bit “cart before the horse”. 

It is extremely important to have your accounting ducks in a row as you grow beyond the PMF stage, however. As you add layers of complexity to your business in the form of new regions, additional sales channels, and an expanding supply chain, you won’t be able to simply log in to your Shopify dashboard and eyeball your profit.

First, let’s talk contribution margin with this helpful thread from Dave Rekuc.

Shorter: how much does it cost to sell & deliver your product to the end consumer? Calculating your CM should be done at the SKU level if you have a varied catalog, and the best way to start is with a spreadsheet that includes all of your cost line items vs your sales price, with a net figure before advertising. This will give you an idea of the room you have for both profit and advertising for each product in your lineup. 

  • Of course, it helps to boil things down into a single number to help guide your planning. Alex Greifeld of No Best Practices put together a handy CM calculator spreadsheet that you can copy. 

  • Of course, business Intelligence and dashboard tools like Triple Whale and Sellerboard can be set up to automatically report your daily net profit dollars after costs and ad spend on channels like Shopify and Amazon. 

Beyond contribution margin, DTC operators need to set up their profit and loss report (P&L) so that it is easy to parse at a glance. A generic chart of accounts will be far too blunt and clunky for management to quickly assess anything.

This sample e-commerce P&L and chart of accounts provide better structure and more clarity than the more “out of the box” reports you’ll get from Quickbooks or a generalist bookkeeper.

Taylor Holiday of Common Thread Collective has this in-depth post on how DTC marketers can master the P&L. 

He notes: “Four-Quarter Accounting is where we take a potentially large group of categories and group them into four very simple groups inside of your P&L that bring to the surface some of the core metrics that drive systemic growth for e-commerce brands.”

Need help setting this up but aren’t big enough to hire a CFO yet? Luckily the DTC ecosystem has evolved to help solve this very real challenge. Here are some platforms and service providers that specialize in bookkeeping for e-commerce:

Also, check out fractional CFO options like DTC Wealth, Free to Grow, or FinanceWithin.  

Takeaway: Understanding your numbers is about having the ability to zoom in as needed but also zoom out so you can understand your business holistically. Executives and operators need to see the forest and the trees. 

Funding Your Business

Cash flow and profit are not necessarily the same thing. You can theoretically be profitable with every single order, but still eventually run out of money. 

Why? Because cash demands swell and wane like the tide. Some things, like salary and rent, are fixed and easy to account for. Others, like major product orders (PO’s), legal bills, and manufacturing expansion projects can be highly variable and require large influxes of cash to execute. 

  • Mike Beckham of Simple Modern noted recently on The Operators Podcast that a good manufacturing partnership can lead to long-term benefits through trust, like better payment terms that can help improve your cash conversion cycle.  

  • A 13-week cash flow model can help anticipate short-term liquidity challenges so you aren’t cash poor when you need to buy inventory or invest in growth. 

Building a supply chain where you can pay for your inventory after you’ve already sold it is the ideal cash conversion cycle, but not every brand can achieve that. 

  • There are other financing options like inventory financing or AR (Accounts Recievable) factoring. However, these depend on having large amounts of on-hand product or big orders from established retail customers to access. 

  • Revenue-based financing exploded during the ZIRP & COVID era with options like ClearCo, Shopify Capital, and Wayflyer emerging to offer quick access to cash based on a DTC brand’s historical sales and growth. 

Revenue financing tends to be much less painful to access than traditional bank debt, but usually comes with more onerous interest rates. Be sure to inspect the payment terms if you are considering this option and fundamentally understand what you’re getting into. 

  • Fintechs like Parker can also be leveraged to extend your cash runway thanks to credit cards with 60-day, interest-free payment terms.  

  • A tool like Settle can not only help manage your cash flow but also provide non-dilutive working capital.   

  • Plastiq can enable you to pay vendors with credit rather than cash.

Takeaway: Managing your cash is as important as managing your profit. There are a wide variety of tools and options to help fund your business, but be very aware of the trade-offs and costs when it comes to implementing them.

Valuing your business

What would your brand be worth if you wanted to sell tomorrow? If you’re looking for an exit (either now or in the future), it helps to understand how a potential acquirer perceives the value of your business.

  • In a different time, DTC brands were able to demand multiples of topline revenue. These days, acquirers are only interested in multiple of net cash like SDE or EBIDTA. 

  • Tools like Charm.io and Brightside can help track and benchmark other DTC brands in the marketplace.

  • A strategic buyer might be more motivated (and therefore offer better terms) to buy your business if the synergies between you and them are good.

Takeaway: Your first focus should be on crafting a business that you’d be willing to run indefinitely. If your brand is growing sustainably, a life-changing exit could be one of your potential outcomes, however. 

Be aware, though, that acquirers are looking for both growth + healthy cash flow, and not just a big topline revenue number.  

Quick Hits:

Reply

or to participate.