Boost Your Scale: With Better Ad Spend Decisions
One of the most common questions I get from DTC brand founders is –
How much can I afford to spend on advertising and what should my ROAS target be?
Scaling a DTC brand requires lots of ad spend, but deploying advertising dollars and scaling spend can be a scary decision to make without the right framework.
How do you know if the ad spend will be profitable?
How do you know if you have enough cash to fund your ad spend AND your other operating costs?
Today I bring you good news!
I’ve personally been through this decision-making process countless times, and I’m here to help.
I’ve put together 3 simple steps that will help you understand how much you can afford to spend on advertising.
Follow these tips and you’ll quickly find yourself making scaling decisions with speed and confidence!
Step #1: Define Your Goals
When brand founders ask me how much they can afford to spend on advertising, my answer is always, “Well, that depends….it depends on your goals.”
The goals I’m referring to here are centered around the long-range vision and strategy that you have for you and your business.
What are the top long-range goals for your business?
To optimize enterprise value and get acquired?
To build a fun lifestyle business that optimizes cash distributions to owners and work-life balance?
Each of these goals have vastly different implications for how advertising spend should fit into the growth, profitability, and cash flow plans for the business.
The bottom line is this –
Before you go any further in trying to decide how much to spend on advertising and what minimum ROAS you need to hit, you must first clearly define the long-range outcomes you want to create with your business.
Once this is defined, we can move onto the next step – defining your minimum ROAS target.
Step #2: Define Your Minimum ROAS Target
Now that you’ve clearly defined the long-range goals for your business, you can turn your attention to defining your minimum ROAS target.
How should you go about this?
It all lies within your contribution margin.
What is contribution margin?
Net Revenue (gross revenue minus discounts and refunds)
less COGS
less Freight out
less Fulfillment
less Payment processing fees
less Advertising spend
______________________
=Contribution Margin
Now, as you can see highlighted in yellow, the last piece of the contribution margin equation is advertising spend.
The basic process for deciding on a minimum ROAS target is this:
Decide on the contribution margin % that you want to hit after ad spend is subtracted.
Calculate your current contribution margin % without ad spend included.
Calculate the difference between #1 and #2 – and that’s the max ad spend you can afford - expressed as a % of revenue.
To convert #3 into a ROAS target simply divide it by 1.
Step #3: Create a 3-Statement Model to Confirm Profit and Cash Flow Alignment
The goal of this step is to model your target ROAS as a driver in your company’s financial projections to confirm that your ad spend is helping drive:
Your desired company-level profitability
Your desired company-level cash flow
A 3-statement financial model includes a projected profit & loss, balance sheet and cash flow statement.
By modeling your target ROAS and forecasted ad spend levels into your financial model, you can see how these drivers contribute to company profitability and cash flow.
This is the final check to confirm that the ROAS target you calculated is aligned with the goals you defined in step #1 of the process.
Summary
In summary –
Making great ad spend decisions is crucial for scaling a DTC brand.
By following the three simple steps I outlined in this article, you can gain clarity and confidence in determining how much you can afford to spend on advertising.
First, define your long-range goals.
Next, use your contribution margin to calculate your minimum ROAS target.
Finally, create a 3-statement financial model to assess how your target ROAS aligns with your company's profitability and cash flow goals.
By diligently following these steps, you can optimize your ad spend decisions and boost your brand’s scale!
We Can Help You Make Better Ad Spend Decisions
If the thought of calculating your contribution margin and building a 3-statement financial model overwhelms you, and you don’t currently have a CFO on your team, we can help!
At Free to Grow CFO we provide the executive-level CFO expertise you need to scale your DTC brand alongside healthy profit, cash flow, and confidence.
The first two things we do with every brand is calculate their contribution margin and build a 3-statement financial model.
We can use both of these tools to help you decide the ROAS and ad spend targets that will help achieve your long-range goals.
If you’re ready to learn more about how Free to Grow CFO can help you boost your scale through better ad spend decisions, click here to book a free intro call.
Until next time, scale on!
