Podcast: How to Find Cash Hidden in Your DTC Brand
Episode Summary
In this episode of the Free to Grow CFO podcast, Jon Blair and Ben Tregoe discuss the importance of extracting cash from DTC brands to build wealth. They explore performance finance, the significance of margins and capital cycles, and the complexities of inventory management. The conversation emphasizes the role of repeat purchases in scaling businesses and the necessity of effective forecasting and risk management. Founders are encouraged to focus on free cash flow generation and to build businesses that not only aim for profitable exits but also provide ongoing wealth.
Key Takeaways
Building a wealth-generating business model should be a priority for founders.
Margins and capital cycles are key drivers of financial performance.
Extracting cash from your DTC brand is crucial for wealth building.
Performance finance focuses on improving profitability and cash flow.
Episode Links
Jon Blair - https://www.linkedin.com/in/jonathon-albert-blair/
Ben Tregoe- https://www.linkedin.com/in/benjamintregoe/
Free to Grow CFO - https://freetogrowcfo.com/
Elephant Herd Consultin- https://elephantherdconsulting.com/
Meet Ben Tregoe
Ben started his career in investment banking and moved to an in-house PE fund at Lazard Freres. After a detour into TV writing at Disney, he got into start ups including two ecomm brands. Ben worked with Facebook for 9 years as part of my job as head of BD and Corp Dev at nanigans which for several years was Facebook’s largest marketing partner. In addition to working with eBay, Wayfair and Zappos, nanigans worked with leading DTC brands like Peloton, Glossier, Harry’s and dozens more. He sourced and closed our $24 million B round with Chinese investors, set up our international efforts across Asia and EMEA and managed our exit sale to Sprinklr.
Prior to consulting, Ben was the founding CEO of Drivepoint which is a leading FP&A platform for ecomm companies and there he spoke with over two hundred founders and worked with Oats Overnight, Branch Furniture, Ibex, Geologie and a couple dozen more brands. He has dealt with many of the challenges brand leaders face including a demanding board.
Ben likes consulting because of the combination of brand and finance, the constant challenges, the thrill of helping solve knotty issues and the joy of helping founders achieve their visions. He also want founders to avoid mistakes he made like betting everything on the big exit or not seeking expert advice.
Transcript
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00:00 Introduction
01:10 The Shift in E-commerce Valuations
02:33 Ben Tregoe's Entrepreneurial Journey
03:39 Performance Finance Explained
04:43 Understanding Margins and Capital Cycles
05:39 The Importance of Cash Flow
10:19 Defining the Cash Conversion Cycle
13:11 Strategies for Managing Inventory Days
19:05 Forecasting Repeat Purchases and Inventory Planning
22:12 Understanding Customer Personas and Purchase Behavior
23:11 The Role of Data in Inventory Planning
25:32 Cognitive Bias in Forecasting and Inventory Management
27:24 Balancing Stock Levels and Demand
29:16 Risk-Adjusted Bets in Inventory Management
31:30 The Importance of Predictable Repeat Purchases
33:29 Maximizing Cash Flow for Wealth Building
35:21 Understanding Free Cash Flow
37:22 Simplifying Financial Concepts for Founders
39:10 Closing Thoughts
Jon Blair (00:00)
Hey everyone, welcome back to another episode of the Free to Grow CFO podcast where we dive deep into conversations about scaling a profitable DTC brand. I'm your host, Jon Blair, founder of Free to Grow CFO. We're the go-to outsource finance and accounting firm for eight and nine figure DTC brands. And today, I'm stoked to be chatting with my buddy, Ben Tregoe, founder of Elephant Herd. Elephant Herd is a consulting firm that provides performance finance consulting for e-commerce brands. Ben, thanks for joining, man.
Ben Tregoe (00:28)
Jon, great to be here.
Jon Blair (00:30)
How's it going? Man, it looks beautiful behind you.
Ben Tregoe (00:33)
It's it's I'm outside Boston and we're having a really slow spring. So this is like the first day it hasn't rained in two weeks, I feel. So yeah, we're getting.
Jon Blair (00:43)
Nice and green out there, man. We're heating up
out here in Austin. In fact, we were just chatting right before I hit record. Ben is gonna be out here in a few days for a big e-comm event that Finaloop is throwing. So get ready for the heat. It's gonna be, I think, 96, 97 for the event. Well, I'm excited for today's conversation. What are we gonna be talking about? We're gonna be breaking down how to extract more cash out of your DTC brand.
Ben Tregoe (00:59)
my god. Okay.
Jon Blair (01:10)
so that you can use it to buy assets and build wealth. This is something I've been talking about a lot more recently. I think here's where this came from and then we're gonna dive into the conversation. We look at the aftermath of like the COVID era of e-comm brands, right? During the COVID era, there was like this wild, wild west of like, know, exiting brands for huge multiples based on revenue, not even EBITDA, this huge asset bubble in e-comm, right?
Where like you could make life-changing money selling your brand. Is that 100 % gone? No, but valuations have reverted to the mean, which is like we're gonna value businesses based on their earning and cash flow generating potential, right? But I'm starting to realize that brand founders need to be informed that there's another way to build wealth besides exiting, right? Which is extracting cash out of your business and using that cash to build wealth and...
Ben has a wealth of knowledge around this. It's very tied into what he's doing at Elephant Herd. So I'm excited to get into chatting about this because in my opinion, brand founders should be looking at extracting distributions on a monthly or quarterly basis as the primary form of building wealth. And obviously if they can sell down the line, perfect, but that's a cherry on top. So to get started, Ben, walk us through briefly your entrepreneurial background and your journey to ultimately starting Elephant Herd.
Ben Tregoe (02:33)
Yeah, well thanks Jon. I started in investment banking in New York, then worked for an in-house fund at Lazard Freres, realized that life wasn't for me, took a detour to LA where I was in entertainment for a brief time as a TV writer at Disney. And then came out of that and I like, I don't want to do that either. And I got into startup and I'm like, this is awesome. I just loved it. So I've been doing startups for the past 25 years, had a...
Jon Blair (02:57)
Hahaha
Ben Tregoe (03:02)
A failure, a couple of successes, I've been in the seat, I know how hard it is, I've done stuff in e-comm and marketing tech and ad tech. Most recently, I was the founding CEO of a company called DrivePoint, which provides FP &A software combined with a data warehouse for e-comm brands, as well as services, and I left there about two and a half years ago, and just have been doing what I enjoy the most, which is the consulting part to brand founders.
Jon Blair (03:30)
So walk me through just like the nuts and bolts of kind of like the basics of what you're helping brands with over there at Elephant Herd.
Ben Tregoe (03:39)
Yeah, well we call it performance finance and so what our ideal clients are ones where we can provide 10x value. So we're looking for clients where we can make big enough improvements to their profitability and their cash flow that our fee is 10 % of that.
And so that's kind of the performance part. It's like pay for performance finance. So that fits often very well with agencies and fractional CFOs like yourself. So we're coming in and saying like, hey, there's these things that we can do really quickly. But oftentimes you need a partner to come in and then help you make those, improve the accounting, but also take over the finance functions after that.
It's more short-term projects and rapid progress and then like, okay, we're onto the next thing. So it's intensive and short-term and is kind of the key to it.
Jon Blair (04:39)
for sure.
So, in doing that work, you talk about how making these financial performance improvements a lot of times boil down to two main drivers, margins and capital cycles. So, let's break that down a little bit. When you say, hey, this all boils down to margins and capital cycles, what do you mean?
Ben Tregoe (05:10)
Well, I've been doing this for a while, right? Like talking to brands and like what struck me originally is like how complex all this stuff is, right? Like it's just, it's really hard. As a brand founder, I have a lot of empathy. Your international supply chains and logistics and customer support and product development and marketing and performance advertising and finance and running a company on top of that. And I think people get kind of sometimes the complexity overwhelms them.
Jon Blair (05:18)
Yeah.
Ben Tregoe (05:39)
And if you zoom out a little, you realize, look, your goal as a brand founder is increase margin dollars and or increase your ability to spend capital. As I invest my capital, can I speed it up? And the way I think about this is you've got to decide, are you Hermes with a 43 % EBITDA margin or are you Costco?
with a 5 % EBITDA margin, but you're spending your capital every 30 days. Or are you somewhere in between?
Jon Blair (06:10)
that inventory turnover like crazy, Yeah, 100%.
For sure. Yeah, it's okay, so it's interesting that you say that because I'm sure you get asked this or have gotten asked this many times, which is like, what should my margin be? So like one of the things I do, I'm a part-time mentor in an e-commerce community called Daily Mentor, and I get the question all the time, like, well, I'm told my margin is too low, what should it be? And I was like, hold on a second here.
First off, do we want a higher margin if we have the choice? We definitely want a higher margin, right? But, you gotta think about how that relates to how quickly you turn inventory a lot of times, right? That like, if you have a super, like I have some brands that we work with at Free To Grow that maybe have like a 85 % gross margin, a super high gross margin, and their inventory turnover is lower,
and it doesn't cause the problems you think it would because they have such a good margin. So they're turning over a higher margin less times per year. But then you've got, like you said, the Costco example, razor thin margin in comparison, but they are just turning through inventory very fast at a much higher velocity, right? Let's talk through that a little bit more. How does that conversation usually go, like trying to walk that?
a brand founder through that and how do you help them kind of understand that relationship and why it's so important.
Ben Tregoe (07:43)
I think you start with organic pre-cash flow generation. And so your business has a natural ability to produce margin and cash cycles. Right? Hermes, to use that example,
Jon Blair (07:48)
Mm.
Ben Tregoe (08:01)
They couldn't get to 30 day inventory and almost 12 turns a year. Like you just can't produce Birkin bags that quickly and sell them, right? So that'd be a terrible business model for them. And the flip side is like, Costco is famous for like, you know, it's 9 % markup.
Jon Blair (08:08)
for sure.
Ben Tregoe (08:18)
So they can't go out and be like, oh, you know what, I'm going to charge an 85 % margin on this, right? So the business model or the kind of industry that you're in, I think, determines that. And then you're working up from your free cash flow. So I think where people get themselves in trouble is the margins are too low. They can't produce enough free cash flow. They try to close the gap with short-term borrowing.
Jon Blair (08:22)
Totally.
Ben Tregoe (08:44)
And then, know, it's often a long march to death from there, right? As they get into themselves into a debt spiral. So I think you got to say like, okay, what level of organic cashflow do we need in order to get our growth, you know, to be sustainable first and then grow from there? And I think the way you answer the first question of what's sustainable is you got to really understand your customer churn. And so it's like, how much money do I have to put back into my marketing budget?
Jon Blair (08:50)
for sure.
Mm.
Ben Tregoe (09:14)
just to stay even. So, and I'm talking about companies with repeat purchasing dynamics. This isn't like fidget spinners and shit like that, that you never see the customer again.
Jon Blair (09:16)
Totally, totally.
Totally, totally,
totally. Okay, so a couple things. I wanna dive a little bit more into the repeat purchase stuff in a second, because this is something I've been talking about a lot in my content, and we've really kind of been digging deep into at Free to Grow, with trying to help our clients understand how that plays into the ability to scale, or the speed at which it's possible to scale profitably, right? Because I think what we've started to realize is a lot of e-comm brands just think,
Cause like back in the day, could like, you could be in a nascent e-comm product category, launch it and just totally crush it and not even have to worry about how, how the dynamics of things like new customer profit versus returning customer profit worked. There wasn't as much volatility and ad costs, right? But that's just not the environment we, we, we live in today. And so, but before we get into that,
Ben Tregoe (10:10)
Yeah.
Jon Blair (10:19)
I want to back up and talk about the cash cycle really fast. So when the cash conversion cycle is something that we work with all of our clients on and it's some, some, some brand founders get it. Some brand founders don't understand it. Some vaguely understand it. How do you define cash conversion cycle and like how a brand founder should think about it and just like the simplest terms.
Ben Tregoe (10:47)
man, this is like one of those things I feel your pain because it's like a great finance and accounting term and like so much in finance and accounting, there's like 90 ways to do it. the formula is always like different, people, way they explain it is different.
Jon Blair (10:59)
Yeah, yeah, for sure.
Ben Tregoe (11:05)
So I mean, right, technically it's like days inventory, days sales minus days payable. I think that's kind of useless for most people. So I'm not even gonna bother going in there. I think the key is just days inventory. Cause that's really the problem. Yeah, you know, so let's just focus there. Cause like there's only so much you can do on your payables at some point you're...
Jon Blair (11:13)
Totally.
Yeah, especially for econ brands, right? Like especially for ecomm brands.
Ben Tregoe (11:27)
your suppliers are like, I think I'll cut you off. And you can only force Target to pay you at such speeds. So let's focus on inventory. And when you do that, then it's like, is it day's inventory or the inverse inventory turnover? All you're deciding is like, how quickly from when I cut my check or wire my money, do I get it back in terms of sales?
Jon Blair (11:53)
Yeah, exactly. mean, like it's okay. So I, there's something that you said that I really like, which is like, okay, let me, let me tell you brand founder. It's the formula is we use even simpler terms. just say AR days, inventory days minus AP days. That's the formula, but what is controllable in like what's really controllable, right? The most. And, and I guess even I would say like what's controllable and like a high leverage way. Cause like you can and should, I always tell brand founders like,
You should definitely always revisit your payment terms on a regular cadence as you're growing and building trust. But you can't do it an infinite number of times and there's only so far you can go every single time. You definitely should work on it diligently, but it's gonna be often times incremental improvement, right? But the inventory days, especially for an e-comm brand, even if they're omni-channel, tend to have very low receivables relative to...
relative to how much cash is tied up in inventory. That's really the thing that's taking you from like, I cut a check for a dollar on day one for inventory and it takes this many days to get back, right, in the form of cash collected from a sale. So I'm curious and I'll tell some stories that are kind of like thoughts on my end, but like, they're.
I do run into a lot of founders who are like, there's nothing I can do about my inventory days. Or like it feels insurmountable, right? Like it feels really challenging. It feels daunting. Break down just kind of some of the first things that typically come to mind on like, let's look here first and then let's look here second and then let's look here third. How does that usually go?
Ben Tregoe (13:29)
So I think to answer your question, the first thing you gotta do is decide, there's some good techniques, right? think like ABC is a pretty good one to start with, where you class your products by, you the A, B, or C, and then you assign Day's inventory to A, B, or C.
Right? And you know, then you can say, you can try to get a little more control over it where you're saying like, okay, I'm going to do 90 days on this, but only 30 days on my C stuff because I don't really know if it's good. So I think that's at least a good start because, know, my experience, like I've yet to run into a brand that's like graded inventory and ordering and really has a process around that.
Jon Blair (14:13)
hard.
Ben Tregoe (14:14)
It's super hard. And I think the problem is, this is a long answer to your question, but I think the problem is that we think about inventory incorrectly. Like we should be thinking about it in terms of bets. And you're betting the capital of the company on this inventory. So when you think about it that way, you know, it's kind of like a poker player, right? They're like, their goal is to build really good decision systems.
Jon Blair (14:25)
Yes, 100%.
Ben Tregoe (14:40)
So when they're presented with circumstances, they play the hand correctly, but there's always an element of luck. And if the hand doesn't turn out for them, what the good ones do is they say, OK, well, I made the right decision. It's just I didn't realize the cars that that guy had. So I think the same is true of inventory ordering. You've got to build really good systems and reward those and incentivize those. And then what you want is you want
As you start asking questions, you should be asking and tracking your answers to these questions. So like, who's going to buy this product? Is it my current customers or new customers? How much are we going have to spend to acquire those customers? And then you want to ask, how quickly do I get paid back?
Jon Blair (15:21)
Mm-hmm.
Ben Tregoe (15:22)
And I think you can capture that in an IRR calculation. because you might have different supply chains for your products, you might have different sales velocities of those products. And so you might be like, oh, I'm only buying 90 days of inventory. But it's like, yeah, but you had to cut those checks 100 days prior to beginning to sell it. So you have this super long period, right? And so your IRRs are going to be worse than the one that had great terms that allow you to start paying them after you started selling, for example.
Jon Blair (15:39)
Totally.
Ben Tregoe (15:50)
And I think once you build some of the little bit of that discipline and kind of thinking about bets, like how quickly am I really getting this money back? And then tracking how accurate you are to that, you start making better inventory decisions. Like, I'm sure you've seen this all the time. Like, know, founders like, you've to load up on the stuff that sells and then like, but I love the purple stuff. And then let's really buy a lot of purple. You know, like now we're like, it's dead inventory. Nobody ever takes responsibility.
Jon Blair (16:06)
Totally.
Totally. Well, no-
So there's a couple things you mentioned. One, I talk all the time about, I call it placing risk adjusted bets, right? And inventory is a great example because oftentimes there's debt financing tied to it for these econ brands, right? And so how you capitalize the bet also introduces more or less risk into the decision. And so what I could try to help founders understand is like, the bigger bet you place,
Ben Tregoe (16:24)
Yeah.
Jon Blair (16:44)
the lower risk there better be. Generally speaking, if there's lower, so going back to the poker hand, when a good poker player, when they go all in, they know that the probability is low, is relatively low, that they're gonna lose that hand. So they're like, so they go all in when there's low risk of loss, right? Now, when there's a higher risk of loss, they play smaller bets, right? And that you should be thinking, scaling is actually,
Ben Tregoe (17:05)
Right.
Jon Blair (17:13)
just a endless series of risk adjusted bets, right? You're placing risk adjusted bets on ad spending, customer acquisition, you're placing risk adjusted bets on purchasing inventory, on hiring new people, ⁓ capital expenditures of those exist in your business. And that's why a CFO is so important for it, not just an e-comm brand, because e-comm is already hard enough.
And capital intensive, but when you're scaling the risk adjusted bets, there's more at stake. You, and it can be, can start to get a little challenging to really assess risk in an objective manner, right? And not a subjective manner. And, so I want to, actually want to turn to talking about risk adjusted, returns, but one thing I did want to mention, I thought of when you're talking about inventory is, this is something that I've seen.
Brands that we work with that have heavy repeat purchase is when they they when they advertise the availability of stock on their Shopify store They will actually subs they'll subtract the next 30 or 60 days depending on their lead times of subscription Inventory from what is available with the goal being we can't ever run out of subscription inventory. We can't ever not fill our
Ben Tregoe (18:35)
Yeah.
Jon Blair (18:39)
subscription orders. And that's what I think one thing that I've learned working with a bunch of brands at Free to Grow is like, if you have strong repeat purchase, you do need to think really, really, like you really need to protect like not stocking out of your subscription base, right? Because those are your loyal customers that have higher margin dollars per order because you've already spent the ad spend.
on acquiring them, right? And if you mess that up, can mess a lot up. But I do want to talk about, this is a nice segue into thinking about the connection between forecasting repeat purchase, returning customers, inventory management, and also thinking about risk, the risk of scaling.
Ben Tregoe (19:05)
Yeah.
Jon Blair (19:34)
You mentioned something when we were kind of preparing in thinking about like the, Yeah, forecasting repeat purchase and connecting that to inventory planning. Like how can understanding the connection of forecasted repeat purchase to inventory planning help brands get smarter about like the impact of inventory planning on cash flow?
Ben Tregoe (19:59)
Yeah. Well, here's, look, as a brand you're selling products to people, right? I think too often we get caught in cohorts and models and it's just like, it's numbers and it's all averages, but it's products to people. And so I think one of the things that I found really useful is to time-based crack cohorts like, those are my August 2020s and whatever are useful, but it's all averages. What I find more useful is when you look at your customer base as like,
How do my new customers purchase? How do my high value customers purchase? And then how does the rest of my customers purchase? And then if you look at your high value customers, can often be like, these are the products that they're buying. In your previous example, was like, these are my subscribers, right? So I think those learnings of my best customers matched with my products help you enforcing that into the inventory buying process.
Jon Blair (20:55)
Mm-hmm.
Totally.
Ben Tregoe (20:59)
then forces everybody to kind of answer these questions like who's going to buy this? Like what percentage of this buy is going to be consumed by our high value customers and our new customers and then everybody else? And as opposed to being like well everybody's buying at like 1.2 orders a month so like that times you know and that's how you over order.
Jon Blair (21:19)
Totally.
Ben Tregoe (21:19)
because you assume everybody's equal and it's not true. It's like, I love this example of Ferrari, right? They only make 14,000 cars a year, hugely profitable, but they make all that money by selling like $3 million cars. They don't make it off of the $300,000 Ferraris, right? So they don't go and build a $3 million car not knowing exactly who's gonna buy it. They're not like, oh, that one didn't sell. They know in advance.
Jon Blair (21:35)
Mm-hmm.
Totally. Well yeah, so what's interesting about what you're saying, we did a bunch of this analysis at Guardian Bikes, which is actually where I first met Ben when he was running DrivePoint. But we did some deeper LTV analysis. Like obviously we looked at the cohort models, which like you're saying are averages for a given cohort. But we started digging into like order level data.
and saying people who repeat purchase, what is their behavior? And what we're able to do by analyzing that order level data was we came up with these basically three personas, right? And like, I don't remember them all perfectly, but I remember one of them was like, there was the family that had multiple kids and what their repeat purchase behavior was. And you could actually see a certain direction that they went through our product catalog, right? And then you, we were looking at the, family that like,
Ben Tregoe (22:30)
Hmm.
Jon Blair (22:42)
They're just, it's the same kid or kids, but they're just graduating through the sizes, right? That was a different persona and I can't remember what the third one was. But the reason why this was helpful is because if you then go a level deeper and say, look at any given month or cohort and say, hey, it appears that we have this many in, know, avatar A that we've acquired in August 2020. And we have this many in avatar, you know, the second avatar. You then have,
Ben Tregoe (22:47)
Yeah.
Jon Blair (23:11)
a lot more intelligence about what they might buy next and when, right? And so it's still not a perfect science. And I do want to say something that I think a lot of people get hung up on. All this inventory planning stuff, it's never gonna be a perfect science. But you can use data to lead you in the right direction and also rule out cognitive bias.
Cognitive bias is really easy. It's so easy to fall into that trap with inventory planning and like, and imperfect data analysis can help you rule out some of those biases that can help you make bad decisions, but it can still lead your ultimately subjective decision in a more objective direction. Like, do you agree and do you see that too?
Ben Tregoe (24:00)
Yeah, absolutely. You know, like a big problem with cognitive bias is the CEO loves their shiny new toy. So they want to order it up, you know, across all the colorways. And then nobody's saying like, I don't think that's a good idea. I think the way that you, what I'd add to what you said is like, you force everybody to track the bet.
Like we thought that this order was gonna be bought X percent or X number of units by this type of customer and then this type of customer and then we, you this. And then you go back and look at it and you're like, God, we're terrible at this. Why don't we understand this better? Maybe that's what we should be working on improving as opposed to like, you know, how did it work out or not as being a criteria of success? like how good were our predictions?
Jon Blair (24:20)
Mm-hmm.
Ben Tregoe (24:45)
And once you do that, then I think you start making better predictions. And it just forces, I think, a better conversation. I you know, I've sat in on these inventory planning sessions and it literally is like one opinion of purple versus somebody else's opinion of orange. And you're like, okay.
Jon Blair (24:52)
Yeah.
Yeah, yeah. And you're probably, that decision is around the biggest capital outlays that that business actually has, right? And so for it to not be some sort of, systematic in some way, right? Data driven in some way, is that you're basically saying you're gonna have no system or process for the biggest capital outlays that an e-comm brand is going to make by virtue of being an e-comm brand.
Yes, that's really, really interesting. I do wanna, okay, so I don't know if you have read the book. Let's see, I'm looking at my bookshelf. It's called Future Ready. I read this book a few years ago. It's about forecasting, and it's not like formula. You're not going through all these formulas and equations. It's actually more about the theory of forecasting. What's the purpose of forecasting? What's the purpose of being right? And it goes through a lot of cognitive bias. There's a whole chapter on cognitive bias. And it actually, recommends doing the exact thing that you just said, which is tracking all of your forecasts and then graphing what actually happened and what it can reveal. let's say, let's use inventory as an example. So let's say you place six buys a year, you graph your forecast, and then you graph what actually happened on the sales side, on the demand side, right? If you see that your variance, you're consistently over forecasting.
every single time, then you have some bias in the data. Like statistically, you have a bias that is consistently causing you to over forecast sales. And what it says is that if you're making unbiased forecast, you should have just as many over projections as you have under projections. So if there's six per year, you should be over three times and under three times. And if you're over or under four, you're biased in that direction. And the point of this is like,
Ben Tregoe (26:44)
Yeah.
Jon Blair (26:57)
to challenge your assumptions. What are the assumptions that are causing us? Assumptions are processes that are causing us to be wrong in a specific direction the majority of the time? And so it's actually a fascinating practice if you do this because you'll just start realizing like, okay, we have a problem and we need to talk about this as a team to try to figure out how we split the difference on how many times we're over versus how many times we're under.
Ben Tregoe (26:59)
Yeah.
Yeah,
That's that's right on. What I would add to that is everybody responds to incentives. So oftentimes, the planning team or the inventory ordering team is responding to the incentives set by the CEO or the founder. here's a great example. The founder gets upset because you've stocked up.
Jon Blair (27:46)
Mm-hmm.
Ben Tregoe (27:47)
So what does the team naturally do? It's like, God damn, never stock out again. Then what happens? Well, you order on everything and then we wonder why we have like 290 days of inventory. And it's like, well, it's like, great. Now we're circling the drain because we have winter stuff in summer and we can't get rid of it.
Jon Blair (27:49)
Don't stock out. Yeah, exactly.
For sure, but what's helpful about that is if you have a CFO or just a finance professional like yourself, who can help you understand, look, yes, stocking out, a lot of times the fear of stocking out, generally speaking, freaks out founders because of the obvious P &L impact, lost sales, But if you can help them understand the balance sheet impact of going too far in the other direction and understanding both of those, it's like, okay, well, I can't over-optimize for either one of these, stocking out or not stocking out.
I've got to figure out how to split the difference here in a thoughtful manner.
Ben Tregoe (28:41)
I don't, if it were me, I would rather stock out than overbuy. You know, because I just think the stock out is a sign of demand. You know, there's this famous, I think it was the, somebody from Aramaze, I can't remember, but they, you they this like phrase. It's like, want to sell one unit less than demand. Right? So like,
Jon Blair (28:49)
Totally.
Yeah, that's
yeah, yeah that yeah
Ben Tregoe (29:09)
Isn't that great? it's like,
look, if you stock out, mean, yeah, you lost out, but like you also have great demand, like, okay, build on it, you know?
Jon Blair (29:16)
Totally,
I agree and I've been on both sides and I prefer to live to fight another day. There's one other thing that we're circling around in a lot of this discussion which is like, going back to this concept of risk adjusted bets. A risk adjusted bet doesn't, a good risk adjusted bet that a financial professional helps you make in your brand doesn't have an unlimited downside.
Right? Your downside is limited. And if you like the place I learned this, I had an old CFO mentor. He was a day trader and he's like, listen, Jon, I place my stop limits. I placed my bets for the day. I can never go to zero because my stop limits keep me from going to zero. So you, it's all about, it's all about placing a bet on some probable, some range of probable upside. the
The downside is not unlimited. That's a bad risk adjusted bet, right? That's a zero sum game. And so like, you don't want to think about your inventory management as like, if I don't hit this, I'm going to go out of business. That's a bad inventory decision. I've never seen that be a good inventory decision. The one thing I will say is if you can structure debt properly, I'm saying that like, properly in the right way.
Ben Tregoe (30:14)
Yeah.
Jon Blair (30:39)
with the right controls, the right payback period, the right lender, you can use debt strategically, but don't just think that just because you can put debt in place, that will solve your problem, because there's plenty of debt that makes the risk actually even higher of placing those big bets. I want to ask you really quick, what are your thoughts on, I have this opinion that when a brand can get in touch with predictable repeat purchase and really start to understand it,
Ben Tregoe (30:55)
Yeah.
Jon Blair (31:07)
that reinvesting back into that business becomes less and less risky, right? Because they have this predictability that they're tracking and understand for customers coming back. What is your view on how ⁓ understanding and seeing predictable repeat purchase, how that changes the reinvestment risk of investing internally versus externally?
Ben Tregoe (31:30)
⁓ man.
I mean, it makes a huge difference. Yeah, I totally agree with you. I mean, going back to what you said at the very beginning of like how do founders build wealth? You know, they should do it through distribution. Like if you think of cash, like one way I think about cash is like you have five mouths to feed, right? You've got to pay debt, got to buy inventory, pay for marketing, cover opex. And then the fifth mouth is distributions to customer. Well, guess who never gets fed, right?
Jon Blair (32:01)
Yeah, the
fifth one. The fifth one, right? Yeah.
Ben Tregoe (32:02)
The founder, right? The founder never even, because they're
like, ⁓ my God, I'm constantly worried I can't take money out of the pot. So once you get more, the more predictability you can get into your business, you know, and that comes through that repeat purchase, and the more confidence you get in it, then the more likely you are to distribute out to yourself. That's really the goal, you know, and if you're constantly have all this volatility, you're never going to distribute, you know.
Jon Blair (32:25)
Totally.
Ben Tregoe (32:30)
So.
Jon Blair (32:31)
Yeah, so
what I wanna kind of tie this all out with is like, I know we've been talking about margins, we've been talking a lot about inventory management. The whole reason is if you learn to manage these things the right way, right, to ultimately drive more cash flow, right, which is going to require not just improving profitability but also keeping your cash conversion cycle under control, which we've defined as basically, for an ecom brand, inventory management, right?
Ben Tregoe (32:59)
Yeah.
Jon Blair (33:00)
If you can learn how to pull those levers, you can take more cash out every single month. And why is that important? Because now this is a cash flowing asset, right? That in and of itself is helping you build wealth. You can take that cash, you can buy other assets outside of the business to build additional wealth, or just enjoy that cash flow. And now your entire net worth is not tied up in what? In exit, which there's just too many
market factors that may determine when and how much your brand can sell for. You shouldn't give that dream up, but you should build your business to generate cashflow that you can take out today. That's the ultimate business game in my opinion. And I'm hoping that we can change, like we can get the message out there that like, this is what we should be doing first and foremost, you know?
Ben Tregoe (33:45)
Yeah, I agree.
Yeah, I totally agree. And if you do that, you actually build a more sellable business because the buyer comes in and is like, can, this thing's not a disaster. I can run this thing. You know, it's kicking off a lot of cash. It's as much more value to them. So they work together.
Jon Blair (33:59)
Totally.
Totally.
So I'm curious,
you have a, if like what we've talked about has peaked a brand founder's interest today, what are the first things, like if this is a brand founder that's like, ⁓ I've never, this is a light bulb for me, right? Like this is really interesting. Where's like the first simplest place you think they should look to try to tackle some of the stuff that we've talked about here?
Ben Tregoe (34:34)
If I were that founder, the very first thing I would look at is my free cash flow generation over time. And I think that tells you a lot. To your earlier question, like, I'm profitable, but I don't make any money. I don't have the cash. It's like, well, maybe your margins are too low. You need to raise your margins. Maybe you need to work on your cash cycles. But you gotta get your free cash flow generation up.
I think if you're, if free cash flow is harder than profitability, right? So, you know, it's usually a subset of your EBITDA. Or it always is. So, I think that's the place to start really understanding that. If they don't understand that, then like, you know, they should be talking to you or, you know, they can read stuff on.
Jon Blair (35:06)
Totally.
Ben Tregoe (35:21)
at Elephant Herd Consulting on my knowledge base. But it's like, you gotta get that to tell you where the problems are or where the improvements are. And then from there, it's just like, I think it's easier if you keep it simple. It's like, okay, I'm trying to increase margin dollars. I'm trying to increase my ability to get cash converted back into, excuse me, inventory converted back into cash. Like when you think, even marketing's subject to that.
Jon Blair (35:30)
Yeah.
Totally.
Ben Tregoe (35:49)
But like
your goal with marketing is just to stack up repeat buyers. Why? Because they can convert cash faster and they are higher margin. Like that's, it's not like some goal in and of itself. And then like you do that and you drive more margin dollars. And so it's everything just boils down to those two ideas.
Jon Blair (35:53)
Totally.
Totally.
What's the simplest version of free cash flow formula or equation that you can offer a brand founder to try to just understand it in the simplest terms?
Ben Tregoe (36:19)
the money that's left over after you pay for everything to keep the business going.
Jon Blair (36:25)
And what
Ben Tregoe (36:27)
Once you define
it like that, then everyone's like, oh, I can do that in my head. I can do a little spreadsheet of that. It's like, how much inventory do you need to buy? What do you need to cover your expenses, your op-ex, and your marketing? And then if you have debt, what do you need to pay for debt? And then what's left over is your free cash flow. Oh, nobody has cap-ex. Almost nobody has cap-ex, so you don't need
Jon Blair (36:31)
Yeah, totally.
For sure. Yeah, no, I mean, it's important because there's a lot of brands that we see that have what appears to be a healthy balance in the bank account, right? But we always help them go like, okay, hold on, but how much is due to our vendors in the next 30 days? What's due on the credit cards, are the purchases that are not on the balance sheet, on the liability side of the balance sheet that we know we have to make in cash in the next 30 days? And how much do we owe in sales tax?
to somebody else, right? And it's like, then what's the number, right? What's left over? That's really a lot closer to the free cash flow that you're talking about, right? Then just looking at your P &L and saying I made X last month in net income, you know?
Ben Tregoe (37:35)
Yeah.
Yeah, and it's so funny because a lot of times people have a very basic spreadsheet of that, or it's all up in their head. The founders are often very aware of all those forward expenses, but it's super hard to model it out. Like, well, what if I do this instead of that? And then you need to build in the models. I think it's, don't know, finance and accounting is like, there's a lot of jargon, and I think people...
Jon Blair (37:49)
Totally.
Ben Tregoe (38:06)
get lost in the jargon and the formulas as opposed to like, well, what is the concept that I'm really trying to do here?
Jon Blair (38:11)
Totally.
Dude, there's a huge problem out there. I think the more complicated a finance person, you can be in any world, I don't care what vertical you're in. If you have a finance person trying to sell you something and speak to you in terms that just sound really complicated and can't help you break it down, it's something to be wary of because there's so many people in the finance world that profit off of sounding really smart, right? And by the way, they probably are really smart.
But the reality is how do you turn these concepts into action, right? Turn the potential into actual kinetics that actually make your business financially healthier and ultimately help you build wealth. I just wanna say this one last time here before we kinda land the plane is like, you should be building your business to create wealth for you. Like that's the whole point of a business, right? Like or else it's just a expensive hobby, right? And selling the business is not the only way.
Ben Tregoe (39:04)
Great.
Jon Blair (39:10)
to create wealth, you should figure out how to maximize cash flow that you can distribute to yourself. And we've gone through a bunch of, I think, really, really helpful stuff here for helping you think about where you might be able to start or ask for support. Before we do end here though, Ben, I'm curious, I ask this to most of my guests, you already mentioned something about being a writer for Disney, which I think is cool, but what's a little known fact about Ben that people might find shocking or surprising?
Ben Tregoe (39:40)
I don't know that it would be all that shocking or surprising, I guess, but I've gotten really into, it sounds so crazy, but I've gotten really into taking care of my property and that involves cutting down lots of trees. And I just like, it's unbelievably fun. I mean, it's like such a challenge.
Jon Blair (40:03)
Hahaha
Ben Tregoe (40:04)
like figure out like, okay, what's going to happen with this tree? And then you break out the chainsaws and like, I've gotten in a fucking problem. yeah, like, my God, it's like going the wrong way. You know, so it's like a constant physics problem that I just find. And then you like take it down and you cut it up and you chop it up, know, and you stack it. And I'm like, every time I make a fire, I'm like, I remember cutting that one down. I'm so excited.
Jon Blair (40:10)
Which way is it gonna go? Which way is it gonna fall?
I love that man. That's super awesome.
When you did share earlier about being a writer for a minute for Disney and then be like, I don't want to do that. I thought I used to be in a heavy metal band that put out one record, went on tour right after business school. And I did it for like a year and a half and was like, okay, I don't want to do that. Like I'm a musician. I love, I still play music to this day, but I was like, that's not what I want to do for a living. And then went back to startups after that. But so I can relate to you in that regard.
Ben Tregoe (40:59)
Yeah, it's a brutal entertainment. It's just like, I mean, you talk about like fate not being in your hands. mean, you know, I was like, don't want to be 60 years old. I'm like, well, you know, I once did something, you know.
Jon Blair (41:07)
Yeah, 100%.
For sure that's that's about how I felt like with
trying to make it as a touring metal musician for sure man. Well, Ben, I appreciate you coming on man. This was a fun conversation I don't get to have a lot of finance nerds on the show with me so this was this is really great. If people want to learn more about Elephant Herd or you get in touch with you to see how you can help them - Where can they find you?
Ben Tregoe (41:20)
Yeah.
Thank you.
Elephantherdconsulting.com Sign up for the newsletter there. I have a knowledge base where I write all the stuff that I find interesting about brand finance. That's probably the best place. can find me on Twitter or X and LinkedIn, but the site has the most stuff.
Jon Blair (42:00)
Definitely check out Ben's site. I've definitely perused it and read a few articles. So great content on there. Yeah, yeah, don't forget if you want more helpful tips on scaling your profit-focused DTC brand, you can always follow me, Jon Blair, on LinkedIn. And if you're interested in learning more about how Free to Grow CFO can help your brand increase profit and cash flow as you scale, check us out at freetogrowcfo.com. Until next time, scale on and thanks for joining, Ben.
Ben Tregoe (42:04)
Nice, thanks.
Thanks Jon.
