Mini Episode: Why 13 Week Cash Planning is a Waste of Time

Episode Summary

In this mini episode of the Free to Grow CFO Podcast, Jon Blair challenges the dogma surrounding 13-week cash forecasts for DTC brands. While most fractional CFOs swear by them, Jon argues that they’re often unnecessary and waste valuable time. Instead, he shares a more efficient, decision-driven approach to cash forecasting that prioritizes practicality over tradition.

Whether you're leading a scaling DTC brand or managing finance ops, this episode will help you rethink how much cash flow visibility you really need—and when.

Key Takeaways:

• Just because 13-week cash forecasts are common doesn’t mean they’re right for your business.

• Weekly cash models should only be activated if monthly projections raise red flags.

• Most brands only need 2–6 weeks of weekly visibility to make accounts payable decisions effectively.

Episode Links

Jon Blair - https://www.linkedin.com/in/jonathon-albert-blair/

Free to Grow CFO - https://freetogrowcfo.com/

Transcript

00:00 Rethinking the 13-Week Cash Forecast

04:03 Building Cash Forecasts for Decision-Making

Jon Blair (00:00)

Most fractional CFOs say a DTC brand should have a 13 week cash forecast. I think this is BS and today you're gonna find out why. Hey everyone, welcome to another mini episode of the Free to Grow CFO podcast where I break down one key concept that will help your DTC brand increase profit and cash flow as you scale. Okay, so do some brands need a 13 week cash forecast? Sure, but does that mean every brand needs a 13 week cash forecast? Not at all. And to be quite honest with you, I'm not even sure where this fabled 13 week cash model even got started and why it has become the gold standard. Look, instead of just following the status quo and what it feels like everybody else is doing, instead we should think critically and ask ourselves two key questions. Question number one is, do I actually need weekly visibility in the cash flows or is monthly enough?

You'd be surprised how often monthly visibility is enough for the decisions that you currently need to make within your business. At Free to Grow CFO, we only activate a weekly cash model when we see something in our monthly cash forecast model that indicates weekly visibility may be prudent. So think of it this way. This is our philosophy at Free to Grow CFO. We have monthly cash flow projections.

You can typically see in your monthly cashflow projections under different scenarios that there may be a risk that cash is gonna get tight at some month in the future. When we see that, we may activate a weekly cash model to dive deeper and get a more granular view on whether or not cash may go negative potentially on a weekly basis.

So, again. Question number one, do I actually need weekly visibility into cash flows or is monthly enough? At Free to Grow we start monthly and we activate weekly when there's a red flag that we see in our monthly cash flow projections. Question number two you should be asking is, what is the appropriate time horizon for the decisions that you need to make next several weeks? is where we're challenging the 13 week time horizon. Again, 13 weeks.

I know it's one fiscal quarter, although it still seems fairly arbitrary. Cause who's to say that one fiscal quarter or 13 weeks of visibility is appropriate for the decisions you need to make. The reason why I started challenging this and why we challenge this at Free to Grow CFO is cause I used to have a 13 week cashflow model at Guardian Bikes And you know what I found?

I rarely, if ever, I may be and quite frankly, as I'm thinking about it, I don't think I ever used beyond week six, maybe week eight. So that begs the question, why am I spending all this time painstakingly, forecasting cash flows all the way out to week 13? So in answering the second question, we really want to ask ourselves how far out into the future do we need to see to make quality decisions?

So for example, if you've decided that the decisions you need to use a cash forecast for are really centered around approving weekly AP payments. I oftentimes find that brands only need two to six weeks of visibility in order to make said decisions. Usually beyond six weeks and quite frankly, typically beyond four weeks, future AP is just gonna change so rapidly on a weekly basis that it's not really helpful to see that much further. So typically two to four or maybe two to six weeks of weekly cash visibility is plenty for approving AP payments. So what's the point that I'm making with all this? The point is you should build forecasts specifically to support making the decisions that are right ahead of you. No more and no less. Anything more than that is wasted time. And let's be real, time is not something that any of us can afford to waste right now.

So in summary, instead of just arbitrarily deciding that you need a 13 week cash forecast, start by asking yourself two key questions. One, do I actually need weekly visibility into cash flows or is monthly enough? And two, what is the appropriate time horizon? How far out in the future do I really need to see to make quality decisions? Answer those two questions, build what you support.

Report the answers to those two questions and don't build any more until the answers to those two questions change.

The Burnout Trap of Success (And How to Escape It)

Episode Summary

In this episode of the Free To Grow CFO podcast, Jon Blair and Matt Kyser discuss the intersection of business growth, leadership, and holistic health. They explore the importance of balancing various aspects of life, including work, family, and spiritual well-being, to achieve success and fulfillment. Matt shares his entrepreneurial journey and a framework for effective leadership, emphasizing the need for self-leadership and the role of rest in enhancing productivity. The conversation highlights the significance of marriage and relationships in maintaining balance and offers practical steps for addressing life imbalances through a structured approach.

Key Takeaways

• Work is a good thing, but it can also be broken.

• Self-leadership is essential before leading others effectively.

• Addressing imbalances in life can lead to greater productivity.

• A four-step process for assessing and improving your holistic health.

Episode Links

Jon Blair - https://www.linkedin.com/in/jonathon-albert-blair/

Matt Kyser - https://www.linkedin.com/in/matthew-kyser-0b085018b/

Free to Grow CFO - https://www.freetogrowcfo.com/

RestorRenewal - https://www.restorrenewal.com/

Meet Matt Kyser

Matt is an entrepreneurial thinker and operator in the non-profit and for-profit world alike. In the non-profit world Matt is the Lead Pastor of Village Church in Irvine, CA, as well as the Founder & CRO of RESTOR. In the for-profit world Matt is the Founder and CEO of Curb Cover, a direct-to-consumer skateboarding company, as well as Curb Saver, a business-to-business company serving nation-wide residential home builders. More than anything, Matt is a follower of Jesus, husband to a remarkable wife and father to three amazing kids. Matt enjoys having fun with his family, being active outdoors and acting as an encourager to anyone he meets.

Transcript

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00:00 Introduction to Leadership and Impact

07:09 The Framework of Leadership Levels

12:51 Balancing Life's Areas for Success

18:04 The Importance of Rest in Work

20:33 Marriage and Its Impact on Work

23:37 Addressing Imbalance in Life

31:23 Holistic Health as a Holy Endeavor

Jon Blair (00:00)

Is growing your business making you feel tired and out of control? Does your day-to-day work feel like it's lacking purpose, meaning, and impact? If so, then keep listening. You're not gonna wanna miss this. 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. All right, today is actually a really exciting day because I've got, who I guess I will say is my spiritual father on today's show, good friend, spiritual father, many other things. Matt Kyser he's the lead pastor at the Village Church. He's the founder of actually many things, Restore Ministries, Curb Cover, a DTC brand.

Curbsaver, a spinoff from Curb Cover, just to name a few. I think I probably even haven't hit them all, but Matt, man, thanks for being here, man. I'm super stoked to be chatting today.

Matthew Kyser (01:01)

I'm glad to be here, Jon.

Jon Blair (01:03)

So what are we gonna be talking about today? Today we're gonna be talking about why your brand's impact and success all starts with leadership and I'll say a guiding principles framework. Now if you've listened to this show at all, know that we're focused, Free To Grow CFO is focused on helping brands scale in the DTC and e-commerce channels profitably. But we're also really, really focused on impact and purpose.

The two are one and the same. Profit is used to drive impact in the world. And business is this beautiful thing that, if you've listened to the show, you've heard me say, I believe God has created business as this beautiful organism that has the ability to make the world a better place for many different parties who are attached to that business. And Matt is someone who, like I mentioned, is a spiritual mentor to me and ⁓ my former lead pastor and

He has a lot of really great and helpful frameworks and principles that he lives by and teaches to others and he's really passionate about how entrepreneurs can, through good work, and through the care of people through their good work, really make the world a better place. So, couldn't think about anyone better to sit down and have a conversation about how to think about leadership and guiding principles to improve your brand's impact and success. So Matt, before we get into some of these principles, can you give the audience a brief background of yourself and kind of your entrepreneurial journey?

Matthew Kyser (02:36)

Yeah, thanks, Jon. Well, you know, I'm 51 years old now and I didn't really understand that I was kind of an entrepreneurial minded person until a few years ago as I went through kind of a master's program and helped me really kind of put some language to that. Actually the guy that leads that, Bob Schenck, was also a pastor, one of my pastors at one time, and really helped me to see that the church planting and the revitalization work that I was doing was coming out of an entrepreneurial kind of mind and heart and bent. And so I'd always say I'm a church sort of revitalizer, help guys get revitalized and renewed and all of those sort of things were more entrepreneurial and looking back on it I can see he was right you know I got kind of kind of cut my teeth doing church work and youth ministry with young people. I had a spiritual mentor, had a spiritual father, mine's Lyle Caselaw, and Lyle really helped me with this as well. But in those early days, we were revitalizing youth ministries. So I went with him to a church, a kind of mega church in our area, and the church was sort of waning and the youth ministry was waning as well. And he brought a group of guys in to rebirth that.

It was starting something new, kind of renewing something. And that's kind as I look back, I think I kind of got my first experience there. Also, just shortly after that, I helped to plant it, and start a church. And that's a very entrepreneurial thing. I think looking back, I've learned.

I really didn't understand how entrepreneurial it was and how hard it would be, but it was hard. And I was a part of a team of a few guys at a young age in my early 20s doing that. And then when I hit age 30, I came to the Village Church and the Village Church has been a great place. Maybe I think I was age 33 when I came to the Village Church and really revitalizing, rebirthing, replanting that church. And so I've been doing that there at the Village Church, helped to get three other churches started in various ways. Along that journey, Dean and I, you know, birthed Restore, which is a ministry that helps renew pastors and their wives and helps to revitalize the churches they serve and lead. then kind of through that process, during COVID, Luke and I started Curb Cover, a direct to consumer skateboard brand. We actually have two patents now on our product. We have the longest skateboard element on the market that you can buy online. Most skateboard elements are six or eight feet, ours are nine and twelve feet. And so really happy and proud about that work. So glad to do with my son. And that's kind of taken a turn now as well into a B2B business where we're helping with Curbsaver construction companies.

save a lot of money on their curb repair and replace some costs and also their bond release and so kind of kind B2B now. So I don't know if that's what you're looking for but that's kind of the journey it's been. It's been fun, it's been really hard and I gotta say you have been a godsend right.

Jon Blair (05:41)

I love it. No, I mean I

Yeah, it's been very enjoyable and fulfilling to help work with you on the business side as opposed to the ministry side. Although, like, you know, was thinking as you were talking and I was making a few notes actually, I've started to form this. So, you know, right after this we'll get into some of these concepts I wanna make sure that the audience is able to listen to, but like.

Matthew Kyser (06:13)

Yeah.

Jon Blair (06:14)

The Bible says in Genesis and elsewhere, the first book of the Bible, that our God is a God of creation, right? He is a God who created everything. And the Bible says that we are created in His image. So if God is a God of creation and we're created in His image, then we are created to be creatures of the creators, right? Creators like God. And entrepreneurs are the creators of our time. And that to me is the spiritual connection.

Matthew Kyser (06:20)

Yeah.

That's right. Yep.

Yeah.

Yeah. Yeah.

Jon Blair (06:43)

one of many spiritual connections between being an entrepreneur, the creator of our time, the creators of our time, right? And that connection back to God, who is the God of creation, who created us in his image to be creators. And so I am very passionate about that connection. And what I wanna start this conversation with is you have this really great framework.

Matthew Kyser (06:59)

Yeah, you know, it's exciting.

Jon Blair (07:09)

about kind of, I'll call it, and maybe not doing it justice, but like these levels, and I would even venture to say probably a sequencing of leadership, that like if you don't get these levels and the sequencing right, the ability to really succeed and make impact in the world through a group of people, which is something that all scaling businesses are trying to do, is very hard and maybe even impossible. So can you run us through your framework.

Matthew Kyser (07:40)

Yeah, well it's really 10 areas of life. know, some guys have 10, some have seven, some have eight. 10 areas of life broken up into four sections. And so we're actually leading young guys through this now. I'm working with 20 somethings. Some of the most exciting work I'm doing right now is with 20 somethings. So we're just kind of getting on this journey from the beginning. But really those four areas are one, leading yourself. Second, leading at home. Third, leading at work. And last, leading on mission. so leading yourself is spirits, soul, mind and body. Leading at home is marriage and parenting. Leading at work is vocation and finance. And leading on mission is church and world. In my scheme, in my paradigm, that's how that works. So four sort of avenues or areas or spheres of life. And yeah, to your point, you know, if you don't get it right from the beginning, you're not gonna get it right for very long. And so I could talk a little bit about what that looks like in the church world and maybe what that looks like in the business world.

Jon Blair (08:44)

Yeah, let's definitely do that. And I wanna start with like, I'm curious, the leading yourself and then leading your family or at home, leading at work and then leading on mission, is there an evolution where you have to do some of those well first before moving on to the others or is it all kind of connected holistically? How do you view that?

Matthew Kyser (09:08)

you

Yeah, well, I think it is all connected holistically in the end, but here's how I kind of found that out. You know, the church and nonprofit organizations sometimes open themselves up to basically whoever, because they're largely volunteer organizations, right? And so my experience early on as a young man was being part of a mega church and a great pastor who was on the radio looked up to his teaching and to him immensely. And he had a moral failing. And then I saw that happen, you know, in other ways, pastors burning out or walking away from the church. And what I found was sometimes you get a guide in leadership, he's leading on mission, right, in the church or in the world. But come to find out a few months or a few years typically later, you look back and you think, actually, I don't know that that guy was really leading himself well.

And you look at his family and you're like, you know, I'm not sure he's got a great relationship with his wife and his kids are kind of frazzled or unruly or just not healthy. And then maybe you think in terms of leading at work, like maybe he just got this role because I don't know, man, the marketplace is hard, it's tough. And would he've done well there and stewarded his resources well. you know, not to...

cast judgment, not what I'm trying to do. I'm just saying that's what revealed it to me. That was my experience showed me. Sometimes we got guys way down the field in football, my son plays football and I use the term outkick this coverage, you know, it's just, it's not working. And so, yeah, I really do believe there is a progression. You need to lead yourself.

any young man especially, you know, gotta lead yourself well before you plan to lead a woman well and lead a household well. You you gotta do that as you're leading well at work. I think Christians should be leaders at work. The Bible says that pastors, elders, people that lead, leaders in the church should have a good reputation among those who are outside a lot of that reputation is through our work. And so that's kind of how the evolution worked out for me and my thinking. And that's kind of a framework we're using, not kind of, that is the framework we're using at Restore and all the things we're doing in the church and the different things I'm working on.

Jon Blair (11:21)

Okay, so this is interesting because I think that putting this in the context of our audience, brand founders who are actively trying to grow their businesses and turn them into increasingly bigger economic generators of value. And so I think that there's, one of the reasons I want to have you on is because there's plenty of content about how to crush it at work.

Matthew Kyser (11:33)

Yeah.

Yeah.

Jon Blair (11:51)

Is work the totality of life? Right? In my opinion, from my viewpoint, it's not. And I would even venture to say, and I bet you would agree with this, it doesn't matter what God you do or don't believe in. I know people who are atheists or who are agnostic or a part of a different faith. ⁓ It doesn't matter the way that we are wired. We are wired to feel healthy and be happy and energized and

Matthew Kyser (11:53)

No.

Yeah. Yeah.

Jon Blair (12:21)

at peace I'll even say, when these four areas that you're talking about are in balance and are all healthy. And when you have one that is out of balance, you can keep it out of balance for a time, but as the others suffer, eventually the connection between them, right, renders the area that you are supposedly crushing it at kind of useless or it starts to not work as well anymore, right? And so,

Matthew Kyser (12:26)

Yeah. Yeah. Yeah.

Yeah. Yeah.

Jon Blair (12:51)

So do you agree and what else do you have to say about that?

Matthew Kyser (12:53)

Yeah, like

Yeah, of course. So, and in our paradigm and in our curriculum, we have this progression that I kind of just discovered over the life of being involved in ministry in the church world and now sort of in the marketplace, but really in the nonprofit and the church world, really a kind of a five-step progression. And one is you start by getting unbalanced.

And like you said, we were created to be healthy, balanced people. The Bible says in Genesis that God created Adam. put in the garden to tend and to steward it, to keep it, to cultivate it, to nurture it. God created everything. He said it was good. He created mankind. said he was very, it was very good. And so God created us to live a joyful, balanced, healthy, holistically healthy life. So when we get unbalanced and we get too unbalanced in too many areas of our life, then we become unhealthy.

know if you've been in an unhealthy season you go from unhealthy to unhappy very quickly. So unbalanced, unhealthy, unhappy and if you become unhappy for too long you become unfruitful in whatever you're doing including your work and then it's not very long till you become unaffected which means you just don't care anymore. So you're unbalanced then you're unhealthy. If you're unhealthy for too long then you're unhappy. It goes really quick from unhappy to unfruitful and over time eventually if you're unfruitful you become unaffected.

just don't care anymore. And that can be true in any of those areas, but I see this happening a lot with guys in their work. know, men in particular are very focused at work, very focused on leading at work, right? Vocation and finance. And so leading yourself can suffer, leading your family can suffer on the front end. And unfortunately, you miss what's on the back end, which is leading on mission. And if you're not a Christian or you don't have faith, you could say something like, you know, becoming some

part of something bigger than yourself, right? Giving your life, giving yourself for something bigger than yourself. So you're missing that as well. So yeah, you might be crushing it at work and you're getting all this content and you're doing a lot of work there, but you're unbalanced in these other areas. And this is just a recipe eventually for disaster, See you in the time we have.

Jon Blair (15:02)

It's interesting,

yeah, me too, and it's interesting, I can even use myself as an example, like, I'll have seasons. And you know, like, it's not even, I think the trick, or the trap for a lot of us entrepreneurs is that we like our work, right? We don't, and the joy of our work and the joy of the progress, we enjoy it, right? And I've caught myself many times.

Matthew Kyser (15:22)

work is a good thing.

Jon Blair (15:30)

And like for me, keeping holding these kind of areas that you're talking about in tension or in balance, like it's not, I'm not ever in equilibrium. It's like I've got this imbalance and then like, hold on, I've noticed it, right? And I, and then what do I need to do about it? Okay. And I'm going to tip the scales back the other way. But what I've seen oftentimes happen and this, I want, I want everyone to hear this. We're so wired as entrepreneurs.

Matthew Kyser (15:42)

Yeah.

Jon Blair (16:00)

to make progress on any given day. Check things off the list. Make measurable progress in our businesses, right? And usually we're the ones driving forward growth. So oftentimes it's sales numbers in one way, shape or form, right? We're so focused on that and that's how we measure the success of our day that when leading at work for me starts overtaking and overshadowing,

Matthew Kyser (16:06)

Thank

That's for sure.

Jon Blair (16:28)

leading my family well and leading myself well, you know what the anecdote actually is? It's not working harder at crushing work or driving sales. It's stopping and maybe getting some rest and waking up in the morning and reading my Bible and feeding my spiritual side of my life for a few. Praying, maybe reading some other self-help book that I just enjoy or feeding my...

Matthew Kyser (16:40)

Yeah.

Jon Blair (16:57)

working on a hobby, right? Going and spending unadulterated time with my wife and my kids. When I do those things which actually feel, here's the trap, it doesn't feel like working. It feels like I'm actually getting behind at work because I'm not checking things off the list. But when I actually stop working and go do that, when I come back to, first off, while I'm doing those things, the groundbreaking ideas for work.

Matthew Kyser (17:24)

Yeah.

Jon Blair (17:24)

pop into my head and I'm like,

I know what to do, right? But then secondarily, when I get back to work, I'm ready to go. And so actually, you've taught me something, and I'd like you to speak into this a little bit more, because it's been really groundbreaking for me, is that rest. I think most of us think we rest, in your words, from our work, right? And rest is about resting from our work, but you also talk about resting for our work, right?

Can you talk about that a little bit, like the different, I don't wanna say uses, but the different impacts that rest has aside from just resting from our work?

Matthew Kyser (18:04)

Yeah,

yeah, yeah, I appreciate that. So I want to say first, work is a really good thing.

Matter of fact, the Bible says that God is a worker. So if any of your listeners are listening and are not familiar with the Bible or they're not sure how Christians would approach the idea of work, it's called the Protestant work ethic, I think for a reason and for some better reasons than others. One of them is ⁓ God is a worker. That's what the Bible says, that God worked. God worked for six days and created everything. God is a worker. And the first thing he did is he put Adam in the garden to tend and to keep it.

So the first role that we had as human beings was workers, right? Work is a good thing. It's created by God. So just a point of clarity there, I know we're on the same page on this, and this is a foundational truth in reality, but we don't want to be workaholics, right? Because work is good, but work is broken.

Work is good, but work is broken. And as Christians, we believe it's broken because of sin and the fall, and that sin impacts everything in the world. It breaks things, it breaks relationships, it breaks a relationship with God, it breaks our relationship with others, it breaks systems and structures, it breaks the good things that God created. so work is a good thing, but it's also a broken thing. And we're broken people. And so our tendency can be to overwork.

or to not work hard enough, right, to be lazy. There's a book in the Bible, in the book of Thessalonians, Paul's writing, he says, hey, some of you guys are expecting Jesus to come back, and so you're being lazy, you're not working hard, and that's not what Christians should do, right? And so, as Christians, we should, correct, rest from our work. We should not be workaholics, not overwork.

but we should also rest for our work, because we should be working hard. And so if you're a Christian and you're listening, people in your company should look at you and be like, that guy, that gal, those people, they work hard, and they do good work. And that's what God's calling us to. And so yeah, it's not just enough to rest from our work, although we should, so that we're not workaholics and overworking, we should also rest for our work, so we're doing good work that brings glory to God.

Jon Blair (20:11)

I'm curious because I do personally see how all these ten areas of life are all equally important but do you see one besides work that people maybe get wrong more frequently than others or maybe a small handful that are like the biggest challenges that you see to like really like keep in balance?

Matthew Kyser (20:33)

Yeah,

I mean, that feels like a loaded question because at the core, I'm a pastor. So I'm going to say it's the spiritual, know, mostly people get the spiritual life wrong. But I'd say one that's really, really, really important is marriage, right, as a leading at home is marriage.

Jon Blair (20:39)

Yeah, yeah.

Yeah.

Matthew Kyser (20:57)

I think people have this idea that they get married and this other person's gonna complete them and that like marriage is basically for them.

The Bible says no, actually not that way. And so I think a lot of times marriage is something that we get wrong. Marriage is a chance to serve another person, not to be served by another person. And so the Bible says the two become one flesh. so matter of fact, this holystic health idea, actually the best picture of it in the Bible is marriage. Paul said that the husbands should love their wives as their own bodies because no one ever hated his own body but nourishes it and cherishes it. And so Paul's saying,

love your wives this way because you would love yourself, you take care your own body and now you're united together with your wife, take care of her. And so I think that's one people miss a lot and that has a huge impact on work. I just want to say, know...

I'm not meaning to like stroke your back here, whatever, but I just think you and Andrea do a great job with this. I think you're a great husband. Even some of the coaching that we've done, you you set aside a lot of time. You realize, yeah, Andrea is my biggest asset in my life, right? And so I want to invest all of my best everything, time, money, whatever, into her. And I think you do a really good job with that. Not everyone does. And when you're synced up together with your spouse,

it has a huge impact on your work. So I feel that way about Dina.

Jon Blair (22:24)

Yeah, in fact, when you're not, it makes it next to impossible to get anything meaningful done at work. I've even, when Andrew and I have been out of sync and I've gotta go to work, I've actually had like, admittedly, like full half days where I actually am just like, I'm not gonna go to work and we're gonna sit down and we're just gonna talk about this because I'm not gonna get anything done anyway, so like.

Matthew Kyser (22:28)

⁓ like, yeah. Yeah.

it's horrible.

Yeah, yeah.

Jon Blair (22:53)

Let's just figure this out. Let's just figure this out and then I'll go to work because I'm just I'm not gonna be able to get anything done anyways.

Matthew Kyser (22:53)

Totally. And if you have a good marriage or you want a good marriage, that's true for you, right? Dina and I, and you know this, Dina and I take prayer walks three days a week. We took one this morning. Early in the morning, we have a four mile loop. It takes us about 45 minutes to an hour. And we walk, we talk, we connect, we pray. We work through conflict, right?

We stay connected and those are like our large chunks of time to do that because it's just the most important thing, you know, in the world to me, right, next to Jesus himself, right? So I think that's, you know, I'm tempted to say spiritual, but I think the marital one is one that a lot of people miss and really, really, really important.

Jon Blair (23:29)

Absolutely.

Okay, so once you realize that, or have a sense that you're out of balance on some of these things, what is your framework for beginning to address it?

Matthew Kyser (23:50)

Yeah, so I've got a four step process. I know that sounds salesy. Here's my four step process, but I do have a four step process. I use it.

Jon Blair (23:55)

Yeah

Matthew Kyser (24:02)

When I read my Bible every morning for myself, I don't wanna, I think one things I love about Jesus the most is he doesn't ask us to do things he's unwilling or unable to do himself. And so I wanna lead my life that way. So if I'm asking people to follow these steps, I gotta follow them. So, and I wanna follow them, because I think they're God's design for renewal. So the four steps are all R words, you know, it's restore, so they're all R words. I thought that was cute. I guess it kind of works, but it at least helps me to remember. So the first step is revelation.

And the question I'm asking there is what is God saying? What is he saying through the Bible? What is he saying through prayer, through godly counsel and friends, through my circumstances? So, Revelation, what is God saying? The second step is repentance. And the question there is what am I missing? What am I missing about what God's already said to me about my relational life or the life of my mind or my body or my marriage or my parenting or my finances or my work? You know what am I missing?

Third step is reformation. And the question there is what needs to change and how. We actually use the EOS system. I know you're familiar, you love that. And so I'm all about it. And it's been really helpful for me when we do our strategic planning sessions with churches, we use EOS. And then the last stage is renewal, last R is renewal. And the question there is what does the future look like? So revelation, what is God saying? Repentance, what are we missing? What am I missing? Reformation, what needs to change and how?

and renewal what does the future look like. And I hope it sounds simple. If it sounds complicated, I work through this system or these steps very quickly, right? It becomes really intuitive. And so I try to apply this to everything I'm doing.

Jon Blair (25:43)

Yeah, this reminds me, when you and I were prepping the other day, I mentioned to you that this sounds to me like very akin to the classic, like in the business world, you hear about the after action review, the AAR. Came originally from the military, and it was their way of assessing how something was actually going, and ultimately the goal is to get to what needs to change, right? What behavior needs to change, or what actions need to change.

And so the after action review is like, what did you expect to happen versus what actually happened, right? Which is similar to like your revelation. And then what worked and what didn't work. Like, where's the gap at, right? And then what do you need to change? And that reformation, like what needs to change? And there's a nice little simple framework too that you can use in anywhere, any area of your life.

Matthew Kyser (26:19)

Yeah.

What am I missing?

Jon Blair (26:41)

whether you're talking about spiritual and reading the Bible or other problems in your life, the what will you change? There's this kind of like, there's this acronym, KISS, K-I-S-S, what will you keep? What will you improve? What will you start? What will you stop? Change really all comes down to like, what am I gonna keep doing and lean into further? What needs to be improved? What should I just stop altogether? And what am I not doing that I should start, right? And so, to me, it's not a surprise that there's like,

Matthew Kyser (26:57)

Yep.

Jon Blair (27:11)

that kind of classic, classically used business framework has so much alignment with what you're talking about because I believe in, you know, God's design of humans. And so that's wired into us to, as this kind of like framework that works for self-reflection and ultimately change, new action plans and taking action in a different way, right? And that's all healthy businesses, all successful businesses.

Matthew Kyser (27:22)

100%.

Jon Blair (27:41)

and I'll say led by successful entrepreneurs, are willing to reassess where they're at and what needs to change. And that ability to adjust, right, and after self-reflection is the key driver of their success.

Matthew Kyser (27:49)

Yeah.

man, Jon,

yeah, I cannot say in the church world, in the kind of consulting or advocacy that I do with churches, step two, repentance, kind of pains me to say a little bit is our differentiator, because as Christians, Martin Luther said, the whole Christian life is one of repentance. But that repentance is the differentiator. There's a lot of processes where there's steps and people call it Christian, they sprinkle Bible verses on it.

But if it doesn't have repentance, it's not inherently Christian, because that's how you become a Christian, and that's what the Christian life is, it's about repentance. And I'm telling you right now, every single time, without fail, the churches that take one step back the soonest, take three steps forward the soonest. The pastors that are quickest to raise their hand and say, I blew it, I haven't been leading you well in this way.

They get more grace and mercy. They get more understanding from their people. They begin to make more progress more quickly. And I can imagine in the business world, it's the same way when I look at Curbsaver, know, when something's not right and I just get to it, I know it, I address it, I assess the data, what are our users doing? What kind of feedback are we getting? The quicker I am to change, I think we say fail fast, right? Yeah, so these are all God ordained principles, you know?

Jon Blair (29:14)

Yeah, yep.

100%.

Matthew Kyser (29:19)

We call it general revelation in theology. We call it common grace in theology, right? God gives this know-how to everyone because he's good and these are good principles.

Jon Blair (29:32)

Well, that's part of the reason why my faith and my entrepreneurial journey are so tightly woven because in God's providence, he was blessing my entrepreneurial growth at the same time that he, that's the same time I met Jesus and he was working on me spiritually and so when I'm

Matthew Kyser (29:58)

Yeah.

Jon Blair (29:59)

when I'm like so deep in both of those things conceptually and couldn't help but see the parallels were just everywhere, right? And also I'll be honest with you too, not every successful business person or entrepreneur is Christian, but the more that I study successful entrepreneurs, because that's something that I'm just, is a passion of mine, is to study the stories and the writings of successful entrepreneurs, I find more that are faithful

Matthew Kyser (30:07)

Yeah.

Yeah.

Jon Blair (30:28)

that are men of faith than are not oftentimes. I don't think, again, I'm not preaching prosperity gospel that you have to, you believe in the Bible and so you're just gonna be blessed. It's not that at all. I'm just saying that these are God-ordained principles. This is the design that God designed us with. And when you align yourself with them, you...

Matthew Kyser (30:48)

Yeah.

Yeah.

Jon Blair (30:56)

make progress and you feel fulfilled, you feel at peace, you feel healthy, you feel energized, you feel joyful. And so I wanna ask you if this is intriguing to someone listening, your frameworks for holystic health, but it seems overwhelming to like really dive into this, what in your opinion,

Matthew Kyser (30:58)

Yeah.

Yeah. Yep.

Jon Blair (31:23)

What's the simplest single thing someone can do to like at least get started on this journey of trying to become more holistically healthy?

Matthew Kyser (31:31)

Yeah,

that's a great question. for one, I've got a survey where you can evaluate your holystic health in 10 areas of your life in 10 minutes or less. And so that would be a good place to start. The second thing I'd say is, know me, Jon I mean, I'm a pretty simple person. I'm a...

Yeah, so I got these 10 areas and I have a one sheet, one pager, right? Kind of like the traction was a vision, vision on one side and traction on the other. I've got a one page document that's got the four core on the front, which is spirit, soul, mind, body, leading yourself. And then the other three are on the back. And I have that similar kiss format in boxes. And once a quarter, I take about an hour and I just sit down and I assess how am I doing in each of these areas. And I write one thing in each box.

Jon Blair (31:57)

Yep.

Matthew Kyser (32:21)

and I fold it up, I tuck it in the back of my Bible, and I reference it on an ongoing basis. And so I'd be happy to send that out to whomever, but that's what I do. I'm a pretty simple person, and I just put one thing in each box. So I'm just thinking about one thing that I can do in each of those areas, and I follow that same parallel.

paradigm, revelation, what is God saying to me in this area, right? And so on. So yeah, simple stuff. Yep.

Jon Blair (32:50)

love it.

I love it. In kind of closing here, of all the things we discussed today, what is kind of the simplest one thing that you want the listeners to take away from these principles that we've talked about here today?

Matthew Kyser (33:13)

Yeah, I think I would just encourage everyone that holystic health is a holy endeavor. And so when I spell it, I spelled H-O-L-Y-S-T-I-C. It's holystic health. Yeah, I was like, well, it's a holy endeavor. This is the way that God designed us to live. And so I think the one simple takeaway is if you live this way and it feels good, right? If you live this way and you feel like,

Jon Blair (33:24)

Why did I not get that the first time I saw that?

Matthew Kyser (33:43)

this is really a good way to live, that's because that's the way God designed you to live. And so I'd say holystic health is a holy endeavor. God wants us to live this way, God designed us to live this way, and that's why it works, right? Wisdom works, and I think biblical wisdom works the best, and that's what this is.

Jon Blair (34:04)

just love this man. Well, man, Matt, this is a great conversation. I feel like this is full circle for me to have you come on the show and chat through this stuff. like, look, what I wanna leave everyone with is like, look, it doesn't matter where you are personally at in your faith journey today. It doesn't. You can still use this stuff and see the benefit. And my challenge would be like, just try it. Like if you are feeling burned out,

Matthew Kyser (34:14)

then

Jon Blair (34:32)

tired and out of control or like, hey, I seem to be successful in some areas of the business, or of my life mostly being in business, but I can just feel that I'm lacking purpose or meaning or impact or traction in other areas of life. man, it's worth giving something a shot. And one thing I really appreciate for what Matt has done is he's put together a very simple framework that you can use and give something a shot, give something like it a shot.

and ⁓ give it a chance and just see what it does for you. Matt, if people are interested in finding more information about Restore, where can they go to find it?

Matthew Kyser (35:13)

Yeah, so our website is restorrenewal.com. There's no E on the end of restore. I also thought that would kind of be a catchy marketing thing. But so RESTOR restorrenewal.com or honestly.

My name's, think, right here on the screen, matthewkyser@me.com I'm a little old fashioned, so if you just want to drop me an email, I would love to send you whatever I can. I could send along my Holystic Health Workbook that has all of this and more, a link to the test, QR code, all that sort of thing. But that's where you'd find it.

Jon Blair (35:51)

I got, so you just reminded me, I had my loan officer who is the guy who finances most of my personal real estate investing deals on the show. His episode hasn't aired yet, but when I asked where everyone could find him, he just straight gave his phone number out, his cell phone number, and I was like, he's, yeah, and he was like, it was like, he's like, call me, I dare you, give me a call and I will help you finance your next real estate deal. It was great. But yeah, man.

Matthew Kyser (36:07)

Yeah, it's fine with me.

I like it.

If someone wants to call me 949-290-7407. And if I don't like you, I'll just block you.

Jon Blair (36:24)

There we go.

Yeah, exactly. I love it. I love it, man. Well, Matt, thank you for coming on. This has been a great conversation. I really think that it'll be fruitful for our audience. And before we close, I just want to remind everyone, if you liked today's episode, please hit the subscribe button wherever you're listening and leave us a review. It helps us reach more people like you, which is really important to us. Also, if you want more tips on scaling a profitable DTC brand,

Matthew Kyser (36:30)

Yeah.

Jon Blair (36:53)

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. Thanks for joining, Matt.

Matthew Kyser (37:07)

Thanks, Jon.

BONUS EPISODE: Ecom Scaling Show: Merchandising Your Ad Account For DTC Brands (Ep. 4)

Episode Summary

Welcome to the Ecom Scaling Show, brought to you by Free To Grow CFO and Aplo Group! Join hosts Jon Blair (Founder, Free to Grow CFO) and Dylan Byers (Co-founder, Aplo Group) as we dive into the crucial—yet often missing—link between marketing and finance in DTC e-commerce.

In this episode of the Ecom Scaling Show, Jon and Dylan delve into the intricacies of merchandising in e-commerce, focusing on how it connects to cash flow planning. They discuss the importance of understanding product pricing, placement, and the overall strategy behind advertising. The conversation highlights common scenarios brands face regarding merchandising strategies, the impact of discounting on consumer perception, and the financial implications of these strategies. The hosts also explore the significance of repeat purchase velocity and the role of debt financing in managing inventory effectively, emphasizing the need for a balanced approach to cash flow and contribution margin.

Key Takeaways

• Discount strategies should be carefully considered to avoid confusing consumers.

• Selling at a loss can sometimes improve cash flow by reducing overstock.

• Effective merchandising requires a balance between marketing and financial strategies.

Episode Links

Free To Grow CFO: https://freetogrowcfo.com/

Aplo Group: https://www.aplogroup.com/

Jon Blair on Linkedin:   / jonathon-albert-blair  

Dylan Byers on Linkedin:   / dylan-byers-046010149  

Transcript

~~~

00:00 Understanding Merchandising in E-commerce

04:48 Common Scenarios for Merchandising Strategies

07:59 Discount Strategies and Consumer Perception

11:31 Effective Promotion Techniques

17:15 Financial Implications of Merchandising Strategies

21:39 Balancing Profit and Cash Flow

29:02 The Role of Debt Financing in Inventory Management

38:37 Price Testing as a Merchandising Tool

Why Your Ads May Not Be as Profitable As You Think

Episode Summary

In this episode of the Free to Grow CFO podcast, Jon Blair and Karl O'Brien discuss the common misconceptions surrounding the profitability of advertising in e-commerce. They explore the importance of understanding unit economics, the distinction between new and returning customer profitability, and the critical role of customer lifetime value (LTV). The conversation highlights the traps brands often fall into when assessing profitability and offers strategies for brands that may not have meaningful LTV. Ultimately, the episode emphasizes the need for a profit-focused mindset in scaling e-commerce businesses.

Key Takeaways

• Many brands misjudge the profitability of their ads.

• Brands should aim for first order profitability based on their business model.

• Small operational changes can lead to significant profit improvements.

• Attribution models can distract from core unit economics.

Episode Links

Jon Blair - https://www.linkedin.com/in/jonathon-albert-blair/

Karl O’Brien - https://www.linkedin.com/in/karlobrien/

Free to Grow CFO - https://www.freetogrowcfo.com/

StoreHero - https://storehero.ai/

Meet Karl O’Brien

Karl is the co-founder of StoreHero, a real time profit reporting tool for e-commerce. With an interest in business from an early age, Karl founded a digital marketing agency based in Dublin, and over 10 years worked with hundreds of business from local stores to fortune 500 companies on utilising digital tools to generate business results. During that time, he saw how data tracking, privacy changes and a lack of visibility on profit has made it really difficult for e-commerce businesses to grow profitably , and from there the idea for StoreHero was born. Karl has appeared on a number of e-commerce & business podcasts and has spoken on e-commerce and digital marketing for organisations and universities alike.

Transcript

~~~

00:00 Introduction

03:03 Understanding Store Hero and Its Mission

05:52 Common Traps in Assessing Profitability

08:51 Analyzing Unit Economics for Growth

11:51 New vs Returning Customer Profitability

15:11 The Importance of Customer Lifetime Value

17:50 Should Brands Be First Order Profitable?

20:57 Strategies for Brands Without Meaningful LTV

23:55 The Role of Returning Customer Rate

26:46 Final Thoughts on E-commerce Profitability

Jon Blair (00:01)

Think your ads are profitable? Well guess what? They actually might not be. And today you're gonna find out why. 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 here with my buddy Karl O'Brien, co-founder of StoreHero. Karl, what's happening man?

Karl (00:31)

Jon thanks for having me, great to chat as always.

Jon Blair (00:34)

Are you calling me from Dublin? Are you in Dublin right now?

Karl (00:36)

Dublin based, yeah we're actually fortunate enough to have some nice weather which anyone who's been to Dublin or heard of Dublin knows that that doesn't happen too often so everyone's a bit happier today.

Jon Blair (00:46)

I need

I was out there what, a year ago in January, which, not the greatest weather but still a lot of fun but I wanna come back out, I wanna- Yeah, yeah, exactly.

Karl (00:50)

Mmm bit chilly. think the expectation yeah the expectation is low so anything other

than like freezing is everyone's happy. ⁓

Jon Blair (01:00)

I love it, I love it man. Well, I'm stoked to chat today. As I mentioned in the intro, we're gonna chat through why your brand's ads may not be as profitable as you think. We're gonna break down some myths around some common mistakes and misconceptions that we see brands make in the way that they measure and assess profitability of advertising, and we're gonna get into the metrics that actually matter so that everyone listening, will be positioned to make much better, more strategic scaling decisions that actually drive profit. So before we get into the nuts and bolts of this, Karl, can you give us a quick background on yourself and StoreHero

Karl (01:38)

Sure, so my background is on the digital marketing agency side. I ran a digital agency based here in Dublin for about eight years. And I suppose in that time saw the ups and downs of COVID and saw how ultimately while e-commerce, it's never been easier to start. It's also never been more difficult to grow a business profitably online as well. I saw that in interacting with clients in the agency and saw how data tracking, privacy changes just made that conversation a more difficult.

My co-founder Thomas has also had a family business in this space for about 20 years, one of Ireland's first e-commerce stores. In his time working at Shopify, he also saw that other dynamic and other side of the coin. So between us, ultimately we saw a need to help businesses really unify the marketing and finance conversations happening on different sets of metrics at different times within the business. I think what can often happen is revenue is used as the daily indicator of success in an e-commerce business but ultimately we're held to account by that profitability metric or P &L at the end of the month. Those are very disjointed. Our marketing team often doesn't have that maybe financial literacy that we might like but equally our financial team doesn't understand the levers of marketing in a lot of cases either impression of Meta is one consolidated invoice they see at the end of the month and that ultimately doesn't tell the full picture. So really in essence that's what we've tried to solve with StoreHero. So StoreHero is a unified profit platform for e-commerce brands and agencies. So what we'll do is we'll unify all your sales data, your marketing data, but unlike other tools also your costs, full cost of goods and a lot of detail as well as your fixed costs as well.

We'll give you a consolidated view of that performance and also actually help you forecast and track and see those metrics on a day-by-day basis versus your goals where you're on track and off track, all with the goal of growing with profit in mind.

Jon Blair (03:47)

I love it, man. Yeah, so I've been fortunate enough to get to know Karl and his co-founder Thomas quite well over the last couple years, as I mentioned earlier, I've traveled to Ireland to meet with them and what they're doing with StoreHero is really, really cool because it gives full transparency, I'll call it top line to bottom line, and on how your marketing efforts, particularly your advertising efforts, are driving or not driving profitability. And so I've actually started kind of this new I've started this list of like, I always say phrases that I'm trying to use more and more and more to get simple ideas that are important out of the marketplace. And one that I came up with recently that I think speaks to what you're saying is growth marketing is not a revenue growth game. It's a margin dollars growth game. That's a game changer to change that mindset. You as a growth marketer or an ad buyer, your job is not to grow revenue.

Your job is to grow margin dollars. And between top line revenue and contribution margin dollars are a number of line items, right? There's the discounts and returns, there is landed product costs, there's credit card and merchant fees, and there's shipping and fulfillment costs. All of those need to be factored into. Are we growing, all those are needed to answer, are my advertising efforts growing margin dollars, because that's your real job, right? And so like, that's the basis of today's conversation. Let's switch our mindset from growth marketing is about revenue growth, to growth marketing is about margin dollar growth. So my first question to you, Karl, is like, with all the brands that you guys are talking to, and you're helping, you're at the forefront of trying to change the perspective of what growth marketing is and what the outcome should be, what do you see as the top, maybe one to three most common traps?

Karl (05:35)

Sure.

Jon Blair (05:42)

that brands fall into that cause them to improperly assess margin dollar and ultimately profitability growth.

Karl (05:52)

Sure, a couple of things come to mind. So first of all, one of those kind of common sayings we have on our side is that e-commerce is ultimately an industry that has attracted people from every walk of life. Most e-commerce business owners haven't started as accountants and built a financial model and built a business off of that. But the challenge and the harsh reality is that at the end of the day, it all comes back to a P &L that we're held accountable to.

You know from a you know, know, that's what's the you know the ultimate representation of our business at the end of the day and how we create value for ourselves our stakeholders, whatever the case may be I think e-commerce is ultimately a finance game masquerading as a marketing game and so often we can see situations where e-commerce store owners are trying to grow themselves out of per unit economics. So that's probably the first piece. I think ultimately

Jon Blair (06:41)

Totally.

Karl (06:52)

Meta has made it so easy for us to adjust that ad spend budget and see that ROAS go up and down and the perception that it's a lever in front of us that we can control. But what that often does is it means that if we have a hammer everything looks like a nail. Everyone of I think has been in a position over the last couple of years because there was an opportunity to double down on spend we didn't know exactly how much incremental profit we were making but our cash balance in our bank account gave us the impression that at least it was positive and because that's no longer the case that disconnect between marketing and ultimately or sorry maybe revenue and profit and marketing and finance has never been bigger.

Jon Blair (07:30)

Mm.

Karl (07:42)

I think another piece that we would see that has caused a big trap over the last couple of years is attribution as a whole. Ultimately, attribution definitely has a place and the concept of wanting to know exactly what each channel contributes to our overall marketing is a great concept that everyone, of course, would want to get around. But I think what we've seen over the last couple of years is a fixation on trying to find a perfect

Jon Blair (07:53)

Yeah.

Karl (08:12)

attribution model and flow and in turn it's meant we've lost focus on those core unit economics of our business.

Everyone is looking at different attribution windows to suit their own narrative and we're missing the critical piece in the middle around are we actually profitable on first order? What's our gross profit we're generating on a new customer order? How much is it costing us to acquire a customer and what is a customer worth over time? And the way I tend to think about this or the phrase says it's like rearranging deck chairs in the Titanic. It's, you know, oftentimes unless, you know, there's more often than not, it's not the priority focus, it's not serving your business. I'm sure everyone has had a position where they've seen maybe additional sales attributed to different marketing channels using attribution tools, they have a place, but again, as a core focus and as a philosophy, we feel a more profit first, profit focus mindset is ultimately a much clearer view of your business that allows you to make more decisions.

Jon Blair (09:22)

Okay, so there's a couple things that you mentioned that I think are really key, right? The first one is analyze your unit economics, right? In the way we do it at Free to Grow and I think similar to the way StoreHero does it, the order level, right? Are you generating the needed outcome at the order level? Because if you think about scaling, scaling is just the average order outcome times the number of orders. And so if the average order, if the average order outcome is not what you want it to be and you just multiply it by a volume of orders, you're just multiplying an outcome that you don't want again and again and again and again. But then there's a second piece you brought up, which is what I want to dive into further. You brought up new customer. It's about saying the new customer order outcome at the order level is this. And the returning customer order level outcome is this.

Do I want to scale each one of these and is the way that they are connected producing the right blended outcome? And so like the trap I see people fall into, it's actually I think one in the same is what you're saying. I'm just explaining it maybe in slightly different words is the trap I see people fall into is using blended marketing efficiency ratios or blended just marketing KPIs. Blended meaning for the entire business or for an entire sales channel.

Right? And saying that, that, which is an average, it's a blended average of many different order outcomes, that appears to be profitable. But when you peel away the layers of the onion, you may find that returning customer outcomes at the order level are what you want, but your new customer outcomes are not what you want or vice versa, or even worse, they're both not what you want. Right? And so we have begun to say we really need to break out new customer

Karl (10:51)

Sure.

Jon Blair (11:20)

profit, specifically new customer contribution margin dollar at the order level and returning customer contribution margin at the order level and measure how they're changing over time. Do you agree and do have anything to add to that?

Karl (11:35)

It's exactly the model we use on the StoreHero dashboard. again, as an alternative to again, trying to kind of mess around with finding this magical attribution window, have a, what otherwise might be considered a relatively simplistic approach, but we've seen time and time again the value of the clarity that it brings. So ultimately, exactly as you've said there, we would look at new and returning customers as two separate buckets. Ultimately, we're looking at channel level reporting to help give us signals as to what channels are contributing to those sales, but working on the basis that we can't build a plan relying on any single one alone.

So let's just take new customers for a second. So ultimately what we want to try to understand here is on each new customer order, again, looking at that order level, what's the actual gross profit we generate on that new customer order? And to pause on that for a second, that's with fully loaded cost of goods taken into account.

It's so often we see kind of there's a number of percentage margin of floating around internally as part of the narrative that may actually represent your product margin. But ultimately that will often erode over time between your welcome 10 discount, your free shipping threshold, adjusted for refunds. You have your fulfillment costs in there, transaction fees, taxes, discounting, whatever the other discounting, whatever that is. There's a, you know, a calculatable gross profit on that first customer order. Now ultimately the way we look at that is to say, okay, depending on our business model, we need to understand what a customer is worth to us. If we're a furniture business and we're not going to see that customer again, we need to make sure that our new customer acquisition cost comes under that amount. So the second number I would say is that new customer acquisition cost.

What we're doing in that case, we're taking our marketing spend and we're dividing it by the actual number of new customers on our store, not using Meta or Google, their own determination as to what those numbers are. Again, we might also want to factor in other related marketing costs, agency fees, or could just be purely on an ad spend basis. So again, broader business level, but very reliable. Let's say for example, we generate $50 of gross profit on our first order and we generate, it cost us $40 of a new customer acquisition cost. The third piece we would look at then is our lifetime value.

And ultimately that lifetime value is going to be on a gross profit basis rather than revenue. That's the trend between all of these three numbers. So ultimately what we're doing in this scenario is we have a lot of clarity. We're putting the burden of our advertising and marketing spend on those new customers. But ultimately the way we think about this is you're always going to have repeat customers fall into the net. But principally we want to make sure that our marketing spend stands on its own two feet in relation to those new customers.

And therefore, if you can be clear that, okay, I generate that gross profit on first and that first time customer order based on my business model, I'll understand what should I spend all of that to acquire the customer? Should I spend half? Should I spend more? And then from there, thirdly, see what that longer term path to profitability looks like based on the lifetime value on a profit basis.

Jon Blair (14:46)

Totally.

Yeah, I love it. Okay, so we do the same things at Free to Grow CFO to summarize new customer. You wanna reorient, right? You wanna break down the contribution margin dollars generated by new customers at both a customer order level and an aggregate for a month.

You wanna do that for new customers and you do it separately for returning customers. What's the difference in the calculation, right? Like Karl said, you take new customer gross profit, which is inclusive of all variable costs except for ad spend, right? Subtract your ad spend per new customer order or per new customer, depending on whether you're doing it at the customer order level. But the bottom line is we're burdening new customer revenue and new customer margin dollars with 100 % of the ad spend.

Because in principle, like, Karl mentioned, we view ad spend as primarily a new customer acquisition activity, even if there is some spillover to returning customers, right? And now to answer the question, and this is where we're gonna take the discussion next, we wanna use these aligned with LTV, which LTV in simple terms, and actually let me point out a caveat that Karl mentioned, which I talk about a lot on this show, and that we make sure our clients understand it Free to Grow.

When you pull up in the cohort model in Triple Whale or Shopify, it's not lifetime value, it's lifetime revenue. We call that LTR instead of LTV, just to remove any confusion. Because that's average dollar spent. That's a revenue number. To convert it to LTV, because what is LTV? It's the lifetime value to your business. And guess what? The value to your business is not the revenue, because you don't keep it all. You gotta subtract all those variable costs.

So that's why we express and StoreHero expresses LTV in margin dollar terms, excluding ad spend. And you'll see in a second why we exclude ad spend, right? So you restate the cohort model and whatever tool you use, you restate it from revenue terms to lifetime value terms, which is in margin dollars, excluding ad spend. And you can use that alongside your new customer profitability economics to decide this next question, the answer to this next question that we're gonna discuss, should a brand be first order profitable or not? So if a brand asks you that, Karl, well first off, actually before we answer that, how often do you see brands even actually asking themselves that question at all, let alone if they do answering it correctly? Because I don't see as many as I would like.

Karl (17:50)

I completely agree. I think ultimately the concept was over the last couple of years that our new customer acquisition would kind of...

We would be in a position where requiring new customers, they're paying for themselves relatively quickly and our repeat customer revenue after accounting for all of our variable costs, that repeat customer gross profit is ultimately what we have left over for net profit for our fixed costs. But ultimately we could easily kind of separate those buckets. The challenge has been that ultimately one is kind of seeping over to the other.

we're often loss making on those new customers and our repeat customer revenue isn't the profit we want to keep ourselves, it's financing that unprofitable new customer acquisition.

So ultimately, the question around, should I be first order profitable, really depends on what is a customer worth to you over time? What's the value you return from that customer? And again, value in the context of profit. So just to take an example, there's three kind of paths to profitability we often talk about. So one is, I suppose the first situation there would be situations in which you should be first order profitable.

Those are the situations in which you earn more profit on the first order than you expect to earn over the next 12 months in subsequent orders. So as a same example, furniture business, unless you're the best marketer in the world, you're not going to sell somebody a second sofa next month. You need to account for that profit today. And ultimately that makes sense. It's kind of, I think in those kinds of businesses actually, it enforces a level of discipline.

Jon Blair (19:38)

Yeah.

Karl (19:38)

that

just, you know, just figures, you know, we figure out a way for it to work. I think there's a messy middle there where ultimately there's a product or a business where most people would fall in this category where there's repeat purchase potential, but it's not necessarily locked in subscribers. And ultimately we're operating in industries in which they're quite competitive. They might have good margins, but we have to, you know, really have to fork up in order to cover the cost of new customers acquisition. So for example, whether it's fashion, beauty, skincare, anything like that, we would see often businesses operate in the middle. And in those situations, they're often, maybe they don't have to be first order profitable, but they should work on the basis that they should be first order break even.

On that basis, they have an opportunity to drive more profit later, but ultimately they're not waiting and relying on that to happen because they're not guaranteed to happen very quickly. And you're at risk of a cash drain on the business. And then thirdly is a situation where somebody could justifiably not be first order profitable. So the reverse number one, where we said on the furniture business, we generate more profit now than we will later. It's the opposite.

in the third situation, we're gonna generate more profit later than we do now. So subscription, supplements, business, for example. I'm willing to forgo that margin, not because I'm selfless, because I know that if I actually put the investment in to acquire that customer, I'm going to see more profit over time. Ultimately, we would look, let's say for argument's sake, you generate $50 of profit on first order and maybe $80 of profit later on.

It doesn't make sense to give up, you know, or maybe even a different, a slightly different example. Let's say you have $50 of profit on first order and maybe you have additional $10 of profit you generate within the next 90 days. It doesn't make sense to give up $50 now in most cases to generate $10 later. We would try to look at that, look at that LTV and just on a percentage basis, are you giving up too much of that slice, too big a slice?

Jon Blair (21:47)

Totally.

Karl (21:55)

of that pie to acquire the customer and you're leaving any return for yourself.

Jon Blair (22:00)

That's a great way of putting it. I wanna add to that and look at the same concept through a slightly different lens, is that what we're saying here is how much, it actually really depends on how fast the streams of LTV or returning customer margin dollars, how fast is it coming back versus how fast are we losing money in aggregate on new customers? Because if you,

You know, we're talking to, think, I'd imagine us and you are talking to a lot of brands that are actively trying to scale. So what does actively trying to scale mean? Actively trying to scale means they're actively trying to increase ad spend. So let's go back to the situation where there's a loss at the new customer order level. That's our unit economics is we're losing money on new customers. The faster we accelerate ad spend, right? The more orders we're multiplying that loss by.

And furthermore, there's another variable, your CAC's probably going up because you're scaling ad spend. So the order level loss is getting bigger multiplied by a higher volume, meaning the aggregate loss on new customers in any given month is growing in the negative direction. You have to make sure LTV is coming back from previous months, right? In the same month that you're accelerating the new customer loss, it's got to be coming back faster, right? And so one thing we've done recently, is graph this out for clients on a 12 month time series and say, the negative bars growing faster or slower than the positive bars? The negative bars are the new customer loss at the monthly aggregate level, total dollars lost. And you can see really quickly, I've run this on several brands and I've seen brands where the new customer loss is going as fast as the returning customer profit.

And so all they do is keep making zero every month, right? Even though they have strong LTV, they need to slow down the new customer loss and let that returning customer LTV accumulation catch up. So there's actually another component which you touched on Karl, which is like, there's first the decision, can we be unprofitable on new orders, right? Or new customers. The second decision is how fast can we acquire unprofitable

Karl (23:55)

if they're lucky.

Jon Blair (24:21)

new customers? And that is governed by how fast people repeat purchase and accumulate more LTV or more margin dollars over time. So if you have someone who doubles their margin dollars in 90 days, they can lose money faster on more and more new customers than someone who doubles margin dollars in 180 days because it takes twice as long, right? So that's another thing that's really important. It sounds like, it looks like you might have some thoughts on this.

Karl (24:50)

A lot of thoughts. So in that particular case, I completely agree. Our repeat customers are financing that unprofitable new customer acquisition. And it's often the analogy I use where, let's say, for example, you've acquired a thousand new customers, whether it's in the last week, month, day, whatever the case may be and we're losing maybe $30 on each of those new customers. I often think about this, that's like you've loaned $30 to a thousand people. It's nearly like you're operating as a bank. Now, ultimately, if you were a bank, well, what would you do? You wouldn't loan somebody $30 if you didn't think they were going to pay you back and pay you back in a reasonable period of time that allowed you to stay liquid. Now, liquid as a bank, liquid as a business, whatever the

Jon Blair (25:23)

Yeah.

Karl (25:41)

case would be that you could ultimately pay your bills as they fall due. So you need to kind of assess that risk maybe like a banquet as well. You know am I willing to forgo that profit now and not only forgo profit but actually eat up cash because if my repeat customers aren't going to pay that bill I need another source of financing to help kind of bridge that gap and here's where you can where I think the discipline of you know using

Jon Blair (25:49)

Totally.

Karl (26:11)

these simple, clear profit-focused calculations can be so important.

Jon Blair (26:17)

I wanna talk about returning customer rate. This has actually been getting on my nerves recently and I've been talking about this a lot in my content because I do all our sales at Free to Grow, so I do all of our CFO audits. I'm analyzing several cohort models a week and financials and doing the calculations that you're talking about for multiple brands. And I'll have a brand that I meet on a discovery call and they say, we have really strong LTV. And I go, look, and they have zero LTV.

Karl (26:20)

Yep.

Jon Blair (26:46)

But they're like, but what are you talking about? My returning customer rate is 45%, right? I wanna get your take on why returning customer rate in Shopify, which people just love to quote that term. We have a 45 % repeat purchase rate. Why is that not equal to LTV?

Karl (26:49)

Yep.

Sure, it's a really important one and something we see consistently as well. So oftentimes people are looking at their sales in any given period of time, let's say in the last month. They're looking at the pie chart of sales. That's nice on the Shopify dashboard, nice pie chart and will show, okay, here's the level of sales from new customers and here's the level of sales from repeat customers. The challenge with that is let's say it's 45 % in that scenario. Sometimes those are repeat customers from last month.

Maybe some of those are repeat customers that you haven't seen, you know, you haven't heard from in five years. So ultimately, it's not necessarily a representative view. It's certainly credit to you for building a product and an offering that's actually getting those customers back, but it's not necessarily the same as the profit you can expect from a given customer in a reasonable period of time. So one thing we have on our store here, a cohorts view, is we'll ultimately group your

Jon Blair (28:01)

Totally.

Karl (28:06)

cohorts or groups of customers by month and kind of lay out a timeline on the profit you accumulate from those customers over the course of three, six, nine, 12 months. What we'll also show is the repeat rate. So with that in mind, let's say we want to look, we're recording this in June, 2025. Let's say we want to look at the cohort of customers we've acquired in June, 2024.

By looking at that group of customers, we wanna see how many of those, if 12 months is the lifetime that we consider when we talk about lifetime value, we wanna know, okay, out of those 500 customers who made a purchase in June, 2024, how many of those are coming back? Because ultimately that's what we can use as a reference point in order to plan what the return we can expect the value in a reasonable period of time.

Jon Blair (28:49)

Totally.

Well yeah, I think the point you're making is if you have low 12 month LTV, when I say like, hey, your brand has almost no 12 month LTV, I'm not saying no one ever comes back and repeat purchases, but what I'm saying is, is it reasonable, like using your example, is it reasonable to use this really hard to forecast group of people who purchased originally five years ago and four years ago and three years ago and two years ago, is it reasonable to use that to determine how profitable someone I acquire today should be. That's not, in my opinion, it's too disconnected, right? And the whole point of a cohort is to say, is the person, really it's just, the person I'm acquiring today profitable? It's a framework, right? And it's not, to be clear, just like every other framework, there's no KPI framework that's bulletproof. But this one is, it's about picking one that's reliable enough that it's not gonna put you in a hole.

And in my opinion, if you consider the LTV over a, I call plus or minus six months, Like some brands need it in three, some need it in six. Yeah, there are some who can get it over 12, but I would say that takes too long to scale fast on losing customers. You have to go slower. So if you wanna scale at a decent clip, six month plus or minus LTV, and then also probably look at your three month plus or minus LTV.

Karl (30:10)

Sure.

Sure.

Jon Blair (30:26)

That's what is reliable enough to decide, going back to your example of the bank, like, can I lose money on this person today? Because a bank also, right, when they give you a loan, they want to get paid back in a certain amount of time. And if you're late, you default, right? And they have recourse against you. And so this is about it being within a predictable amount of time that allows us to feel confident in taking a risk.

Karl (30:41)

Sure.

Jon Blair (30:55)

which is losing money on a new customer, right? I wanna ask you something else that we've been dancing around, because this is something I've been dealing with a lot in doing CFO audits for our prospects, and I'm starting to form this rough roadmap or playbook of what a brand should do if they don't have meaningful LTV over a six plus or minus month period, because what I don't wanna do is I don't want people to hear this and say,

I don't have that and so my brand will never make it because I can tell you right now, I have helped scale brands to nine figures that have no LTV. It's a different playbook, right? And so do you have any thoughts or opinions on just very high level strategies that first order dominant brands that have no LTV need to consider as they scale to keep scaling profitably?

Karl (31:48)

Definitely. ultimately, way I would look at that in that scenario, when you don't see incremental sales, ultimately sometimes, you know, the more durable your product is, the less people are coming back quickly because it's a, you know, the nature of the product, it's not a consumable and you're nearly causing your own problem in this case. But the way I look at that is, okay, whatever profit you're generating on the first order, that is your lifetime value. And again, this is about a trade-off.

Ultimately, let's say you're generating $30 of profit after all those various cost of goods are taken into account. Ultimately, of course, you're going to need to be first order profitable in this case because you can't expect and wait for somebody to come back. But equally, you need to look at that amount and say, okay, you know, what's the, what are the different pathways for me to scale? And when do I hit a point of diminishing marginal returns? So sticking with this analogy, let's say again, I've got $30 of profit on first order. I could have a customer acquisition cost of $10.

Jon Blair (32:45)

Yep

Karl (32:56)

and capture kind of $20 left over after marketing on a certain volume of orders. I could be willing to spend 15 and you know, again, I have 15 left over in that scenario. And ultimately, this is where really contribution margin overall can be a much better indicator than just looking at return on ad spend.

because ultimately what we're trying to do here is we're not necessarily trying to look for the most efficient orders. And what I mean by that is you don't necessarily want your ROAS to be as high as possible what you want to do is find what's the optimum ROAS that allows me to generate the most profit overall and what that could mean there is you could do a higher volume of orders with more profit left over per order or sorry a higher volume of orders with less profit left over or a smaller volume but more it's it's whatever you know there's a simple formula there and if you're looking at contribution margin which is why we have it literally as a north star on the StoreHero dashboard you can continue to spend as long as you know the sum of its parts the the cumulative or the profit each order contributes to your overall profit pile is still growing.

As long as that's the case, then again, that's going to give you a lot of clarity to figure out if you're in an optimum position. And the other piece I would mention there as well, having clarity on what that gross profit is on each first time customer order. Also to go back to like that previous analogy where if you can, you know, it's easy to adjust your meta budget and based on your CPA, but you could say, okay, well, I need to get my CPA down. It's increasingly tough to

Jon Blair (34:28)

Totally.

Karl (34:43)

especially if you're trying to scale. What the other side of that coin is is okay well how do I make that CPA work for me and be profitable?

Jon Blair (34:44)

Yeah.

Karl (34:52)

Okay, well, it just depends on what I'm getting. You're making an investment. What are you getting in return? So there's so many times we've seen this scenario where if we can construct an offer that allows us to drive a higher gross profit on that first order, we may not see our customer acquisition costs fall necessarily, but we make it work for us because we're spending $15 to acquire a customer, but they're actually generating 20, 25, 30, $35 in return.

Jon Blair (35:21)

like it, I like it, that is a great angle. And another thing that I always tell brands is like, you might need to think about when is it time to add on another sales channel, right? Like, and you don't wanna do it too quick, but a lot of brands that are first order dominant, no meaningful LTV over a six month period, they need to get onto Amazon sooner, and then potentially physical retail. But again, what you're talking about is laser focus on that CAC, because even moving to Amazon and physical retail, it's actually, they're doing the same thing you're talking about. They're managing their

Karl (35:28)

Yep.

Jon Blair (35:49)

their blended CAC, they're looking for new TAM, new addressable market, where they haven't reached the law of diminishing returns yet, where they can return back to that $15 or less CAC, right, so that they can keep turning a profit. So I have one final question for you, and then we're gonna have to land the plane here. What's most important to you personally, about the mission and purpose of the work that you're doing at StoreHero and what it ultimately achieves at the end of the day?

Karl (35:56)

Exactly.

I think a big part of it actually comes back to my own ⁓ running a digital marketing agency, running a bootstrapped business, albeit service business. I kind of empathize with any business owner in e-commerce.

I know what it's like to be trying to scramble to pay salaries on Christmas Eve. The dynamics of e-commerce are tough. There's so many variables to think about, variable costs being some of those variables. And ultimately,

time and time again we've seen the clarity that not necessarily only StoreHero is given but a clear view or a methodology to think about their business and again it's not flashy it's not going to make your ads look better than maybe the Meta dashboard will but it gives you the clarity to scale and every e-commerce business puts in so much work

Small changes, but fundamental changes can have a dramatically different outcome for you as a business in order to return value and actually see a proper return for the work you're putting in.

Jon Blair (37:30)

I love that man, we have the same heart at Free to Grow. When I started this business, I was like, man, who is a group of people that I can serve, right, and make their life better? And I was like, man, e-comm brand founders, they're doing one the hardest things that they could possibly ever choose to do by trying to scale an e-comm brand. It's super stressful, and if our fractional CFOs and our accountants can help them make better decisions, with more confidence and help them sleep easier at night,

any incremental founder we can do that with is making the world a better place in my opinion. And so I love what you guys are doing, man. I really appreciate you coming on. Look, this is a conversation chocked full of real practical advice on how to make better decisions that actually drive profitability in your advertising. And so this is a master class in the right way to do things amidst an ecosystem in which so many brands are not doing these things.

Karl (38:03)

100%.

Jon Blair (38:27)

they're measuring ad spend profitability in the wrong way. So I appreciate what you guys are doing over there, Karl. For anyone who wants to find more information about you and StoreHero where can they find you?

Karl (38:37)

Sure, so thanks again for having me on Jon. I think best place to find more about us is storehero.ai. Ultimately, one thing I'd always recommend is to sign up to our free trial.

That free trial will give you visibility on these metrics nearly automatically with a couple of additional costs to add in. But there's very infrequently situations where someone doesn't get some value out of seeing this LTV chart, seeing the profit they're generating on first order, and ultimately what actually return that's driving for the business. So we'd recommend anyone check that out and we'll be more than happy to walk them through it.

Jon Blair (39:15)

Definitely check out the free trial, it's super easy to set up and man, another great episode. Look, in closing everyone, don't forget, if you liked today's episode, please hit the subscribe button wherever you're listening and leave us a review. It helps us reach more people like you. Also, if you want more tips on scaling a profitable DTC brand, 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 flows you scale, check us out at freetogrowcfo.com Thanks for joining, Karl.

Karl (39:45)

Thanks Jon.

Mini Episode: A Million Dollar Secret That Only the DTC Scaling Elite Know About

Episode Summary

In this mini episode of the Free to Grow CFO podcast, Jon Blair discusses the concept of risk-adjusted bets in the context of scaling Direct-to-Consumer (DTC) brands. He emphasizes the importance of having a great CFO who can help businesses make calculated risks that limit downside while maximizing potential upside. The conversation covers how CFOs can assist in sizing bets, structuring capital, and managing risk effectively to ensure sustainable growth.

Key Takeaways:

• Understanding what a risk-adjusted bet is and why it matters for your business.

• How a great CFO can help you size your bets based on risk levels.

• The significance of choosing the right capital structure—debt vs. equity—for your investments.

Episode Links

Jon Blair - https://www.linkedin.com/in/jonathon-albert-blair/

Free to Grow CFO - https://freetogrowcfo.com/

Transcript

00:00 Understanding Risk-Adjusted Bets

01:52 Sizing Your Bets Wisely

04:27 Capital Structure and Risk Management

Jon Blair (00:00)

A great CFO who understands scaling doesn't have all the answers, but what they do have is the ability to help you place risk-adjusted bets. And the ability to place great risk-adjusted bets is what separates the DTC scaling elite from the mediocre. Hey everyone, welcome to another mini episode of the Free to Grow CFO podcast, where I break down one key concept that will help your DTC brand increase profit and cash flow as you scale.

Today, we're talking about risk adjusted bets. Why? Because I believe that scaling is simply a series of risk adjusted bets. So what does this even mean? A risk adjusted bet is a bet with a potential upside, but without unlimited downside. The key here is that your downside is limited. In other words, it's a calculated risk that you take as you're scaling that has a probable upside potential, but with limited downside risk.

A great CFO should help you place bets as you're scaling to achieve your goals as you're growing the business, but not bet the whole farm or your entire business on a binary Binary outcomes yield high risk decisions could effectively kill your business, and that's not what we wanna do. We wanna scale on a sophisticated matter, placing bets that have limited downside. So our main job as CFOs of a scaling DTC brand is to help a brand place these risk adjusted bets. And the main way that we can help is to help the brand think about how to limit the risk of every bet that they place. Think of every bet as an investment. That's really what it is. It's an investment in trying to reach your goals and trying to scale. Think things like scaling ad spend, buying inventory, hiring people and spending on capital expenditures. A good CFO who understands scaling should help you to place those bets in a manner that downside risk is not unlimited, so no single bet can put you out of business. So how does a great CFO who help you limit the risk of the bets that you place? So there's a couple key areas that I wanna focus.

The first one, is a great CFO will help you limit risk by helping you size your bet. So the riskier the bet, which basically means the more uncertain the outcome, a good help advise that you place smaller bets you're talking about a riskier, more uncertain outcome. That helps limit risk. On the flip side, if a bet is assessed as being less risky because the outcome is more certain, then a good CFO will encourage you to place a bigger bet. So, method number one that a CFO can use to help you limit the risk of your bets is help you to size the bet depending on the risk. The second really important way is that a good CFO will help you limit risk with the bets you place by advising on the right capital structure to finance that bet. In simple terms, that means deciding whether to finance the bet with debt, equity, or both.

So the key here is that a good CFO is going to help you graduate from thinking about, will we have enough cashflow to pay back debt. And if so, then just take on debt, graduate from that thinking to instead thinking about how risky is this bet and should we finance it with debt or should we finance it with equity or both? And so a good CFO is going to help you decide how risky your capital structure is and help you structure the way that you capitalize or fund these bets in a way that limits the risk of the investments that you're making. So a good CFO tell you, hey, look, if the bet is higher risk, meaning less certainty, then let's place a smaller bet, like I mentioned earlier, and let's use less debt. If the bet is lower risk, which means more certainty, like I said earlier, we can place a bigger bet and more debt is okay.

Another way that a CFO can help you limit risk with structuring, your capital structure the right way is thinking about the maturity of debt. Longer maturity debt, meaning it's paid back further out in the future, is lower risk, and shorter maturity debt, meaning it's due sooner, is higher risk. So a good CFO is gonna help you choose between longer and shorter maturity debt to limit risk of the bets that you're placing.

And then lastly, as it relates to capital structure, a good CFO will help you assess how risky the interest rate structure is on your debt. Fixed rate debt is less risky than variable rate debt because variable rate debt changes, your interest rate changes over time. So to summarize, a good CFO should be advising you on how to limit risk of the bets you place by helping you size the bet appropriately and think about to structure debt and equity funding of the bet appropriately, all in the name of limiting downside

So look, with an amazing CFO by your side, the game of scaling ends up being just a series of risk adjusted bets. Some of them you win, some of them you lose, but without any single bet being so risky that it ends the company's existence. Wash, rinse, and repeat this process day after day, week after week, month after month, and year after year, and the bets you win will propel you towards prosperity.

Should Your Brand Be Using an ERP?

Episode Summary

In this episode of the Free to Grow CFO podcast, host Jon Blair speaks with Kyle Hency, co-founder and CEO of Good Day, about his journey from finance to building successful consumer brands and software solutions. They discuss the challenges of scaling DTC brands, the importance of product development, and the unique approach Good Day takes in providing ERP solutions tailored for e-commerce businesses. The conversation highlights the significance of understanding customer needs, the pitfalls of inventory management, and the critical connection between operations and finance for sustainable growth.

Key Takeaways

• Brands should build with a margin structure that supports multiple distribution channels from day one.

• Brands often fall into traps of over-optimizing their operations without needing complex systems.

• Product quality is essential for driving marketing and sales success in consumer goods.

Episode Links

Jon Blair - https://www.linkedin.com/in/jonathon-albert-blair/

Kyle Hency- https://www.linkedin.com/in/khency/

Free to Grow CFO - https://www.freetogrowcfo.com/

Good Day Software- https://www.gooddaysoftware.com/

Transcript

~~~

00:00 Introduction

01:07 Kyle Hency's Journey to Good Day

03:52 Similarities Between SaaS and Consumer Goods

06:06 Key Success Drivers in Scaling Apparel Brands

08:41 Navigating Physical Retail for Apparel Brands

10:35 Aha Moments Leading to Good Day's Creation

12:02 The Importance of Inventory Management

14:42 The Role of Former Operators in Business Success

19:03 Why Not NetSuite for E-commerce Brands?

21:54 Common Traps in Inventory Management

27:22 Unique Approaches to ERP at Good Day

29:10 Connecting Operations and Finance for Better Scaling

32:04 Personal Insights and Conclusion

Jon Blair (00:01)

Yo, what up 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 here with my buddy and I'll say fellow Texas Hill Country transplant, Kyle Hency, co-founder and CEO of Good Day. Kyle, what's up, man?

Kyle Hency (00:27)

Hey, not too much. Good to see you, man. How are you?

Jon Blair (00:31)

Good, I I'm sweating my butt off in the Texas Hill Country heat and you're just hanging out in Tahoe so a little bit jealous but that's all good man.

Kyle Hency (00:40)

That's living, that's living.

Jon Blair (00:41)

Well, dude, I'm stoked to chat. Who knows what we're gonna get into because we've got Good Day, your current project, IMS, ERP, Chubby, so many different things we can get into. So before we dive into kind of the meat of the conversation, I'm just curious about your kind of like your elevator pitch, like background, your journey to getting to Good Day. Can you run the audience through that?

Kyle Hency (01:07)

Yeah, yeah, so I guess in my former life, kind of like, I came from a finance background. I got to a place in that career where I was like, you know what, I just don't want to work for the man anymore. Like, I don't say that in any sort of like bad way. Like my former bosses are my best mentors, et cetera. But just wanted to like break out on my own and do my own thing. That journey for me was Chubbies. We started that on the side while we had other jobs.

Jon Blair (01:20)

Ha

Kyle Hency (01:34)

It went so well, me and my like three closest college buddies were all of a sudden in business together, know, full time investing in our careers for over a decade building that brand. And while we were kind of navigating that journey, we built a piece of software called Loop Returns for ourselves at Chubby's, effectively. And there was a whole operational team that went and ran with Loop after we developed it initially.

And I was able to kind of be at the board level for that business for shoot this makes me feel old but now eight years. And the manifestation of Good Day is really applying a lot of what I've learned there but also applying it to the operational challenges we experienced at Chubbies right? Like I was just telling a brand earlier today that I was talking to about Good Day You know, we were marching marching marching got to call it 20 million in scale. We're starting to expand distribution channels and it felt like our whole like operating infrastructure blew up. And it took several years to kind of get systems in place, get processes in place, just get better at everything we were doing. And it's like that experience that we're trying to just make less abrasive for these brands and that's Good Day.

Jon Blair (02:47)

I love it, man. I always forget that you guys were the ones that started Loop Returns. That's, yeah, so I'm interested, I mean, this is not necessarily where I was planning on starting the discussion, but I am curious as you're going through that, what is, you have this background of like starting and scaling a consumer goods brand, right? But you've also started two software companies. Like, what has been like interesting in terms of like,

Kyle Hency (02:55)

Yeah, well.

Mm-hmm. Yeah.

Jon Blair (03:17)

the differences and or carried over similarities of like running SaaS versus running consumer.

Kyle Hency (03:24)

Can I do the opposite? Can I do what's exactly the same? Because I think it's easy to imagine what's different, but it's maybe more compelling to do what's the same, right? It's like, well, there's a problem, right? You need to come up with a real solution to the problem and it needs to matter to somebody, right? And so in the case of both Loop and Good Day, I mean, we spent a decade living these problems. In the case of Loop,

Jon Blair (03:25)

Yeah. Yeah, yeah, let's start there.

for

Kyle Hency (03:52)

My former CFO and COO, who's now my co-founder at Good Day, was sitting over his brother's shoulder watching him do manual returns and exchanges via email. I was just like, this is insane. Are you going to do this all day? And he's like, yeah, this is 80 % of what I do for my job. And it's like, OK. That was a pretty simple insight. Like, wow, we can make that a lot better for ourselves. And I bet that will actually be better for the

Jon Blair (04:06)

For sure, for sure.

Kyle Hency (04:20)

the end customers as well. And that was really the insight with Loop is that the end consumers also like a self-service experience better. The emailing and manual nature of what they were doing wasn't good either. And so that same mentality is very much what we take into good day. It's like, well, we lived this pain. We had our operating system totally blow up on us. We couldn't satiate the different sources of demand. How do we build scalable infrastructure that works for smaller and smaller businesses?

Jon Blair (04:31)

for

Kyle Hency (04:47)

and makes that easier at an earlier stage in their life cycle, right? That's a problem we experienced. This is the tool we literally wish we had. I was telling somebody the other day that the case of Good Day, we've been building for two years and we know exactly what we're going to build. And we have from day one and the product roadmap has not changed hardly at all. That's so much more challenging if you don't have the operational experience, that's so much more challenging.

Jon Blair (05:05)

for

Yeah. No, it's interesting because like, like I...

Well, you know your customer and their problem at a deep, deep level. It's actually like very akin to our story at Free to Grow. I tried to replace myself at Guardian Bikes with a fractional CFO so I could elevate to like COO president and I couldn't find a fractional CFO firm who understood e-comm. And I was like, dude, someone's got to get this and they just didn't. And so I started the fractional CFO firm that I wish I had.

when I was trying to scale Guardian Bikes and delegate and elevate. I'm curious, apparel is tough for a number of different reasons. What are some of the key things that you recall that were drivers of success as you guys scaled an apparel brand at Chubbies?

Kyle Hency (06:06)

Yeah, I think the primary insight was that when you are building a business and you just talking specifically to apparel, right? You learn what it means to be in a fashion cycle. You learn what it means to be in a seasonal business. In the case of Chubbies, were very spring, summer seasonal. And your natural inclination as an entrepreneur is to try to solve those things.

Jon Blair (06:21)

Mm. Mm-hmm. For sure.

Kyle Hency (06:30)

Like, holy cow, we have to, in the case of seasonality, I remember, very early in our life, we opened up an Australian subsidiary that failed pretty immediately. That wasn't because it was like we were bad operationally, it was just a really bad idea. And we were trying to solve something that was natural to our business. And so what we learned was like, actually, no, that's actually core to what you are. You need to make the most of those peak seasons. That's more important than trying to lift the valleys.

Jon Blair (06:54)

Mmm.

Got it.

Kyle Hency (06:59)

And so the more you can identify in any business, I think, what is the core of what you are and attack and make the very best of you, the very, very, very best. I think that that's just like a recurring theme that I've seen and it's particularly applicable in apparel. Like you can't make apparel not have a fashion element to it in my mind, right? Like there's just always there. In our case at Chubbies, we couldn't make our business not seasonal.

Jon Blair (06:59)

Mm.

Totally.

Kyle Hency (07:27)

Shoot, we tried, over 12 years we tried literally everything. At the end of the day, three quarters of that business happens in spring and summer.

Jon Blair (07:37)

I'm curious and then I wanna dive into Good Day some more, but just because this is something that I see a lot of brands struggle with as they're scaling apparel or not, but I think probably there's certainly some specific challenges with apparel or kind of like maybe a specific kind of sort of playbook or threshold. At what point, from your experience, at what point do you think brands who are scaling need to start thinking about channels other than e-com channels and getting into like physical retail like what was your learning about like what what when was right and what was wrong about getting into physical retail.

Kyle Hency (08:13)

Yeah, I mean if I had to do it all over again and certainly if I were building a brand starting today, I would be starting on day one. I would be building the brand from day one with a margin structure that supported all of the channels. I would be building it in a way that it extended itself really well into all of the different distribution channels. You know, I think in the context of like getting a business off the ground,

Jon Blair (08:21)

Interesting.

Kyle Hency (08:42)

you can get an e-commerce and a wholesale business off the ground pretty easily. They're both variable cost structures and you need enough capital to buy inventory and you need to be able to isolate demand and move the inventory. In the case of things like your own retail stores or Amazon or a bunch of these things, think, and I talk about this quite a bit in general and in some of what I write, you have to really hone in on when you can handle these things operationally.

Jon Blair (09:11)

Totally.

Kyle Hency (09:11)

You know, Chubbies opening our own retail stores is the hardest operational thing we ever did. Period. Like obvious hands down in hindsight, like we should have gone much slower in that journey, right? And been much more methodical if I had to do it over again. But at the end of the day, 80 % of the market happens offline. And over the long arc of time, and you look at the very best of the Chubbies brand, which I would argue is coming to life today.

Jon Blair (09:16)

for sure.

Mm-hmm.

Totally.

Kyle Hency (09:41)

It looks a lot more like the overall market than it did the disruptive e-com only brand of 10 years ago.

Jon Blair (09:49)

Yeah, that's interesting and I think very wise advice. I'm curious, as you guys were scaling, and maybe it sounds like there maybe wasn't a single aha moment that made you wanna build Good Day, but what were some of the things that happened specifically as you were scaling where you're like, hey, building an ERP solution for, you know,

I will call it, maybe I'm wrong at this, like middle market solution that actually lives where it should live for a scaling e-comm brand. What were some of those like aha moments along the way of the Chubbies journey where you're like, Good Day, these are the problems we're gonna solve and it's a no-brainer that we have to solve these problems.

Kyle Hency (10:19)

Yeah. Yeah.

I mean, the big Chubbies aha moment that I think has led to all this effort we've put in to Good Day is that when you're building these businesses, it's easy to lose track of the one thing that can move all of your metrics is showing up with the right inventory at the right time in the right place for the right people at the right price. This is the mantra of retail. This is how retail works. You have to have an amazingly differentiated product.

When we were building our business, what we noticed in the early years is it's like, whoa, like the product is really the thing that makes marketing hum and makes distribution hum and all these other things hum. We're only spending 30 % of our effort on product. Like what if we put 60 or 70 % of our effort into the product and our resources into the product itself? And I think once we kind of let that unlock happened, you know, then we saw all these other things kind of work as a byproduct of that. And so.

You know, if you let yourself think that, you're like, whoa, then my inventory assets are really my most, my largest and most important asset in my business. And if you, if you just follow that journey, then you say, okay, wow. Then the tools related to managing your most important and largest asset, they better be evolving with the times. And I think for anybody who's scaled a brand on Shopify and found themselves on NetSuite, which is what we did at Chubbies.

Jon Blair (11:45)

100%.

Kyle Hency (12:04)

you look at that experience and you're like, well, that doesn't seem like the future that I'm imagining. Right. And so I think between just like the importance of it and that the market incumbent that we're competing with day to day, it's just, it's just technology from a different literal like set of decades. you know, that that's our opportunity.

Jon Blair (12:12)

Mm-hmm.

Well, it's interesting because,

Well yeah, so what you're saying, that makes me think about one thing that I've said a lot in my content is like, hey, if you're a consumer goods brand, right, no matter what class of consumer goods, you're literally, you're in an inventory, you're in the inventory business. That is the thing that you sell. And I've also, I also say like, a lot of people, you know, are kinda talking about like,

LTV heavy brands versus no LTV. I always say like, dude, LTV, repeat purchase, customer loyalty, it's not a marketing issue. It's a product issue. Like yes, do you have to have solid enough marketing execution to go to market? Yes, but you can't sell a crappy product that doesn't mean something to people, no matter how good the marketing is. Maybe you can do it for a time, right? But your brand will not withstand the test of time.

I totally agree and like the product function within a business is so important. And furthermore, if you look at inventory, it is the thing, it's the biggest cash outlay and bet or investment that you place as you're scaling, right? Like certainly marketing is a big one as well, but you're always like, man, that cash outlay for inventory. And it's not about just the amount you buy in aggregate, it's about what you buy.

And with these seasonal businesses, you miss the seasonal sales pop, you gotta wait till the next one. It's not like you can just blow it out the following month. There may just not be any demand where anyone even cares, even at a super cheap price. So nailing it is super important. Dude, I'm curious, because I'm a big fan of businesses run by former operators that are just really deeply intimate with

Kyle Hency (13:56)

Yeah, yeah.

Jon Blair (14:19)

the customers they're serving, and the problem they're solving. That's my story with Free to Grow CFO. You've touched on this a little bit, but how important to Good Day's success, your product development efforts, your sales efforts, the way you serve your customers, how important is it to your success that you guys are former operators that just, you know your customer and you know what you're trying to do?

Kyle Hency (14:44)

Yeah, I think it's really important on two levels, right? So one is you have to be able to read the room and know when things are hard for your customers, in our case, our merchants, right? You have to be in it with them and supporting them. And I think, least as I zoom out and look at the technology landscape, I don't think most technology builders are used to operating at the pace that their merchants operate at.

Jon Blair (15:09)

Hmm.

Kyle Hency (15:09)

And

so like you better care a lot and have a lot of empathy for what these, I mean, look at this year. I mean, all of these brands rolled into the middle of April, not expecting their cogs to go up somewhere between 30 and 150%. If you went and held or hid in your shell because you were scared when that happened, that would have been really bad for your business, right? The merchants weren't able to do that. So the technology providers, I think,

Jon Blair (15:33)

Totally.

Kyle Hency (15:35)

diving in and helping is really, really important. I think we do that as well as anybody, even as a startup. That's partly because if you just look at our employee base, it's about half former brand operators. And those folks are in the trenches day to day with our merchants in Merchant Success, or they're me doing sales demos or whatever. We're all the way in there with these merchants helping them out. And in some cases, it has nothing to do with Good Day. I mean, we're dropping.

Jon Blair (15:45)

Mm-hmm.

Totally.

Totally.

Kyle Hency (16:04)

You know, we've referred folks into you guys, they don't, literally don't need an ERP. They need help getting accurate financials, right? And, and, and so, you know, I think we're, we're taking a slightly different approach that is just very, very merchant centric. And I think we're also making a, we're making a pretty firm statement, which is the ERP of the future for retail in particular needs to be wildly interwoven into Shopify's infrastructure.

Jon Blair (16:13)

Totally.

Kyle Hency (16:33)

Shopify is the market in our opinion. That's why we've built our product as a Shopify app. It's why you can implement our product in less than two months and be up and running and getting value from it. And so, you're like, look, everything down to those sorts of decisions are being made with a brand operator mindset. Like, yeah, the brand's already operating in Shopify. Let's just make this easy for them. It should be an app. It lives in the same interface.

Jon Blair (16:33)

Yeah, I love that.

Totally.

Yeah, man, I love that. There's a lot of parallels at Free To Grow. A good portion of our team is former operators on the finance side, both accounting and CFO. And there's a certain level of just, let's put it this way, consulting and service providers are notorious for being highly theoretical and conceptual, right?

And the theories and the conceptual frameworks are good foundational, they're good foundations to stand on. But if you've been an operator, you've seen it all break. It's like being, I'm a musician, so it's like being a jazz musician. They teach you in jazz, like learn all the theory and then throw it all out the window. You weave in and out of the theory, right? And that's what being an entrepreneur is all about. That's what scaling is all about. You learn the theory and the concept and the foundation.

And then it all breaks and you have to figure out how to put it back together in a way that you've never been taught before and that they don't teach in school. So I think there's something about service providers, whether it's in SAS or otherwise who have been former operators that we have like, it's not just empathy. We have grace for the fact that stuff's going to go wrong. Right? And, and, and part of being an operator is saying, we don't have a playbook for this, but we're going to figure it out. Right? And so like,

I'm sure that the way that you guys serve your clients has that in your ethos. Like, Hey, this went wrong and we're going to figure out how to fix it. Right? Instead of just selling sunshine and rainbows, this perfect idealistic theory and concept is going to work for you. And like, that's part of reason why I personally have such a big issue with Net Suite in the middle market. I personally moved guardian bikes to NetSuite and then we moved off of NetSuite and we were sold sunshine and rainbows.

and it was not what we thought. And so like, I'm curious, NetSuite, the people on NetSuite probably don't like me and I'm not trying to beat them up because there is a place for NetSuite. Just most of the brands we work with, the market we play in, they're not in that place, right? So I'm curious, I to get your take and I'll share mine. Why not NetSuite for the space that we play in?

Kyle Hency (19:02)

100%.

Yeah. Yeah, I agree.

Yeah, I think it's primarily the case that the brands in, let's call this middle market and down on Shopify, let's very arbitrarily say that's 200 million in revenue and down. I think that those brands have to be laser focused on the number one thing that matters in their business, and that's developing excellent differentiated products and taking them to market.

So anything that distracts them from that, especially including building custom software on top of a horizontal accounting system, right? Becoming a technology business, I think is kind of the antithesis of focusing on what matters when you are that scale of business, right? And so like Shopify itself 10 years ago,

Jon Blair (19:50)

Yeah, for sure.

Yeah.

Kyle Hency (20:08)

We're trying to bring an out of the box experience to the ERP landscape. No engineers required. All of the data integrations we're going to go build for you if we haven't already built them for you or your peers. We're going to get you in the system getting value really quickly. Then we're going to acknowledge on the way in, yeah, there's a bunch of rough edges. You're not going to get any ERP setup in

voila, everything is perfectly automated across your business. What we're seeing initially is we can get value inside of four to eight weeks to our merchants, but we have a process over the next three months from there where we're really trying to help them automate a lot of the edges of their operating stack. In some cases, that's perfectly beautiful in product technology, and in some cases, it's just looking at it as a former brand operator and hacking through it with them in Google spreadsheets or whatever data warehouse they want to use.

And so there's, you know, one thing that we're really taking to heart is like at the end of the day, we're just solving problems. We're just helping these brands scale and automate better than they were last year. And that job never ends, right? That's going to be true again over the next year and the next year and the next year. And so over that time horizon, yeah, it should get much more automated. It should get much more rhythmic. And hopefully these, the technology, the processes, the systems can fade into the background.

Jon Blair (21:17)

Totally.

Kyle Hency (21:34)

And the team's resources can be focused in some of these more differentiated parts of their business.

Jon Blair (21:39)

I love that man. When a brand comes to you guys, what are the biggest traps or most common traps you see brands falling into again and again and again with the way they're managing inventory and operations prior to talking to you guys?

Kyle Hency (21:56)

Man, I think typically when you're not in a system, but you should be in one. So this is somebody who has a real capital N need to be in an IMS or an ERP light or whatever you want to call this sort of class of technology. I think of this as complex order management, complex inventory management, high focus on accurate automated cogs, those sorts of things you just cannot do unless you're in a system. I would say

Jon Blair (22:03)

Mm-hmm.

for sure.

Kyle Hency (22:26)

Folks who have the operational complexity that require a system that haven't put one in place, they lose visibility and they're asking themselves, why am I not managing these things well? That's how it feels day to day. So there's like that whole class. And I think getting into a system like Good Day is the answer to that problem. I think there's a whole other class of folks who I would kind of loosely characterize as over-optimizers. And I think those ones are the ones that

Jon Blair (22:51)

Mm.

Kyle Hency (22:54)

Absolutely don't need an ERP. They have a really simple business. They have 30 SKUs on Shopify. They're only selling on Shopify and they're kind of putting systems in place to put systems in place and and it's like satiating some Something for them. I think those are the ones that I'm like really brutally honest with and I'm just like as a brand operator in good faith I can't do this like you you really don't need this. You know on some level you may want it, but like it's just gonna be too much of a lift

Jon Blair (23:09)

Yeah.

for sure.

Kyle Hency (23:24)

and you're definitely not gonna get the value for the effort. And I'm pretty direct when I think that and believe that early. And again, that connects back to my roots as a brand operator. That's because I wanna be working on things where I know I'm driving value, right? It makes no sense to work on those things.

Jon Blair (23:30)

Yeah.

Totally. Well, dude,

it's so funny, man. We really do have a lot of parallels. I have told so many brand founders who wanted to work with Free to Grow, no, you don't need to. And they're like, and they always say, hey, I really appreciate that, but like, why didn't you just take the fee? And I'm like, because I was a brand operator and I've been screwed by every overpriced consultant and attorney and service provider and whatever.

and not receive the value that I paid for. And I'm not in this business for that. I'm in the business to actually make a difference in the life of e-commerce brand founders, right? That like we make so much of a difference that it's a no-brainer you're getting the value out of the service. And that in turn makes your life better and me and my team get much more satisfaction. Like I had a brand founder call me this morning that we've been working with for like three weeks. And he's like, dude,

I'm so glad that we found you guys. The last, he's like we're still like, you know, working out the kinks and it's only three weeks in, we're getting onboarded, but like all the things that your team knows how to do and just live and breathe, I haven't had in my former fractional CFO who didn't know e-commerce and wasn't previously an e-commerce operator. And like the people that are on my team at Free to Grow,

They have been doing this for a long time and they do it with a ton of other brands. And so the stuff that I bring them that feels like hairy and scary and crazy to me, they're like, no, we deal with this all the time and we have dealt with this for years. Like, don't worry, we will help you through this. And that's where we get the satisfaction of doing what we're doing. Like truly and like no exaggeration. There's something spiritual about business, right? About like solving a problem for a group of people that you actually care about.

And for me, and I have a feeling there's some similarity with you, for me it's like I've felt the pain of these things going wrong before and I don't want them to go wrong for others and so insofar as my business can make these problems go away, I wanna try to do that, you know?

Kyle Hency (25:49)

Yeah,

I think the other maybe only thought I would layer on that I think is probably true of you guys just like Good Day is that, when you're managing one of these brands and your day-to-day decision-making is coming into question because you literally have no idea if the Information off of which you're making that decision is at all accurate? It's like a really good moment to be like well Why why isn't why has this gotten to a place where I can't actually quite understand the underlying data? right

Jon Blair (26:04)

Mmm.

Kyle Hency (26:18)

I mean, there's a whole part of what we were doing here that is very hygienic. It's like, do the necessary work to understand the underlying data and cleanse it so that in your day to day, you have high visibility to the operating information and you have a stable foundation off of which you can make strategic decisions. If you have that stable foundation, you can be a lot more decisive, right?

Jon Blair (26:37)

Totally.

Kyle Hency (26:42)

The hardest points that I've ever navigated through are when you know you need to make a big decision and you also in the back of your mind know the data you're looking at to make that decision is wrong. And it's like that last part of that, ⁓ man, we need to remove that as much as we can from these complex decisions. so in terms of like mission one versus mission two versus mission three for Good Day, mission one is that. Go clean that up and we're starting.

Jon Blair (26:50)

wrong. Yeah.

Totally.

Yeah, I love that, I love that, man.

What other things besides being built out in the Shopify ecosystem are unique to your approach of building ERP at Good Day?

Kyle Hency (27:24)

Yeah, I think we take a really opinionated approach to data interoperability. So the main thing being that in our ecosystem, for the most part, middleware is not as big of a conversation. Right? Like we're going and making the major connections for our brand. Yeah. And again, like the why is important. Is it, should it be a brand's job to go work with outsourced engineers?

Jon Blair (27:42)

That's huge, man. That is so huge.

Kyle Hency (27:52)

and develop custom software to connect these things, right? And so we are going and working with external parties as well as our own internal folks to make those sort of connections just work. And so again, it's a very merchant-centric approach. I think the closeness to Shopify is a really big approach. I think everything we've built in the retail operating system, so your inventory management, your supply chain, your off Shopify sales, all that sort of order management around all of those surface areas is built with the mindset of making accounting dead simple. So you're remember our Chief Product Officer, Dave, my co-founder, he was our former CFO and COO, he's a CPA at Chubbies, right? And so his big kind of like intellectual takeaway from the 10 years at Chubbies was like, man, we really never got great automation in the accounting stack until we fixed the inventory flows upstream.

And so we're just absolutely attacking the inventory flows at every step upstream with the hope that as we get into the accounting stack, things are just a bit more simple for us.

Jon Blair (29:00)

Okay, so last question here for you, and I had prepared this before and you just segued very nicely into it. What are some of your key viewpoints around the importance of the Ops Finance connection?

Kyle Hency (29:12)

I think the more that they can be interwoven, the better they'll scale. I think if you can make decisions that say, if we get great data at the point of creating a purchase order, then we're going to get a lot more visibility downstream when accounting is tying out your landed costs. I think if you can start to connect dots that are like, hey, we have the right inventory in the right channel, right as demand is arriving, we really spin up our cash cycles and we make a lot more cash as a company. Again, that's connecting the operating arm to the financial arm and making sure that they're really closely interwoven. That was happening organically at Chubbies because Dave is one human. Yeah, so I think organizationally there's a lot of there there in terms of marrying those parts of the organization.

Jon Blair (29:55)

Yeah, I was the CFO and COO at Guardian too, so like that connection was in me, you know?

Kyle Hency (30:08)

And especially making sure that that part of the organization is really geared up to support the product and marketing teams who are driving velocity on the top end. And so, look, I think it's really easy to under invest in those parts of the business. And I think as a brand operator, you should be pretty wary, especially when you start to lose visibility and trust in your underlying data.

Jon Blair (30:35)

Yeah, and you mentioned the cash cycle. For an e-comm brand, basically generally is very little to no AR. So your whole cash cycle is inventory days and AP days. And inventory days being the big piece of that. So there is no way to disconnect cash management in an e-comm brand or consumer goods brand period from inventory. They are one and the same, you know?

Kyle Hency (30:56)

Yeah.

The other thought I will just call out is you find out you've under invested in these areas at your very harshest moments. If you've under invested in this entire part of your business product through accounting and tariffs drop on you you have no idea what your margins are all of a sudden, and you have no way to flex in and around the policies that have just arrived, you're going to feel it, right? And so I do think it's like,

Jon Blair (31:06)

Totally.

Kyle Hency (31:23)

a set of investments you have to be pretty proactive about. You have to make while times are good so that if times are less good in the future, you have the right systems, people, processes kind of humming already.

Jon Blair (31:28)

Yeah.

Such a good point. I have talked about in my content before the number of times I've seen founders go through an oh shit moment where they have this oh shit moment where accounting and finance is not dialed but they can't ever unsee it after that. They can't go back and putting it in place is a lot more painful than having it done on the front end and they may have been able to have navigated that moment a whole lot better and quite likely would have. Man, this is super awesome. I wanna end with a personal question, a little known fact about Kyle that people might find shocking or surprising.

Kyle Hency (32:07)

Okay, let's do it. Yeah.

Oh man, I think I've maybe told this story before, but in college I played soccer. And my friends who would frequently come to our games would chant, every time I would get the ball, they would chant the gazelle because I was notably one of the slower players on the field. So I just had like an army of 20 dudes like totally dragging me.

Jon Blair (32:30)

Hahaha

You

Kyle Hency (32:41)

every single time I got the ball all the way through college. But yeah, I was just happy to be on the field, to be honest.

Jon Blair (32:48)

That's awesome, man, that's awesome. Well, before we land the plane here, where can people find more information about you and about GoodDay if they're interested in learning more?

Kyle Hency (32:55)

Yeah. Yeah,

I would just say go to www.gooddaysoftware.com. You can also find us under Good Day Software on LinkedIn. I'm on the front lines doing our initial product demos for almost 100 percent of our demos. So if you want to see the product, I'll be in there with you diving into it and would love to hang out and show you what we got.

Jon Blair (33:18)

Yeah, look, I highly recommend reaching out to Kyle and his team if you're interested in learning more. I don't know an e-comm brand that's scaling towards success that doesn't have challenges with managing inventory. So you definitely gotta see what they're doing over there. See if it might be a fit. We have several mutual clients and I highly recommend getting to understand how they might be able to help support your scaling journey. So, yeah man, well this is a fantastic conversation. I really appreciate you coming on.

And just as a reminder for everyone, if you're interested in learning more about how Free To Grow's DTC accountants and fractional CFOs can help your brand scale, check us out at freetogrowcfo.com and until next time, scale on. Thanks, Kyle.

Kyle Hency (34:02)

Thanks, Jon.

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

~~~

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.

BONUS EPISODE: Ecom Scaling Show: Scaling Your DTC Ads Profitably In 2025 (Ep. 3)

Episode Summary

Welcome to the Ecom Scaling Show, brought to you by Free To Grow CFO and Aplo Group! Join hosts Jon Blair (Founder, Free to Grow CFO) and Dylan Byers (Co-founder, Aplo Group) as we dive into the crucial—yet often missing—link between marketing and finance in DTC e-commerce.

In this episode, Jon Blair and Dylan Byers discuss the intricacies of managing profit margins in e-commerce as brands scale their ad spend. They explore the importance of understanding customer acquisition costs, the balance between new and repeat customer revenue, and the role of forecasting in financial planning. The conversation emphasizes risk management and capital allocation strategies, providing tactical approaches for brands to achieve their growth goals while maintaining profitability. A real-world case study illustrates the practical application of these concepts in a collaborative environment between finance and marketing teams.

Key Takeaways

• Forecasting is not about predicting the future but about creating scenarios.

• Collaboration between finance and marketing teams enhances decision-making.

• Brands need to assess their contribution margins for both new and repeat customers.

Episode Links

Free To Grow CFO: https://freetogrowcfo.com/

Aplo Group: https://www.aplogroup.com/

Jon Blair on Linkedin:   / jonathon-albert-blair  

Dylan Byers on Linkedin:   / dylan-byers-046010149  

Transcript

~~~

00:00 Understanding Profit Margins in E-commerce Scaling

03:00 Customer Acquisition Cost (CAC) and Its Impact

05:51 Balancing New and Repeat Customer Revenue

08:45 The Role of Contribution Margins

11:46 Risk Management in Scaling Strategies

14:54 Forecasting and Planning for Growth

18:09 Tactical Approaches to Achieve Goals

21:01 Collaborative Financial Planning

24:02 Real-World Application and Case Studies

From Profit to Property: How DTC Founders Can Build Wealth Through Real Estate

Episode Summary

In this episode of the Free to Grow CFO podcast, Jon Blair and Chad Hampton discuss the importance of real estate investing as a means to build wealth while running a DTC brand. They explore Chad's journey into real estate, the significance of cash flow, navigating high interest rates, and various financing strategies. The conversation emphasizes the need for a knowledgeable loan officer and the potential for scaling a real estate portfolio, providing practical advice for DTC brand founders looking to invest in real estate.

Key Takeaways

• Real estate can be a powerful asset class for building wealth.

• Diversifying investment sources can help scale a portfolio.

• Real estate investing is accessible even in a challenging market.

• Investors can use the property's income potential to qualify for loans.

Episode Links

Jon Blair - https://www.linkedin.com/in/jonathon-albert-blair/

Chad Hampton- https://www.linkedin.com/in/chad-hampton-lending/

Free to Grow CFO - https://freetogrowcfo.com/

Mortgage Movement- https://movement.com/chad.hampton

Transcript

~~~

00:00 Introduction to Real Estate Investing

02:18 Chad's Journey into Real Estate

04:08 Understanding Wealth Building through Real Estate

07:27 Navigating the Current Real Estate Market

10:33 Cash Flow vs. Appreciation in Real Estate

13:43 Risk Management in Real Estate Investments

17:23 Leveraging Debt for Wealth Building

20:34 Long-Term Strategies for Real Estate Success

21:20 Building Wealth Through Real Estate

28:05 Understanding Leverage and Debt Financing

32:48 Scaling Your Real Estate Portfolio

39:14 Getting Started in Real Estate Investing

42:00 Final 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 DTC brand with a profit focused mindset. 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 here with my buddy Chad Hampton. He runs the Gulf Coast branch of Cornerstone First Mortgage. What's happening, Chad?

Chad Hampton (00:25)

Hey Jon, glad to be here man, I'm excited for this. I love your content and I'm looking forward to being a part of it.

Jon Blair (00:32)

Yeah, so this is like this we're going a little bit off the beaten path here of the Free to Grow CFO podcast, but I think it's going to be incredibly enlightening and empowering to our audience. So Chad is actually the way I met him was he actually is the loan officer at a previous lender that he worked at Movement Mortgage and he's helped me finance my own personal real estate portfolio in the Mississippi area. And in getting to know Chad and learning a little bit about his story and he himself is a small business owner, he's also a real estate investor and from my standpoint, know, Chad is a real estate financing guru. He knows how it works inside and out and he's been one of the most helpful loan officers, actually the most helpful loan officer I've ever worked with on financing real estate deals.

Here's why we're gonna talk about this today and why I brought Chad on.

We talk a lot about how to increase profit and cashflow as you scale a DTC brand. Super, super important things, right? But I think there's this common misconception in the DTC space that the only way to build wealth is to sell your brand one day. That is a way, but it's also a binary outcome. You either do it or you don't. And so at Free to Grow CFO, we're working really hard with our clients right now on this effort to help them figure out how to take cash out of the business on a regular basis.

and buy assets. So buy things like real estate, index funds, whatever asset classes you're interested in personally. But the bottom line is to build wealth along the journey of building your business. And so today I want to focus on how to build wealth through real estate. And that's why I brought Chad on. So Chad, before we dive into this, can you give everyone just a quick background of and how you ultimately got into real estate investing and also real estate lending?

Chad Hampton (02:26)

Yeah, absolutely. So I actually came through supply chain management through a large corporation. I think it's fine to say the name DuPont is where I kind of grew up through that. At that time, I think we had somewhere around 27 business units. And I was in a space on the Gulf Coast, southeastern United States, but doing lots of work with China, South America, and So doing that under that umbrella, picked up finance and the mergers and acquisitions space when we were going through things like that, and was used to using set amounts of capital and budgeting and all that and figuring out how to optimize the company's profit. I started consulting with some companies, some other large companies. And then honestly, during the COVID shutdown, it kind of changed where I could go as far as the facilities and things. And so I had more time on my hands, I couldn't travel. So I started doing some real estate finance, which some friends had talked to me about for many years, and I just didn't have the time, but the time freed up, started playing in it, found out that I loved it.

I had a passion for it because I could impact people and help people's cash flow improve or else, you know, even when you're buying a personal house.

you know, as far as that standpoint goes, if you get a better deal, I mean, even your monthly personal household cashflow can be benefited in a positive manner. And I could see the impact much more than what I was doing before. On stock prices, can't, even if you save 50 million bucks, you're not going to see that in the stock price of a company that big. Right? So, yeah, so, so started doing that. Did both the consulting in that work for a while.

Jon Blair (04:05)

for sure.

Chad Hampton (04:13)

probably about a year and I just, my passion kind of took over for this and I just dove head first into it about five years into just doing this now and really, really, really enjoy it. So on a personal side, I initially got into real estate investing.

with some developer friends and other investors as like a part member, partial member. And I would dive in a few little deals where we would raise capital together and go in and buy them and what have you. I've also done the other thing where, like you're talking about, I've sold us a small business as a partner and took the cashflow from that and used it to do some real estate investing as well. So I've done both.

Jon Blair (04:59)

Awesome man, well it's interesting because like both you and I come from a different business background, right, and kind of turned real estate investors. I actually, I'm curious, I'm gonna tell a little bit of my story and I'm curious of like what got you interested in terms of real estate as an asset class, but for me I had this light bulb moment.

Maybe about two years ago and it was the classic. was reading Robert Kiyosaki's Rich Dad Poor Dad, which had been on, I'm an avid reader, but that's been on my list for like, for like 10 years. And I was like, I'm finally going to read it. And it really, really changed my perspective. And what, one of the things I took away from it that I want the audience to understand is that like, you know, to get rich or really build wealth, right? It's about building wealth. You don't have to quit your day job, right? So like for me, my day job is

Chad Hampton (05:25)

Yeah.

Jon Blair (05:49)

growing Free to Grow CFO. For a DTC brand founder, maybe scaling their DTC brand, right? You still have a day job, Chad, in running the branch of a mortgage lender. But what I took away from that book was take your day job income, right, and invest it into assets. And most importantly, Robert Kiyosaki says, just pick an asset class you like. It actually doesn't matter which one it is.

But you need to like it because you're going to do it for the rest of your life. You're not going to just build wealth over time or immediately. There's no get rich quick schemes. There's get rich slow schemes. So pick something you like and get rich slowly in it, right? So turn your day job income into assets, which will build financial freedom over time. And this light bulb went off that I had been given this conventional kind of advice from CPAs of just like,

Fill up your 401k every single year, invest it in index funds, and that's the way you get wealthy. And this light bulb went off where I was like, I can't get to my 401k until I'm old. And I wanna retire before I'm old, or I wanna be financially free before I'm old, right? And so I'm like, how can I build financial freedom quicker and enjoy the fruits of it sooner? And I started to realize that cash flowing real estate was the way and then I got super nerdy about it and as Chad knows, I love it because we get into conversations that are probably too long about all the deals that I want to do. But that was my aha moment. For you, when you kind of started to finally understand real estate investing, what was the light bulb moment or moments for you when you're like, this is a great asset class to build wealth in?

Chad Hampton (07:32)

Yeah, great question. So a few things, not unlike you, I was dumping into the 401k, I was dumping into different things like that. But I started looking for diversification of risk, right? And I was reading a lot of things too, and I saw what asset class performs the best historically in down markets and things like that. It's real estate, looking at things like ⁓ the fact that rents are growing faster than anything else.

The better part of the next last two decades, we've had less homes produced, new homes produced, then we've had housing demand rise. So there's a lack of affordable housing. So a lot of people are going to have to rent that didn't have to otherwise and what have you. thinking about all those things, you know, and then talking to people that I know that do well in real estate.

and the tax benefits involved in all that as well, it just made sense, right? It was the next step just try to learn everything I can from every person that I come in contact with in that world and take little tidbits here and there and also reading like you do. you know, over time, it's something that you have multiple ways to build wealth, whether it's property appreciation or...

you know, paying down whatever debt service you have and then using that equity for other things down the road. And then, you know, monthly cash flow benefits that can be used to grow other things.

Jon Blair (09:11)

Yeah, okay, so you touched on a couple things there. I'm still a newbie. You probably don't even know this. I'm just gonna like lay it out on the table. I'm very candid on this podcast. The first real estate deal I ever did was through you. You financed all of my investments, right? My personal residence was financed with a different loan officer. I've done all my real estate deals. Like, you've been my guinea pig on the financing side of the house. But you have taught me, I'm already a finance guy.

So I understand how debt works and I understand how leveraged return on equity works, right? But you have really helped me understand the ins and outs of the different levers that you can pull using debt as a tool, right, in real estate, which is something you can't do, generally speaking, in the stock market, right?

And so you just hit the nail on the head in terms of multiple factors for building wealth. There's monthly cash flow, there's principal pay down on your loan, right? There's appreciation. And then there's this kind of X factor, which is like, how do you creatively use debt and the equity in your portfolio to continue to scale? Here's my question for you right now. I chose to jump into real estate investing when a lot of people are not jumping into real estate investing. Or I'll say the average person is like, now is a terrible time to invest in real estate because interest rates are so high. you know, a couple years ago when interest rates were 3%, you could buy a deal and cough and you would make money. Like you didn't have to analyze it very well, right? I have seen the deals that we've done together, we've done I think six or so, they're already cashflow positive and I believe they're going to gain steam over time. if someone were to come to you or the audience is like, hey, interest rates are seven plus percent, there's no way I could find a cash flowing deal. What would you say? What are you seeing out there? I mean, obviously you've seen my deals, but like, is it possible to find cash flowing deals and finance them with debt today?

Chad Hampton (11:19)

So it is possible. I think each individual person has a unique situation, right? And so like that's one thing that I think, like I said, my background didn't grow up through banking, right? It was finance, it was supply chain, it was multiple things like that. And so I kind of follow the concepts of that book range ⁓ where you take different things that you learn in different parts of life and then you apply things that maybe aren't as commonplace in a new subject, right? That is very common in another place. So in that aspect, I would say I try to understand each person's individual goals. Like is it monthly cash flow? Is it long-term?

A growth through appreciation. Are you trying to gain some tax benefits? Are you taking money from another investment that you've earned and trying to take a 1031 and save some taxes now and build that way? So to get back to your specific question, I think we have to be just very diligent in the particular property deal and you're great with that with your models, which is why I had no idea that you hadn't done this before. They're super sophisticated and I love that because I kind of geek out with you on these numbers. So I think that's the deal. You find a property where you make some form of positive cash flow in the interesting rate environment that we're in now, okay? And then all you can do there going forward is improve it. So if you're...

Jon Blair (12:40)

Hahaha

Chad Hampton (13:03)

making money under the assumptions right now of of occupancy and you know what your property taxes and insurance and all that thing and all those little components add up to then okay we're going to make money here on a monthly basis we're going to get you know depreciation and other tax benefits at the end of the year and then when the overall market improves and provides an opportunity to either take cash out and use it on another investment or, and hopefully at the same time, reduce your interest rate, you can improve your cashflow then and your earning potential kind of goes up. But I think the biggest thing is just making sure that from day one, you're okay, whether that's breakeven or making positive cashflow and you're good with that situation, that's built into your assumptions and you're not assuming what's gonna happen down the road, which...you look for an opportunity to improve it, yeah.

Jon Blair (14:02)

For sure, yeah, okay. So that's a we actually talk about this a lot on on our podcast with other investments because if you think about it like scaling a brand When you're incrementally trying to invest in ad spend or the next inventory order those are all investments that you're making right? those are all like bets you're placing with capital and It's about how what we talk a lot about is like how to do so in a manner that gives you the best risk adjusted return Not the best return the best risk adjusted return. Super key, right? Because comparing a super risky 20 % IRR and a not very risky 5 % IRR, that's apples and oranges. You cannot compare those two investments unless you consider risk, right? And so, what you just said right there is like, when you're underwriting a property, when you're building your financial model, like that you're not basically assuming all your upside will come from an assumption that has not played out yet, right? And is overly concentrated in one area. I see that a lot with assuming that all of your upside is gonna come from appreciation only, right? And so I get a lot of people coming to me say, hey Jon this is gonna lose me 200 bucks a month to start, but it's gonna be worth it because of appreciation, but you're putting all

Chad Hampton (15:06)

Right.

Right.

Jon Blair (15:25)

your eggs in the basket of appreciation, right? Do you ever have people that bring deals to you that you're like, you kind of maybe advise them against or at least advise them to think through like what the ramifications are from a risk adjusted return standpoint?

Chad Hampton (15:39)

Yes, that's an absolutely great question. So a couple of things that I've built in that I like to look at is historical rate of return by the zip code that this property is in, the neighborhoods around it, all that kind of thing. Now, I'm not a realtor, you know, so they have a little bit different.

Jon Blair (15:48)

Mmm.

Chad Hampton (15:58)

research that they do comp wise and things like that, compared to property wise. And I will get input there. But what I do like to do is look at the condition of the property, what's going on around the property and try to see, I mean, cause sometimes you find a deal that's worth doing on a cashflow basis because it makes money, right? But that property is probably not going to appreciate that much because maybe the condition of the property is going to require a lot of investment down the road and or the neighborhood or the area around it maybe is maybe it's deteriorating or maybe there's not a lot of investment you know infrastructure wise and so those are things that I like to throw caution you know out about but also it can work the other way I mean I know of a few markets where either either they're getting something like a new airport or some other major investment infrastructure wise, it's going to have to bring in revitalization to an area. And that's kind of another thing that I like to consider if it's a metropolitan area, the cycle, the life cycle of that city. Because a lot of times, you know, people move out of the cities, it starts to run down and then someone will have an idea to revitalize it, start investing money, making it trendy or, or cleaning it up or improving things. And then stuff's going to grow around

it, you know, in a 10-year window or something like that. So I think these are things that are very important to look at if you're in a buy and hold strategy other than someone that's just going to buy a property and make some cash for a couple of years and sell it, which people do that too, you know. So I think that's, again, that goes back to the individual person's goals that I think that's a great question and I think that's a serious focus you have to have up front when you're figuring out what you want to do.

Jon Blair (17:32)

So I'm gonna turn to financing in a second, because that's obviously an area of expertise for you, but before I do, I just wanna kind of summarize a couple things. So generally speaking, what I've found is that even though the interest rate environment is quote high, by the way, it's not high historically, when you take a step back, but it is high in the more micro-historical viewpoint for the last like say, you know, five to 10 years.

I've personally been able to use how high interest rates are as negotiating leverage and I'm completely honest. I'm I am a very honest negotiator I'm like, hey, I'm an investor with as high as rates are this is what I can afford to pay you if you can't sell for this I totally understand and no one can force you to do that, right? But this is what I can afford to pay so I underwrite it so that all of my properties after covering

your mortgage payment, taxes, insurance, a repairs reserve and a capital expenditures, a future capex reserve, that there's some amount of cashflow, right? But I have studied the data in these areas and there's an upward trajectory in rent growth. There's some amount of appreciation and it's different based on the different sub markets that I invest in, but the mortgage is also getting paid down. Furthermore, a part of my thesis is that at some point, but I'm not betting on when this is gonna happen,

At some point, I believe interest rates will come down below where I've financed these properties at. It could be in one year, it could be in five years, it could be in 10 years, but at some point when they do, I can refinance them and either crank up the cash flow or take cash out and go buy more property. So there's multiple levers. So that's my strategy right now, Anything that comes to mind, Chad, as I was running through that?

Chad Hampton (19:34)

No, I mean, it's a great strategy and I think it's logical and I think risk averse, you know? I got a great piece of advice 17, 18 years ago. So, you know, I've always been one who wants to be in the room with people who I think are smarter than me, know more about me, more about a subject than I do so I can learn little things and what have you. And I had a mentor type of gentleman back then who, again, not his day job, very, very successful day job, but completely different avenue, exactly like we're talking about, where he had real estate investing and other types of investments, including some small hotels and things. And I ran by the first real estate deal I did with him. I know I'm digressing into a tangent, but it comes back. So I was contemplating, this was my first deal.

Jon Blair (20:23)

No, no, this is great. This is great.

Chad Hampton (20:28)

kind of partner on this commercial building. think, yeah, the first one was a piece of a commercial building and then there was some rental aspects to it, some condo, condos in there. And then the second one was like a seven, seven unit portfolio of things that we were doing. I told him, I laid it out there for him. had done all the numbers and I took a bunch of the assumptions that you're kind of talking about here. And he said,

And I said, you know, we're putting this on a 20 year AM instead of a 30, which hurts our cash flow. But the idea is here's what we'll make when we pay this thing off. I'm to be very aggressive and throw money at this. And he said, you know, I've done several deals like this. And what I will tell you is I like the deal. I like the numbers, but you're never going to pay that off. You're never going to see that. And I said, what do you mean? And he said, I know you're talking about throwing money toward the principal and that's great.

He said, what you guys are gonna do is you're gonna build this equity and then you're gonna go refinance it, take that equity and you're gonna go buy more things. That's exactly how the seven unit thing happened next. He was right, he predicted the future, you know, and now doing this on a regular basis, I see why. Because you're not paying taxes on that money when you pull it, right? And then you go take that money and you reinvest it and now your cashflow just continues to kind of compound because you're getting a little here, a little there and.

Jon Blair (21:30)

Yeah, for sure.

sure.

Chad Hampton (21:52)

and you're only part of it, the interest rates are dropping as you take the money out from refinance if you time it in that manner. And if not, you're at least taking money for your down payment or your entry cost, acquisition cost on the next one without paying a tax benefit, I mean a tax consequence. So yes, I think it's a tried and true thought process.

Jon Blair (22:05)

Totally.

Chad Hampton (22:17)

And if you're just diligent upfront, then you can build something that's going to bring you cash flow and retire. know lots of people that fund their retirement that way. They just sit on their 401k until their ⁓ past 59 and a half. They delay the social security and all that and all their living on their rental portfolios.

Jon Blair (22:37)

Totally. Dude, I love real estate investing so much because of what you just said. You cannot take cash out of your index funds, your S &P 500 index fund, tax-free in the same way that you can with real estate, but furthermore, there's the leverage component, right? It's actually a refinancing that's generating the cash flow in that situation. ⁓ It's this powerful growth lever.

Chad Hampton (23:02)

Yes.

Jon Blair (23:05)

that just isn't, that leverage enables, right? And furthermore, I wanna mention something here, because we talk a lot about debt financing from the perspective of scaling a DTC brand. It's usually around buying inventory. Why is leverage, and I'm not talking about why lenders wanna lend against real estate, although we can, we'll probably get into that next, but why is leverage as an investor a good idea? Because technically you can borrow.

You can qualify to borrow and invest in the stock market technically. But why is that a bad idea versus leverage for real estate? Because real estate's a hard asset that has a very low likelihood, maybe an impossible likelihood of it ever going to zero. And prices can definitely go down. Don't get me wrong. But we just saw 20 % drop in the stock market not that long ago, like just weeks ago. ⁓

Real estate is projected to maybe go down flat or down by a couple points nationally, right? Over the same time horizon. You don't see these and stocks investing in a business, that's a zero sum game. Your investment can go to zero. Highly unlikely, probably impossible that that will ever happen in real estate. So using a responsible amount of leverage of debt is a lot less risky with real estate because there's this inherent hard asset value.

where you're not taking debt out on something that could potentially go to zero, which is the riskiest possible thing you could use debt for, as if something can go to zero. Next, I wanna talk about just some practical kind of advice on like, I'm a DTC brand founder. I'm able to take cash out on a monthly basis, and let's say I'm able to save $50k to $100,000 a year that I wanna put towards buy and hold real estate.

You as a lender who does these kinds of deals all day long, let's bust the myths. Like, what's possible, what's not possible, what kind of down payments are needed? Like, how should someone who just wants to take out 30-year mortgages to do buy and hold real estate deals, couple a year, what do they need to prepare themselves for to be able to do those successfully from a financing standpoint?

Chad Hampton (25:24)

Yeah, sure. Great question. One comment before we dive straight into that. When we're talking about the stock market can turn super quick. You can lose a lot really fast depending on the asset class. With real estate, it also is market specific. So like if you've done a good job of analyzing the market, even though nationally we may get a 2, 3 % reduction in value,

Jon Blair (25:41)

Mm.

Chad Hampton (25:53)

a lot of markets are still appreciating just because supply and demand of housing or growth or whatever. So that's another thing to contemplate. Diving into your question. if you can pull 50 to 100K per year to invest, you could build a portfolio fairly quickly, a cash flowing, positive cash flowing portfolio, depending on

Jon Blair (25:55)

Totally.

Chad Hampton (26:20)

you know, the price point you decide and which market you're looking at. Again, there are even risk categories of that. Are you doing short-term rent? Are you doing long-term rent? Are you doing mid-term rent? You know, short-term would be more risky. You'd have a higher upside in return. So those types of things. But generally speaking, the minimum amount you can put down on a property like this and we're talking residential because commercial that's another thing in that you only have a 20 year term the rates are going to be higher it's going to be harder to cash flow this just depends on unless you're buying a portfolio of properties at one time you probably want to go with a residential investment loan instead because you're getting 30 year terms or maybe even 40 with a 10 year IO on the front end of it and it's less out of out of pocket typically to get into the property as well. So that being said, you're doing that, the minimum you can put down would be 15%. There are other things that come into your cash out of pocket at that lower down payment percentage that come down through, not to go too far into that, but they're called loan level price adjustments and they come down through the government regulatory agencies. The agencies are Fannie Mae and Freddie Mac.

Those those types of fees kind of work themselves out in 5 % down payment increments. So Typically if you can get to around 25 % you're probably going to get the best the best terms for the lowest amount out of pocket It is possible. Like I said though to do lower you can do 20 % if you're doing more specialty product which we can talk about if you want to down the road like a DSCR or something. But yeah your rates are affected by down payment percentage, credit score, and your debt leverage, your debt to income leverage. There are investment products that don't consider that if you want to talk about those like the debt service coverage ratio, the DSCR loan, which is pretty popular now for investors, where you just use the property's income generating potential against its cost as your income and debt.

But there are lots of ways you can get creative and get these properties started, build your portfolio. There's lots of options.

Jon Blair (28:47)

Yeah, so a couple things I want to dive into further there. let's talk about debt to income ratio and how I think this is a common concern for a lot of people like, look: Can I? Will my debt to income ratio allow me to get approved to buy another rental property, right? So walk through a little bit about how debt to income affects

Chad Hampton (28:54)

Okay.

Jon Blair (29:14)

the ability to get approved for a loan in the buy and hold real estate context.

Chad Hampton (29:19)

Okay, so typically your cap on that would be 50 % and that's monthly liabilities. That would be your minimum monthly payments on things like credit cards, loans, mortgages. Doesn't consider things streaming services or utilities or anything like that, insurance, none of that stuff, except for on the property. And then the income would be your gross.

If you're a W-2 employee, that's pretty easy. It's just whatever your gross is that way. If you're self-employed or you have tax return generated income, it would be what you made throughout the year with a few things that are added back like depreciation. And then another thing that's used to improve your debt to income ratio on one of these types of conventional investment loans would be the property's market rental potential. So whatever the appraiser judges the market rent to be based on comparable properties or if it has leases or things like that, you can use 75 % of the appraisal value there to contribute to your income in that calculation. So a lot of people think they can't qualify that way, but they actually can once you add.

I mean, this is property, this is an investment property and you're doing it to gain income. So you're going to use 75 % of it. And the reason why that number is not a hundred is they're just factoring in occupancy. And then another option, if you don't make the 50 % cap on debt to income is,

is if you're self-employed, you can do a bank statement and you're using your monthly deposits averaged over a year or two years, depending on which way you do it. And then you just factor out an expense ratio for whatever type of business that is. Or another way, the popular way is the debt service coverage ratio. And so that would take 100 % of whatever the property will make and it'll be used monthly average. And then you just...you know, do the math, divide the debt, which would be the mortgage note, any property taxes, insurance, if there's HOA fees, that's it. You know, if you want to shoot for a break even, you can actually do it with a 25 % loss if you really wanted the property. But yes, yes, so .74 would be that ratio, would be like the minimum, but the rates get better once it breaks even at a 1%.

Jon Blair (31:55)

Interesting. I did not know that.

Chad Hampton (32:05)

a one to one ratio and then as it gets better like 1.1 or 1.15 or 1.25 you just get better rates. But that's a super popular thing right now.

Jon Blair (32:14)

Yeah, interesting.

What I'm hearing when you walk through that is like, if your business makes cash flow and you can take a consistent amount out every single year, there are several different ways that you can qualify for a loan and keep scaling. One is if you're buying places cheap enough that they're, effectively their monthly mortgage payment, their monthly debt service is...

Plus the rest of your personal debt services is less than 50 % of your income, right? You can qualify for on that basis. Additionally, because you're doing buy and hold rental real estate deals They will add in 75 % of the market rents for the property You're gonna buy into your income. So that increases your ability to still qualify under debt to income. And if you're finding really good deals, there's several deals that I've done with Chad where Chad's like, hey man, this actually made your DTI, your debt to income ratio, better because you found such a good deal of rents relative to what your mortgage payment is. Like you bought this thing for such a good price that like this actually makes your DTI better. Then the other, then if you're still having issues after accounting for those two things,

there's the DSCR debt service coverage ratio type loan where they will underwrite, if the income from the property at least breaks even with the mortgage payment taxes and insurance, you can get a loan through the DSCR program. I'm curious, like Chad, how, just because I think a lot of people don't know this, like I know a bit about this, but like, if you're just an owner operator of a business, you're taking cash flow and you're buying a few properties a year, you're getting 30 year loans on all these. How many loans can one person have? At what point do they have to stop scaling and look for capital somewhere else?

Chad Hampton (34:06)

That's a great question.

Okay, so it depends. So from the conventional loan standpoint, like Freddie Mac, Fannie Mae, they're gonna say 10 financed at a time. But there are investors like investment banks or hedge funds or whatever, venture capital funds. So, your Citibanks, your Goldman Sachs, those type of investors that we can use their products to do DSCR loans, bank statement loans, all the things that fall under the umbrella of non-QM, non-qualified mortgage, where they'll have their own rules. Some of them will allow 20 properties, or some of them will allow five properties with just them. There's different things like that. It depends on that particular investor's appetite. And you can add to your portfolio just by diversifying the investment source behind the scenes that's guaranteeing the loan.

Jon Blair (35:04)

Hmm, Yeah, see, that's interesting. Those are some of the tidbits that you know that like not every average loan officer understands that has been really intriguing about working with you is that like, and I'll say this, and I'm not trying to just like, you know, shamelessly plug Chad Hampton, although he has been fantastic to work with, but having the right loan officer makes all the difference in the world.

Like I actually moved from a different loan officer within ⁓ the same lender over to Chad. It was partially because of just licensing, local licensing. My previous loan officer who helped me buy my personal residence, who was fantastic at that, right, was not licensed in the state where I was investing, but I learned a valuable lesson, which is that Chad is also an investor, right? And a loan officer who understands investing, is really important because the options and the factors, especially when you're talking about scaling a portfolio, are not the same options and factors that a loan officer is walking you through on the personal resident side of things. Like, Chad, how important is it that people have a loan officer that understands financing investment properties?

Chad Hampton (36:25)

Yeah, it's big. Honestly, so I have a partner in our business, Brian Lynch, and he is a guru with condos.

We gained a lot of business internally from our umbrella just because you understood the condo space so much and there's different tripping hazards, I'll say there. So given the market we're in, most of the deals are second home or investment property. So we had to be very, very detailed and knowledgeable about the ins and outs and the things of that manner that affect those types of deals. Because they are different. The income sources of the people that we deal with are different. The way that their tax returns are done are different. And so basically, I'm one of those people that has a thirst for knowledge and so I just try to learn everything I can about that. Like I'm saying, every time we do a deal, we talk about things and I think about your mindset and we'll implement that somewhere else, right?

And so I think just...having someone that understands what you're trying to do as a both a macro and micro level, I think makes all the difference in the world because I may have seen something, for example, somewhere else that we don't know to ask about, right? And so, I mean, it's the same thing. There are types of deals that I don't do that much of and I'll go ask someone that I know that does a lot of those, right? Or, you know, might even say, hey, this is in so and so's wheelhouse, whatever. But there are, for example, a lot of people build a portfolio like we're talking about for cash flow for long-term appreciation for residual income later in life and maybe they exhaust their capital upfront on their first deal or their first or second deal or whatever and they want to acquire some more properties because they like the cash flow they're getting. Well, there are things like HELOCs or HELOANs which are the the 30 year fixed rate equivalent of the line of credit option, right? And a lot of people will use those to get down payments on more properties. And because we saw so much of that, Brian and I expanded our state licenses. Like I can do business in 49 states and Puerto Rico because I would have people wanting to buy, you know, a beach condo or an investment house somewhere, but they lived somewhere else. And things just got more complicated where I need to get I need to get equity from here to do this and do that or what have you. So I like to build portfolios with people, right? So we have like a working relationship where I understand what they want, they understand, you know, and it just makes it smoother. And so I think the more experience you gain there...

the more things you can predict and make them either not a problem or easier to handle when it comes up. I think it's just the same as any other type of business that any of these founders or business owners do. They're gonna know more about whatever it is that they do than someone else that may compete against them, but not really in their wheelhouse.

Jon Blair (39:40)

Totally. I found the same thing with agents as well. Like got to work with agents who have they don't have to exclusively work with investors, but they should have a they should have a significant book of business with investors because it is not the same game. Right. And like knowing the ins and outs and the lessons learned and the, you know, tips and tricks and hey, the avoid this because I've seen this mistake made. That's what saves you the money in the long run, you know, and ultimately helps you place better bets as you're growing your portfolio. So look, before we land the plane here, I'm curious if there's a founder of a DTC brand who's listening to this episode and they have 50 to 100K that they've been thinking about wanting to invest in real estate, just what is your simple advice on how they can get started on just like doing their first deal.

Chad Hampton (40:40)

Yeah, so So first of all, to structure it, I think talking to a loan officer that knows investments would be a good thing upfront because you figure out, know, a what it's going to cost you out of pocket, and then be what that would look like. cash flow modeling on a on a monthly basis or an annual basis, however you want to look at it.

The thing about that is, I think that could help you also look into a specific market, because if you can figure out the price point first, that will drive which markets you can play ball in and still have a desirable property, which in my opinion is one of the most important things, because that drives your supply and demand, right?

Because you can get a great deal on a property that's not necessarily a great area and it might not be that easy to keep it rented. I think talking numbers with someone is a great first step. And then you find out how serious or how...

you know, how tough it would be to make that first deal happen. And then you can go plug in with a good real estate agent who, like you said, is familiar with investors because they're going to know good inspectors, they're going to know good contractors. You know, a lot of times you can just do cosmetic stuff and increase your rental potential, but you want somebody who's going to find the hidden problems ahead of time.

I think that's your first two probably most important steps. Find somebody to talk money with and then go find an expert from a local area that you're interested in to go look at properties.

Jon Blair (42:31)

Yeah,

I think that's a great idea. It's a money game you're playing, so talk to the money guy first for sure. And not to mention, I mean, Chad has been super helpful on like, helping me think about what other markets we could potentially play in, because if he's doing deals all around the country, he's seeing some, he's seeing numbers, right? All around the country as well. So like a big part of how I got started was I just started asking people in the space, where should I invest? Why?

You know and like you got to go do your own research and validate it, but just ask people for introductions ask people for suggestions and believe me you'll you'll have more than your fair share of opportunities before you know it if you're willing to just get out there and ask. So unfortunately, we have to land the plane. This we could talk about I could talk about this for a really long time, but before we do close up here, where can people find more information or reach out and contact you and find out about how you and your partner can help with their real estate lending needs?

Chad Hampton (43:33)

Yeah, thanks for asking. So my personal cell phone is 601-624-7163. We can drop that. And then I have an email address, is champton @ cfmtg.com.

Jon Blair (43:49)

Heck yeah, definitely reach out to Chad. If he can't help you for some reason, I'll be pretty surprised, but if he can't, he will definitely pass you off to someone who can. He's a wealth of knowledge when it comes to not just the financing of real estate investing, but also other resources that can potentially help you in your journey. So man, I really appreciate you coming on, Chad. I just want everyone to take away from this. If you're able to generate cash in your business,

And there's no reason why you can't become a real estate investor. As Chad mentioned, even in today's interest rate environment, if you've got 20, 25%, you can put down on a property and you can get it to cashflow. There's multiple upsides from here on out into the future, Appreciation, refinancing when rates come down, rent growth, just to name a few. And it's never been a better time.

Contrary to what you may be hearing out there. It's never been a better time to look at starting real estate investing There's lots of opportunity. There's more buyers markets out there than there have been and I don't know five plus years. So now's a great time to get started

Chad Hampton (45:00)

Totally agree with that, man, totally agree with that. Also see a lot of people who offset W-2 income with their tax benefits too.

Jon Blair (45:08)

Yeah, which is absolutely huge. Look, I hope this was helpful everybody. Remember, use your brand to create wealth. Don't just wait for the exit and real estate is a great way to get started. And also, don't forget if you want more helpful tips on scaling a profit-focused DTC brand, consider following me, Jon Blair, on LinkedIn. And if you're interested in learning more about how Free To Grow's DTC accountants and fractional CFOs can help your brand increase profit and cash flow as you scale, check us out at freetogrowcfo.com. Until next time.

Scale on. Thanks, Chad.

Chad Hampton (45:39)

Thanks, Jon.

Mini Episode: Why LTV in Shopify and TripleWhale is Wrong

Episode Summary

In this mini episode of the Free to Grow CFO podcast, Jon Blair discusses the concept of LTV (Lifetime Value) in the context of DTC brands, emphasizing its importance in measuring customer value over time. He highlights common misconceptions about LTV, particularly the confusion between LTV and LTR (Lifetime Revenue), and stresses the need to measure LTV in margin dollars rather than revenue. Jon also explains the significance of time-bound LTV and its role in assessing profitability against customer acquisition costs (CAC).

Key Takeaways:

• LTV is the cumulative value that a customer represents to your brand over time.

• LTV should be measured in margin dollars, not total revenue.

• LTV must be time-bound, expressed in specific time frames.

Episode Links

Jon Blair - https://www.linkedin.com/in/jonathon-albert-blair/

Free to Grow CFO - https://freetogrowcfo.com/

Transcript

00:00 Understanding LTV: Definition and Importance

03:14 Measuring LTV: Common Mistakes and Correct Approaches

04:59 Using LTV for Business Decisions: Profitability Assessment

Jon Blair (00:00)

What is LTV? How is it measured? And why do most brands get it wrong? Hey everyone, welcome back to another mini episode of the Free to Grow CFO podcast, where I break down one key concept that will help your DTC brand increase profit and cash flow as you scale. I'm your host Jon Blair, founder of Free to Grow CFO, and today we're gonna dive into a well-known, but often misused DTC metric, LTV. Alright, so first, what is LTV?

If you've been in the DTC world for any amount of time, you hear this term get thrown around all the time, usually by marketers, right? LTV is the value that a customer represents to your brand over time, right? So they're gonna, when you acquire a customer, in the first month that you acquire them, they're a new customer, and in the first month that you acquire them, their first order, unless they order twice in the first month. But generally, the amount they spend on their first order is their LTV. But as they come back and they purchase over time, they repeat purchase over time, their LTV increases. The value that that customer represents to your brand over time increases as that customer comes back and repeat purchases. So LTV is the cumulative value that a customer represents to your brand over time.

How do you measure it? This is where brands go wrong, honestly, I think 99% of the time. If you look in Shopify or TripleWhale at the cohort analysis that exists with any of those platforms or any other platforms that give you a cohort model, oftentimes what is called LTV in those models is actually what we call at Free to Grow CFO, LTR, lifetime revenue because it's measured in the average amount spent per customer within a given cohort over time.

So let's definitely not call revenue amount spent per customer LTV because it's not, it's lifetime revenue. Why is it not lifetime value? Because your brand doesn't keep 100% of the revenue value, right? You keep your margin dollars on that revenue value you should actually measure LTV in margin dollars. What margin? Some people call this fully loaded gross margin. We Free to Grow call it contribution margin before ad spend. Effectively, you take revenue, you subtract landed product costs, shipping and fulfillment costs, and then credit card and merchant fees, not ad spend. So whatever that margin is before marketing, whatever that percentage is, you wanna multiply that by your LTR, lifetime revenue, the amount spent per customer in a given cohort. That then gives you the margin dollars, right? The cumulative margin dollars that that customer cohort represents to you over time. So, we always want to and need to express LTV in terms of margin dollars, and that's margin before ad spend the next thing that's really important in defining LTV is it must be time-bound. You can't just a non-bound LTV. It needs to be what is the 30-day LTV? What is the lifetime value of that customer cohort over a 30-day period? What's the 60-day LTV? What's the 90-day LTV? What's 120-day LTV?

So, now that you understand these things, let's take a step back here and say, how do you use LTV in a meaningful manner to make decisions within your business? One of the most important things is to take a time-bound LTV and compare it to your CAC, which is the ⁓ cost per customer that spent in ad spend to acquire that customer. And as soon accumulated LTV in margin dollars surpasses the CAC for that cohort, that cohort is now profitable. say we say the 60 day LTV for a cohort is $50, the CAC for that cohort was $55, so at the end of 60 days that cohort is still turning a $5 loss. $50 LTV minus $55 CAC. Let's say that the 90 day LTV for that brand measured again in margin dollars is 65 and the CAC was 55.

Now that CAC has a $10 contribution margin dollar profit at the end of 90 days. reason I'm breaking this down for you is because it's very, very important to understand what LTV is and isn't so that you can calculate it the right way to actually assess the profitability of a given cohort. If you were to use LTR, lifetime revenue, you would think potentially you wouldn't be able to measure the profitability of a given cohort against CAC.

So in summary, LTV is the value a customer represents to your brand over time in margin dollars and it must be time bound. It must be expressed in a number of days.

Why Your Bank Won’t Finance DTC Inventory

Episode Summary

In this episode of the Free to Grow CFO podcast, Jon Blair and Quentin Purtzer discuss the challenges DTC brands face in securing financing for inventory, particularly in the context of traditional banks' reluctance to finance DTC inventory. They explore how Flexport Capital offers unique solutions through real-time visibility of inventory and logistics, enabling brands to finance in-transit inventory and navigate personal liability issues more effectively. The conversation emphasizes the importance of clean accounting and the role of a CFO in helping brands scale successfully, supported by a case study illustrating the benefits of strategic financial planning and collaboration with lenders.

Key Takeaways

• Collaboration between CFOs and lenders can lead to better financing solutions.

• Real-time visibility into inventory allows for more aggressive lending terms.

• Personal liability requirements can be reduced with effective inventory management.

• Flexport Capital provides a unique inventory financing solution that integrates with logistics.

Episode Links

Jon Blair - https://www.linkedin.com/in/jonathon-albert-blair/

Quentin Purtzer- https://www.linkedin.com/in/quentin-purtzer-b4a763a9/

Free to Grow CFO - https://freetogrowcfo.com/

Flexport Capital - https://www.flexport.com/products/capital/

Transcript

~~~

00:00 Introduction to DTC Financing Challenges

02:11 Understanding Flexport Capital's Unique Offerings

05:15 The Role of Technology in Inventory Financing

10:15 Financing In-Transit Inventory Explained

19:14 Navigating Personal Liability in Lending

23:57 The Importance of Clean Accounting for Financing

29:41 The Need for CFOs in Scaling Brands

33:13 Case Study: Successful Financing and Growth

37:00 Key Takeaways for DTC Founders

Jon Blair (00:01)

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 here with my good buddy, Quentin Purtzer senior manager of Flexport Capital. Quentin, what's up, man?

Quentin Purtzer (00:25)

Jon, good to see you again. Thanks for having me on.

Jon Blair (00:28)

Yeah,

I think I was on your podcast, ⁓ what was it? The CFO mindset. You and Nick Kirby, like a couple years ago.

Quentin Purtzer (00:33)

Yeah, that's right. would say a couple of years ago, short lived one of those things coming out of COVID, looking to get into the podcast game like everybody else. I think we did five or six episodes and then unfortunately other things kind of got in the way and shut it down. But yeah, you're able to do that. Join Flexport for multiple webinars. It's been great to have you on.

Jon Blair (00:54)

Yeah, that was a fun one. Honestly, that was one of the first podcasts I was ever on. And so that kind of ⁓ got me into the game. I won't ever forget that. But yeah, so what are we talking about today and why should brand founders listening care? We're talking about why your bank doesn't want to finance DTC inventory. That might sound like a little direct, but like...

If you listen to the show at all or you work with Free to Grow and you've heard me talk about debt oftentimes I'm reminding brands that look in the early stage when you're growing really fast Your bank the commercial banks JP Morgan Chase, Wells Fargo, Bank of America even smaller regional banks They don't like financing DTC inventory why it's seen as risky to them. They like assets like accounts receivable which are more liquid and seen as less risky and so by virtue of the fact that most of the brands we work with don't fit in that credit box, or at least the smaller brands we work with, I've gotten to know the guys at Flexport Capital really well because they have a credit box and a credit product, an inventory financing credit product that has been super game changing for a number of brands that I've worked with over the years. And so before we dive into the nuts and bolts of this, Quentin, can you introduce yourself to the audience and then also just an overview of like kind of Flexport Capital and what you guys are doing over there?

Quentin Purtzer (02:20)

Yeah, definitely. Thanks, Jon. ⁓ Like you mentioned, I'm Quentin Purtzer I'm the senior manager at Flexport Capital. I lead all go-to-market functions for Flexport Capital in terms of new loan originations as well as ongoing client management for large portfolio companies or a large book of business. At Flexport, not only are we a financing, an inventory financing partner, but we're also a logistics company. Flexport was started 10 years ago. ⁓

the goal of making global trade easier for everyone. And so we're a freight forwarder, a customs broker, we have trade advisory specialists. We have warehouses throughout the United States. And then of course we have our capital arm.

Our capital product goes hand in hand with the logistics business of Flexport, where if you're moving a container with Flexport, we have visibility into your commercial invoice for the value of the inventory that's inside of your container. And when those goods, the bills come due for those goods, Flexport Capital will make payments directly to your supplier and extend terms out between 90 and 120 days with Flexport repayment schedules. And so we've been scaling that for.

Really seven years, we had a slowdown during COVID and of course, since 2021 really, we've been scaling the brand and that's when I joined and have been leading the team for a bit over a little more than a year and a half now. yeah, our product is to embed financing within your supply chain setup. The goal is to make this very, very straightforward. Think of it as a buy now, pay later program for your inventory and then you're pairing it with your supply chain partner or your logistics partner to make everything simple and consolidated, under one place.

Thanks.

Jon Blair (03:53)

Yeah, whenever I'm doing content or trainings on lending options for DTC brands, always, ⁓ Flexport Capital is always one I mention in in founder terms, I just call it buy now, pay later, like you mentioned, just because it's easy to conceptualize, right? That like, ⁓ Flexport Capital sends the wire directly to your supplier, right? And then depending on the structure you have set up,

with Flexport Capital, there's a fee that you pay to extend that effectively payable out 90 days, 120 days, whatever it is. I always tell brands, hey, think of it as payment terms for a fee, right? Which works really, really nicely in the early stages when you don't quite have the relationship or the leverage with your supplier to actually have 90 day terms, let alone like, even brands that have really solid relationships, going straight to 90 day terms is really hard and oftentimes unheard of, right? And so like, I wanna talk about why, ⁓ you mentioned the, you know, embedding it within the supply chain, and why is Flexport being a logistics company? Why does that allow you guys to provide unique

lending structures or terms?

Quentin Purtzer (05:18)

Yeah, definitely. Well, we're a freight forwarder, but we're also a tech company. We started in Silicon Valley. Our headquarters are still in San Francisco. We've raised money from significant VCs throughout.

throughout the Bay Area. And we've really invested heavily in the technology side of our logistics platform. And so what that means is that everything that's flowing through Flexport is on our dashboard. We can see when shipments are departing. We can see history with your suppliers. We know who your suppliers are, and we can talk to them live on our platform. And so as companies are using Flexport to import their goods, we are able to aggregate data both on your know average shipping times, the cost of your inventory, your patterns, when are you ordering more inventory, less inventory, and we have this unique perspective that a lot of other lenders don't, where we can actually anticipate when you're going to be ordering more inventory and build customized financing solutions around it. So you can see graphs on our on our dashboard about ordering patterns, landed cost over time, and we can track that and then build things to ensure that we know when your suppliers' invoices are coming due, that we can support, that we can move all of your freight, and then we can land. so having this extra layer of visibility just gives us an upper hand more often than a lot of traditional lenders to build the correct, really the correct credit limit size for these clients, and to make sure that we know ⁓ historical ordering patterns so we try to work with them as best we can to not let them get over their SKUs as well where we know that there's this fine balance to find where we want to help a company grow without allowing them to buy two years of inventory all at once knowing there's a 90 day balloon payment coming up shortly thereafter.

Jon Blair (07:02)

For sure. Well, so okay, so here's what's interesting. Like I've done a bunch of ABL deals over the years and one thing, this is my opinion, right? And so like, even have plenty of friends who run ABL lenders, so if they listen to this, sorry guys, I love you. You have great products for the right season of a business, But what's the reality of ABL lending? Because it's based on the asset value, right? And in the DTC world, primarily inventory.

How, the question is from a risk standpoint on the lender side, on the ABL lender side is like, how do we protect ourselves, right? Well, like how do we know we're lending against an asset that actually exists and has that value? So one of the things that they have to do is they have to do these big long inventory appraisals on the front end. They cost the brand money, they take weeks and weeks. It's a lot of information. You're basically getting this full on audit, right? And they usually do that several times throughout the year to basically go assess that this inventory exists and truly has that cost, right? Whereas Flexport actually is taking custody of the goods and moving the goods and you guys are tracking this information effectively in real time in your platform. That added visibility that you guys have, what does that allow you to do in terms of ⁓ the terms you're able to offer relative to an ABL lender?

Quentin Purtzer (08:29)

Yeah, we have physical possession of the inventory for all of our clients. so what that means is that we're able to get more aggressive on our advance rates. So typically you'll see an ABL, and without quoting specifics, inventory advance rates of somewhere between 50 to 65%. With Flexport just because we have that added, one, the added visibility, and we're lending for a shorter period of time, right, typically 90 days, maybe up to 120 in select circumstances, that we will fund up to 80 in select cases.

up to 100 % of the cost of the inventory.

for our clients. And so for a company that's really moving through inventory and turning it over quickly, if they can sell a majority of those goods within 120 days, this is a very low risk transaction for Flexport Capital. And so functionally, when we hold goods for 60 of the 90 days and then you can follow that up with some sort of security, we can feel really comfortable lending at a much more aggressive rate than an ABL And if we need to divert or exercise like collateral, it's not necessarily the traditional type of ABL where we don't need to foreclose on a business, but it is. We have inventory in our possession, we can use that as needed. So it can be very flexible. We can be much, much more aggressive than a traditional ABL lender. ⁓

Jon Blair (09:49)

Yeah, flexible, living up to the Flexport capital brand name, right? But okay, so, how to throw in that joke. ⁓ I always wanna call you guys FlexCap or FlexCapital because it's just like, it rolls off the tongue. So you brought up something that I think lends well to us segueing into talking about in transit inventory, right? Which is, ⁓ back in the day, so like 10 years ago, I was able to get the...

Quentin Purtzer (09:52)

Yeah, thanks.

Jon Blair (10:15)

traditional ⁓ ABL lenders that like e-commerce, I was able to get them to finance an advance rate on in-transit inventory stuff on the water, on a ship, or even just like in-transit on a train or a truck or whatever. Along comes COVID, that all like dries up.

We were able to get, I was able to negotiate several like one time in transit advances, but they were special over advances that cost a little extra money. ⁓ Side loan agreements, things like that. ⁓ Where I have brought a lot of business to Flexport Capital over the years is like brands that they really, they need to finance what's in transit. They're in a period of building inventory. Talk the audience through.

Quentin Purtzer (11:01)

Yeah.

Jon Blair (11:02)

why you guys are able to finance in transit inventory.

Quentin Purtzer (11:07)

Yeah, let's make sure the audience understands the need for that too and why there is this working capital gap there. And let's use an example of a company that's working to scale up but has limited history with one of their factories somewhere overseas. So they need to use a traditional freight forwarding method, like a full container shipping or a steam ship line to move goods across the world. ⁓ As a company's trying to build inventory and building out a relationship with a supplier. Typically there's a semi-standard set of supplier terms that a company will follow where when they're getting to know a new supplier and you know for an apparel brand for instance they may need to pay a 50 % deposit at the time of cutting a PO in order for that factory to just begin production. You know that takes a handful of months and then the inventory is ready to go at the factory in whatever country they're producing it in.

And then that payment is due right at that time for the remainder of their inventory before the goods even leave the factory in whatever country. From there, they need to have a truck go and pick up the inventory, drive it to the ⁓ origin port, and then of course move it across the world into the US typically, and then into a warehouse, and then they're able to sell it. That gap is the in transit, is really the in transit piece that you're describing. And that can be, you know.

Jon Blair (12:25)

sure.

Quentin Purtzer (12:27)

three to four months depending on what you're doing. And a brand that's trying to scale and it's limited on inventory, they have to make the choice of how they're going to allocate their capital. And having to pay for that inventory so far, like upstream from when they're going to be receiving revenue for it, causes this large working capital gap.

Flexport does we are able to be a natural complement to like bridging that gap and the way that we're able to do it is that all these things can happen through our platform and what I mean by that is if a company is using Flexport as their logistics partner, we have order management systems like booking management systems. We have different products available where you can actually cut that P.O. and track the production of your inventory through our system. And so we can see in real time how your inventory is being produced where it is in the production cycle. And then containers can be booked directly off through our platform. And so we have all this real time upstream visibility into production being. ⁓

like happening in real time. And then when the goods are ready and those bills are due, we've seen them being produced over the last few months. And so we know that we can immediately turn around and finance it because these goods are real. The PO has been cut. The commercial invoice is real. All of the shipping documents are real. So there's just not this.

Jon Blair (13:48)

And you guys are the ones picking it up, right?

Quentin Purtzer (13:49)

And then we go and pick it up, right? Depending on your Inco terms, meaning when you take custody of the goods, ⁓ you tell Flexport to go send a trucker to the factory in whatever country, we pick it up and we handle it from there. And so because we're holding that, we feel comfortable in tandem with a company that has financials that will be able to make it really over the next three to four months and well beyond that we can partner to finance that entire in-transit cycle. And so when goods land, if you're growing fast enough, you can turn around and sell them without needing a secondary financing partner. Or then you can have those goods land and be eligible in a borrowing base or something more traditional like an ABL and pay us off through an ABL. So we really can't complete the working capital cycle financing that in-transit in such a significant way.

Jon Blair (14:39)

Yeah, no, so like let me dig into that further and summarize some of this for everybody. So if a traditional ABL, right, you can't borrow that 50 to 65 % advance rate until that inventory is in your domestic warehouse ready to be fulfilled in finished form, right? Depending on where you're ⁓ exporting the goods from and where you're importing them into in the US.

on the low end, maybe the in transit time is 30 days, on the high end, 60 days, 90 days, 120 days, who's financing that inventory, right? That's in transit if you can't borrow against it ⁓ on your ABL, because it's not eligible until it gets to your domestic warehouse. Well, you either have to finance it through, you basically have to finance it through equity dollars, right?

And so the thing is that, depending on what season your brand is. Now, usually, generally speaking, when your brand gets big enough, right, tens of millions of dollars in revenue and generating sufficient profitability, you may have enough retained earnings, like in your equity cushion, and enough inventory on hand in your domestic warehouse that between the two of those, you can finance in transit. But what we find oftentimes working with brands who are growing super fast, I mean, we've brought more than one brand to Flexport for this exact scenario. This brand is growing so fast, they keep depleting their inventory levels, right? They're selling out time and time again. They're air shipping stuff from China or somewhere overseas, which is adding a huge amount of cost to their cost of goods sold. And they're doing it just to keep up. And they come to Free to Grow CFO and they're like, dude, there's gotta be some way that I can borrow enough money to put ⁓ a container on a ship and save a ton of money on each unit, but like be able to wait the time for that inventory to show up. But what is their challenge? Their challenge is they're growing so fast and it takes so long for a ship to arrive versus an airplane, they have to place quite a big order to get kind of that stream, that flow going. And they don't have enough capital in the bank to place those initial orders to get inventory built. So, will bring them to a lender like Flexport Capital, right? They'll finance the inventory, these container shipments, which Flexport moves for them, that allows them to move into the system and be available in their fulfillment warehouse and either they can just pay off Flexport Capital and sell through it or if they need more funding, they can have a traditional asset-based lender, refi or take out Flexport. And actually you guys, to even work alongside ABLs on an ongoing basis, if it makes sense, correct?

Quentin Purtzer (17:36)

Yeah, yeah, that's right. Because we have that physical possession of the goods and we're financing for such a short amount of time, know, relatively speaking, compared to an ABL who may be working on multiple year, you know, year long draws. We can absolutely work in tandem with a lender, but it really just depends on what a company needs. So we will be, you know, we will talk to a lender and carve out, you know, what they call like an inter-creditor agreement, meaning that when Flexport has the goods, we have priority over.

like an ABL, as soon as they have it, it's in their borrowing base and so they can. So this can be, it's a bit of a clunky solution, so to speak, just because you need to use two lenders to finance the same inventory. But ⁓ yeah, that's exactly right, where we can work with a company in tandem. And then for a lot of cases, and some of the cases that you brought us and the clients, they're growing fast enough and they have a high enough gross margin, where if they finance this larger ⁓ inventory buy, and they have, you

70 to 80 percent gross margins. When that larger container lands 40 days in, they have 50 days to only sell a third of the inventory that they just brought in to pay for the cost of Flexport capital or the cost of the inventory. because we've lended the cost of inventory and then you sell it retail value, of course, and so the spread between that can really recover the debt quickly. And so we enable these brands, even without an ABL, to sell through and then have a lot of landed inventory in the warehouse.

and right-sizer inventory to make sure that they can take advantage of the upside of their efficient marketing or...

Jon Blair (19:14)

For sure, for sure. So there's another thing that I wanna chat about here, which is that asset-based lenders, oftentimes have to require a lot more.

personal liability for Owners, I think this is my opinion. I believe there's a lot of truth to it and it's because since they don't have ongoing visibility of where their collateral is They basically need to put the owner on the hook because they're certifying Usually the owner founder assigning the borrowing base saying I am certifying that this information is true and you can lend me 60 % against this inventory value. So there's a lot of trust there. There's always trust of the founder with every lender, but I know that Flexport has been able to work with founders on personal liability a little bit more. And from my vantage point, it's because you guys already have the collateral, right? You don't need them to certify where the collateral is. Flexport has it. Am I correct in that? what are some of the common ways that you guys can get loans underwritten faster and also have different like owner liability than like a more of a traditional asset baseline.

Quentin Purtzer (20:31)

Yeah, definitely. have real-time visibility into all the inventory that's in our possession within the Flexport system, ⁓ and we have that on a daily basis. So what I mean by that is, when I mentioned earlier that Flexport can go and pick up the inventory from your company's factory, we load that into our platform, and we have the commercial invoice value, and we just upload it into a dashboard that says, you know, Company X now has a million dollars of inventory in Flexport system, and it's at this location.

And then every day we get updated all the way through when those goods are released from Flexport. And so in some instances, that's when goods are cleared from customs or were delivered into another company's ⁓ warehouse. Or if they're in Flexport's warehousing system, then those are just transitioned. And we can see exactly how long goods have been sitting in our warehouse, the composition of the goods, what's ready for sale and what's not. And so with that, understanding of how long inventory has been sitting, how quickly it's moving, and then the historical patterns over the shipment cycles over the years, then of course, like at the warehousing side, the turns. We don't always need to take a personal guarantee or any additional like owner liability with our customers because we can under, we believe that we can underwrite more effectively based on this additional data that we're not actually relying on the owner for.

But we have our own data and our own software engineers that are building this tech to help us make these smarter decisions. And with that, we can really pinpoint, one, challenges within a company. Why are they not moving SKU? Why? Or what are the upcoming ordering plans? And we can build customized lines against that. And when we get to work with a company that specifically, we don't always feel as though we need to work. We need to build in owner's liability into the security pool that we're going to be taking because we have the physical inventory and the data to really track what we're doing and so we can be traditionally more flexible than an ABL partner.

Jon Blair (22:27)

Obviously it's all case by case, right? It depends on the financial profile of the business and a number of other factors, but there's flexibility that there isn't, that there sometimes just is not with other forms of lending. The other thing is, what about underwriting? How hard is it to get underwritten? What does that take?

Quentin Purtzer (22:50)

Yeah, we try to underwrite quickly. And I caveat quickly as related to a traditional ABL where the production of a term sheet should be pretty quick. We like to see two years of financials. We like to see bank statements and forecasts and have a discussion with the owner over what their borrowing plans are and what their goals are. But then we can have a decision ready within 10 business days of receiving a full underwriting package. And then there's not additional underwriting that we need to do after we've heard of

sheet because part of our term sheet stipulates that you're going to be using Flexport for logistic services or you already are and so we have that additional data ready to go and so we don't need to have the inventory exam or appraisal that is traditional with an ABL. I won't say that we can move as quickly as emerging cash advances or revenue-based financing ⁓ options.

That being said, we tend to be a cheaper cost of capital. So we're kind of in that right in the middle type of underwriting, where it's fast but not immediate, but there is not the extra hard burn associated with ⁓ a longer term, like, borrowing-based driven solution.

Jon Blair (23:57)

Okay, so you were mentioning two years of financials. I'm gonna ask you the obligatory question for coming on a Fractional CFO Firms podcast. What are some of the common issues that you guys see with messy accounting and why might that hinder a brand's ability to get a loan with Flexport Capital or any lender for that matter?

Quentin Purtzer (24:00)

Yeah.

Yeah, there's one big challenge, especially when I prefer clients over to you, is the difference between cash and accrual-based accounting. And it's more of a spectrum than saying you're either on cash or accrual-based financials, right? ⁓

Jon Blair (24:24)

Ha ha.

I there's like, there's this I know exactly what you're talking about. There's this hybrid. Like, some cash, some accrual, right? ⁓ I don't, yeah yeah, anyways, go on.

Quentin Purtzer (24:38)

Yeah.

But a great example of that is like freight in on your your P&L Right when you're moving freight, especially for a company that isn't consistently importing inventory or just buying inventory if you can use a if you can buy inventory ⁓ In with like a like, I don't know a few times a year Oftentimes we see that as just hitting the P&L all at once as opposed to like actually accruing for the freight in

Jon Blair (24:48)

Mm-hmm.

Quentin Purtzer (25:09)

in when you're tying that to the revenue that you sell. With that, you get these fluctuating gross margins and fluctuating months of profitability that it doesn't always prove exclude us from doing a deal, but it really slows down the underwriting process to one, try to understand what's happening in those months. Two, if you told us you're on accrual-based accounting, but there's some inconsistencies there. And then it really allows us to take a step deeper into trying to one, understand where this business needs and if it is something that we can potentially take a risk on if they don't have full visibility into ⁓ their accounting statements and anything like that. That would be one, just a kind of structural challenge that we see pretty often with companies that we underwrite.

Jon Blair (25:55)

I see that constantly. do all of our, what we call our free CFO audits. It's part of our sales cycle. We analyze for free a brand's P&L balance sheet. ⁓ And we do it in part to give some tangible value for free to our prospects. But we also do it to understand what's under the hood and make sure that we understand where the brand's currently is and what the financial opportunities are going forward. And I was doing an audit last week and I had a conversation with a brand about the exact thing that you're talking about. what I explained to the founder was like, hey, let me explain to you in kind of like simple terms why it's detrimental for you to be expensing or charging all of your freight in, in the month you get billed for it straight to cost a good sold. Because,

Right now, this particular brand, they're in a season where they really want to understand how hard can they push on ad spend, right? How hard can they push to grow the brand through advertising? And I said, well, because some months you have these big charge-offs to cost a good sold for freight in and other months you don't, I can't tell you how profitable your ad spend was or wasn't in a given month. I can take a step back and maybe look trailing 12 months, but that's not helpful for this month's

profit decisions, right? And so we actually have to try to take a step, like you said, take a step back and figure out what would your margin have been and even estimate what would your margin have been if we had built this cost of goods sold or this freight in into your inventory valuation and charged it off to cost of goods sold as you sold the product. Either way,

we're trying to effectively do the accounting right in hindsight. So let's just figure out the process to get this built, get your freight in built into your inventory valuation when you purchase it or you get billed for it and charge it off to cost a good sold as you sell the product. Because if not, we will be guessing every month as to how profitable you actually are. And when you're trying to scale, you're making a lot of decisions, you're pulling a lot of levers. You wanna know if the levers you pulled this month drove profitability or not.

You don't want to guess about that, right?

Quentin Purtzer (28:11)

And what's so important about that is these scaling brands like unfortunately are going to be strapped for cash You know as you scale like margins aren't they're not sass margins, right? You're a bottom line if you're doing 20 % net margins like that's a fantastic business and so you're needing to continue to make the right decision for your business whether you invest more in inventory more in marketing and that that Balance is it's a choice over where those dollars go if you're not accurately accounting for that and you can't attribute the performance

It's just a huge risk to the business just because unfortunately the margins are thin and these choices really matter. when those choices aren't, they're not made with the right data, it can be extremely detrimental and things can unfortunately go down really quickly. And it's why it's just so important. So that's something that we always look for in a brand. And it's why we like to refer our brands over to you is because we know that they're going to be accounting correctly for.

for everything and we can trust the final we're receiving on the back end.

Jon Blair (29:08)

for sure.

So I'm curious, what is your opinion? And we didn't, I actually, didn't, when we were preparing for this, this ⁓ question about accounting issues, I hadn't even thought of that, it just kinda came up in real time, and this is another question we didn't prepare for, but I'm just curious, what's your opinion on why a brand not only needs clean accounting, but needs a CFO once they hit a certain size to help them with forward-looking financial planning?

Quentin Purtzer (29:41)

Well, the problems that you have when you scale only get more significant as you continue to scale. And so when you're using a traditional accountant or just someone internally without CFO skills or that kind of talent set,

Being able to project out what you need for all four quarters of a year and make sure that you're making strategic decisions in Q1 and Q2 that will enable you to sell in Q3 and Q4 if you're a traditionally seasonal business that is selling for Black Friday, Cyber Monday, it's incredibly important. If you are just making decisions as they come without an overarching plan, which is typically what a CFO or a fractional CFO will do for you is build that plan and allow you to track to it.

You just don't know what you don't know if there's no plan, right? And so you can have these rough guidelines and then any disruptions can just throw your entire year or the future of your business into disarray. Having a CFO who's been through changes in, for me, for changes in supply chains and changes in tariffs, Having someone who's been through that and is able to at least weather or model out different scenarios and talk you through how you're thinking about inventory purchasing, marketing, those different decisions, it's incredibly important, especially in a volatile environment.

Jon Blair (31:05)

Yeah, and I'll even tell a brief story. We have a mutual client who ⁓ took out a Flexport capital line or inventory financing, bought a huge amount of inventory for a holiday in 2023. The ⁓ brand was growing super fast, right? And the founder placed a huge order. But before he did, we went through a financial projection exercise and we said, hey man, this is a massive order.

But even if you only hit half of your sales forecast, we will be able to help you right size the ship over the course of several months. We missed the projection by a lot, still grew the brand sizably, but we missed the projection by a lot. And coming out of the year, we actually sat down with Quentin and the Flexport Capital team and we said, hey, the solution we have in place right now,

we had used the inventory financing product, Flexport also has a term loan product as well. We sat down and we kinda mapped out basically the next six months and said, hey, we need a fresh draw of capital from you guys, but here's how we need it structured. And we sat down, we looked at the projections with them, we got that in place. ⁓ The brand now today, ⁓ almost a year and a half later,

is debt free at the moment. Inventory has largely been right sized. It took 12 months to do it. But with the right partnership between us as their CFOs who could put together scenario projections and actually plan out the capital structure that we needed, we were able to sit down with Quentin and his team, make a case for like why we needed the debt to be structured slightly different. They were able to go to bat for the brand and...

It was a win-win-win all the way around. And so that's like the perfect story about like how the brand can partner with a fractional CFO and a lender to put together a much more sophisticated solution than the brand could have done on their own.

Quentin Purtzer (33:13)

Yeah, and the future of Flexport Capital is really aimed to be doing that. And we have nothing officially to announce today on this podcast, but it is something that we'd like to continue to explore, where this brand you're talking about is using Flexport for their freight forwarding. So the in transit piece is covered. They also use Flexport for warehousing. And so we have all the data that I mentioned earlier, where we can see the inventory on hand, how quickly it's turning, the value of the inventory.

And so, you know, over time we'd like to leverage that data into full comprehensive solutions and whatnot. We were able to use this client as a bit of a test case to really show that with a strong CFO, strong planning and inventory in our possession that we can do incredible things for brands and really match their conversion cycle on the type of financing that they need in a way that is not disruptive to the brand. And it's somewhere that we like to go and something that we're definitely working on.

Jon Blair (34:05)

Well, and I quite frankly, like without us partnering with you guys on they one couldn't have placed the bet that they placed with trying to grow in 2023 so big come out of that bet behind where they thought they were going to be and not just survive, but thrive like in in 2024, they ended up being far more profitable than 2023. 2025 is shaping up to be a great year. We still work with them and

And like I said, they paid all their debt off. Like it was a win across the board. They haven't continued to refinance the debt or take new draws. They borrowed the money for the time they needed it. They got profitable enough to pay that loan back with the profits and everything turned out well in the end. so it's about, but I will say one takeaway is, and I helped lead the charge with this for this particular case, but I was like,

You know, the founder was really scared at first when he came out of, of, you know, for a moment, he's like, man, we really missed our projections. Like it's okay. We look like let's, let's look at the new projections and I can show you we're going to be okay, but let's sit down. The lesson is sit down with your lender and say, Hey, here's where, here's what ended up happening, right? Here's where we're at. Here's what we need to keep moving forward. Here's our plan. We laid it out for them. And that's a much different situation than like.

missing your projections and going man I hope my lender doesn't like send me any emails asking me about this and I have to fess up to this you know what I mean

Quentin Purtzer (35:37)

Yeah, no kidding, and I should have brought that up as another benefit of a fractional CFO like you all is that you get to advocate for your clients and you get to build this and you get to have multiple test cases, you for better or worse over what the brands that you're working with need. So you're able to lay the case out to all parties involved and make everyone comfortable. It's almost as an intermediary, right, between a lender and a founder for, you know.

you are the expert, here's the cash flow of projections, and then it's able to be vetted. I don't want to say in a more real way than something that's founder led, but it's just, it's a second set of eyes that's always, always beneficial for a lender to see because they know that they can trust us and there's history there where we don't know every, every founder, especially at the onset of relationships. And so that, that built up history can make a huge difference in advocating to get what your founder needs, as well as just to build out more favorable terms and, and, build out different options for your founders.

Jon Blair (36:35)

For sure, for sure. So before we land the plane here, I'm curious, we have a bunch of founders who are gonna be listening to this episode. What are some of the key takeaways or maybe key indicators that you wanna leave founders with that might be, how do you put on a founder who's listening to this radar?

hey, Flexport Capital might be, this might be the right time for Flexport Capital. What are some of the things they should look out for and take away from our discussion today?

Quentin Purtzer (37:08)

Yeah, there's a few of them. One is that if you're importing, consider Flexport as a potential partner for you. Whether Flexport Capital works or not, we can do literally anything that you need in your supply chain to benefit your business and give you the visibility that you need with suppliers or where your inventory is throughout the world. For Flexport Capital specifically, there's a few things that you should think about and if you want to reach out please do. The first is when you're negotiating with suppliers and they are not budgeting on terms, reach out to Flexport Capital because we can give you those terms you know for a fee but it's something that we can partner with. Two, if you're struggling to have to keep inventory in stock and you know that if you buy more inventory you can grow more, reach out to us. Or have Jon reach out on your behalf.

We can help you place those large orders and have the confidence that when your balance payments come up, once that inventory is ready, that we can give you 90 day terms on top of it.

And get you to a point where you're actually ahead on your inventory, you're not always trying to catch up and stay in stock. And then three, if you're looking for additional availability and you're a brand that has been able to ⁓ open a line of credit or an ABL with a bank or a private credit institution, and there's just a little bit of a gap that you need to fill, meaning the in-transit piece, or if you need to build a little bit more inventory, then your line can support getting ready for your peak season reach out, we very likely already know that ABL, we know the folks there. And we can work in tandem to give you a little bit more availability to make sure that you've right-sized your line. So keep us in mind really ⁓ for anything tied in transit, ⁓ inventory and financing.

Jon Blair (38:57)

Those are three great triggers to look out for. I was smiling while you were saying we likely already know your ABL lender, because I was thinking to myself, I was like a funny ⁓ kind of like LinkedIn post headline would be like, your lenders already all know each other and they're all talking about you behind your back. ⁓ it's like, I'm being a little facetious there, right? But like, everyone knows each other. It's a small space, especially in consumer goods, and I would say even furthermore, lenders who like or are comfortable with e-commerce. And the reason I'm bringing that up is because like you don't want to burn a lender. You want to have good relationships because guess what? Not only will you burn the bridge with that lender, but they all know each other and they and you don't want word to get around that you're a brand that is like a problem to work with. But keep in mind, lenders are willing to look at working alongside each other. So don't be afraid either, right? Like everyone's looking for a win, win, win. Obviously you may not have the financials or the situation that would allow two lenders to come in at the same time, but like don't be afraid to ask.

Quentin Purtzer (40:07)

Yeah, definitely. And usually it's just about making sure that you're very specific over how you want to use a lender. If you want to use Flexport Capital for Intransit and another ABL for landed goods, that can work all the time. in the consumer goods space, especially on the DTC side, there's so few lenders that are truly comfortable with lending on inventory only, without AR, that you do see the same players over and over again, which is a great thing. It builds a strong community and it enables brands to build the right solution for what they need to give them the cash flow to grow and really take that worry out of the equation at least, know, for the short term here. And then once the banks come in, can always be a different view and usually that's when we try to partner more selectively. yeah, it's a great community and everyone's really supportive and trying to help brands grow.

Jon Blair (41:02)

So before we end here, where can people find more information about you and or Flexport Capital?

Quentin Purtzer (41:09)

Yeah, Flexport.com has got everything on there. It's got our 20 different services that we provide, and Flexport.com/capital is our website. And then of course, my name's Quentin Purtzer I'm on LinkedIn. ⁓ I'm all over the place, and I can always send over my contact information. ⁓ My team is spread out all throughout North America. We're very happy to have conversations with anyone who'd like to chat, figure out what the best solution is for them. And of course, ⁓ Jon and I are talking all the time. So you know. If you're a brand that is interested, make sure that you reach out to one of us and we'll get in touch.

Jon Blair (41:41)

For sure, definitely reach out to Quentin if you're interested in what we've talked about here. And don't forget, if you want helpful tips on scaling a profit-focused DTC brand, consider following me, Jon Blair, on LinkedIn. And if you're interested in learning more about how Free to Grow's DTC accountants and fractional CFOs can help your brand scale, check us out at FreeToGrowCFO.com. And until next time, scale on. Thanks, Quentin.

Quentin Purtzer (42:05)

Thanks, Jon.

Mini Episode: A Dead Simple Formula For Building Wealth Without Selling Your Brand

Episode Summary

In this mini episode of the Free to Grow CFO podcast, Jon Blair discusses how DTC brands can build wealth without relying on a big exit. He outlines a simple three-step formula that includes optimizing cash flow with a CFO, investing in long-term rental properties, and working with a tax advisor to maximize tax benefits. This approach allows brand owners to create a stable income stream and build wealth over time, independent of the sale of their business.

Key Takeaways:

• Many brand founders mistakenly believe wealth comes from selling.

• Building wealth takes time but is achievable without selling.

• A good tax advisor is essential for maximizing benefits.

Episode Links

Jon Blair - https://www.linkedin.com/in/jonathon-albert-blair/

Free to Grow CFO - https://freetogrowcfo.com/

Transcript

~~~

Jon Blair (00:01)

Think the only way to build wealth through a DTC brand is through a big exit? Think again. Welcome to another mini episode of the Free to Grow CFO podcast, where I break down one key concept that will help your DTC brand increase profit and cash flow as you scale. I'm your host, Jon Blair, founder of Free to Grow CFO, and today I'm gonna break down why you should stop waiting for an exit to build wealth and instead use your business to buy assets now.

Okay. So I think during the COVID era, many brands saw that it was relatively simple to get your brand purchased by a strategic acquire or private equity or something like that for really high multiples. And quite frankly, ⁓ irrational multiples based on revenue as opposed to EBITDA and the true earning power of a lot of brands got caught up in that and there started to begin to be this prevailing kind of ⁓ thought across the e-commerce world that like, hey, the way that you really build wealth through an e-commerce brand is you sell it for a large sum of money. And when that bubble burst and M&A activity really, really kind of dried up in the space, I just hear a lot of brand founders say like, man, it's not super likely that I'm going to be able to sell my, my, my brand for a big payout. And so, ⁓ you know, like there's just not a lot of money to be made here, but here's the reality. There's actually a dead simple formula for building wealth without selling your brand.

And here it is. One work with a CFO to optimize your cashflow. So you can pay yourself monthly distributions of profits. Two, take the distributions from step one and work with a real estate investing team. That's an agent, contractor, and a property manager to build a buy and hold long-term rental portfolio. And then the third step is to work with a tax advisor who can help you maximize the tax savings of investing in real estate.

So let's break these down. Step one, work with a CFO to optimize your cashflow so you can pay yourself monthly distributions of profits. In simple terms, profit never equals cashflow, especially in an e-comm brand. A good CFO can help you make tweaks to your financials on the P&L and the balance sheet side to free up cash so that you can maximize how much you can distribute to yourself as the owner every single month.

Step two, take those distributions and invest them in real estate. And so ⁓ it's really actually very possible today if you go find the right markets that you can go purchase cash flowing long-term rentals. These are effectively when you take the cash flow that you bring in every month by charging rent and after you subtract mortgage payment, ⁓ mortgage interest, insurance, property taxes, repairs, and even future capital expenditures still have positive cash flow left over. So you can ⁓ earn a return that way plus your tenant is paying down the loan which is gonna earn you an additional return plus over time, over a long period of time, that real estate is going to appreciate. So between appreciation, the loan pay down and your monthly cash flow, you're actually generating a very stable cash on cash return that in my opinion is actually less volatile than the stock market. So you're taking cash flow from your cash flowing brand that your CFO has helped you optimize how much cash flow you can take out. You're working with a real estate agent, contractor and a property manager to build a long-term rental portfolio.

And then the third step, is hire a tax advisor who understands how to take advantage of long-term rental real estate portfolios ⁓ tax benefits. In large part, we can't go through all the details here, but effectively you can leverage things like depreciation so that you can actually be, a lot of times generating a total return including your cash on cash return, your loan pay down and the appreciation of the property, you can oftentimes, over time, generate a 10-15% total return, but with depreciation on your tax return, it actually looks like the return is zero or negative. And if you hire a really good tax advisor that helps you set things up legally and correctly, you can actually offset the taxable income that you make in your brand these losses from your real estate.

And so, if you follow this three step plan, you do this for five to 10 years, you'll be amazed at how wealth you've built. Even better, you don't have your wealth tied up 100% in selling your brand, which may or may not ever happen. And I'll tell you, step one, working with a CFO to optimize your cash flow, that just makes you a more sellable brand. If your brand is generating like, really healthy cashflow to the point where you're paying yourself some nice distributions on a monthly basis, people are going to want to buy that because there's only so many businesses out there with strong cashflow.

So, in summary, follow this dead simple formula for building wealth without selling your brand. Work with the CFO to maximize cashflow and monthly distributions, invest those distributions in long-term rentals, work with a tax advisor to harvest all of the tax benefits of long-term rentals. Do this for several years and you'll be shocked at how much wealth you build without ever having to sell your brand.

BONUS EPISODE: Ecom Scaling Show: Build Financial Resiliency Into Your E-Commerce Business (Ep. 2)

Episode Summary

Welcome to the Ecom Scaling Show, brought to you by Free To Grow CFO and Aplo Group! Join hosts Jon Blair (Founder, Free to Grow CFO) and Dylan Byers (Co-founder, Aplo Group) as we dive into the crucial—yet often missing—link between marketing and finance in DTC e-commerce.

In this conversation, Jon Blair and Dylan Byers discuss the essential components of building a financially resilient e-commerce business. They explore the importance of understanding key financial metrics such as gross margin, average order value (AOV), and customer lifetime value (LTV). The discussion emphasizes the need for brands to assess their financial health, manage operating expenses, and develop strategies for customer acquisition while maintaining profitability. The conversation provides insights into how e-commerce businesses can navigate challenges and ensure long-term success.

Key Takeaways

• Financial resilience isn't about high revenue—it's about having the flexibility to weather volatility.

• If your return customer margin can't cover your fixed OpEx, you're building on shaky ground.

• The most resilient brands keep fixed costs lean, manage inventory tightly, and avoid overleveraging.

Episode Links

Free To Grow CFO: https://freetogrowcfo.com/

Aplo Group: https://www.aplogroup.com/

Jon Blair on Linkedin:   / jonathon-albert-blair  

Dylan Byers on Linkedin:   / dylan-byers-046010149  

Transcript

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00:00 Building Financial Resilience in E-Commerce

02:49 Understanding Key Financial Metrics

06:05 The Importance of Gross Margin

09:05 Strategies for Increasing Average Order Value (AOV)

11:57 Leveraging Customer Lifetime Value (LTV)

14:57 Managing Risks in Customer Acquisition

18:13 The Role of Operating Expenses (OPEX)

22:23 Understanding Financial Resilience in E-commerce

32:18 Navigating Inventory Management Challenges

43:11 Key Takeaways for Building Financial Resilience

Jon Blair (00:01)

Alright, welcome back everyone. Episode 2. Dylan What's happening man?

Dylan Byers (00:06)

Not much. Excited to chat about building a financially resilient e-comm business. It's going to be a good time. It's going to be a good time.

Jon Blair (00:13)

Yes, man, let's just dive right in because there's so much to talk about here. So to frame the discussion, as Dylan mentioned, we're talking about how to build a financially resilient e-comm business today. Why does this matter? This matters because there's a low barrier to entry to start an e-comm brand. You source a product and you start a Shopify store. It's actually easier than it's ever been in history to do that today.

But just because you're able to do that and get people to buy the product and ultimately experience some form of product market fit, it doesn't mean that you have a financially resilient business. Dylan, from your perspective, just like when you think about financial resiliency, is that a word? Either way, financial resilience. What, like, if someone says, hey, Dylan, is my business financially resilient? What are some of the first things that come to mind?

Dylan Byers (01:01)

We're gonna roll with it. We're gonna roll with it.

Yeah, I mean, I think that like, there's a couple of kind of areas to dive into first. I think the obvious one is like in the event that you had to scale back volume some amount for some amount of time, how would you fare in that situation? Like would you run into cashflow problems? Would you still be able to be profitable and cover your OPEX? I think that like, the most normally having a high lifetime value is like one of the areas that is correlated with being, I would say, financially resilient. Because in those situations, you can often have more of a reliance on that return customer revenue if you ever have to pull back due to issues with acquisition efficiency, maybe something happened in your supply chain and you don't have as much stuff, the products that tend to perform well in acquisition, because sometimes it's different as to what works on acquisition versus what works on retention. I'd high LTV is like one piece of it.

Healthy first order contribution margin is sometimes a piece of it, especially if you're very first time customer dependent. And then low OPEX is probably another piece of it as well. Again, in this kind of like worst case scenario, for whatever reason, maybe you don't get enough product, so you can't do the volume that you want to do, and therefore you gotta do less volume. Do you actually have enough contribution margin left doing that less volume to cover that OPEX? So I think like diving into like the first order contribution margin is like more of the acquisition piece.

Jon Blair (02:12)

Mm.

Yeah.

Dylan Byers (02:35)

How do you engineer LTV to ideally have that stability? And then how do you think about OpEx and team building and when to go in and do, you know, X, Y, or Z for me hiring or team building standpoint. So those are some of the things that come to mind. there, are there any that you think I'm missing there?

Jon Blair (02:49)

Well, so it's interesting, like kind of stepping back from and kind of bringing in kind of a higher level concept to thread the needle between the things that you mentioned. It's really like how resilient is your P&L, right? And another word that was coming to mind as you were talking is like optionality, right? Like do you have the optionality having multiple options in any given scenario is a completely different ball game

Dylan Byers (03:12)

Yeah.

Jon Blair (03:19)

then this is the only way this business makes money. When you have a single option, you have finance, what we call that as concentration risk. And you can have concentration risk in ad channels, in products, in seasonal times of the year. If you have a B2B presence, you can have concentration risk with a single big customer or a couple big customers. Those all reduce optionality. It's heavy reliance on some aspect or aspects of your business, those bring more risk into your P &L. And then when you're talking about on the OPEC side, that's another, that's called operating leverage, right? From a finance perspective. Operating leverage meaning just like financial leverage, which is debt financing, operating leverage can actually increase profitability at scale, but just like debt, it's risky if you can't cover your operating leverage. So can talk about that more in a second. The other things that come to mind are the balance sheet side.

Right? we, that's like, obviously inventory being one of the big ones, especially in the e-comm world, but like thinking about how many days do you hold, how many days it take to replenish. So ultimately like your lead time, you can get a little more complicated and you can even look up, look at product development and say, what kind of interchangeability is there on components and materials if you have to switch?

and you start seeing that a certain skew mix, your skew mix is changing, so how quickly can you react to skew mix changes? And then there's the capital structure side of financial resilience, which is like, again, coming back to leverage, how much are you leveraged? So that means how much of your capital structure is debt? Because debt can enhance owner equity at scale, but it's also riskier because you have fixed payments that you have to make, just like fixed overhead represents operating leverage. It's a risk.

But also can enhance your financial return. So let's dive in first on the P &L side. Let's talk about first order contribution margin or just first order profitability. One thing I wanna like ask you about, cause I get asked this, this is one of those questions I get asked all the time. And I'm in an e-commerce mentorship group called Daily Mentor. I've probably got this question, like a dozen times in the last week, which is what should my gross margin percentage, my gross margin ratio be? Is there a floor? I have some opinions about this and I think there's some flexibility, but before we talk about first order profitability, what are your thoughts on gross margin and how that contributes to first order profitability?

Dylan Byers (06:05)

Yeah, I mean, it really depends on what you're selling, but at the end of the day, the higher, the better. It's easier said than done. But I think it's really, really, really hard to give like, has to be this. I'd say that like directionally on new customer ROAS at scale, unless you're really high AOV and in like, you know, specific, maybe uncompetitive categories getting a new customer ROAS outcome in excess of a 2X is relatively difficult. So like a fair starting point is like you want to at least have probably like in the realm of 50%. So like I'd say that that's like directional advice, but you got to be careful with that because there are nuances where sometimes you can survive with less. And then in some cases where like in certain categories, you just need more because it's so competitive over time. I think another piece of it too is like, how big is your TAM? And do you have LTV? Because if you have very little to no LTV, but you have a very high TAM, at the end of the day, you're probably gonna see less attrition in your acquisition metrics as you scale very quickly. But if you have a lower TAM, you probably need to have more gross margin available, because you'll probably just see that attrition faster.

Jon Blair (07:03)

Yeah.

Dylan Byers (07:28)

And if you don't have that LTV to help supplement some of that attrition over time, I think that's where you start kind of having these like typical conversations of like the fundamentally the offer that I'm selling today is probably reaching some amount of saturation, at least in the channels I'm running. And do I need to go and add more channels and, or do I need to go and make new products and new offers? So I'd say that like, yeah.

Jon Blair (07:51)

So I want to camp on that for a second because we come across this a lot. There's another piece of the puzzle really quick though from a metric standpoint which is new customer AOV, right? Because at the end of the... When people ask me about what should my gross margin percentage be, I'm like, well look, hold on a second. I actually care more about gross margin dollars, right? And I'm not saying that the percentage doesn't matter. The ratio does matter, but the dollars matter more. Why? Because CAC is a dollar amount, right? It's not a percentage. You can mess with the percentage by messing with volume and ad spend scale. And so you could have, the reason I'm bringing this up is because if you have a $200 AOV, first order AOV product, and your gross margin percentage is 40%, right? You could get the same dollars by having an 80 % gross margin product with a $100 AOV. So AOV matters because it's ultimately gross margin dollars minus CAC equals new customer profitability. So how do you, what are some things that come to mind when you start thinking about gross margin dollars versus percentage and what like brands should be thinking about there?

Dylan Byers (09:05)

Yeah, I think that like, to some degree, you can look at it either way. Ultimately, you're kind of looking at both at any given time, whether it's a ROAS outcome or a cost of acquisition outcome. The only risk with going like that, hey, how do I increase my AOV? Which by the way, I think is like, probably in most cases, the way you should be thinking about it, if you're running a net of contribution margin dollars on acquisition, is some strategies that get deployed to actually increase AOV are offset by a decrease in conversion rates.

And therefore they add our net out to being equal or worse. So that's why like it's, it's, you gotta be careful that it's easy to say let's just increase first order AOV and assume a constant acquisition costs. So when you do those AOV deployments, it's strategy implementations. It's important to understand that you want to make sure that your conversion rate is actually not being negatively impacted. And a lot of the deployments that do increase AOV often will have some negative implications to your conversion rates.

Jon Blair (09:35)

for sure.

Dylan Byers (10:04)

And that's potentially okay. I've wanted the gains from the AOV bump are greater than the decreases in conversion rate and you get out to a better outcome. So that's kind of like the balance. I think that like different, different types of products have very different mechanics on site and, or in offer construction that impact the path of least resistance to actually getting AOV to be higher. Generally speaking, in my experience, consumer packaged goods are sometimes the easiest because you can often just have a very simple mechanism to get people to buy more, save more. If they like the product or they think they're going to like the product, if you have a structure set in place where the more they buy, the more they save, it kind of encourages that increase in AOV. On like another category, like clothing and apparel, it can sometimes be a little bit more tricky because unless you're selling like basics, like it may be difficult to get people to buy like five of the same t-shirt. So you have to get a little bit more, I guess, creative with how you're kind of incentivizing people for either free shipping cutoffs or like,

Jon Blair (10:56)

Totally.

Dylan Byers (11:03)

upsells, cross-sells and cart. Or maybe there is some sort of a buy more, save more elements. But again, that buy more, save more element I find is often better when you're not like, when you're selling more like the basics. So it very much matters into what you're selling. I'm not sure if you've seen any other like common AOV boosters. Obviously there's like post-purchase upsells and that's a whole other realm of opportunity, but those are kind of like the most common ones I'll see.

Jon Blair (11:24)

Yeah.

Well, okay, so couple things here. I agree with you. There's a difference or there's a difference between trying to impact the economics of new customer profitability with your current product base and channel mix versus thinking about it from a product development standpoint as you decide, hey, we need to bring new products to market. Or even let's say you're even earlier stage and you're just getting started. What I'm walking through here about thinking about gross margin dollars is, calculate that before calculate the estimated gross margin dollars, right? Before you develop the product do some it you don't you're never gonna get your forecast perfect But do some scenario analysis of like what might the first order AOV be right? And the point that I'm making is I think there's some brands we've worked with who have a $65 first order AOV who maybe would have never started their business that way had they thought about how many gross margin dollars were available because the brand that I'm thinking of it was like 22 bucks. And if you go talk to an ad agency and say, got 22 bucks to basically cover CAC, and I don't know if anyone's gonna repeat purchase, well, we'd advise that maybe, hold on, let's slow down, let's rethink this. They ended up later pivoting, they ended up doing some customer research and finding that one of their higher AOV products that was more like 75 to 80 bucks actually had a lot of tractions with their customers, but they weren't advertising it, they thought of it as a follow-on product as opposed to their flagship product, they switched to that being their flagship and it worked and it changed everything about their business. But the point I'm making is that it's not by accident. You don't just find a product that you think people will buy for the price you're gonna charge, right? And bam, you've got a business. We're talking about financial resilience on the P &L and in this case, we're talking about first order profitability. You gotta ask yourself, okay, what might the AOV be for the price point that I'm selling and how I'm packaging it and bundling it if you're even doing that, right? Multiply that by the gross margin percentage and say, this is the dollars I have to work with. And then a good ad buyer is gonna be able to tell you like, like this is the band within which I can spend, right? Like it's, you can tell them roughly how far you can go and you're gonna know very quickly if you can go far or you can't. And here's the other thing. Let's say, let's just say for a second you have,

You're on the lower end of the spectrum of gross margin dollars per order What's my first? What's my first follow-up question gonna be? Does this product lend itself to LTV? Like LT a fast enough LTV velocity to offset that right so so let's let's change the kind of conversation to Okay, we've talked about first order profitability a little bit. How does LTV lack thereof or potentially strong LTV velocity?

Dylan Byers (14:06)

Yeah. Yeah.

Jon Blair (14:20)

How does that change how we can think about first order profitability?

Dylan Byers (14:25)

Yeah, I I think that on our side, ultimately, when we're thinking about forecasting and planning growth, we're always looking at how does contribution margin grow over time as a byproduct of some assumed compounding of acquiring more customers month over month via an estimate new customer ROAS slash CPA outcome and the historical cohort trends. Though in some cases, that means that like the LTV is just not good enough to really justify going negative on acquisition.

But we do see some brands where it makes a ton of sense to go negative on acquisition because the upside on the volume and how that impacts contribution margin growth over time is just worth it instead of being super risk averse and refusing to lose money on acquisition. So there are cases where it makes just a ton of sense. But the key thing there is making sure that you actually have the data to back your thought process and your strategy of acquiring at a loss.

Jon Blair (14:57)

Mm-hmm.

Dylan Byers (15:23)

One thing that we see in some businesses too, and it's not super common, but there are definitely instances of this is like, and you're talking about, Hey, there are another product in the business that can increase my AOV that works on ads. And all of a sudden the business changes. The same can be said for LTV. Like we've seen it sometimes where maybe there's a product that is like marginally worse on acquisition. And therefore it just doesn't get the attention on paid acquisition. But if you break out LTV by product or category, you might learn that, a second.

I'm willing to take like a 10, 15 % worst first time customer ROAS or first time customer CPA because the LTV in this product or category is just like way better than the alternative. And I know like that's one of the things that people can look more at and how you decide to allocate your media dollars because often there are these outliers that do exist in some businesses. I'm not sure if you've seen any other examples like that, but here's the LTV. That's where my head goes.

Jon Blair (16:08)

Yeah.

Well, I want to mention something because I've been talking about this a lot with my team and specifically on a few of the mutual clients that Apple and Free2Grow CFO have. We're trying to explain, I'm sure you guys have to explain this too, we're explaining to one of our mutual clients like, listen, we're going to look at the cohort data. We're going to look at the data that explains historically how repeat purchase has behaved and how CPA has changed as we've changed ad spend levels.

But that's historical data. It's not a crystal ball that ensures as we make changes to spend and trying to mess with LTV that the same thing is gonna happen. But it at least gives us some way to forecast a couple data-driven scenarios. So I had one that I was working with on Friday. They have very strong repeat purchase because they have a strong subscription base and they sell a consumable. And they came to me and they said, Hey Jon, I wanna try spending 40 grand on this podcast. They've had success on other podcasts in the past. they're like, do you think we can do this? And I said, okay look, ultimately you've gotta make the decision on how risky you think this is, but let me outline what some of the risks are. This is a brand that loses a little bit of money every month on first order acquisition, new customer acquisition.

But because of their subscription, they have very strong repeat purchase velocity and it more than overcomes that every month. But at the pace they've been scaling ad spend, if you like take off on new customer acquisition in a given month, month over month, you just really increase spend, your loss is bigger in that month and you don't have a big cohort of people coming back to cover that. So I was explaining to them like, look, we have to forecast, can we cover a big kind of one time loss or short?

short-term loss that should pay for itself, right? Within, and I looked at it I said by month three, it should pay for itself and be profitable. And I was able to give him the estimate of the number of dollars that we'd probably lose in month one on that cohort. And so I was like, hey, look, we're gonna lose 14K on this cohort based on historical data. We could potentially lose more, but if we get at least to this much in revenue which is, which he felt very confident that they were gonna get to at least X in revenue. Here's how much we would lose. So we got to cover that loss for this month. And it was totally based on the rest of their P &Ls, like we can cover this. And based on their cashflow, I like, we can cover this. And by month two, that loss will have shrunk to this dollar value. And by month three, it'll actually be net profitable. And I said, so what do you want to do? How do you feel about this risk? And the brand founder is like, I feel good about this. I want to give it a shot.

And so did we give him a crystal ball? No, but he was able to feel more comfortable because he was like, hey, I'm probably not gonna lose more than X in month one and I'm not scared of that. And I feel very confident that by month three, this cohort's gonna be profitable. That's how we help brands from a CFO perspective. We don't predict exactly what's gonna happen. We help you understand the range of possibilities and if they're not scary and you're good with taking that risk and we feel like your P &L is resilient enough to cover placing that bet, then we try it and we see what happens.

Dylan Byers (19:46)

Yeah, no, I think that, and this is like another prime example of when you have higher LTV, it's easier to like manage your downside risk in a lot of these things. Because at the end of the day, even if you have like a terrible outcome, depending on how terrible it is, there's probably some chance that in some timeframe you make your money back. That's more on like a P and L side, less so on the cash flow side. And that's what you were talking about, like, Hey, like, can we stomach this in like a single month loss? But again, that's, that's another, you know, prime reason why LTV generally.

Jon Blair (19:55)

Totally.

Dylan Byers (20:16)

is correlated with being highly financially resilient.

Jon Blair (20:20)

Yeah, and so let me just summarize a couple things before we move on to the next aspect of a resilient P &L. We first talked about gross margin, right? We talked about gross margin ratio or percentage of revenue. We talked about dollars, and now we're talking about LTV frequency or velocity. What should you be taking away as a brand founder? What you should be taking away is that it's no single KPI that makes your contribution margin dollars resilient within their business, in your business, right? We're trying to outline some of the key levers so that you can think about how these apply to your efforts to develop new products, to think about ad spend strategy, right? So to think about channel selection. And so, you know, this isn't fully comprehensive, but it gives you more than one lever to think about. And I'll say the most financially resilient brands that I see on the P &L side from a contribution margin standpoint,

they address both the first order margin and LTV. And when you bring those together, there's this compounding effect on the resilience and health of your P &L. let's chat next about OPEX, or on the CFO side, we call it fixed operating costs. What do you see on your end, Dylan, as like kind of some of the most common questions, or maybe, mistakes or misconceptions that you see around like OpEx relating back to a financially resilient P &L.

Dylan Byers (21:57)

Yeah, so I think that how you treat OPEX is probably a byproduct a little bit of how resilient your business is because if you're, for example, very first order contribution margin dependent, because return customer revenue isn't great, a good rule of thumb that we like to kind of think of is you do not want your OPEX. And this is more so applicable if you're like, you know, scaling from

Jon Blair (22:12)

Mm-hmm.

Dylan Byers (22:23)

seven into the eight figures into the low eight figures. As you get bigger, sometimes it becomes a little bit easier to kind of accomplish this. But if you're like a low eight figure scaling brand, making sure that your return customer revenue, contribution margin dollars, easily cover your fixed costs. Because in that situation, even if you do have like an issue with first order contribution margin dollars, you at least have that kind of resiliency existing from that active customer base. And again, you can debate if you did have to pull back, how long can that active customer base actually hold you if you don't have great LTV and that's why you want to give some sort of buffer. But like, I often consider the first order contribution margin type brands with low LTV, some of the riskiest in the basket of DSE brands, not to say they cannot work.

Jon Blair (22:54)

Mmm.

Totally.

Dylan Byers (23:16)

because there can be volume and there can be profit achieved, especially if the total addressable market is super large. But you've got to be really cognizant of like, you're probably signing up for a fairly volatile business in terms of ups and down, because you're going to be very, very much focused on like the slim marginal acquisition. And you want to make sure that in those down periods, you're having that resiliency to exist, easily cover that fixed cost. So that's like the biggest risk we see is like over hiring into a business.

that is inherently not resilient and about identifying that, hey, I'm resilient enough to say, I can maybe make a bigger bed here. And the second piece I'll say is like different businesses require different levels of human capital and resources. And this is something that we've observed is like, if you're running a CPG brand, you don't have any SKUs, you may not need as many people as a clothing and apparel brand with hundreds or thousands of SKUs. Where there's way more work on managing that entire, basically everything multiplies, whether it's

Jon Blair (23:59)

Yeah.

Dylan Byers (24:14)

creative inventory planning, products planning and design.

Jon Blair (24:18)

product development cycles, like product development cycles, like, and product development, people don't realize, dude, product development takes so long, so much effort, and it's so cross-functional, it consumes a lot of resources in the business. Yeah.

Dylan Byers (24:31)

100%. Those are mine too. I'm not sure if you have any other recommendations. will put in the books, there's some value in saying keep your fixed costs below X percent of revenue. But again, it gets really dependent brand to brand in what you're selling.

Jon Blair (24:42)

Sure.

No, I mean, first off, it's a fascinating concept about like thinking about returning customer contribution margin dollars that you can basically at least break even. What you're saying is that based on what you expect in returning customer contribution margin dollars, you can at least cover your fixed overhead, which means you can at least break even on just your existing customer base. That's definitely like a fascinating concept. And it...I would say you're exactly right. I've seen multiple instances of brands that are, they have no repeat purchase, no LTV. They're very first order profitability dependent. And they've had historically healthy new customer contribution margin dollar outcomes. But then you're really at the will of seasonality of consumer demand and in your product category. Acquisition like, diminishing returns of ad spend within whatever channel that you're at and like capping out or hitting that ceiling in your channel. And I have seen, I mean, I've worked with a couple brands that are, that have that makeup and they've scaled super fast because of the TAM in their product category to like, I was the CFO for a brand that went from 1.8 million in revenue to 35 million in one year, all on meta. And the next year when they were trying to go from 35 to 70, their acquisition costs shot through the roof and profitability became really hard. The ultimate solve for them was to get into physical retail, right, and open up that channel. But that was like such a huge effort to go from a $35 million DTC brand to a $50 million like DTC brand that's becoming retail heavy. And the head count they had to bring on to invest in that and inventory, it all changed things, right?

But so I agree with that and it's interesting I've seen it. On the looking at like maybe a simpler version of fixed overhead health, we see best in class brands who are scale. Look, the Ecom brand of today, the DTC focused brand of today is super lean. Way more lean than 10 years ago when I was scaling Guardian bikes and we had the likes of like Tuft & Needle and Casper and like I'll call it like the early DTC darlings that were exiting or going public or whatever when we started Guardian. You know, back then we needed, I was the full-time CFO. I was a full-time CFO, I had a full-time controller, full-time accounting team. One of the reasons why Free to Grow, fractional CFO and bookkeeping services for D2C brands has grown so quickly is because no one needs a full-time CFO anymore and that's the case. We see that across the business, right? You're contracting out to specialists like Aplo for ads and email, right? Free to grow for CFO and bookkeeping services. I mean, it's even a lot, you you're outsourcing to a 3PL for fulfillment. Contract manufacturing on the production side. So what you're doing is you're taking all of those either what are typically huge fixed costs and you're making them smaller fixed costs or on the op side, like with fulfillment and contract manufacturing, you're taking what would otherwise be a big fixed cost if you did that in house and you're converting it to a variable cost. And so what we're talking about, the difference between shrinking your overhead versus doing that stuff in house, it's not that brands can't do that stuff in house anymore. We see some that have to based on their business model and their value prop, but they're experiencing something called operating leverage, which I mentioned earlier, which is they have high fixed costs and the risk is, every month they have to cover that. So getting to break even, you have to do more revenue. But the upside, because leverage always has upside, that's why it's called leverage, is when you pass your break even point, if you have more capacity left in your warehouse and your production facility, you actually take something that normally would continue to scale as a variable cost and it's fixed and you open up the floodgates of profit. But the trick is, when do you have to add more fixed costs to then open up capacity? So it's a different game.

So I'm saying a lot of things, but all this is to say is that like the financially resilient, the average, there are verticalized brands, meaning they do their own production. Guardian Bikes today, the brand that I helped start, we have our own manufacturing facility in Indiana. We have verticalized. But there's a reason behind it. There's a strategic reason behind it. We had to raise a lot of capital to pull that off, right? And so most brands, the average brand we encounter, has a lot of that stuff outsourced. run lean and mean and they really rely on outsourced specialists and those brands, they're running an OpEx of like 10 % or less, a lot of them, the best in class ones. They may have to step it up to 13, 14, 15 in a season where they're like hiring people and then they scale on that and they get it back down to 10, but it's about 10 % or less.

But, again, you have to dig into that a little bit deeper and think about what Dylan was saying. that like, is that 10 % every month? How much, how much, seasonal is your business? How seasonal is first order acquisition? I have some brands who have really strong repeat purchase, but they have a few months out of the year where they acquire all their new customers because those are the months that they can afford to do it. And so you definitely have to think about both of those things. And here's the biggest thing I'll say about Fixed Overhead before we...turn our attention to the balance sheet. It's about reversibility, right? Because when you commit to fixed overhead, here's stuff that's hard to reverse. Opening up a bunch of your own warehouses, right? Buying a bunch of machinery. That's really hard to reverse. If you have an agency who's doing your books like we are, if things go bad, if you have to turn this off, you can. Although the cost is so low these days that you usually keep those things on and you cut other things. When you're outsourced stuff, it's a lot easier

cut and right size things, right? And so think about the reversibility of your fixed overhead cost investments and if something is highly irreversible or expensive to reverse, then it's gonna make you less financially resilient. It doesn't mean it's the wrong thing to do, but as it relates to resilience, it's gonna make you less resilient on the P &L.

Dylan Byers (31:16)

Yeah, reversibility is such a key thing because I've been having conversations similar to that recently and looking at trying to reduce fixed costs for a specific brand and kind of working with the client to discuss what are some of the options. And there's a couple, a lot of the bigger ones are just not reversible. And when they're not reversible, it's a lot more difficult to view. There are just certain things you need to have to keep the lights on. And the more, if you can...

That is not a word I have used to think of it in the past, but I think that's a great way to think of it.

Jon Blair (31:50)

Well, and one, it's directly in line, it's another way to say optionality, right? Optionality is like, I reverse course and go down a different path, right? So resilience in many ways is about not just financial flexibility, but it's about optionality that you get into certain situations. You have multiple options. You have more than one option to survive and ultimately, hopefully thrive. So yeah, let's turn our attention to the balance sheet.

So we've already talked a little bit about inventory a bit at the beginning. But maybe we can start with, are there any examples that come to mind, Dylan, that when you guys are scaling a brand on the ads side, on the paid acquisition side, do you see some common places where brands get stuck in not being financially resilient on their balance sheet?

Dylan Byers (32:44)

Yeah, I mean, you guys probably see more into this specific piece far more than we do, but from the, the, from the pieces that we kind of do somewhat interact with at Aplo, I'd say that one of the most common things is like, just like a crazy overstock of unpopular skews or items. and basically having that become like cash tied up in a relatively unproductive asset. So.

I think that like how you strategically go about your inventory purchasing, as well as how that kind of relates to where you're at from a balance sheet perspective, is probably one of the big things. And that's more common in like high skew count stores. Normally if you have a low skew count store, especially at the tile TV, it's somewhat more rare that you kind of get in those situations because at the end of the day, even if you acquire less customers than expected, the return customer piece is there to kind of help.

Jon Blair (33:40)

Mm-hmm.

Dylan Byers (33:40)

you know, sell through maybe instead of selling through it in three months, you sell through it in six months, nine months, whatever. But if you're first time customer dependent, you really got to make sure you're moving those units, especially if they're seasonal. So I'd say like the biggest kind of things to not to try to avoid to stay more resilient is like, if you are very first time customer dominant and or seasonal at the same time, making sure that like, almost like not being too overconfident in the types of orders you're placing because that can get you into tricky situations. You got to basically wait a whole year to go and sell that inventory effectively again. And then for a lot of high, high skew businesses is like kind of having that, you know, that, that, conversation is like these, you're scaling an e-commerce business is very cash intensive as you invest in inventory, depending on like what kind of payment terms you have, et cetera, et cetera. I'm sure something you'll get more into.

Jon Blair (34:11)

Yeah.

Dylan Byers (34:31)

and it's like, do you want to kind of focus or nail your focus a little bit on some of these SKUs and make very conservative bets on kind of something like the B tier, C tier, D tier SKUs to make sure that the A tier SKUs that meaningfully drive acquisition in LTV are properly taken care of. What you don't want is a bunch of C tier, D tier SKUs and then no A tier SKUs. So from our side, that's kind of the more common things to avoid.

Jon Blair (34:50)

Yeah.

Dylan Byers (34:56)

If you can avoid that, I'd say you're probably going to be more resilient. But curious your thoughts on that as well as if you have some other like common things that pop up.

Jon Blair (35:05)

Yeah, unfortunately dude, I think a lot of brands have way too... have skew catalogs that are too big. We come across that a lot. That's a hard thing to reverse quickly. It's next to impossible to reverse quickly. You have to really, really work at it. I'm actually curious, I have a lot of thoughts on this, but like... I'm curious, how does... Because I've been dealing with this a lot with several clients that we work with. When you have a brand that...

Potentially has too big of a skew catalog and it it it it lacks focus Right like like there's maybe some they have a kind of this hero product category, but then they have this like tangential product category How does that affect you guys on the marketing side because like I have a brand that I work with that I think they have a skew catalog That's way too big. They're known for a specific Category that's what they're known for and they have these kind of like tangential products. It feels to me like it it

actually probably makes it harder to be focused on the advertising side, right? Because there's this pressure to veer off from the hero product category that has made the brand. And it does well financially because they're starting to get overstocked on these tangential kind of products. So it's like, well, do we shift ad spend there? But then you're shifting it away from really what they're known for. how do...

Do you guys ever see that and does it make it more challenging on the outside? I gotta imagine it does, but like I'm curious.

Dylan Byers (36:29)

Yeah.

Yeah, I mean, like when overstock happens, like the general workflow is if a client's like, Hey, we have way too much of this. It's like, Hey, how much is too much? Like what are we dealing with here? First things first is like, can we move as much of it as possible via email and SMS? Second thing is like some brands have different kinds of thoughts around this, but like whether it's like a perpetual clearance section on the site or sales section, sometimes you can increase sell through just by having certain things live in that category.

as a byproduct of people landing on your site from some of your other ads, and then naturally being more like discount shoppers and kind of going towards and looking for what's available on sale. Those are like the ideal situations. Ideally, you can just move it on email and SMS, but as you and I both know, oftentimes an overstock is happening, it's really happening, and that's not gonna be sufficient. The sale path is arguably better because you're not having to allocate that new ad dollars to a dedicated funnel.

Jon Blair (37:22)

Yeah.

Dylan Byers (37:29)

The second you have to allocate net new ad dollars to a dedicated funnel to move an overstocked product is usually a recipe for disaster. Cause there's usually a reason that it's overstocked and it's because it's not popular. So if you're going to have to move it on ads, unless you get lucky or you find some sort of angle that actually works, it's usually going to skew down your account performance. And then it's just an honest conversation of like, do I care more about getting my money out of these units faster or do I care more about my P and L? And that's.

Jon Blair (37:58)

Well, so look,

I want to say something about that. Well, so this is where I see this happen most often. It's new product introductions and being too bullish on what the demand is. And so one strategy for having a more resilient balance sheet as it relates to the inventory side is when you just be willing to stock out of new products, that's not a bad thing, right? Like, like validate the demand of new products and then go bigger, make data driven decisions, right? Or, or even the most

Dylan Byers (37:59)

probably where you come in.

100 % 100 %

Jon Blair (38:27)

The most resilient thing you can do is just sell them on pre-order to start, right? And not actually have purchased the products. I'm not saying you should do that. I'm just saying there's a spectrum of there's like, you can go really big and make yourself very not resilient if you're wrong. You can go the other side of the spectrum, which is pre-order, but you can also, there's also a place in the middle where it's like, let's just be more conservative until we validate demand, right? So inventory is a big piece, but the other thing is how do you pay for the inventory, right?

Dylan Byers (38:37)

Yeah.

Jon Blair (38:56)

And the big thing I wanna mention is debt. Just because you can borrow the money to buy the amount of inventory you wanna buy doesn't mean you should. You have to look at the whole capital structure. You know, in real estate, real estate is just like a really simple example, because a lot of people have a mortgage on their house in the US, and it's like, look, they won't, unless you have like a special government-backed mortgage program that you apply for, generally, they want a 20 % down payment, right? That's actually 80 % leverage, right? 80 % debt to asset value. I am not even, if you look at your whole capital structure, 80 % leverage, that would mean 20 % of your capital's equity and 80 % is debt. That's super risky. An 80 % leverage business is very risky. 70 % leverage business is less risky. 60 is less, right? And so like what percentage is right?

It depends on a lot of different things. It depends on how resilient your P &L is. It depends on how much cash you have in the bank. It depends on how quickly owners could inject equity capital into the business, right, if needed. And the reality is not all debt is healthy. It's called leverage because it's riskier and it might, you might be able to leverage it for a higher return, but you have to make sure you can service the debt.

And so one thing that we do as CFOs is help brands look at, okay, you wanna take on 500K in debt, how much equity do you have? I've had a brand, many brands come to me and say, I need to get this million dollar loan, I got approved, but their equity on the balance sheet is negative because they've actually lost more money than the business has ever made or that equity investors have put into it. And what that means is you're over 100, you're 100 % debt leverage, which means you have to make it or refinance the debt or you're done. And that is not resilient, right? So we talk about, balance sheet resilience from a capital structure standpoint, it's about choosing a healthy mix of debt to equity, not just the amount of debt you need for the inventory purchase. You have to step back and look at a higher level beyond that inventory purchase and actually have to look at the whole capital structure of your balance sheet. That's where a CFO can really help is like help you decide what is healthy and what is unhealthy.

Dylan Byers (41:16)

Yeah, agreed. And want to add one thing specifically to something like the being okay with selling out of new products. I think it's also about being very intentional about what you want out of like a new product launch. I think the default approach is let's go and promote it over email and SMS. And often that's good. like generally that's going to be a higher profitability channel for most brands. So when you do launch some of these new products, can kind of think of it this way as one option.

Jon Blair (41:31)

Mmm.

Dylan Byers (41:46)

I am going to promote it to email and SMS, be it both people who haven't bought and who have bought. And if it has a high take rate and it is like a relatively high demand product, that will be an indicator that it may go and work on ads. That indicator is probably going to be more effective when you're already pushing it in like the same category that your customer base is used to buying from you. Not always, not always an indicator, but sometimes there may be correlation.

Whereas if you're going go into a completely new category or it's a pretty new thing, you may actually want to make the decision to not promote it on email and SMS, to save the units, to actually test on ads. And again, still making the smaller purchase order to just have that skew count to validate that it may or may not work on acquisition. Because I do think it's important that when you do roll out SKUs, that you're intentional about how you wanna move those units initially just from like a data gathering standpoint to better inform your future POs. And also is it a retention skew or an acquisition skew? Because some skews are like just retention skews where it's like, do I make this like, how do I increase my LTV? I wanna go and get something that's complimentary to what people generally buy on first order, but naturally has higher. So those are some like other ways of thinking about it too.

Jon Blair (42:44)

Totally.

Dylan Byers (43:06)

when kind of managing the bets, but also getting the most utility out of your bets.

Jon Blair (43:11)

I love it, I love it. Well, we're gonna have to land the plane here. We might have to talk more about this. Well, hey, you know, this is only episode two. We got plenty of time to talk about this kind of stuff. But really quick as a recap for everyone, we're talking today about how to build a financially resilient e-comm brand. Your takeaway should be there's multiple levers, right, in your business that build financial resilience in your P &L.

Dylan Byers (43:16)

I know, I know.

Jon Blair (43:40)

and your balance sheet. It's not one without the other and it's not a single metric, right? So you should be thinking about and intentionally managing first order profitability, LTV, fixed operating costs, inventory health, really thinking about the health of your capital structure and leverage, which is debt versus equity. And we didn't get to touch on it, cash conversion cycle, maybe we'll do another episode about that. But...

Yeah, hope this is helpful. Remember that you as the founder, you don't have to understand all these things at a deep, deep level and, and, and, you know, put together, it's synthesized the strategy. You can hire experts like the Aplo group and free to grow CFO to help you with these things. So don't forget, you don't have to do it alone and hope this is helpful. Looking forward to episode three, man.

Dylan Byers (44:33)

Let's go. Yep.

Mini Episode: Reading Your P&L Hurting Your Brain? Try This!

Episode Summary

In this mini episode of the Free To Grow CFO podcast, Jon Blair discusses how to effectively organize your Profit and Loss (P&L) statement to maximize insights for Direct-to-Consumer (DTC) brands. He emphasizes the importance of understanding the difference between fixed and variable expenses and how to calculate profit using contribution margin. By reorienting the P&L to focus on contribution margin before and after advertising, businesses can better assess the impact of their advertising spend on profitability. This approach allows for clearer insights into financial performance and helps identify areas for improvement.

Key Takeaways:

• Not all expenses are made equal; understand fixed vs. variable expenses.

• DTC brands need to isolate fixed overhead in their P&L.

• Reorient your P&L to focus on contribution margin.

Episode Links

Jon Blair - https://www.linkedin.com/in/jonathon-albert-blair/

Free to Grow CFO - https://freetogrowcfo.com/

Transcript

~~~

Jon Blair (00:01)

Does it hurt your brain to make sense of your P&L every month? Well, you're in luck because I've got a solution for you today. Hey everyone, welcome back to another mini episode of the Free To Grow CFO podcast, where I break down one key concept that will help your DTC brand increase profit and cashflow as you scale. I'm your host, Jon Blair, founder of Free To Grow CFO, and today we're gonna dive into exactly how you should organize your P&L to maximize insights. Okay, so to start, Profit equals revenue minus expenses, right? Wrong.

Profit equals contribution dollars minus fixed overhead dollars. Why does this matter? Revenue minus expenses equals profit technically is right, but it doesn't pay homage to the fact that not all expenses are made equal. There are two different types of expenses. There are fixed expenses and there are variable expenses. Fixed expenses, just as the name suggests, stay the same every single month, regardless of revenue going up and down. Variable expenses or variable costs go up and down correlated with revenue. Usually they're order level or unit level expenses or costs. so contribution margin minus fixed overhead equals profit pays homage to the fact that there are variable expenses and fixed overhead expenses.

So the way you should actually set up your P&L is revenue minus landed product cost equals gross profit minus shipping and fulfillment and merchant and credit card fees equals contribution margin before advertising. Then, subtract advertising equals contribution margin all in including advertising minus fixed expenses equals profit. Doing this will allow you to see how your business operates on the margin or incrementally. Now when I say on the margin, I don't mean margin in terms of like margin dollars divided by revenue, gives you a margin percentage. On the margin, so when you hear people talk about like what's the marginal impact or what is the incremental impact, it means that what is the impact of the next dollar?

So when we've now reoriented our to measure gross profit, contribution margin before ads, contribution margin after ads, and fixed overhead, we can look and see how those metrics as we scale sales volume up and down. And I think most importantly for a DTC brand, you can see if contribution margin dollars go up as you scale ad spend.

Because if, as you scale ad spend, contribution margin dollars go down, what's happening is a fixed overhead stays fixed and contribution margin dollars go down. That means scaling ad spend is reducing your bottom line profitability. So now we're all of sudden able to isolate the impact of scaling up and scaling down. And again, probably most importantly for a DTC brand scaling up and scaling down through advertising spend, we can ultimately assess the impact on bottom line profitability because we've isolated fixed overhead and we've put that at the bottom of the P&L to be subtracted after contribution margin dollars. So it's all about understanding the impact of different incremental decisions. Most of it will be ad spend and sales volume on contribution margin dollars.

Furthermore, splitting out your contribution margin into what we at Free to Grow CFO call gross margin and then contribution before ads and then contribution after ads allows us to graph out on a time series the relationship of your product cost to sales price, your product cost less shipping fulfillment and credit card fees compared to your sales price, and then your margin inclusive of landed product cost, shipping fulfillment, credit card fees, and ad spend in relation to your sales price. So it helps us to quickly identify if your contribution margin going up or down is because of product cost issues, shipping and fulfillment cost issues, or ad spend issues. look, in summary, you should reorient your P&L to not be revenue minus expenses equals profit, but instead to be contribution margin dollars minus fixed overhead equals profit.

Furthermore, at Free to Grow CFO, we suggest and do this for all of our clients. We split out contribution margin dollars into gross margin dollars, contribution margin dollars before ads and contribution margin dollar after ads. Do this. And now all of a sudden that, that brain hurt from trying to make sense of your P&L goes away. And all of a sudden the insights just start popping out at you.

How to Choose the Right Debt at the Right Time

Episode Summary

In this episode of the Free to Grow CFO podcast, Jon Blair and Kyle Rector discuss the intricacies of debt financing for direct-to-consumer (DTC) brands. They explore how to choose the right debt at the right time, emphasizing the importance of understanding risk boxes, cash flow management, and the evolution of debt products as brands grow. The conversation also highlights the significance of selecting the right lender and the potential economic impacts on lending criteria. Overall, the episode provides valuable insights for founders looking to navigate the complex world of debt financing.

Key Takeaways

• Understanding risk boxes is crucial for securing appropriate financing.

• Maintaining a healthy balance sheet is essential for long-term success.

• Lenders bucket your brand based on risk. Knowing which box you're in can help set realistic expectations about terms and availability.

Episode Links

Jon Blair - https://www.linkedin.com/in/jonathon-albert-blair/

Kyle Rector- https://www.linkedin.com/in/krector/

Free to Grow CFO - https://freetogrowcfo.com/

BoundlessAI - https://www.getboundless.ai/

Meet Kyle Rector

Kyle Rector is the Co-Founder of Boundless AI, bringing a wealth of experience from top lending institutions, including Wells Fargo, GE Capital, Clearco, and most recently Outfund, where he served as VP of Global Sales. With a track record of helping deploy over $1 billion in capital, Kyle is a seasoned leader in fintech and alternative lending. At Boundless AI, he is focused on revolutionizing how businesses access financing by leveraging AI-driven risk analysis and tailored capital solutions.

Transcript

~~~

00:00 Introduction to Debt Financing for DTC Brands

01:15 Understanding Boundless AI and Its Role

02:26 Common Misconceptions About Debt

06:09 The Evolution of Debt Products for Growing Brands

10:39 Navigating the Transition from MCAs to ABLs

13:56 The Importance of Choosing the Right Lender

16:54 Planning for Future Debt Needs

22:19 The Risks of Over-Leveraging

27:07 Understanding Debt Ratios and Financial Health

32:19 The Impact of Tariffs on Lending

39:06 Conclusion and Resources for Founders

Jon Blair (00:01)

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. Today I'm here with Kyle Rector, president of Boundless AI. Kyle, welcome man, thanks for being here.

Kyle (00:24)

Thanks for having me, Jon.

Jon Blair (00:26)

So ⁓ what are we gonna talk about today? We're gonna talk about how to choose the right debt at the right time. I get a lot of brands that come to me with being a fractional CFO of saying like, hey, what's the best debt? And I always say like, well, the answer, it depends, right? It's not about getting the best ⁓ debt in absolute terms. It's about getting the best debt for where the brand is at at any given point in time. ⁓And so today we're gonna dive deep into chatting about how a brand can choose the right debt at the right time. But before we get into the weeds here, Kyle, can you introduce yourself and also talk a little bit about Boundless AI and what you guys are doing to help brands choose the right debt at the right time?

Kyle (01:15)

For sure. So Boundless AI is a business financing tool that uses proprietary market intelligence to make sure that businesses are effectively applying to lenders that will want to work with them. think one of the biggest challenges that we've historically seen, and I think every founder can feel that, is going through a lengthy sort of credit process, underwriting process with lenders, and then it not being a good fit at the end of the day. So what we're really focused on is educating brands about what their funding expectations should be based on where they're at and then making that application process as seamless for them as possible. So to date, we've supported over 2,000 businesses, a couple billion in capital requests and formed for the platform. And, you know, we're really about to, I think, make a nice big splash in this space and then make it lot easier for founders. But just prior to that and starting up Boundless a couple years ago. I've been on the lending side directly, Wells Fargo, GE Capital, Clear Co, Outfund. our whole team is effectively ex-lenders. So we have a lot of, I think, interesting opinions on both sides of the fence here.

Jon Blair (02:26)

Well, the gap or the problem that you're talking about that you guys solve is it's a huge, huge issue. What I see, the problem that I see is that like one, brand owners get hit up constantly with cold outbound from all different kinds of lenders. And that cold outbound in my experience is not really necessarily targeted. And quite frankly, I don't know that it can be targeted unless they have like financial data on said brand, right?

So it's very top of funnel, ⁓ you know, spray and pray. And the problem is they'll lure in a business owner to get on a call and even provide some initial diligence information, financials, maybe AR/AP aging, ⁓ maybe, you know, inventory on hand, but without like really vetting if there might even be a fit here. And so what I've found, I've had so many brands come to me and the founders like, hey, JP Morgan said they're gonna give me a $2 million loan. I'll look at their financials for two seconds and say, no, they are not gonna give you a $2 million loan. But that's because I know the box that they play in. So that leads me to kind of the next question that I wanna talk about is like, what do you see as like maybe, I know there's a lot, but what do you see as maybe the most common misconception of brand founders thinking they can get some type of debt that they really can't?

Kyle (03:58)

I think the most common thing that we see and that we're educating our clients on is what risk box they actually fall into. ⁓ That risk box, every lender has a bit of a different one, but that affects your term length, your APR and all these things, right? The truth is that lenders look at your business and you might have a really cool brand, an amazing story, working on something really interesting, but...

Jon Blair (04:07)

Mm, yeah.

Kyle (04:26)

they're still going to slot you into a risk box. And I think one of the biggest misconceptions that founders come to us with is understanding what could be available to them, what those terms might look like. And then spending time on maybe those options that could provide those terms, but that they're not going to be qualified for similar to your JP example, right? So we'll have founders come in and say, Hey, yeah, I'm looking for 10 % APR. And, you know, maybe they do 50 K a month and they already have

Jon Blair (04:36)

Totally.

Kyle (04:56)

45 grand in debt, whatever the case is, right? The reality is like, you're not big enough for any deal. You're probably not going to get a bank line of credit. And if you do, it's not going to be enough capital, right? You can look at your personal line of credit or some other option to maybe get there. But is that the most important thing to you or is growth or is cashflow or is something else, one of these other projects you have more important than whatever that cost might be. So I think we see that a lot.

We're really trying to help educate them and we're obviously building some pretty interesting tools ⁓ to get founders on the same pages as lenders. But I think that's usually where we see a lot of sort of ⁓ gap in the process as it exists today.

Jon Blair (05:40)

Totally, yeah, so I'm both with our free to grow CFO clients and I'm also a mentor in an e-comm group called Daily Mentor. I've done several trainings on debt financing options and I always start with don't optimize purely for cost of capital or APR, right? And why? Because optimizing for cost of capital or lowest APR, that's usually something, well actually, I don't even wanna say usually.

It's basically always something that happens at scale. At scale, you get to the point where you can really optimize for cost of capital. When you're in the early stages of growth, ⁓ you rarely, if ever, get to optimize for that unless the founder or one of the owners has a bunch of net worth and they're willing to PG some line of credit that would not be provided. It wouldn't be provided to the business otherwise. It's underwritten based on the owner's

Kyle (06:35)

Yep.

Jon Blair (06:37)

credit worthiness, which is not usually, that's usually not the case for most of the brands that we work with in the lower to middle market. I'm assuming that's not the case of what you usually see. ⁓ with that being said, I wanna talk about what is a typical path or evolution that we see ⁓ as the optimal debt stack for a fast growing bootstrap DTC brand. Where do they start and how do they kinda start evolving to different credit products

over time and what are some of the mile markers for brand founders to be on the lookout for. So let's start with where do you typically see them start in the earliest days?

Kyle (07:17)

Yeah. So let's put it in terms of like that risk scoring from a lender's perspective, right? Earlier, newer business, smaller revenue than they might have in two years, right? You're going to be looked at as generally a riskier business just based on revenue, time in business, whatever the case might be. Right. So most often you're going to get a merchant cash advance, which is effectively a lender buying the rights to future revenue. Right. Is it more expensive? Yes.

Right. But you're playing in a risk box that only certain lenders will fund and the odds of those businesses at the earlier stage of the company not working out a significantly higher than when we got to, you know, the later ABL type conversations, which we'll get to in a moment. So I would say generally we started off seeing MCAs a lot of personal financing, right? If you're able to maybe leverage your own personal line of credit to keep costs lower terms good.

Jon Blair (07:50)

Mm-hmm.

Kyle (08:15)

We can definitely start there. But generally we'll see those MCA type products, which are maybe six month term ⁓ cash advances effectively. I generally see that in businesses anywhere from like 10 grand a month in revenue all the way up to ⁓ a few hundred thousand, even in the millions sometimes. It depends on again, why you're taking the capital and what the objective of it is. But we'll generally see MCA ABLs, so ⁓ asset based loans.

Jon Blair (08:34)

Mm-hmm.

Totally.

Kyle (08:45)

Obviously you need to have the assets then, right? So a lot of the earlier companies, especially in the CPG space, run pretty lean on inventory. They're trying to collect AR pretty quickly if they're doing wholesale at all. So that ABL doesn't really come into play until you have probably a good million in assets, I would say at the minimum. And obviously if you have a million in assets, well, now you're in that sort of growth stage, right? We're probably looking at the millions in revenue. You know, I would say at least five mill likely.

Jon Blair (09:05)

sure.

Kyle (09:14)

Just based on how CPG metrics generally work to have enough assets there. And then obviously the end goal is a bank line, right? ⁓ Now you can use a combination of all these, right? Larger brands that we work with, they'll have their bank line and it'll be the lowest, best, know, rate available, longest term length for a payment, whatever the case is. They will typically supplement that with MCAs or bank financing. So even the brands that do 60, 50, you know,

Jon Blair (09:25)

Totally.

Kyle (09:43)

20 million, whatever the case might be, they'll usually have that ABL or that bank line and they'll use MCAs or other types of financing to supplement their total capital requirements for a year. generally I would say that's the life cycle. Always start with your bank, always keep conversations with them going. But generally speaking, you're going to be looking at MCAs early on to ABLs and then bank financing, I think is the ideal path for most founders.

Jon Blair (10:11)

for sure.

Yeah, yeah, I see, we see the same exact thing and like, so let's dig into that a little bit deeper. wanna echo a few things that you said and draw out a couple like conceptual things for founders listening here to think about. The first one is the move from MCAs to ABLs or asset-based loans, right? ⁓ I used to think that MCAs were always evil.

Because they're so expensive and generally speaking for a consumer goods brand They don't really match well with the cash conversion cycle of said brand. However, if you don't have the access to Equity investment either through the form of outside investors your own personal capital or retained earnings and you do need a little bit of capital and you don't have the asset based for an ABL it may be the only option right and so you

Another concept for, or consideration for everyone here to think about is what credit box are you in at any given time and what is truly available to you, right? Because you can't choose something that's not available to you, unfortunately. And so MCAs, I see oftentimes use transitioning to getting enough inventory and or AR on the balance sheet that you can sufficiently borrow against it.

Now to Kyle's point, when he was saying like at least a million dollars in assets to move to an ABL, the reason why that tends to be the case is if you look at it from a lender standpoint, let's take inventory for example, a very typical advance rate against a million dollars in inventory is somewhere between 50 and 60 % of that million dollars in value. So really, if you have a million in assets, they can lend up to 500 to $600,000.

Anything less than that, it doesn't move the needle for these lenders. need to lend a minimum amount of capital to make it worth their while, right? Because they're generating fees and interest off that. that's one of the reasons why you need at least a million or some minimum amount of assets, right?

Kyle (12:19)

Yeah. And I think one of the other things to consider, like from a founder's perspective, getting it like a $200,000 ABL doesn't make sense because you have to pay audit fees. You have to pay legal diligence fees. Right. So yeah. Exactly. Yeah.

Jon Blair (12:29)

Totally.

Totally. And monitoring fees, there's fixed costs basically, right? That you're ⁓ effectively like kind of amortizing these fixed costs over a smaller average amount like borrowed or average amount out on the line. And so what that, that basically, the annualized, the APR impact of those fees is massive for a small line compared to something that's more sizable.

Kyle (12:58)

Exactly. know, diligence and audit fees don't vary that dramatically, ⁓ from a $200,000 ABL to a 20 million, right? They still have to go fly out there, count up inventory, do whatever they need to do. So it doesn't always make sense, right? And it's also a time consuming process. That's one of the things that, ⁓ I think objectively, like if founders are always just interested in the lowest rate or whatever the case might be, you're going to spend a lot of time trying to find something that likely doesn't exist for you right now.

Jon Blair (13:02)

Totally.

Kyle (13:27)

Right? It could in the future, but you know, the reason MCAs I think are good in certain scenarios and obviously want to get the right letter, right? The MCA product itself is, you know, standard, but different lenders do operate in different ways and you want to make sure you're getting the right letter that will work with you on things. But yeah, generally speaking, I would say, you know, you don't want to spend all your time trying to find this Holy Grail facility that doesn't exist for you. Right?

Jon Blair (13:28)

Totally.

for sure.

Totally.

Kyle (13:56)

taking that cash today and turning it into something that can get you there is why, you know, lenders like Shopify have been really good with their capital programs because they're building you up. They're helping you grow that brand. Yeah, it's a little expensive, but it's quick. it lets you get back to building your business and not spending two or three months on some facility that may or may not exist. And the one thing I want to call out for founders is, and you kind of touched on this in the beginning, Jon, like it is spray and pray for lot of lenders.

Right. Lenders want lead flow. ⁓ you know, that that's the number one thing that a lender wants. They're going to send out pre-approvals. They're going to send out things that may materially not be what an offer would look like from them. Right. ⁓ and then you have a lot of brokers that operate like their lender saying, yep, we can, we just got you a pre-approval of 500 K.

Jon Blair (14:26)

Totally. For sure.

Totally, totally.

Kyle (14:49)

You're not a lender. Like how could that be possible? You don't even have my financials. You don't have my banking data. Like how are you possibly going to tell me that you can do that? So founders like get sucked in, I think. And obviously, you know, you're looking for capital. Some things usually in finance, if they sound too good to be true, probably are ⁓ in the debt space. So exactly. So.

Jon Blair (14:54)

For sure, for sure.

Yeah. Especially in lending. Yeah.

Kyle (15:12)

I just want founders to be really cognizant of that because the market is there's a lot of good actors. There's some bad actors for sure. Just making sure that you're spending time with the right people I think is probably the most important thing when it comes to your capital planning.

Jon Blair (15:15)

100%.

No, I couldn't agree more. like that's the thing is like, can you find a loan that's a good fit without Boundless or without a CFO who understands debt financing? Like, yeah, you can, but like it's kind of a roll the dice unless you yourself as the founder already have a lot of experience there, which some like serial entrepreneurs, they've been through this evolution of debt products that we're laying out here. And so they get it, but a lot don't. And here's the other thing too, like even if you get it, you don't wanna be the one spending the time on it, right? Like you want someone else to help you through it because you as a founder, most of the founders we work with, they're very product-centric, marketing and sales-centric, right? And like that's where they create the most value for the business, that's where they're most passionate. You wanna have a CFO or tools, you know, like Boundless to help you go further faster with these kinds of decisions. And here's the other thing too.

There's a lot of risk, and I wanna talk about this next, is like there's a lot of risk in even choosing the right debt product and lender for today or for this season and not thinking ahead on how do you get out of that and refi with the next product, right? And I made a ton of mistakes in that regard when I raised debt ⁓ at Guardian Bikes in the early days when we were naive and scale on the brand.

One story that I have is like, we got an SBA loan. We got a, I think it was a $600,000 or it was a $500,000, the Express program, a 7A loan, I think it was a 10 year term. And we were super pumped because no one else would give us anything like that at the time. We were losing a little bit of money on the P&L. But we were growing super fast and in like nine months, I was like, this is not enough capital and a term loan is not what we need right now. We need a revolving line of credit with how fast we're growing.

And so we got out of that loan, but within nine months, I was already looking for the next lender and we didn't consider the cost to get out of that loan, right? Like the termination fee, not to mention like how much money we spent on the diligence upfront on that loan, right? And the origination fees and everything. So like, what are some things from your perspective, Kyle, that like...brands need to think about, even if they find the right lender for today, what are the considerations they need to be aware of to make sure that they're able to either grow at that lender or roll out of that product and refinance it and move on to the next one when it's time.

Kyle (18:00)

For sure. Let's start with the find the right lender. the majority of lenders that early stage founders will work with are borrowing money from other lenders, right? That's the way that this market works. So you go, you find a cool, you know, fintech lender, they're raising equity. They're running effectively like a large scale fintech startup, right? And

Jon Blair (18:03)

for sure.

Kyle (18:25)

What I want to say is like, be cognizant of which lenders you're working with. ⁓ we've seen it over the last couple of years, you know, with the Amplas and things like that, where, yeah, really good money. ⁓ great product. People loved it. Probably giving a little bit too much money out to founders, right? ⁓ and for a founder looking at those deals they got, they were saying, wow, this is awesome. Like low APR, lots of money more than I probably thought I could get. But when that company, you know, went, went down.

Jon Blair (18:30)

Totally.

Kyle (18:54)

It was really hard to refinance those deals. So you had a lot of like really good large brands that were now over leverage. And yeah, like they were working with Amplem. They loved it. Well, it was great, but they weren't really thinking about like the financial health of the lender. Right. And what happens if the lender goes bust? So, you know, I think in the early stages for founders, like that's what I mean by find the right lender as well. Like you want to do a bit of diligence on your lender. ⁓ you want to make sure that.

Jon Blair (19:09)

Totally.

Kyle (19:23)

You know, they, they're well backed, um, that they have been doing this for a long time. They haven't just popped up in the last two years. Um, and I think that's like a really big part of it because that can create a lot of sticky situations for founders. If they end up with a lender that goes bankrupt or goes in an administration and then, and then you have to pay it all back all of a sudden. Right. Yeah.

Jon Blair (19:30)

Totally.

Well, let's talk about this a little bit actually. No, no, this is a great point. So I learned this lesson, probably the second deal that I did with Guardian Bikes and we really did a lot of diligence on those lenders and we ended up, that time we ended up going to Dwight Funding who is a fantastic partner. I've become friends with Dan and Ben over there over the years but, here's the thing, when you read these loan docs, especially if we're talking ABL, and I know this is also universal to other loan docs, you read these, effectively every one of these ABLs and the like, they have this concept, this legal concept throughout them called discretionary. These lines are discretionary. What that effectively means is that, basically means at any point in time the lender can say, we're gonna stop lending, right?

And so there's all of these, and the bottom line is so, the reason I know this so well is because we try to negotiate that out of the deal with Dwight. And one of their founders over there who's a great guy and ⁓ kind of like a mentor to me at this point, he was like, he's like, listen, Jon, I can take this line out, but there are other places in these docs where it effectively, if we went to court, it effectively, we can very easily argue that this thing is still discretionary.

Our lines are always going to be discretionary. We're a lender. We have to protect ourselves. If something happens outside of these docs that we didn't foresee and we have to stop lending to protect ourselves, we have to do that. But what does that also mean? That also means if that lender gets into liquidity issues on their end, right? They have the ability to stop lending and call basically anyone's note to try to force your hand and to improve their liquidity situation. And so if you're working with a lender who runs into liquidity problems, can guarantee you they have the legal ability within your loan docs to stop lending and actually call your note and make it all due at the moment that they call it. And that's a huge risk to you if you're working with a lender that doesn't have solid financial backing. And that's a real risk to your business.

Kyle (21:39)

Exactly.

Yeah. And you know, it is a dime a dozen, but you don't want to be on the other side of that when it does happen. Right. And every couple of years it happens to a new lender. So, um, finding the right lender, making sure you're working with someone there that actually like understands your business, understand exactly what you want, that you can sit down and go through, you know, a loan agreement with to make sure you really understand the terms that's incredibly transparent for you. They're really important. Now debt product planning, right. Um,

Jon Blair (21:50)

You don't wanna be that, right? Totally.

Kyle (22:16)

that side of the equation.

Debt is kind of like, we don't really see that many smaller brands forecasting out their capital needs. Well, it's a lot of work, right? You got two year projections on stuff and it's just some assumptions and they've just dragged a cell over on Excel and done the math and then great. It's done. Right. I think making sure that a, whatever your strategy as a business is,

Jon Blair (22:27)

Totally.

Kyle (22:47)

is considered when you're trying to build your capital plan for the year is important. If you're DTC now and you want to go into wholesale, well, larger upfront orders, larger costs for maybe pulling a container over upfront costs for logistics, right? You got to sit down and actually do the math. I think that's when CFOs are incredibly valuable. It's like actually plan your debt with the same amount, if not more considerations than you plan like your business strategy or revenue, right? People don't forecast expense as well. Interest is an expense. It's, know, principal payments are an impact on cashflow, right? ⁓ So build a plan, build a two-year plan. It doesn't have to be perfect, but think about what you're trying to do as a business, ⁓ what those growth goals are gonna be, what the costs on inventory or these other elements will be. And then sit down and say, okay, like, so here's our response today, we're an MCA world, we're going to move to wholesale, which means we're going to have invoices. So maybe we should consider or make sure that our MCA is cool with us taking an AR financing line in a year when we start to do more wholesale, right? Maybe you work with a bank right now and that bank has a 25 grand LLC with you.

Jon Blair (24:02)

Mm-hmm.

Kyle (24:09)

But maybe it's first position, right? And as you grow, great, another first position lender wants to come in and give you more money. Like, okay, what are the considerations that your bank has? What are those costs to get out of that agreement? So in short, like I think plan debt well, don't be reactive. I think we see a lot of brands reactive and you want to make sure that you are having an actual strategy to your capital.

Jon Blair (24:27)

Yeah.

Kyle (24:38)

and not just kind of doing it when you need it because that's if you go out to look for debt when you absolutely need it, it will be the worst time.

Jon Blair (24:38)

Totally.

Totally, yeah, yeah, 100%. And so a couple other things that I want to say about that. One is when you are negotiating or structuring a debt deal, give yourself options for your product, the product to evolve, right? And just be honest with the lender. Like I've negotiated the ABLs and they wanted a two-year term and I said, hey, we fully anticipate like, if everything's going well, we literally want to stay with you for two years because I don't want to do another debt deal. But we need to make this one year only because we're growing so fast. I actually can't predict everything that's going to happen in the next 12 months. I want to work with you and I would like for us, we know that you guys are able to handle lines much bigger than this. So our hope is that we can keep working together. But I do need this to end in a year and let's talk about renewal 12 months from now instead of 24 months from now because our business is changing so fast. And you know what they said?

Totally understand that fair and what we'll do is some of the annual fees, you know, like they were gonna already kind of split them up into annualized. We won't put that second one in the contract as like you owe it to us unless you renew, right? And so just, mean, it's truly a partnership. They want to, a good lender is gonna want to and needs to understand your business and your strategy. So the more that you're willing to tell them, what you feel confident about happening and what you're not sure is gonna happen and how like the lender needs to work with you. I mean, a good lender wants to have those conversations. The other thing I wanna mention is not getting over levered, which is something that you brought up, Kyle. There's a couple points that I'm thinking of. One is what's the best way to protect yourself against your lender's liquidity crisis, even if you've vetted them and they run into issues?

Make sure you haven't over levered yourself, right? Because if you don't over lever yourself, in a worst case scenario, can you pay back that loan if it does get called for some reason? If you're over levered, you're like, man, I have no choice but to try to refinance this in a hurry, which is not good for anyone. And so like, what other advice do you have about like, how brands should think about... ⁓

Like are there any sort of thresholds, debt to equity, debt to assets, or just some general advice you have for guidelines to think about like when, where the line is of being quote, over levered.

Kyle (27:19)

Yeah. So founder's got to remember that there will be lenders that will be willing to give you capital pretty much no matter how much debt you have on your books to a degree, right? It's going to be incredibly expensive, low amounts, but if you start with, you know, a good capital provider or an ABL, and then you add a little bit of Shopify on, then you add a little bit of, know, whoever else, right? They're lenders. There's hundreds, thousands of them that are lower and lower on the totem pole of what their risk tolerance is. And they will deploy money to you until the only thing you're doing with your cash flow is paying back all the lenders. It's really hard to get out of that situation because no lender wants to in and refinance five, six other positions out. Right. Also think about like the actual terms of these loans. So if you have RBF, right, revenue based financing, and it's a percentage of your revenue but then you also have a term loan, right? Repayments are going to vary, but they might be as high as possible at the same time, right? If you're going be doing 30 % payback and you go from 50k a month to 100 the next, like that's a big impact on cashflow, right? So my general advice for founders is think about the cashflow and less about the term or the interest rate or whatever the case is, right?

Jon Blair (28:25)

Hmm.

Totally.

Kyle (28:46)

Can you afford to pay this back? Does it put you in a bind? Like taking debt can be scary if you're not doing it intelligently. Nobody wants to take debt because they have to cover payroll costs that they didn't plan for. Right. Make sure you're actually thinking about the cashflow impacts. What's the optimistic pessimistic sort of scenarios for your business over the next three months? ⁓ review your capital stack, right? People take time every quarter. They go through their tech stack. What am I paying for?

Jon Blair (28:46)

Totally.

Kyle (29:16)

Should I cancel this subscription? Like do that with debt, right? You want to be on top of your debt. You want to figure out if their way, their way is to take advantage of earlier payments, waiving interest, things like that. So think about the cashflow side, right? Don't just get sucked into this term or that term's great. You're not going to go off and brag about how good of an MCA deal you got, right? What you might brag about is how much you've grown your company because you were so smart with your cashflow, right? So that's what I would say focus on.

Jon Blair (29:29)

Totally.

Totally.

Yeah, no, I think that's a really great point. look, mean, look, shameless plug for having a fractional CFO. mean, that, but seriously, like, is one of the things that's at the core of what a CFO does to you, for your brand. And I'm not talking about an accountant. We have an accounting service also. That's creating the books in a timely manner in a way that can be used by a CFO for decision making. Our CFOs, they're helping with forward-looking projections and forecasting, forward-looking planning, the types of planning that you're talking about, Kyle. And we're forecasting and projecting not just a P&L, but a balance sheet and a cash flow statement, right? 12 to 24 months out in the future. And I think a lot of people think about P&L forecasting and cash flow forecasting, but forecasting the balance sheet is so important for us as CFOs, because we're going and we're looking at what some of these future debt balances are going to be, right? We have formulas in our cells that like show the amortization or payback of these different, you know, debt structures your business has. And we're going and we're looking in different P&L scenarios, different inventory purchasing scenarios, where is that debt balance gonna be or what does it need to be, right, in order to be able to execute on this strategic decision. But then furthermore, is it healthy? So for example,

I was looking at a potential debt projection of what it would take to buy for a brand's Q4 season and they were experiencing massive year over year growth. They had done 30 million in revenue the year before and they wanted to hit 60 in the upcoming year. And when I looked at how much debt they needed to take on, it was gonna put them at like an 80 % debt to asset ratio, which what that effectively means is that in their capital structure, 20 % of it was gonna be equity and 80 % of it was gonna be debt.

Is that good? Is that bad? Well, it's riskier than a 50-50 split, right? And so I just, I pointed that out to them. Like, hey, look, 80 % of our capital structure is going to be debt. Do we feel good with that risk? Because there's two sides of this coin. You know, it is true, it is mathematically true that debt can enhance return on equity. Because you can use someone else's capital to generate a return that...

but your equity investment stays fixed. That's true, but the other side of that coin is debt needs to be paid back, right? So debt carries risk with it. That's why it's called financial leverage, right? Leverage meaning it can enhance returns, but it's also risky. do you like, do you have anything else to say on that point? Cause it's important that brands understand this.

Kyle (32:19)

Yeah. Yeah.

Yeah, I think, I mean, when you mentioned like the balancing forecasting, last thing people do seriously, we find, right? It's always the P&L that people forecast and they want to forecast them getting the profitability. You know, first time founders or smaller teams or whatever the cases, they focus on that. They don't focus on the balance sheet, right? That's where I think you kind of hit the nail on the head. Like it could be good. It could be bad, right? Are you comfortable? Like if in two years,

Jon Blair (32:58)

Totally.

Kyle (32:59)

You've grown the business double, but you have, you know, 3 million in MCA payments a month. Are you comfortable with that? Like, yes, no. Okay. Then we have to plan around that. Right. ⁓ so I think that's a really good point. It's just, you know, it's, you want to be in a healthy spot, but you also want to make sure that you're comfortable with where you're, you know, balance sheet actually is and that you're comfortable sustaining that much debt. Right. ⁓

So that's what I would kind of like, I would double down on. I think that's a really good point.

Jon Blair (33:33)

Totally, yeah, mean, the balance sheet, which is also called the statement of financial position, right? It shows how your assets and your liabilities and your equity in one respect are relating to one another, right? And that's really important because $10 million worth of debt for a brand that has 20 million in total capital may be less risky than the brand that has $10 million in debt and 12 million in total capital, right?

Those are completely different makeups of like equity cushion, right? That's able to soften the blow should something not perform according to plan. And so it's important for brands to understand that for sure.

Kyle (34:16)

Yeah. And it can affect like what your strategy is. If you want to sell in three years and in three years, you have a ton of debt on the balance sheet and you're not profitable. Like, well, yeah, sure. The goal might be to sell for 20 million bucks in three years, but if you're not in a financially healthy spot, like that deal might not get done. verse your zero debt on the balance sheet and you're trying to sell for 20 mill and you're doing whatever in revenue. Then yeah, like so

Jon Blair (34:37)

Totally.

Kyle (34:45)

There's different implications to that balance sheet forecasting and it might affect like what your strategy is as a business as well.

Jon Blair (34:53)

So I want to turn our attention to recent tariff news. I feel like we can't have an episode on the Free to Grow podcast, at least for now, without talking about that. As of today, it's April 21st, 2025. Over the last couple weeks, there's been a ton of noise in the e-commerce and I guess, you know, really just in the broader US and global economy about the impacts of these proposed Trump tariffs, which, you know, have changed several times. Now they're on pause for 90 days, supposedly, but I wanted to bring up the impact on lending because there's been moves in the 10 year treasury. The 10 year treasury is like plummeted. I'm a real estate investor. So I actually like track those daily and I was like, yeah, let's go baby. And then they shot back up, right? but then there's also other implications. I'm thinking specifically around asset based lending. Cause I, I was the CFO for guardian bikes during the first Trump tariffs. And I was actually in the middle of underwriting an asset-based loan deal. We're in the middle of the inventory appraisal as Trump was slapping tariffs on China where we were manufacturing at the time. And I sat down with the appraisers and they were like, hey, we're concerned about how your margin is gonna get compressed. We are expecting our term sheet had a 65 % advance rate on it. After the deal was underwritten, it went down to 58 % specifically because of the tariffs. So I threw out a bunch of different things right there, but are you seeing anything in particular or talk from any lenders about how they might be changing underwriting criteria or anything in wake of the like tariff uncertainty?

Kyle (36:31)

Yeah. Going back to my first point earlier, which was, lenders are borrowing money, right? Similar to like an ABL structure where a business might borrow on, you know, a floating rate. Lenders are doing the same, right? So higher benchmark rates typically mean that a lot of these lenders are also paying more for their money. And they're not just going to eat that cost. They're going to pass it on. Right? So what we've seen is a little bit more, ⁓

Jon Blair (36:38)

for sure.

Kyle (37:01)

a little bit more aggressive, you know, on the, on the pricing side from like the MCA lenders in the world. Folks that have ABLs, are now maybe paying a point or two higher, just based on benchmark rate plus two or 3 % for their deal. so we're seeing a lot more on that. but I also anticipate like a tightening of these credit boxes and you know, there's an overhaul with the SBA program going on right now. ⁓

there's a whole bunch of stuff that all these ABL lenders are looking at and they also need to maintain returns. know, tightening of credit boxes, absolutely. Likely higher rates for smaller businesses that are not necessarily in that bank rate world just yet. ⁓ But also considerations on exposure limits, right? ⁓ These things are changing very fast for everyone on all sides of the table. And whether you're a lender or

Jon Blair (37:44)

Mm-hmm.

Totally.

Kyle (37:55)

you know, a founder, everyone's trying to work together to figure out what's going to happen next. But I do anticipate that in the wake of all the volatility around how much something might cost for a lender to deploy or what their return might need to be, there being tightening of credit boxes and tightening of exposures, right? If you're on a 500k LLC from your bank, there's a world in which, you know, depending on how things go, that gets reduced a little, right? If you're growing, might go the other direction.

Jon Blair (38:22)

Makes sense.

Kyle (38:25)

but I just anticipate that, and we've already seen that on a number of transactions over the last couple of months, ⁓ but it's very fluid. So I think, you know, for founders just keeping that in mind that nobody knows what's going to happen. Tariffs could be gone tomorrow. It could be triple tomorrow. You know, focus on what you can control. Exactly.

Jon Blair (38:43)

Yeah, exactly. knew he like, don't know. Well, something might have happened while we were recording this, for all we know. ⁓ Well, look, man, this was a super insightful conversation. I really, really value your perspective, not just because of what you're doing at Boundless, but because you personally have experience on the lending side, both in the bank world and in the non-bank world, right, which is not like always super common to find. So I appreciate you coming on.

This has been really great. think it'll be super helpful to our audience. Before we land the plane though, I'm curious if you could let the audience know, can people find more information about you and about Boundless AI?

Kyle (39:20)

Yeah, for sure. Find us at www.getboundless.ai. Feel free to book anytime with our team and we're happy to kind of take you through what we do and see if we can help support your business there.

Jon Blair (39:33)

Awesome, awesome. everyone, I hope you enjoyed the show today. ⁓ And don't forget, if you want more helpful tips on scaling a profit-focused DTC brand, consider following me, Jon Blair, on LinkedIn. And if you're interested in learning more about how accountants and fractional CFOs can help your brand increase profit and cash flow as you scale, check us out at FreeToGrowCFO.com. And until next time, scale on. Thanks, Kyle.

Kyle (39:59)

Thanks, Jon.

BONUS EPISODE: Ecom Scaling Show: Why DTC Marketing & Finance Are Better Together

Episode Summary

Welcome to the Ecom Scaling Show, brought to you by Free To Grow CFO and Aplo Group! Join hosts Jon Blair (Founder, Free to Grow CFO) and Dylan Byers (Co-founder, Aplo Group) as we dive into the crucial—yet often missing—link between marketing and finance in DTC e-commerce.

Key Takeaways

• Marketing and finance must collaborate for success.

• Understanding financial inputs is crucial for growth marketing.

• Data validation helps reduce risks in decision-making.

Episode Links

Free To Grow CFO: https://freetogrowcfo.com/

Aplo Group: https://www.aplogroup.com/

Jon Blair on Linkedin:   / jonathon-albert-blair  

Dylan Byers on Linkedin:   / dylan-byers-046010149  

Transcript

~~~

00:00 Introduction to the Podcast and Hosts

03:20 The Importance of Marketing and Finance Collaboration

06:12 Understanding Contribution Margin and Financial Metrics

08:51 Aligning Marketing KPIs with Financial Goals

11:26 The Debate on Contribution Margin as a KPI

14:11 Exploring ROAS as a North Star Metric

17:03 Cash Flow Management in DTC Brands

19:43 Strategies for Managing Overstocked Inventory

22:27 Final Thoughts and Future Topics

How To Bootstrap a DTC Brand from Zero to Scale

Episode Summary

In this episode of the Free to Grow CFO podcast, Jon Blair interviews Sean Busch, founder of DadMode and former founder of Puracy. They discuss Sean's entrepreneurial journey, the challenges and successes of scaling bootstrapped brands, and the importance of customer engagement and financial reporting. Sean shares insights on driving repeat purchases, building strong relationships with customers, and the operational challenges faced when scaling a brand. The conversation also touches on the birth of DadMode, a brand focused on household cleaning products for dads, and the value of creating relatable content for their audience.

Key Takeaways

• Creating uncomfortably close relationships with customers can turn buyers into loyal brand evangelists.

• Valuable customer insights often come from doing the unscalable.

• Scaling a business without outside capital requires strategic supplier partnerships.

Episode Links

Jon Blair - https://www.linkedin.com/in/jonathon-albert-blair/

Sean Busch- https://www.linkedin.com/in/seantbusch/

Free to Grow CFO - https://freetogrowcfo.com/

DadMode - https://godadmode.com/

Meet Sean Busch

Sean Busch is a serial entrepreneur who launched his first business at 16—a high-end car detailing company built entirely on word-of-mouth. After stints in pharmaceutical and surgical sales at Novartis and Johnson & Johnson, he joined a fast-growing CPG e-commerce company in Austin, where he led acquisitions and strategy, helping scale it into a category leader.

In 2013, he co-founded Puracy, a line of natural cleaning and personal care products inspired by fatherhood and built with scientific rigor. With no outside capital, he scaled the brand to over $30MM in annual sales and national retail expansion before selling to BRANDED in 2021—their largest acquisition to date. Today, after a brief sabbatical, Sean is back with DadMode, a bold new brand making premium cleaning products for dads who show up at home. It’s equal parts performance, purpose, and humor—built to make cleaning a badge of honor, not a burden.

Transcript

~~~

00:00 Introduction

01:16 Sean's Early Entrepreneurial Influences

04:40 Scaling PureCity: Key Factors for Success

10:08 Customer-Centric Strategies for Repeat Purchases

13:31 Leveraging Amazon for Brand Growth

17:41 Building Uncomfortably Close Customer Relationships

23:18 The Soul of Business and Its Impact

25:04 Optimizing Product Packaging and Manufacturing Costs

29:19 The Birth of Dad Mode: A New Brand for Dads

33:57 Creating Engaging Content for Dads

37:14 The Importance of Financial Discipline in Scaling

41:04 Personal Insights and Future Directions

Jon Blair (00:01)

Hey everyone, welcome back to another episode of the Free to Grow CFO podcast where we dive deep into conversations about scaling a profit-focused 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 nine-figure DTC brands. And today I'm here with Sean Bush, founder of DadMode, a household cleaning products brand for dads. Sean, what's happening, man?

Sean Busch (00:25)

Hey Jon, great to be here. Thanks for having me.

Jon Blair (00:28)

Yeah, I appreciate you being here. For those of you who are watching this on YouTube, you can see I strategically have my best dad ever mug here. Yeah, man, I'm super excited to chat today because you have a really interesting background. You founded a couple of brands and one of them ⁓ you scaled to, you know, tens of millions in revenue, effectively bootstrapped, you know, and as a fractional CFO firm that works exclusively with bootstrapped, fast growing eCom brands, I think your experience is gonna be right in the strike zone of the audience who listens to the show. So I'm really excited. So before we dive in, I'd love to get kind of the high level background. If you could just walk through the audience, your high level entrepreneurial journey that ultimately led you to founding DadMode.

Sean Busch (01:16)

Sure. So I was born to two entrepreneurs. My parents were both small business owners, very small businesses, and more on the labor side of things, and grew up in eastern Long Island. And just learned from them the ups and downs of entrepreneurialism, and how you could have good years and bad years, and a lot of the things that you saw were when people say, oh wow, look how great they're doing. Those were snippets of the life cycle of a business. Most of them were gritty and grinding and getting up at 5 a.m. and just doing really hard things or things that just weren't fun. And they kind of instilled in me this notion that if you want to do something on your own, you've got to have that mentality, but also you've got to find something that you like doing.

And so I started my first company when I was 16. It was a car detailing company. I was in mobile. I went to everybody's house. And then I built that over a number of years. I started doing testing and development for the chemical manufacturers in that space when I was a teenager in high school. Built that business into something decent sized. And I kept it going through college. It helped leverage me into a couple of my first professional careers in medical sales.

And then it ended up giving me down to Austin from New York because one of my clients claimed that he couldn't find a good detailer, flew my wife and I down to first class and I thought it was the coolest thing ever but then by the end I was like, yeah, come work for me. So I started in the internet landscape at that time and worked for his company, running biz dev for a CPG e-commerce company that was 100 % self-funded. And so I learned about small business, I learned about customer-centric methodologies. learned about the beauty of the internet and how you can sell products when people are sleeping and you get all this amazing data on what people do when they get on their computer or their smartphones. And then I leveraged that into starting Puracy. I kind of got bored after a couple years and wanted to start something on my own and I started something with my neighbor in South Austin. We were both about in the sort of family planning stages. He just found out, him and his wife were pregnant, we were trying to get pregnant, evaluate all the products in your household. Hey, what's toxic, what's not? And then we realized there was this big gaping hole that was not really filled. There were some natural products in the household cleaning space at the time, but everything was going to stores and buying them. And kind of said, I looked at them, said, look, I think we go to Amazon. This was back in 2012 when we started talking about this.

And so, know, FBA was brand new. Nobody was really doing much in our space. And we launched at the end of 2013 that brand and the brand called Puracy focused on pure ingredients and household cleaning products. And that ended up building into a brand that sold baby care products, personal care products, and then at the end, even pet care products. But we bootstrapped that company and moved into Target and Walmart stores around 2019. And then we sold it a couple years ago.

Jon Blair (04:40)

Awesome journey man. So a couple things that I want to draw out of there. One, I was on the founding team of an eCom brand called Guardian Bikes that's still around to this day and we launched on Amazon Seller Central in 2015 and I was the guy on there like trying to figure out how to label shipments right to get them to FBA and get them accepted and dealing with like that super annoying queue of like products that just get lost in the FBA system and like so

Yeah, 10 years ago, FBA was like, what's funny is a couple years before that we launched our site, our DTC business on Magento, which is like, takes me back. And Shopify was brand new and we were having issues with Magento and we had to do this quick pivot before our Shark Tank episode aired. ⁓ Because like, our Magento developers were not available on the weekend, so we literally like stood up a Shopify store like, over the weekend ourselves and like it's those kinds of things like I love meeting people who have been in the game as long as you have because I was in those early days as well and it was like we're just like figuring stuff out right like not really knowing what the heck we're doing and just trying these effectively nascent platforms right and so anyways I love that the other thing you mentioned that I that I just want to draw it is like you're talking about at the beginning of your journey ⁓ you know

seeing your parents as, you know, kind of entrepreneurs that you looked up to and going like, I want to be an entrepreneur and doing things that, grinding through things that you don't necessarily enjoy. And it just made me think of like, I'm a big Robert Kiyosaki fan and he talks about in investing, which if when you start a business, you're just investing in your own business, right? And you may be operating as well, but any amount, any type of investing, he says, listen, pick an asset class you enjoy because it's the enjoyment of it that allows you to grind through the hard times, right? And so like, ⁓ anyways, all that being said, I wanna dive into the journey of scaling, Puracy first, ⁓ bootstrapped. When you think about the one or two key factors that allowed you to scale bootstrapped, what are the first things that come to mind?

Sean Busch (07:06)

Got to know your margins. So as a consumer products business, while it's built on consumables and repeat business, that's obviously not guaranteed. So you still have to think about it from the outset of what we try to do is we solve for a break even or small profit on the first item. And then once you acquired that customer, the goal was to get them to subscribe to the product. But you needed to know Hey, if I'm purchasing this now as a small business, as a small brand at 3000 units, what does it look like at 10, 25, 50, 100 and so on? And where do the price breaks come in and where do you have to go and then go to different vendors at that point? You know, is your manufacturing partner good enough to scale with you? Right? So you're sort of having to ask all of these questions in upfront conversations. And like you said, that was my first real startup. And so you're sort of, my co-founder had no background in CPG or anything. so we're sort of figuring it out as you go. And you make a lot of small missteps, but I think the thing about an early stage business is you're doing these minor pivots sometimes more than once a day.

Jon Blair (08:29)

Yeah, continuously, right? Just like continuous minor pivots. The number of times we pivoted at Guardian Bikes and probably still are to this day. ⁓ That's part of being entrepreneurial. And honestly, man, like in the e-comm world, like you just have to be nimble. Things change still to this day. They change constantly, right? And ⁓ you're operating a lot from an acquisition standpoint. You're operating a lot on like what I call rented land. you know, when you're, when you're, your things are working on meta that that's rented. That's, that's a rented channel, right? The algorithm, I've seen the algorithm change on brands so many times in the last decade. And they're like, shoot, what the heck, you know, and they eventually figure it out. But like, you know, it can, it can up end the brand. Like overnight, I've definitely seen that happen. ⁓ There's a couple of things you pointed out that I see time and time again that are key factors in being able to scale.

Bootstrapped right the first the first factor is like you have to be profitable That's just a necessity when you're scaling bootstrapped and you mentioned think two core tenants that I see time and time again either lead to the success of profitability or lack thereof is Margins and repeat purchase and there's actually like a really tight connection between the two of those you mentioned Turning a small profit or at least breaking even on a first order and then really making up your profitability on repeat purchase. What were some of the repeat purchase retention tactics that you guys used that you saw that were successful?

Sean Busch (10:08)

We were so dialed into what our customers wanted from a product experience standpoint to where we really leveraged the review database of Amazon early on and started to, now there's all these tools and things that you can get in use for, but we did it all manually and part of reason I love doing manually is that I had my hands in it all the time. And so you start to pick up these little snippets and when you think about it from a more, formalized methodology around quantitative and qualitative consumer research. You start to see, okay, this is what people write about it, but what do they really want? What are they really trying to solve for here? And that's really the sort of path we were trying to figure out. And so I did a ton of focus groups and you just start to find out that, hey, I wish the hand soap rinsed off better. I wish my hand soap feels slimy after that.

And so like these little things that most consumers can't articulate and they don't understand why they like it. They just expect it. You know, go through that element and then you go through things like foam height on, hey, when people wash their hands, they want it to foam up real fast. It's called flash foam. So we started to analyze all these little tiny nuances of it. And then I'd solve for them with our chemists. And then you start to talk about, you know, ingredient safety and quality.

So it was really about just listening and observing people in their natural habitat. And for Puracy the brand was targeted at young moms or soon-to-be moms. So there's a heightened level of emotion, there's a heightened level of hormones, which the hormone thing was interesting because one of our early findings was that, hey, I like Mrs. Meyers because they have all these great scents, but when I'm pregnant, I actually have to find a different cleaning product because the scents are so strong, makes me nauseous. And we started to that over and over again. And that became boom. Like that's our, that's our end spot right there. It's like create good scents, but have them be just sort of refreshing and complimentary to what you're doing, but not overpowering. And that's really where we landed on that particular side of things. So I think highlighting all of these little nuanced things, because again, as much as I wanted to be better, better, better, it was about being different. It was about finding that angle in the market to where you can comment and people recognize you for. So that was the pure ingredients that was not overpowering. So it just became a brand that was very approachable and ⁓ yielded a great experience through and through. Nothing was offensive about the brand or just in your face. And I love that because that's what people came to expect from the Puracy brand.

Jon Blair (12:37)

Yeah.

So I see a lot of DDC brands who also have Amazon as a channel that struggle with driving repeat purchase specifically on Amazon as a channel. Besides like mining the review data and kind of having focus groups and whatnot, are there any other specific tactics on Amazon specifically that helped you drive repeat purchase?

Sean Busch (13:31)

Yeah, you know, it's tough. Amazon, even on the early days, now everybody knows that you're just sort of conditioned to one quick buy everything and have one day shipping. But at that time, yeah, like I'd say early on, we had to pump up a lot of our inventory levels to kind of be able to allow the entire United States to have quick shipping. So that was one. You also, it was way before subscribe and save. So it became this thing where we try to time our follow-ups and you were still limited to two follow-ups. We tried to time our email follow-ups on Amazon to where, that was a tough one. That was again, a moving target. You don't even think about it, but people buy stuff and typically they're not going to, at least in household cleaning products, they're not going to use it the second they get it. People don't usually run out. They just buy and say, all right, I have like two weeks left of it. So we had to time it so that it didn't feel like.

Hey, why are you emailing me? Like literally the box just got to my door, I haven't even opened it yet. So I think a lot of it came down to how well could we analyze our customers' habits of purchasing and then usage. And then those follow-up emails started to help with repeat purchase rates because if there was a question or there was a concern, for the first four years of the company, every single thing came to me.

And I made sure to sign all of the emails, all the responses, all of the customer reviews that were critical online. I signed all of them, Sean, founder of Puracy because I wanted people to know that, yeah, like the owner of the business is the one chiming in here, not somebody who's reading off the script somewhere. And that started to turn the dial for us because you started to take a look at, again, I'll give you an example, Mrs. Meyers giant organization or giant brand within a massive organization, S.E. Johnson. And yeah, you're not getting Mrs. Meyers responding to you. And that for a lot of people, especially for moms, right? You've to think about the mindset and the state of mind that they're in as they're pregnant or they just have a newborn. They want to be talking to somebody who actually knows what they're talking about. That's why there's such a high touch point with doctors and things at that time period.

Jon Blair (15:29)

Yeah.

Totally, totally.

Sean Busch (15:54)

I, yeah, again, I just hyper-focused on those elements.

Jon Blair (15:57)

So I wanna draw something out here that I have, I talk about a lot on this show and I talk about it a lot with our Free to Grow clients. E-commerce channels, in this context we'll talk specifically about Amazon and your DTC .com store. Those should be part of your strategy. Now that might sound like, of course, obviously Jon, but what I'm saying is I see too many brands that are just like, we're gonna start selling DTC. ⁓

or Amazon because it's just an easy channel to start selling on. But they're not thinking about what is strategic about these e-commerce channels. So like at Guardian Bikes, the reason why we launch a direct to consumer kids bike line is because we had a brake that prevents you from flipping over the handlebars. We were selling it brick and mortar at the beginning and we were like, you can't tell the story of why this is safer, right? You go to a Walmart aisle, the Walmart kids bike aisle and there's just stuff everywhere. There's zero differentiation. We did it out of strategic necessity to explain why this bike is safer. And secondarily, but this actually became more important, is to build a direct customer relationship, right? And so the point I'm making is that what I hear you saying here is that, like, you're not just leveraging Amazon and DTC as sales channels for just outlets to get transactions recorded.

You're actually strategically leveraging them to build a relationship that you couldn't have otherwise if you had started in brick and mortar, right? So, when we were prepping for this episode, you mentioned something about uncomfortably close relationships with your customers. Can you dive into that a little bit more and how that was, how you engaged in those relationships and then any more that comes to mind about how you leverage those for your success?

Sean Busch (17:30)

Yeah. And Jon, you're a hundred percent right. Like as much as we wanted to be more DTC focused because look, you cut out Amazon stuff. People are just conditioned to Amazon, especially with consumable products. So you had to do the best you could with your product presentation on Amazon, which was a differentiated factor for us in the beginning because even the big brands we competed against just didn't have good descriptions. But yes, when you went to our website, it became this treasure trove of information.

We found what happened was our website never really had great conversion rate because people would go to the site, research us, they'd research our team, they'd research our chemists, they'd research all of the research that we did on all the ingredients we put in our products and the ones that we refused to put in our products. And what it does is it builds trust. And I think that's really, really important when it comes to a brand that has touchpoint with moms and kids. So I think that when you start to kind of build out a repeat purchase rate and like what makes an uncomfortable ⁓ relationship with customers, uncomfortably close. It's a couple elements. So I think one is when you convince somebody to buy your products and we knew that we had one shot with, especially when we came out with our baby care line, like baby shampoo, baby lotion. Those products were such a binary purchasing experience.

And thankfully we tested them so rigorously in labs and with friends and obviously our families that they were very well received. But you have this response from people when they go ahead and they're like, hey, my child has eczema. I've tried this, this, and this, and it doesn't work, your stuff is the only thing that's worked. And all of a sudden you have cheerleaders and you have people that are back about your products. And that is what we tried to build is we tried to build cheerleaders and then you have situations where somebody says, hey, I like this, but like the lavender is a little bit too strong in the scent. And then you get a couple more of those comments and then the next production line, we fix it and we dial it down a little bit. And then I go back to all those people who had, you know, what are Amazon reviews and you try to match them.

Or they wrote us letters or direct messages on social or emails. And I go back to every single one of them and I said, hey, we heard you, we fixed this. Please send me your address, I'm gonna send you a bottle for free, no charge, would love to hear your thoughts on the newest formula. And they go to you like, wait, you listened? And you made a change to the product? And all of sudden it's like boom. So it's the situation where, yeah, it's very manual, but you have a customer base that will sing it from the rooftops when you have pleased them because once you build that trust, you're sort of on the inside at that point, you're a trusted brand.

And so we did a tremendous job of trying to keep a squeaky clean reputation across the board because we wanted to be seen as a really trusted brand. So I think when, you know, you, also have these conversations or longer conversations with customers and reach out and they know that hey I can reach out I'm going to talk to a person I'm going to talk to a person that's actually at this company and not at some hired firm and then I'm going to get results from it and that starts to kind of reach itself out into You know mom discussion groups on Facebook and then know your grassroots style of Exposure through like hey, I have a mommy group locally that I you know, there's ten different moms in it. We're all talking about what's going on about being a parent, hey, all of a sudden this starts to come up as a brand that's trusted. that is, it's an amazing thing. I still get letters to this day, honestly, from customers that are like, you your products have changed our lives and changed our household.

Jon Blair (21:57)

Yeah, it's interesting because when you're scaling a brand, right, ⁓ there are things that you should do that are not scalable, right? Both internally and externally. Like, I'm a big fan of doing things that are not scalable with how we treat our team internally and how we manage our team. Doing things that are not scalable with how we work with our clients. I write a handwritten card to every client when we start working with them and I kind of have this list of people I send cards to on a monthly basis, just things that come up that I'm aware of that are going on in their business or in their life and it's super, it's very much not scalable and I always feel like I'm behind on it if I'm honest with you but you know, it's meaningful, right? ⁓ And actually interestingly enough,

I was so passionate about that when I started Free to Grow three years ago. Like our purpose is to build a profitable business that truly cares for people. That's our purpose statement. And it's important because we do it through e-commerce finance. That's how we care for brand founders. But having that as our purpose reminds me that like how are we caring for people by making this decision, by taking this action. And I'm just like a big believer in the fact that when you build an organization that actually has that soul in one way, shape or form, it just performs better, people are happier and it makes a true difference in the world. And at the end of the day, that's the beautiful thing about business is that ⁓ it's something, yes, it can create financial wealth, it can create financially positive results for everybody involved, right? But.

Sean Busch (23:23)

Yes. ⁓

Jon Blair (23:46)

it can actually make the world a better place above and beyond that in terms of how it changes the world from a product and service perspective, how it changes your employees' lives, and I just think that's really cool. ⁓ One thing I was thinking about as you were talking, and I was thinking about scaling a brand, some of the things that I've seen at Guardian Bikes and that I see our clients who are scaling, dealing with all the time is like, you're seeing success on the marketing side, you're acquiring new customers, you're getting repeat customers your ⁓ sales are going through the roof and inevitably there's operational bottlenecks or potential operational bottlenecks because now all of sudden supply has to keep up, right? And then furthermore when you're trying to scale from a bootstrapped perspective, ⁓ that means you don't have deep outside equity investor pockets to go to when inventory purchases start, you know, start, ⁓ you know, tying up more cash on the balance sheet.

So two things, the first one is negotiating with and partnering with your suppliers. How did you work with them on both pricing and I would say equally as important payment terms so that you could finance the increasing purchases you're having to make to keep up?

Sean Busch (24:49)

Yeah, I love that question because it's so important to the growth of the business. so a couple of points on that. So one, you know, like with DadMode we use the same bottle size. Obviously it's pre-printed, it's custom. But with Puracy we use plastic bottles that were labeled and we ended up sharing a lot of bottles across the product

So we had a lot of shared components across multiple products, which was helpful because you can purchase at larger quantities and you weren't overloading on inventory of bottles. didn't have 12 different bottles, you had like three or four. So that was one. The second one, which then you look down the list of where are your largest expenses? And obviously that's contract manufacturing. So we went into our contract manufacturer, which was our second one, because the first one we outgrew quite quickly. And we had to give them some runway first. We had to start moving some product over. And obviously, you keep that close to the vest because, for a host of reasons really. ⁓ But then, once you get a couple of POs on your belt, they see that you're paying on time. They see that your POs are getting larger. It gives you an opportunity to kind of go in and say, just tell your story. And so we did.

Literally went out there physically, met with them, saw their facility, saw our products getting run, and then sat down with ownership and said, look, here's who we are. We chose you guys because you have a history of taking smaller brands and making them big. So Babyganics was like their big claim to fame that they helped scale them to exit. And I said, you need to kind of work with us from the standpoint of we are...bootstrapped, we don't intend to raise money. We want to continue to grow profit. What what can we do from this right at the time we were in at 30 and What the situation started at which was a leverage point was hey, we're gonna run larger production lines, but we need the first half of it or whatever we spend to Amazon Let's say we'll pay you net 30 on those because we know we're gonna sell them fast, but the other half we need to one store them at your facility and two, pay net 60 on And so, you we had some back and forth on it and credit checks and this and that, and they ended up saying, okay, you know, we'll work with it here. And then as we grew beyond that, we got into the position where, yeah, the numbers got bigger. And again, I think it was critical that we stayed current all the time on our payments.

Jon Blair (27:46)

Yeah.

Sean Busch (27:47)

You obviously have to have your forecasting down and kind of really know your business. And we ended up moving to net 60 on the whole account. And that was a real critical juncture for the brand to be able to cash flow things because you could turn that product and could pay it off in a timely basis because of how, as you know, Amazon is net two or three and they pay fast. So that was a really important part I think to allowing us to go ahead and scale.

Jon Blair (28:20)

Yeah, the super key, like for everyone listening, your partnership with your key suppliers is like, it is one of the most important relationships that you have to maintain as you're scaling a bootstrapped brand. Because things change, things change for them, things change for you, and open communication lines are key. I'm even seeing, ⁓ you know, with the tariffs that recently went in place, like the first move that we're advising everyone to do is sit down with your suppliers.

Talk about how we can get through the next 30 60 90 days together, right? Because it's in everyone's best interest to keep the relationship right and and you're real they're an extension of you and so ⁓ That's a great story and really great advice on on you know how to maintain How to think about partnering with your factory as you continue to scale to make sure that payment terms are working for your bootstrapped brand I want to go now to DadMode

So walk me through kind of ⁓ the birth of DadMode and what you guys are all about.

Sean Busch (29:26)

So when we sold Puracy, I remained on for effectively 30 months afterwards to run the brand. ⁓ were a number of incentives sort of tied to me staying there. it made sense. And frankly, I wanted to. I didn't think that my job was done there. was just more a situation where we had the ability to join a much larger company with a lot more resources. That's something that I never had before.

It also gave me the time to open up my mind because I had been so dialed into Puracy for so long that I hadn't thought about any other businesses. you know, over the course of a few months post-acquisition, I came up with 40 or so business ideas that I jotted down. And I honed in on this one for a couple of reasons. Again, it goes back to like, know what you know, know what you don't know. You'll find something you're good at and make money with it. But I think it intersected an interesting point in the market where COVID had happened, hybrid work environment was at full ⁓ speed at that point. And what you saw was like this accelerated shift of dads contributing more around the household. were just naturally, it's like a dad has taken Zoom calls from the bedroom, dad's gonna chip in with dishes or laundry or taking the kids to school. And that set off a light bulb. And so I did some consumer research with dads in that demo and you just start to go through the whole thing and you start to kind of draw these parallels like, hey, remember what men's grooming was like 10, 15 years ago? It was nothing. And now it's enormous. There's brands everywhere. There's two aisles of Target, two aisles of Walmart. And so you start to go down this path and then you realize there's these hot buttons for dads where, you know, being a superhero in your kid's mind was like a 10 out of 10 for every single dad. Being a great father in your spouse's mind was like a 10 out of 10. Every single dad.

And so what we realized was dads are willing to chip in more around the house. Things have changed fast. Even though now lot of dads are back in the office. And there were no brands that were speaking to them. like, yeah, I'm Mrs. Meyers' lemon verbena, or I'm using 7th generation citrus. And it's like, okay, I'll do it. And that's fine. But yeah, it would be a lot nicer if I could use something that was catered towards me. And then there was the element around scent, you know, there's an element around, these products have to work extremely well. And then this whole, you know, sort of cherry on top, there are two cherries on top, one was around this growing concern around microplastics. And really the fact that all plastic that we use, most of it's not recycled. Overwhelmed majority is not recycled. It, you know, goes into landfills and it leeches into our water systems and then it ends up in our drinking supply. And so I saw this opportunity for, you know, metal aluminum to become the savior there. And then the top one was really, how do we sort of portray this? How do we get men to give a shit about this? And there was this growing body of data around men who do more chores around the house get laid more. And so became this thing where like, well, all right, men are animals again. And like they want to have a better relationship with their kids and their wife. And like, this is sort of the catalyst.

They're already doing it. We're not asking them. We're certainly not trying to tell them to do like an hour more per day at work. So we these products as easy to use and as easy to be as effective in the shortest amount of time possible. And then also layering on this nice masculine scent to kind of show that dad did the work. So that's really how the brand idea was born. There's a lot of other sort of nuances around it, but I saw this and I kind of said, hey, I'm living this right now.

Jon Blair (32:59)

Hahaha

Sean Busch (33:21)

feel like I could be a great spokesperson because I understand the target demographic really well.

Jon Blair (33:27)

So ⁓ I'm curious, ⁓ one thing that you mentioned in prepping for chatting today is valuable content that resonates with your audience. So when you think about DadMode and you've gone through the process of finding content that really connects with your audience, walk me through high level your process and what you found.

Sean Busch (33:57)

It's a lot of fun, honestly. That was like one of the things that stuck out because the Puracy brand built a really clinical brand ⁓ through a lot of product reviews and extra testimonials from doctors. We had a couple of doctors on our staff that would answer questions and write blogs. And that was all fine and dandy, we had no social presence. And the world has shifted a lot since I started that brand. And what I saw was like people were just yearning for humorous education, like edutainment type of content. They want real, they want raw, they want honest. They don't want this sort of polished Instagram lifestyle. And I think that's why TikTok has exploded. It's because people just want this genuine connection. They want to look on the other side of camera and see like, okay, that's a normal person, right? They don't even use filters and they're not using all this makeup and special scenes.

And that's what we saw was like, if we can create this as an example, chore play, right? Dad's just clean mode, get laid more. You know, have this sort of suggestive humor that makes dads laugh when they kind of view our content. If we can have stuff that's like really dumbed down to kind of show, hey, you can spend five minutes a week pre-treating your laundry and like your wife is gonna love you because they don't pull out your son's shirt and there's like a giant stain in the middle. And it's literally a simple as going through the entire laundry pile spraying the stain and then cleaning it whenever you get around to it. There's no special formula that you have to do with scrubbing and it's just wait, let the product do its job. teaching them how to do that, really kind of dumbing it down because a lot of dads just don't know. And then, yeah, all the other humor and I think what we're trying to build into is this resonance about...

you know, how to be a better dad, how to spend more quality time with your kids and just different examples of doing that. And that's really the underlying theme that we're trying to build here on the larger movement scale is really trying to get dads to be more engaged. And again, I think we're the leading generation to do this because our dads weren't that involved, ⁓ most of them generally speaking. And now the dads kind of have access to a lot more resources around, this is what it looks like. We kind of want to be out there talking about it just a little bit.

Jon Blair (36:27)

I love it, that vision and purpose is near and dear to my heart as a dad of a six, four and two year old who's building a business working from home. ⁓ So I truly love that. I'm curious, now having scaled more than one brand and exited one successfully and having the rigor around profitability because of bootstrapping from your perspective, imagine yourself sitting across the table from a first time e-comm brand founder who doesn't necessarily know the difference. To you, how valuable is clean financial reporting and a CFO or CFO level advice as you're scaling a bootstrapped brand?

Sean Busch (37:14)

I'll put it this way. ⁓ In some other interviews I've done, people ask me like, hey, what's the biggest regret we had with Puracy? And my number one answer, unequivocally every time, not hiring a CFO student. When we moved into retail, that was phase one of it getting pretty sticky, because we had to reduce our retails. And then when I say reduce our retails, that was reduce our retails for retail and online and our cash conversion cycles went to hell because retail is a joke. And then you have to home a lot more inventory and then COVID hit and then trying to buy components in the early parts of COVID. And then, you know, as I mentioned before, we shared bottles, for instance, we shared sprayers and closures. So you might over it for one product and then you get bumped back in line. And then all of sudden you now have five products out of stock.

Jon Blair (37:49)

Totally.

Sean Busch (38:13)

because you can't buy other bottles. And so, and then once you say, okay, we're gonna buy more, you know, we're triple our order, we're gonna just sit on a ton of inventory, then your marketing team's like, where'd my budget go? You're like, well, a bootstrap, I have it. So that's always been my number one ⁓ call out was a CFO has to be there. And then when I look at it from DadMode we, you know, just so happens because I trust him and what he did towards the end of that business to help us get to exit was big. We brought on our former Puracy CFO to be a to be a formal advisor to the company because him and I worked so well together. He knows the landscape. He's worked in CPG almost his entire career and paramount. And then we also hired a accountant/controller on a fractional basis.

And when we went out and we did our friends and family seed raise, people were like, whoa, you guys are really buttoned up. And I said, you can't not be. You absolutely have to be. Especially now where you don't have these, like you said, back in 2015, 2014 with Amazon, it was kind of awesome, right? You kind of put stuff on there and you get some reviews and things sold. And now it's, you know, it's like 15 ads on every page. So everything is very expensive. And now you have all the big players have woken up think you have to be extremely disciplined in that fashion from a financial standpoint. And you might have push and pull, you should frankly. The CFO is, I have a friend who's a CFO who says he is the king of unpopular opinions. That is how it kind of titles his role. But it is for a reason. And you have to respect them for what they're doing for your organization. You know their job is to go ahead and money. That is their job.

Jon Blair (40:04)

For sure. Well, and actually if you think about it, like one way to describe what is the role of a CFO, they're the chief capital allocator in your business. And if you are bootstrapped, that means inherently by saying we're bootstrapped, there's a finite amount of capital to allocate. So there's a trade-off to every dollar you allocate to one area of the business, that means it can't be allocated to another, right? And so it's of the utmost importance and obviously that's why we do what we do at Free to Grow CFO. ⁓ Not having that advice makes running a brand which is already stressful, way more stressful. And we're here to help remove some of that stress by giving guidance ⁓ and solutions to capital allocation constraints and trade-offs. unfortunately we gotta land the plane here, but before we do, I'm curious, I always like to ask a personal question on the show. And I'm curious for you, what's a little known fact about Sean that people might find shocking or surprising?

Sean Busch (41:13)

goodness. ⁓

So I think...

Look, I'm very passionate about great, safe cleaning products, products that are good for the environment. I'm passionate about the sort of plastic movement or anti-plastic movement, and that's why we created aluminum bottles and single-use refill pouches that weigh almost nothing. But...

love cars and I love gas powered cars. I always think about that. There's a line that I will be the last holdout for an electric vehicle. ⁓ I get them, I understand them. I think they're great to the people that care about them, but there's something about the roar of a V8 that ⁓ just gets my blood going. And I know they're not great for the environment. I work from home so I don't put lot of miles on it but I used to have a diesel truck, same thing. So that's like one of the things that as passionate as I am, ⁓ there are limits.

Jon Blair (42:23)

can't be perfect man, we all have our things and as the founder of a brand called DadMode I feel like you're, it's okay that you like gas powered vehicles. Well Sean, this was amazing. For all of you out there listening, you might want to listen to this one a couple times. This is chocked full of really awesome advice about how to scale not just one but two, you know, bootstrap brands. Before we do, break here though, where can people find more information about you and about your brand DadMode?

Sean Busch (42:59)

Yeah, so for me, obviously this podcast and LinkedIn for DadMode, it's godadmode.com. We also sell on Amazon and we also sell on TikTok shops. So those are the three areas you can find us. We should be moving into retail stores next spring. And that's going to be an exciting position for us to be in. That's really why we built the brand. The way we did was to launch online, get a ton of data and use that to help craft our content and acquisition strategy as we head into a retail.

So I think that sort of covers it. But yeah, we built out our website to be pretty detailed and rigorous and should cover everything. But again, it's one of those things where we are always keeping our ear to the ground. And if you want to learn something new about our products and it's not out there, then we'll make content on it. If you want to see it used in a certain way, we'll make content on it. And for now, for foreseeable future, I will be the one talking to you on the other side.

So, don't be a stranger.

Jon Blair (44:07)

love it man. Definitely check out DadMode. I'm probably gonna have to check it out by virtue of running a business from home. There's this joke actually. ⁓ I'll sweep the whole house when I'm on a call that I don't have to be on video. I'm on my phone and Andrea, my wife, will come home and go, were you on some calls today? Because the house is all swept. I'm probably, I'm your target market man. I'm gonna check it out for sure. So appreciate you coming on and look everyone.

Don't forget if you want more helpful tips on scaling a profit-focused DTC brand, consider following me, Jon Blair, on LinkedIn. And if you're interested in learning more about how Free to Grow's DTC accountants and fractional CFOs can help your brand increase profit and cash flow as you scale, check us out at FreeToGrowCFO.com. And until next time, scale on. Thanks, Sean.

Sean Busch (44:54)

Thank you, Jon.

Why an IMS May Not Fix Your Finance-Ops Disconnect

Episode Summary

In this episode of the Free to Grow CFO podcast, Jon Blair and Arjun Aggarwal discuss the challenges faced by DTC brands in managing inventory and landed costs amidst current market fluctuations. Arjun shares his journey from finance to founding Mandrel, an AI-powered inventory automation platform. The conversation delves into the importance of accurate inventory valuation, the interdependence of finance and operations, and the differences between ERP and IMS systems. They highlight how Mandrel aims to automate inventory workflows, providing real-time tracking and reporting capabilities to help brands save time and improve their financial health.

Key Takeaways

• The connection between finance and operations is crucial for accurate inventory management.

• Many brands struggle with tracking inventory valuation due to fragmented data sources.

• Real-time tracking of inventory helps brands respond to market changes quickly.

Episode Links

Jon Blair - https://www.linkedin.com/in/jonathon-albert-blair/

Arjun Aggarwal- https://www.linkedin.com/in/arjun-aggarwal-18049436/

Free to Grow CFO - https://freetogrowcfo.com/

Mandrel - https://www.mandrel.tech/

Transcript

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00:00 Introduction

02:52 Arjun's Journey and the Birth of Mandrel

06:12 Understanding Landed Costs and Their Importance

08:54 The Interdependence of Finance and Operations

12:12 Challenges in Inventory Valuation

14:55 ERP vs. IMS: Understanding the Differences

17:55 The Role of Mandrel in Inventory Automation

23:50 The Importance of User Compliance in Inventory Management

26:01 Automating Inventory Tracking and Cost Management

29:11 Integrating Email and Document Management for Inventory

32:38 Building a Comprehensive Inventory Ledger

35:59 Understanding Costs and Inventory Movement

38:00 Maximizing Efficiency with Mandrel

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 DTC brand with a profit-focused mindset. 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 here with my pal, Arjun Aggarwal founder of Mandrel Mandrel is an AI-powered inventory automation platform for consumer brands. And I'm stoked to be chatting today. What's happening, Arjun?

Arjun Aggarwal (00:30)

Hey, how you doing Jon? Thanks for having me on today.

Jon Blair (00:33)

Yeah, crazy day to be talking about this. So as of today's recording, April 4th, 2025, I believe it's the day after or two days after the big tariff announcements from Trump. There's all kinds of trade war stuff happening, retaliation from different countries like China and the stock market is, I don't know, I checked today in the last 48 hours, I think the NASDAQ was down like another 10% and like it's like,

Arjun Aggarwal (00:58)

Crazy. Yeah.

Jon Blair (01:00)

over 20 % off its recent high, so it's in bear market territory. It's like crazy, crazy stuff. anyways, tariffs strike again, and guess what we're talking about today? We're diving into landed cost of goods sold and inventory automation, which is like, couldn't be more timely. And so before we dive in and start chatting, I think you have a really cool, unique background and journey that led, that ultimately was the experience that led you to start Mandrel So I'd love for you to run the audience through that briefly.

Arjun Aggarwal (01:29)

Yeah, awesome. So background on me, I actually started my career in the finance world. I was a banker and then investor. And I actually spent a lot of time, unlike the majority of investors who focus primarily on software, I spent a lot of time around like industrial technology, which involved working with hardware businesses. And I ended up joining one of those hardware businesses, a 3D printer OEM called Desktop Metal. We manufactured and sold industrial 3D printers for automotive, for consumer electronics, for oil and gas, et cetera. So these big kind of six, seven figure printers. I ran product there for about five or six years. it was a really interesting place that kind of cut my teeth on the operating side of the world. It's actually where the story of Mandrel starts because running product there, obviously you're managing hardware, physical goods and a big part of I think being a product owner is understanding all the economics of your products. And so, you know, especially as rates went up post COVID and in 21, the company really started to focus a lot more on margins and cash flow understandably. And so it became a big part of my responsibility and my team's responsibility to get down into the nitty gritty around our products. I think we all at the business thought we had a good understanding for what the margin profiles look like. But we found that upon digging in, we were a little bit further off from what I think that the general understanding on the team was. And a big part of, think, that miscalculation is not properly taking into account all the different components of costs.

So there was freight, there was customs, there was warehousing, there's all these different costs that contribute. And especially when your products are of a certain complexity or of a certain size or weight, these things can add up. But even across the board, it's important to really take into account these full costs. So we spent a bunch of time looking into all these external costs beyond just straight from the manufacturer.

And I think the other thing that kind of led to some frustration was just like, where are the numbers coming from? And we had a great ops team and a great finance team. Each team was kind of in their separate tool sets, where ops is a lot more obviously focused on the actual products and building those and making sure they're high quality and delivering to consumers. Finance is a little bit more transactionally oriented. And they're sending in ERPs and AP/AR tools.

And the net of it all is that the numbers rarely seem to line up. You get some numbers from ops and some numbers from finance, and we were kind of stuck in the middle trying to figure out what was what. And so all of that in combination with just trying to generally understand where was our inventory, not just quantities, but dollar amounts, how much cash did the company have committed, whether it was on the balance sheet or off the balance sheet and all these things and the challenges with doing that and

the data adventures that me and my team had to go through to kind of wrestle this all together ultimately was inspiration for what we're building now at Mandrel

Jon Blair (04:55)

Cool, I'm excited to get into kind of the nuts and bolts of what Mandrel does, you mentioned something that I think we should dive into first, which is the connection between ops and finance. And we'll talk about it in the context of landed cost. know, landed cost is for, mean.

If you listen to the show, you've heard us talk about this many times in kind of like other discussions, but landed costs is like your true fully loaded cost of the product that you sell, right? So that's the supplier cost plus freight plus duties, and that's freight into your fulfillment center. We see, as we've talked about a lot on the show, issues with varying incorrect ways of accounting for landed cost. Most commonly, brands are just you know, basically expensing to cost of goods sold just the supplier cost and they're either expensing freight or duties straight to cost of goods sold in the month they get billed for or they come up with some sort of amortization over time. Either one of those is wrong and incorrect. But what is the challenge? What I see time and time again and what you just mentioned and I want to dive into is like, is that finance alone does not manage all the data, right? To ultimately calculate landed costs and not just calculate landed costs at any point in time, but at the right time, right? And all throughout the process. so talk me through a little bit about like the way that you view the challenge and the interdependence between finance and ops on like accurately tracking landed costs all the way through the purchasing and life cycle.

Arjun Aggarwal (06:20)

Yeah. Yeah.

Yeah, I

think that you can look at this from two lenses. One is like the straight up accounting lens, which is you got to close the book so the numbers have to be correct. And the other is more of like a strategic finance or strategic ops lens, which is how do we use these numbers to actually improve the business? From an accounting lens, you want to have these landed costs because it helps you accurately recognize your cogs within a period.

Jon Blair (06:44)

Mm-hmm.

Arjun Aggarwal (07:06)

And you want to accurately kind of record the value of your inventory on the books at the end of a month, say. You know, we we see brands lose a huge amount of time in back and forth between ops and finance, whether finance is in house or outsourced. And what ends up happening is there's a bunch of scrambling, a bunch of time wasted digging through folders, Google Drive folders, Dropbox folders, or digging through emails, looking for documentation. Yeah, usually it's emails. Looking for documentation just on what has shipped, what has been received, what has been invoiced, and matching all three of these up. And it's more than just your through a match if I want to make sure I paid for what I actually got. I need to understand what has been received and what hasn't been received and how that compares to what the invoices are so that we can appropriately account for it. The challenge comes when you have these costs that are not direct costs, freight, duties, et cetera, because they usually get billed on a per shipment basis. And it's really hard to allocate them out at the individual SKU level, which is important so that I understand, my SKU-A has a value on the books at the end of the month of $10 and SKU-B has a value of $20.

That's needed. when you sell those the next month, you can accurately account for the cost of those sales. And so what we see a lot of times with brands is Ops has this spreadsheet that's pretty messy, that requires a lot of manual data entry for every shipment, you know, where they take the freight cost decisions with that, they allocate it out, they do some, you know, some math in the spreadsheet, and they have a link to a Google Drive folder or to an email.

And then finance at the end of the month is looking at the spreadsheet and inevitably stuff gets dropped. Not every document's in there, not every shipment's in there, not all the costs are calculated correctly and things don't make sense. And so that's where a lot of the back and forth comes in. And it can be a huge time suck for brands, whether you're on the op side or you're on the finance side to actually reconcile all of this at the end of the month. so finding a way to automate this and reduce the back and forth between ops and finance can be a huge ROI just from time saved for a brand on a week to week basis.

Jon Blair (09:29)

Yeah, I wanna go a little bit deeper on this from the finance perspective. So first let's talk about why does the inventory valuation on the balance sheet matter? Well, for like a DTC brand, right? And then we'll kinda segue into talking about prepaid in transit versus on hand. But like just from a high level, everyone needs to have an accurate inventory valuation because it's one of the biggest components of calculating the cash conversion cycle and also just liquidity and solvency health metrics, basically cash flow health metrics, right? And when you have that number wrong, you don't have a true picture of basically inventory turnover or days inventory on hand and ultimately the cash conversion cycle, which for those of you who haven't heard us talk about that on the show before, the cash conversion cycle is key for a DTC brand. It's the number of days it takes for you to spend a dollar on purchasing inventory and get that dollar back into your bank account from selling that inventory. The longer that cycle is or the higher the number, the higher the number of days the more days your cash is sitting somewhere besides your bank account. And so you want a smaller number. Guess what one of the biggest components, or actually for DTC brands, the biggest component of measuring that number is, is inventory turnover. And you can't do it if your balance sheet valuation of inventory is inaccurate on a month to month basis. But you brought up something else, Arjun, or you kind of, you were like tangentially touching on something that's really important that absolutely, like it has to have, collaboration from finance and operations and it's tracking in transit inventory, right? And valuing that on the books at any given point in time. What are some of the complexities or challenges that you're seeing brands experience there?

Arjun Aggarwal (11:17)

Yeah, I think part of it is just knowing what's in transit. We talked to lot of brands who have in 10 different varieties a PO tracking or shipment tracking spreadsheet. And again, it comes with a lot of these challenges that really at the root of it is data entry. And a lot of the data is coming in via email. And so it's incumbent on someone in ops usually to actually take it out of email and put it into a spreadsheet to understand this is what's actually in inventory. The problems that come with that is that when goods are in inventory, you haven't necessarily been invoiced for all the costs associated with that. You haven't necessarily been invoiced for the products that were manufactured and almost certainly you haven't been invoiced for the freight. And so if you have product and inventory at the end of the month, you may not have all the documents. But more importantly, your cost and your inventory value doesn't reflect that. So the next month, you may be, or one month to the next, you may be way over billing to your costs, all of that inventory, or you may not be including any of that inventory at all of your costs. And so now you get huge swings month to month in what your P&L actually looks like that makes it hard to understand really what the performance of your business is.

Jon Blair (12:35)

Totally, yeah, so to explain what Arjun was just talking about in different words, like it's very uncommon, especially for brands that have overseas supply chains, but just generally speaking, it's very uncommon to have all of your landed cost bills from all your vendors received and recorded on the general ledger at the time that the product is received in your warehouse, which is really the time that you need to receive it at full landed cost. Why? Because the second its in your warehouse, it may go out the door to fulfill an order, right? And so, what Arjun is, well here's what I see happen most often is, we've got the supplier invoice, usually, sometimes not, but you at least got the supplier invoice, right? By the time the inventory hits your warehouse, but you likely don't have the duties invoice, and you likely don't have the freight invoice.

Arjun Aggarwal (13:11)

Yeah, it could get sold. Yep.

Jon Blair (13:30)

And so if you only receive the inventory on the day that it arrives at your warehouse at supplier costs, whether you're using average costing or LIFO or FIFO, it's going to actually incorrectly calculate that layer of inventory until you introduce the landed costs components, in this case, freight and duties into the actual SKU costs. so you actually have to, that's where accruals come into play from an accounting standpoint, which we've talked about on the show is like, that's where your accountant,

And, again, you have to work with operational data because where do you go to get estimates for landed costs, right? And duties. There's usually documents that the operations team is managing, right? Yeah, exactly.

Arjun Aggarwal (14:09)

Yeah.

There's quotes, there's like a variety

of things. You can look at historical data, there's quotes, all these things. Ultimately Ops is the one, especially when it comes to like logistics related costing. Ops is where, you know, is the source of that data.

Jon Blair (14:19)

Totally.

Totally, yeah, right, like, let's say the controller is the one recording bills, the controller's not getting freight quotes. I mean, there's some companies that happens in, but that's not common, right? So like, someone on the ops team went and got a quote for that freight move. They're usually keeping an eye on what the duty rates are and the HTS codes that are being used upon import. That's not something that the finance team is doing. So the point that I'm trying to draw out here is as Arjun, you know, keeps like bringing up solid examples for,

Arjun Aggarwal (14:34)

Yeah.

Jon Blair (14:55)

You can't do, finance can't do this in the silo. If they do, they're gonna miss something, right? And there's going to be some sort of incorrect cost that ultimately, from a founder's perspective, what does that mean? It means one month, your COGS is gonna be too high and another month, the COGS is gonna be too low. Because effectively, in some form or another, your freight and your duties are gonna be recorded on a cash basis or on like some, using some allocation method that isn't actually aligned with selling that inventory. So I actually want to go into something a little bit deeper here on, well I want to talk about Mandrel a little bit more because Mandrel is a tool that, so oftentimes when brands are struggling with this, right, managing their landed costs, generally speaking it's like ERP, ERP is probably the acronym that comes up more frequently. I think some people, know what an IMS is, some people confuse it with an ERP. Before we get into like Mandrel and inventory automation, like let's talk really quick about ERP and IMS. Like what are those two things and how are they different?

Arjun Aggarwal (16:09)

Yeah, everyone has a different perspective on this. I'll share mine. And Jon, maybe you can agree to disagree. I kind of view IMSs as a subset of ERP, really. The difference between the two being that an IMS doesn't always have a general ledger component to it, but an ERP usually does. The primary functions of those tools, both an IMS and an ERP in the context of working with brands, is

Jon Blair (16:13)

For sure for sure and I guess I'll share mine after yeah

Arjun Aggarwal (16:38)

to help you track your inventory and get all of the costs associated with your inventory into the right place at the right time and record all the revenue associated with selling that inventory in the right place at the right time. If you have an ERP, it's also recording to your basically your accounting statements. Where an IMS, maybe it's not doing that. Maybe it's plugging into a QuickBooks or similar. I think these tools, have a lot of functionality, a lot of people that end up adopting these tools don't make use of like over 50 % of actually what the tools offer. But aside from that, I think that one of the big challenges with these tools, especially as brands are trying to stay lean and grow, you know, while being efficient is the amount of admin that is required both in the initial implementation and

Jon Blair (17:13)

Yeah.

Arjun Aggarwal (17:33)

on an ongoing basis. There's a huge amount of data entry, data upkeep, and data admin required to take advantage of these tools. But that's kind of my perspective on ERP, IMS, what they do. They do their job. They do a good job. It just requires a lot of investment and time from a brand to actually benefit from them.

Jon Blair (17:55)

For sure, yeah, so like in a nutshell, the way that I've heard ERP pitched a lot of times is like ERP is a quote, fully integrated kind of closed loop system that includes GL, IMS, WMS oftentimes, which is warehouse management system, HR and time tracking and CRM. And like Arjun is saying, if you go through all that, like that's a lot. What I see used most frequently is some, part of the IMS, not even the full IMS, right? And then the GL, maybe some WMS, but rarely do I see a company using all of them, right? And so, those are made more, I was listening to a limited supply podcast a number of months ago, and they were interviewing the founder and CEO of Fulfill.io, which is an e-comm focused ERP system, and he said, and I think this is a very great way to explain it, like,

Arjun Aggarwal (18:32)

whole thing. Yeah. Yeah.

Jon Blair (18:51)

What's the use case for ERPs? Like when your brand has reached sufficient complexity, right, in multiple of these areas, that it truly makes sense to put in the effort and the cost, right, to implement. And so what, this is a generalization, but what I tend to see, ERPs tend to make sense when you have...

When you're truly omni-channel and you've got heavy B2B and B2C and maybe multiple B2C or multiple B2B channels, right? And you're doing more complicated inventory management that includes some form of manufacturing transformation, right? I call that complex manufacturing, not assembly and kidding. Like you're maybe taking metal and machining it. Yeah, exactly. So you have like, and so when you have, we have complex manufacturing.

Arjun Aggarwal (19:36)

like turning raw into finished. Yeah.

Jon Blair (19:44)

multiple sales channels and a solid mix of B2B and B2C, right? And you run your own warehouse, maybe, maybe you've reached sufficient complexity for ERP, right? On the IMS side, like Arjun said, IMS is a module within ERP, but they can stand alone as well, right? And have no integration to GLs, some of them have like third party integrations to QuickBooks and other GLs. But let's now talk about like the lens through which you think about Mandrel and this concept of inventory automation, how that differs from an IMS.

Arjun Aggarwal (20:17)

Yeah.

Yep.

Yeah, so I think as I kind of alluded to earlier, our view on where the existing set of software tools fall short is that they require a lot of investment from the users, from the brands. In many ways, they're not really that different from a well-built out spreadsheet where you have to enter in all the data into that spreadsheet, and then the spreadsheet does all the calculations for you across 50 different tabs or five different worksheets. Functionally, the software is no different. You have to enter in a bunch of data into the software, and it does all the calculations for you across different UX. I think the main benefit of using these tools is they work on top of a database, and so there's a little bit more persistence. You can maybe be a little bit more sure that the data is going to be correct or accurate. You don't have to worry as much about a finger problem in a calculation or something reffing out in a spreadsheet. But fundamentally, your workflow doesn't change. You're still spending all that time. You're still spending all the resources on keeping those updated. And we see brands that end up having to hire one, two, three heads, depending on the scale or the complexity of the product, just to admin an IMS or an ERP. And they cost a lot of money.

Our view is that the main problem to solve for here is not like a UX or UI necessarily. It's really that that time element where there's so much manual work required, whether it's entering in data or changing statuses, you know something like receiving a shipment in your ERP system. That's something that you have to actively do. And so where we see kind of a new opportunity to build is to build with automation. You know, that's kind of what we're putting Mandrel into is a bucket we're calling inventory automation. Where really the goal is to take your existing set of inventory workflows. That is everything from creating and managing POs, know, looking at the inbound shipment tracking, costing all of your inventory as it comes into the warehouse, tracking it in and out of the warehouse, and then calculating the COGS and your inventory values on the back end for accounting. All of these different workflows are things that you may be doing in an IMS and or spreadsheets. Usually we see a combination of these things. We want to take those workflows and one by one, we want to automate them using a combination of AI, straight up kind of software automation and third party data that we're bringing into the fold as well.

Jon Blair (22:51)

Yeah.

Arjun Aggarwal (23:06)

In many cases, I think we could be an alternative to an IMS or if you want to adopt software in a more wedge or use case specific way, I don't know if we'll get to speaking about how brands adopt software, but there are modules of what we've built that you could adopt one by one. You could think about it as replacing your spreadsheets one at a time, your costing spreadsheet, your item, PLM spreadsheet, your inventory tracking spreadsheet, your PO management spreadsheets. You could adopt any of these and Mandrel could easily take off the, know, whatever two, three hours a week that you spend updating each of those spreadsheets independently or collectively as a system.

Jon Blair (23:50)

For sure. Yeah, I mean, you and I have talked about this a lot. I've worked with Arjun and had some conversations about like, you know, product feedback and product development. And one thing that I've, the terms I've always used to describe this is like, an IMS can be great, but it requires compliance, user compliance, right? Like the user, it's garbage in, garbage out. If the user is not super disciplined about

entering in transactions as they happen along the way.

Right? You don't have accurate snapshots along the way. And like you can even, let's even take this a step further and let's talk about like, let's say you close the IMS monthly. So let's say you like save everything up, right, to enter and you're closing the IMS to get your numbers for the month. Well, if you pull a snapshot at any point in time throughout the month of where's my, how much do I have in transit? What's my current landed cost? Any other, the other data that the IMS tracks.

Arjun Aggarwal (24:26)

That's right. Yeah.

Mm-hmm.

Jon Blair (24:50)

You can't because you have not been complying with the system. So, like if you think about something like, let's say mid-month, you need to cut a PO, right? But you're not accurately tracking how things are going from on PO to received but in transit, and then some is going from in transit to received in the warehouse. If you're not tracking that as a user the whole way through, you...

Arjun Aggarwal (24:53)

throughout the month,

Jon Blair (25:14)

the IMS won't even calculate your inventory requirements properly, right? And so what Arjun is building here at Mandrel is something that captures these inputs, right, in a more automated way and tracks the movement of these transactions and the changing of status. Trying to create this transactional table or tables, if you will.

Arjun Aggarwal (25:18)

Yep. Yep.

Jon Blair (25:37)

automatically through reading documents and third-party data which we can talk about a little bit more but so that you have this real-time feed right of the movement and costing of your inventory amongst other things but with minimal human intervention and it's not so it's not completely in a hundred percent Reliant on user data entry compliance

Arjun Aggarwal (25:42)

Yeah even in a wrench.

Yeah.

We, you know, I don't know if it's a unique insight or what, but fundamentally what we realized is all of this data sits in kind of about your inventory movement sits in one of two locations. For the outbound side, it's usually exists in a third party platform, whether it's a warehouse management system that a 3PL is sitting on top of, or it's your Congress platform or EDI for selling, you wholesale. You can usually grab like, has this item what items have been ordered and what items have been shipped from those platforms. The inbound side is a much bigger mess. Brands use various freight forwarders. Sometimes they're using a bunch. They have 10 different suppliers, whether it's for raw materials or finished goods. It's all over the place. And what we found is that the place where all the data ultimately ends up in some way, or form is in email.

Jon Blair (26:39)

Yeah.

Yeah.

Arjun Aggarwal (26:59)

And so we sit on your inbox. You can forward emails to us or we have an email integration that is kind of scope limited to the vendors that you put into our system. And we'll look at your documents coming in and your documents going out and use those to assemble as Jon kind of said, a real time up to date ledger of everything that's happening to your inventory, not just how it's moving from place to place, but also how costs and invoice are coming into the equation so that we can understand the value of your inventory in every state that it's in. And I should add at the SKU level, which is really important as well.

Jon Blair (27:35)

Yeah, so.

For sure.

Totally, yeah. So like for listeners to kind of visualize this, think about a software platform that's grabbing from whatever email inbox or inboxes in your business are managing the workflows of the movement, ordering and movement of inventory, right? It's going in, it's identifying those documents, POs, bills of lading, packing lists commercial invoices, entry summaries, whatever, like all, I'm just listing a few that come to mind. And it's going and it's saying, hey, this constitutes a movement or of a piece of inventory and it's relating it to the other documents and saying,

Arjun Aggarwal (28:04)

receipt notices, yep, everything.

Jon Blair (28:20)

we're calculating that this is the landed cost at this point, right? Or the estimated landed cost at this point. And it's moving your, using this document recognition, it's building your landed cost and moving those SKUs through, transactionally, through the system and telling you where, effectively what stage it's in. Now, additionally, there's other integrations, like if you're in the e-comm world, it can be connected to your Shopify or to your 3PL. So it's also tracking orders and outbound. So when Arjun says documents and third party data, this is what we're talking about. It's like connecting to the different systems that have your warehouse transactions outbound or inbound, but it's usually outbound and inbound using this document flow, right, which is extracting from emails to effectively put this inbound inventory ledger into place.

Arjun Aggarwal (29:11)

Yeah, it's pretty magical. We have customers where they plug in their emails and all of sudden they come in without doing anything and they see their purchase orders and invoices. We extract all the document level data, vendor information, payment terms, delivery and shipment information, all the dates that are involved.

And then we get down to the line item level and we're extracting all that data as well on every SKU, quantities, lock codes, unit costs, et cetera. We do all this data extraction, we present it in our system. And one of the great things that we do, and this is where we go above and beyond, like if you uploaded a PDF to ChatGPT, it could pull out some data. It has challenges as the format starts to vary, it doesn't always know what fields to pull out.

We have kind of built the system so you don't have to do any of that configuration. We automatically bring it all in, capture all the relevant fields. And on top of that, what we do is we actually map it to all of the objects in your database in Mandrel. So if you have your items list in Mandrel, we will create a two-way link between that line item on an invoice and the item in your system. So when you click on the line item in your invoice, it will take you back to the item and vice versa.

So everything in the system becomes interconnected from your documents all the way to your items. It becomes really easy to navigate. But more importantly, you get all this data that is able to be filtered, searched and sorted by the items, by the vendors, by the locations, all automatically without you having to actually enter in any data or even forward emails or save them to a file storage. We handle that all automatically for you as a brand so you can get out of the spreadsheets.

Jon Blair (31:03)

Yeah, so it's not just the transactional ledger that's actually tracking the status. It's what bucket of inventory SKU sits in, whether it's prepaid or in transit or on hand and the actual accumulated costs up to that point. But it's also because it's capturing and relating all of these data points together across tables, you can also kind of run your own reporting on whatever view it is that you need to see because you're building all these relationships that otherwise like all like a perfect example that I see often times is like if someone wants to if someone wants to look up like say the actual transit time for like a given SKU or on the last shipment or or the production lead time you know like you guys are building all these connections that ultimately are gonna be able to calculate what those metrics look like, the time between PO and shipment, the time between shipment and arriving at the warehouse, like there's just gonna be a lot of rich, you know, reporting that people are gonna be able to grab from this.

Arjun Aggarwal (31:56)

Yeah, all the data. Yeah.

All the data comes into the platform and ultimately can be manipulated. And we can do some pretty cool stuff as a result. I mentioned we map all the data from your documents to items in your system. We also intelligently link your documents together. So we can come up with a shipments table that shows all of your shipments and all the documents attached to those, the costs for every shipment, the items on every shipment. And we use this to automatically allocate freight, automatically allocate customs costs, whether it's a split shipment or a consolidated shipment, you as a user don't have to do anything. The system kind of handles all of that automatically. So what you get is your inventory value in Mandrel. I can see, you know, how much do I have on hand of every SKU at which location, what's the quantity, what's the value. You could see it in transit. You could see it on order.

Jon Blair (32:53)

Yeah.

Yeah, see it's interesting because like the root problem, like what's the reason why this inbound tracking is so hard? In my opinion, it's because the freight forwarding, one of the drivers is that the freight forwarding industry is so fragmented, everything is subbed out. like, you know, depending on like when I used to run supply chain for Guardian Bikes, depending on the freight forwarder that we use. And look, sometimes we got forced to use a freight forwarder. Like we don't wanna use those guys, but they're available and our go-to is not available. And guess what, guess how those guys look up statuses of stuff. You email them, they get on the freaking phone and they call someone who calls someone who calls someone, right? And so like Flexport is trying to solve that problem by, like they're realizing they have to just like own the whole.

Arjun Aggarwal (33:34)

Yeah.

the whole thing. Yeah.

Jon Blair (33:45)

logistics chain, right? And so that is a solution, right? It's super capital intensive. And they have to like, they have to have basically ownership over ships and trucking and trains and all this kind of stuff. And they can feed all that data in their platform. But in order to get that you have to use Flexport on every single shipment. And I'll tell you right now, like we loved using Flexport at Guardian, but there was numerous times when for one reason or another it didn't make sense to use Flexport. So we had to actually have a Rolodex of kind of go to freight forwarders. If we had something like Mandrel, it wouldn't matter what freight forwarder we're using as long as we had access to the documents that signify a move from what kind of one stage to another. And then we can feed it all into Mandrel and it can be our one source of truth of how the supply chain is performing, tracking landed costs, inventory valuation, all of those things. So I'm just trying to explain some examples for the audience to kind of wrap their mind around the problem that Mandrel is like is solving here.

Arjun Aggarwal (34:24)

One place to the next. Yeah.

Yeah.

And what's so funny is, you know, we're like getting into the weeds and all this operational and logistics stuff. You know, this is a Free to Grow CFO podcast. We're finance people here, but it just goes to show you how like interconnected the op side of house is with the finance side of house. And it's not just on closing the books. It's like, Hey, if I'm a brand, I want to know SKU ABC. I want to be able to see every shipment that I've made the breakout of all the costs for that shipment for that SKU.

Jon Blair (34:58)

100%.

Arjun Aggarwal (35:10)

and how those are changing over time. It's really hard to do that today in any software, in any kind of automated way. And so that's a level of intelligence. If you put the accounting part aside, that's a level of strategic finance or strategic ops intelligence that as a brand you can really benefit from. You can understand, know, our costs for freight have been steadily increasing or decreasing, or we had a huge spike, you know, in the first three months of January, that was the result of ABC Reason, or maybe there's some macro factors that led to it. And so it helps you understand, what are the things that are leading my business P&L to look the way it is, to be able to go in and at the SKU level, look at the breakout of all of your costs for every shipment of your products.

Jon Blair (35:43)

Mm-hmm.

Totally, totally. look, I mean, with, you know, with tariff changes front and center, right? Like tracking the real time changes in your product costs and the movement of your inventory has never been more important. And I would even say like, yes, tariffs are this big kind of black swan event right now, like affecting landed costs. But in the Ecom world, freight spot rates, supply chain delays, that stuff is changing all of the time, right? And so having the ability, having this intelligence, this stream of transactional intelligence and reporting capabilities that you're talking about is super important to being nimble, let alone to nailing your accounting. So look, before we land the plane here, like if there's one thing that you want,

Arjun Aggarwal (36:34)

Yep. Yep.

Jon Blair (36:55)

brand founders listening to this podcast to take away from like what Mandrel is doing and how you're changing the face of managing supply chain and finance. What is it?

Arjun Aggarwal (37:05)

Yeah,

I would say look the reason to use us is to get back a lot of time that you're you know wasting maybe not the right word, but that you're spending on entering data into your operational tools, whether it's spreadsheets or IMS is or equivalent. We can kind of be a standalone solution that saves you that time gets you to understand not just your costs, but where your inventory is, you know, for every SKU.

without you having to really do any manual data entry. And so that is potentially, if you're submitting five to 10 POs a month, if not more, across one to two people, that's potentially 10, 20 hours a month and tens of thousands of dollars of ROI up for the grabs that Mandrel can come in and save all that time for you so you can get back to actually growing the business. But you still get to understand

all of the costs and the qualities and the locations of your inventory.

Jon Blair (38:05)

That's massive, that's super massive. Where can people find more information about you and Mandrel if they're interested in learning more about that?

Arjun Aggarwal (38:13)

Yeah, you can come check out our website. It's Mandrel.tech or check us out on LinkedIn or feel free to kind of shoot me a note on LinkedIn as well. Happy to reach out any of those ways. Yeah, we'd love to chat with brands, learn more about how we can help you, especially kind of today, two days after a big shock to the system. I think understanding costs and being able to track kind of inventory

in a more audit ways is more important than ever.

Jon Blair (38:45)

So before we land the plane, I always like to ask a personal question at the end of every episode. what's a little-known fact about Arjun that people might find shocking or surprising?

Arjun Aggarwal (38:50)

Yeah.

man, a little known fact. This may or may not be embarrassing and may lead to some folks looking up at YouTube. But I actually was on a dance team in college. And so that's where I got all the moves that I show off on weddings, which I've got one coming up this weekend. But that's a little known fact. I was on a dance team in college. And it was a good coming out experience to like

Jon Blair (39:13)

Heck yeah.

Arjun Aggarwal (39:28)

find myself and have a fun. And I had a great time learning that. that's the thing that a lot of finance people don't necessarily have. So I'm proud of being able to say I was on the dance team.

Jon Blair (39:39)

Yeah.

Dude, I love that. People sometimes when I ask that question will turn it back around on me and I've got some possibly embarrassing videos on YouTube you could find as well. I was in a thrash metal band that got signed to a record label right out of college with a bunch of business school dudes and that toured and...

Arjun Aggarwal (39:50)

Hahaha

Jon Blair (40:01)

Yeah, you can find some videos of me playing thrash metal on YouTube if you search hard enough. But hey, those kinds of things are important, Life is not just about business. Business is a part of life and it's important to have those kinds of things, you know? But man, thanks for chatting. I think what you guys are doing at Mandrel is super awesome. If any of this stuff piqued your interest, anybody, definitely reach out to Arjun, check out Mandrel, get a demo.

Arjun Aggarwal (40:04)

Hahaha

Yeah.

Yeah, of course.

Jon Blair (40:31)

when you see it yourself, the concepts we talked about here become much more tangible and really brought to life. And look, don't forget, if you want more helpful tips on scaling a profit-focused DTC brand, consider following me, Jon Blair, on LinkedIn, and if you're interested in learning more about how Free to Grow can help your brand increase profit and cash flow as you scale, check us out at FreeToGrowCFO.com, and until next time, scale on. Thanks, Arjun.

Arjun Aggarwal (40:59)

Awesome. Thanks, Jon.

Mini Episode: The Two Most Important Acquisition Metrics for DTC Brands

Episode Summary

ROAS and MER might dominate DTC marketing conversations, but they’re not the metrics that actually tell you if your new customers are profitable. In this short, high-impact episode of The Free to Grow CFO Podcast, Jon Blair breaks down the two numbers that matter most for evaluating your acquisition strategy: gross margin dollars per order and CAC (customer acquisition cost)—both expressed in dollars.

Learn how to calculate them, why they matter more than ROAS or MER, and how reframing your analysis around these two metrics can drive better decision-making and long-term profitability.

Key Takeaways:

• ROAS and MER don’t tell you if your new customers are actually profitable.

• Reframing acquisition in dollars forces better decisions than just tracking percentage-based metrics.

• Profitability comes from improving margin per order or lowering CAC—not just increasing revenue.

Episode Links

Jon Blair - https://www.linkedin.com/in/jonathon-albert-blair/

Free to Grow CFO - https://freetogrowcfo.com/

Transcript

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Jon Blair (00:00)

Hey everyone, welcome back to another mini episode of the Free to Grow CFO Podcast. I'm your host, Jon Blair. Today I'm gonna talk about the two most important customer acquisition metrics for your DTC brand. Is it MER? Is it ROAS? No, it's not. I would say those are the two metrics that I hear most commonly discussed when talking about the financial success of customer acquisition. Actually, the two most important financial metrics for acquiring new customers is gross margin dollars per order and CAC, both expressed in dollars.

So why is that? ROAS can be misleading for a number of different reasons. So can marketing efficiency ratio, MER. They're both important metrics to track, but in reality, what really matters is how many gross margin dollars exist before spending on ad spend for a new customer. How do you measure those two things?

The way you measure them is gross margin dollars per order. So that's revenue minus all variable costs except for ad spend. In practice, that's revenue minus landed costs, minus shipping and fulfillment, minus credit card fees. That number in terms of dollars per order, that determines how many dollars are available to cover your CAC per order and then either have some left or not.

So let's use an example. Let's say before marketing is 50% of revenue. So if you sell $100 your new customer AOV, multiply by 50%, that's $50 of margin before marketing available to cover CAC. Okay, let's say that your CAC is $25, you subtract that from 50 and you have $25 left over to cover fixed overhead and or drop to the bottom line. So you really need to understand those two metrics in dollars on an order level specifically for new customers. That really is the only way for you to understand profitable your new customers are or aren't and for you to understand the drivers around why they are or are not profitable.

So you have really a couple of options. You reframe and remodel new customer acquisition financial performance in terms of gross margin dollars before ad spend and then CAC per order, then what you can do is say, hey, what are the levers I can pull to increase margin dollars per order before ad spend? And then you can ask yourself, what are the levers I can pull to decrease CAC or keep it steady, right? And so it's a reframing that gets us away from just talking about revenue and ad spend because there's way too much between revenue, ad spend, and the bottom line that we're not accounting for by looking at just ROAS and MER, which effectively just uses revenue and ad spend in those calculations.

So anyways, hope this is helpful. Again, as a summary, if you really wanna measure the financial performance of new customer acquisitions, stop using ROAS and MER and instead use gross margin dollars per order minus CAC dollars per order.

Messy Margins, Broken Balance Sheets, and the Real Cost of Bad Bookkeeping

Episode Summary

In this episode of the Free to Grow CFO podcast, Jon Blair and Melissa Cafagna discuss the critical aspects of scaling a DTC brand with a focus on bookkeeping, accounts payable, and inventory management. They explore the challenges brands face in financial management, the importance of accurate financials for capital acquisition, and the common pitfalls in bookkeeping practices. The conversation also delves into the significance of understanding landed costs, the integration of AP with inventory management systems, and the impact of tariffs on DTC brands. A case study highlights how effective profitability analysis can lead to smarter business decisions.

Key Takeaways

• Integrating AP with inventory management systems improves accuracy.

• Accurate financials are crucial for capital acquisition.

• Effective financial management can alleviate stress for brand founders.

• Landed costs must be tracked accurately to understand true profitability.

Episode Links

Jon Blair - https://www.linkedin.com/in/jonathon-albert-blair/

Melissa Cafagna- https://www.linkedin.com/in/melissacafagna/

Free to Grow CFO - https://freetogrowcfo.com/

Settle - https://www.settle.com/

Meet Melissa Cafagna

Melissa Cafagna is a passionate advocate for mission-driven brands, known for her customer-focused approach and her role as a 'financing fairy godmother.' With extensive experience in the financial industry, she is dedicated to helping small businesses grow through innovative and personalized financing solutions. While living in Europe for three years, Melissa transitioned from finance and accounting to sales, gaining cultural insights and developing a dynamic empathy that shapes her approach to building relationships. In her free time, she enjoys spending time with her family, exploring Chicago’s beautiful parks and city centers, and immersing herself in hip-hop and R&B music. 

About Settle

Settle is the best way to power up your brand’s cash flow and operations—designed specifically for consumer brands ready to grow. With a unified platform tailored for 'finventory' management, you can seamlessly plan, purchase, manage, and pay for inventory, all in one place. Automate payments, 3-way match purchase orders, and real time accurate landed costs. For businesses that qualify, Settle Working Capital offers founder-friendly financing, so you can Settle now, pay later, and scale confidently. Join brands like Thread Wallets, Truvani, and Olipop to confidently scale for what's next. Learn more about Settle today.

Transcript

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00:00 Introduction to the Free to Grow CFO Podcast

02:03 The Importance of Bookkeeping in Scaling Brands

07:58 Challenges in Financial Management for Emerging Brands

13:59 Common Bookkeeping Issues Found in Brands

19:56 Integrating Inventory Management with Financial Processes

26:00 Streamlining Accounts Payable for Better Control

27:20 Segregation of Duties in Accounting

28:31 Understanding Landed Costs and Inventory Management Systems

33:30 The Importance of Accurate Profitability Analysis

39:29 Integrating AP with Inventory Management for Better Insights

44:00 Navigating Tariffs and Their Impact on DTC Brands

48:01Case Study: Improving Profitability Through Data Analysis

Jon Blair (00:00)

Yo, yo, yo, what's happening everyone? Welcome back to another episode of the Free to Grow CFO podcast, where we dive deep into conversations about scaling a DTC brand with a profit-focused mindset. I'm your host, Jon Blair, founder of Free to Grow CFO. We're the go-to fractional CFO firm for eight and nine-figure DTC brands, and today I'm back with my co-host, because I think I'm gonna be getting some questions, the financing fairy godmother herself.

Mel (00:26)

Yes, you are.

Jon Blair (00:30)

Melissa Cafanga Capital Partnerships Rep at Settle. Melissa, what's up?

Mel (00:32)

Yes, it's up. mean, busy, busy weekend, working all weekend. A lot of exciting things going on for Settle in the next few weeks. So preparing for that. But yeah, it's it's been really good.

Jon Blair (00:51)

You guys are, are you guys going to, is next week Expo West? It is, so you guys are getting geared up for probably being out for a week, right? Like being out in the field.

Mel (00:53)

Yeah, yeah.

Yeah,

yeah, it's so exhausting and you're likely gonna get sick from all the handshakes and stuff. I'm just already like, this time I'm taking my Emergen-C you will not get me down and making sure I get as much of a full night's rest as possible. Sometimes I don't know when to turn off my social butterfly battery and so I'm just on and on and on. And so I'm like, no, I gotta have some hard stops this time. So yeah, but it sense.

Jon Blair (01:04)

Hahaha!

Hahaha!

The conferences are fun, like it's like it is exhausting and Expo West is like pretty much everybody goes. Like I haven't been in a conference mode in a few years because of the age of my little kids, but I'm like feeling the itch. I was like, should I go to Expo West this year? I think I'm gonna miss it this year, but maybe next year.

Mel (01:30)

It is.

Yeah. Yeah.

Yeah.

Yeah.

Yeah.

What about SXSW? That's next week for you guys, right? Is that something you'd ever go to? Yeah.

Jon Blair (01:51)

Yeah, there I've been to a few things. I have a few local people who invited me to ⁓ you know, like a happy hour or dinner too. I might see what ⁓ what I can crash. So I'll probably go to something but it's a lot easier because it's right here in Austin. So Well, well, thanks for joining me again. ⁓ our last conversation was super awesome. And today we're gonna actually talk about something a little bit different. If you guys heard the last episode with Melissa, which by the way, if you didn't

Mel (02:03)

Cool. Yeah, right, exactly, exactly. That sounds so cool.

Jon Blair (02:20)

go back and check it out, was several weeks ago. That was about the different types of debt financing products that exist in the marketplace, pros, cons, when is a good situation or a bad situation to use different types of debt structures. Today we're gonna focus more on the accounting side because Settle is not just a capital provider, but Settle also provides several accounting enablement tools.

⁓ like probably the most famous that most of you brands out there use or are familiar with is Settle as an AP platform, but they also recently introduced, inventory or IMS for short. And so what I want to talk about today is kind of bookkeeping AP and inventory kind of best practices. And, and, know, even though this is a founder focused podcast, we're not going to get into all the debits and credits, but like, what, what, does the founder need to know?

about bookkeeping, AP, and inventory, and why is it important to get those things dialed as you're scaling your brand. actually, what I'm gonna do, something a little bit different, because we don't need to hear Melissa's background. If you wanna hear Melissa's background, you should go check out the last episode we did together. I'm gonna let Melissa ask me the first question. This is unscripted, so Melissa, what question do you have for me to get us started here?

Mel (03:31)

Yes.

Yay! I love it.

So

On the bookkeeping side, I really wanted to know, because it sounds like based on certain conversations we've had, like Free to Grow was mostly focused on CFO advisory, but it felt like there was like a need to also implement this bookkeeping service as an option to help brands. When did you guys realize that that was going to be a really super important part of helping your current customer base and also just attracting prospective customers?

Jon Blair (04:09)

Yeah, that's a really interesting question. So funny enough, I was an accountant. There's kind of like two different kinds of CFOs out there, right? There's the ones that come from like more finance backgrounds, so either FP&A or investment banking or private equity or something. And then there's the accountants who become CFOs. I first was a bean counter and accountant in the early days. And so 15 years ago, started doing accounting, rose the ranks to become controller and then eventually CFO. And so,

Mel (04:16)

Right.

Mm-hmm.

Right.

Jon Blair (04:38)

I actually, it's funny and I guess kind that when we started the firm, we didn't have an accounting service. But the reason why we didn't at the beginning was first off, started, I started free to grow about just pretty much exactly three years ago, February of 2022. And I was, it was just me. I was a solopreneur with an EA. And so like being an accountant or controller, bookkeeper, and a forward-looking strategic CFO, it's really hard for a single person to do fractionally, right? And really, when we started, the heart behind us starting was to come alongside brand founders and help them escape the stress and the overwhelm of all the decisions they have to make as they're scaling. And the FP&A forward-looking forecasting financial strategy, growth strategy advisory, that was where I saw the like the pain points first and foremost. So that's what we started doing first was forecasting. So projections, KPI tracking, overall like financial strategy, debt fundraising. within, I actually remember this, so like this is like I think two or three months in, I had like four or five clients I was managing myself and I was getting them on the cycle of like close the books.

Mel (05:36)

Totally.

Right.

Jon Blair (05:59)

and

then I had these dashboards I had built that tracked certain KPIs on the balance sheet and the P&L and I would analyze them and do what I call the monthly financial review. Well, by like month four, here's what was happening. I would have like one brand whose books were two months late and another's that were, there's three months late, another one that was actually on time and the one that was on time, the books were wrong and I was like, dude, I don't even know what month I'm doing a financial review right now.

and I'm basically going to do my analysis and I can't because I can tell the margins are wrong or the balance sheet is wrong. And so that's where the tension started and we first started to to partner with a couple of bookkeeping firms. That was hard because we just couldn't get enough of their attention to get them to do stuff consistently our way. And so I got fortunate enough to be able to hire my controller

from Guardian Bikes, the brand that I was on the founding team of, few months into the business, and that's how we launched our bookkeeping service. And at first we just did it by necessity of needing to get consistently accurate and timely financials done our way so that we could analyze the business and give really solid financial insights to the brand founders. Fast forward to where we're at today, we didn't.

go in to this endeavor of starting a bookkeeping service with this in mind, but it's turned out to like be one of the most important things that we do for brands. One, we can work with a brand who's not ready for a CFO, but very clearly needs their bookkeeping done and then help them graduate to a additionally, it actually takes a lot of weight off of the brand founder that they don't have to be a liaison between us and another bookkeeping firm.

or us and their in-house bookkeeper, we're just managing our team in-house here, right, getting the bookkeeping done. So it actually puts everything under one roof and it's better for all of us. We're able to deliver a much better service and experience than we could without the bookkeeping service. So it's actually kind of funny that we ultimately had to come back to And so I wanna ask you a question on the capital side, right?

of the world, I know for a fact, not just from talking to you, but actually talking to a lot of other lenders, one of the biggest pain points from a lender's perspective is like, there's this brand that needs their capital, they're likely, or you believe they're likely a good fit for your capital product, but their financials are such a disaster that underwriting can't make sense of them one way or another.

Do you see that often and what kind of challenges does it present when you're trying to the brands, brands the debt capital that they need to scale?

Mel (08:53)

Yeah, especially when we speak to emerging brands a couple of the problems we see are that they're not consistently closing on a regular basis And so maybe they're doing a quarterly month close. So at settle we require a monthly and as an inventory led business You're gonna want to see things on a monthly basis even like if you could get things down to like certain Like KPIs on a weekly basis knowing what those are. That would be amazing More for yourself, but as far like a Settle requirement, yes. To your point, I think it also shows that the founder is serious about their business, right? They want to make sure books are clean, right? I like to say like, bookkeeping is like keeping a personal planner for yourself, right? You think about, well, you wouldn't schedule lunch with a friend without looking at your calendar first, right? You don't want to double book, right? And you wouldn't also pay a large bill if you don't look at an AP aging report, right? To make sure, hey, like where's our debt currently at, right? So think about it like that, right? Are you going to be that responsible like person who's going to be like, no, let me check my calendar first before I make plans with you.

Jon Blair (09:49)

for sure.

Mel (09:59)

founders are in a way asking themselves those same things when they're making financial decisions, right? And so it's just that more of those things are like, hey, like tracking all of the transactions in your business and not only just tracking it, but making sure it's organized in a way that paints a story that's helpful to you, right? So I think...

Jon Blair (10:04)

Yeah.

for sure.

Mel (10:20)

That is huge. Another, I remember Chris, who is our sales manager, we were like looking into the data and actually we noticed that brands that...

had accounting firms and were doing those monthly closes, right? Because that's generally required specifically with the vertical specific accounting firms that we work with had higher approval ratings actually. So that means that, hey, they're handling the business responsibly, right? And so those are brands that our underwriting team wants to work with, right? And so I think it's really one of those things where from day one, you gotta get it figured out, you know, you gotta start tracking, finding a way to track it.

Jon Blair (10:51)

for sure.

Mel (11:00)

consistently. certainly there are certain, I would say like certain softwares are really helpful with that. If you have a finance background, you might be able to get away with tracking things on spreadsheets because you know stuff like that. I definitely recommend it just for like solving any problem or answering a question about any part of your business for sure. Yeah.

Jon Blair (11:22)

for

Yeah, that

was making me think like I'm curious. think my My guess is it's like very frequent but like how frequent do you guys see financials that were like the balance sheet is just broken

Mel (11:35)

Hmm.

Right, right. We're seeing negative cash balances, we're seeing negative liability accounts, we're, yeah, negative inventory. Yeah. Or like inventory not getting updated on a regular basis, which is a huge thing that our underwriters like to see, right? They want to see inventory actually moving, right? They want to see that it's actually being sold and that you're tracking your COGS right? So I think that that is huge. And I don't know, like I would say that

Jon Blair (11:44)

Yeah, negative inventory. always love seeing a I love a good negative inventory account, you know.

Mel (12:08)

It depends on the channel that that prospective customer comes from. I would say more likely than not when it's kind of like somebody reaching out from like just like checking out the website, clicking on an ad versus we have other other channels where we're partnering with folks that are already kind of in the CPG network or this consumer brand network where they likely are already set up with either the right tech stack, the right advisors.

Jon Blair (12:12)

Sure.

Totally.

Mel (12:38)

If they're venture backed, they'll definitely likely already have a team in place as well. So I would say it's dependent on the sales channel and the sales channel that probably is where we see the most books at a whack is kind of like inbound clicking on an ad probably. would be my guess, but yeah.

Jon Blair (13:00)

Make sense. Yeah,

hopefully, hopefully we're not ever sending a brand to you that we work with that needs financing and you guys are going like, what's up with these books? Although I will say there are times like sometimes we have a new client. I don't know if this has happened with Settle or not. It maybe has, but it's definitely happened with other lenders that we work with on regular basis. And it's like, hey, look, this brand's just started working with us. Their books historically do have issues. We are working on them, right?

Mel (13:11)

Yeah, right, right. Right.

Right.

Jon Blair (13:28)

we can answer the questions that you have in order to underwrite this. And so actually sometimes even though the books are not in perfect shape, we can kind of bridge the gap by working with the lender and giving them peace of mind that we are working on fixing things and still end up getting the capital for the brand that they need. it's interesting because bookkeeping, I always say like bookkeeping is one of those things that for oftentimes for founders,

Mel (13:30)

Yes.

Exactly.

Yes.

Absolutely, yeah.

Jon Blair (13:57)

Not important until it's important and when it's important It's usually really urgent and dire and like some of the common ones are like I'm going out for a fundraise and Investors don't understand the financials. I mean or a debt fundraise and the lender doesn't understand the financials or They get to this certain level of growth. I see it a lot of times between 6 and 10 million in revenue. We're like they've been able to kind of Follow their gut up until that point

Mel (14:02)

Yes, that's so true.

Exactly, that's a big one.

Yes.

Yeah.

Jon Blair (14:27)

and they're getting, they're approaching eight figures in top line revenue and they're like, I need to know if this number is accurate or not. I can't guesstimate it anymore, you know? So anyways, it's one of those things that like, like so many things in life, eating healthy, working out, like in the moment it feels kind of painful, right? But in the longterm, your future self will thank you if you get your bookkeeping dialed. I'm curious.

Mel (14:34)

Right. Yes.

Right.

Great.

Totally, absolutely. Yeah, and then, Yeah.

Jon Blair (14:55)

What other questions you got on that list over there?

Mel (14:57)

I know.

guess like this one was kind of just on the bookkeeping topic. Let's get a little bit more granular. Kind of what are like the specific issues that you see when a business is coming with you and maybe their books are not as clean and you're like, hey, I keep seeing this thing over and over again. And what are you constantly having to repair?

Jon Blair (15:17)

Mm.

for sure.

It's funny that you mention this because I run all of our sales and an important part of our sales process, which actually we didn't develop this part of the process because we're like some sales geniuses. This again, just like our bookkeeping service was out of necessity. We were closing deals with brands and then getting into their stuff afterwards and we're like, what have we done? We did not realize how bad this was, right? And so we actually do a free audit now.

Mel (15:53)

Yeah.

Jon Blair (15:53)

And I always tell brands, I'm upfront, I'm like, this is as much for you as it is for us. For you, it's to get some real clarity on where the gaps are that we can help you fill, right? But for us, it's to make sure that we give you a proposal that's truly informed and that we think we can do a great job at taking over your accounting and finance. And so some of the most common ones you mentioned, or like close to mention one earlier, one,

Mel (16:11)

Right.

Jon Blair (16:21)

When I see inventory on the balance sheet is the same number every single month, huge red flag, that means they're expensing their purchases straight to cost of goods sold and doing cash basis, COGS accounting. When I don't see inventory on the balance sheet split out between on hand and prepaid and in transit, and a lot of people, is super common, and I think brand founders don't realize how important it is. Here's the reason why it's important.

Mel (16:24)

Great, yeah, huge rich flag.

Exactly. Yes.

Yes. Yes.

Jon Blair (16:50)

Because a common way that accountants reconcile inventory at the end of the month is they pull a report of what's on hand at your warehouse and the value of that, they compare it to the balance sheet and whatever the delta is, they charge it off to cost a good sold. But here's the problem, if you don't have stuff that's in transit and prepaid, separated, they will assume that what's on the balance sheet is all on hand. And so that will be included in the reconciliation so it's an apples to oranges comparison and then sales tax We all when I don't see sales tax payable on the balance sheet and I instead see it as a revenue account or an expense account or I'll see it both sometimes like sales tax collected in revenue Sales tax paid as an expense that's incorrect. It should never be on the P&L It's a liability that gets paid out to tax authorities over time And then in the in the econ world specifically

Mel (17:28)

Yes.

Right.

Jon Blair (17:51)

when we don't see what we call merchant clearing accounts. that's the current asset accounts for Shopify payments in transit, PayPal payments in transit, whatever payment methods you accept. And it's because the cash received for orders paid in a given month is never fully received in your bank account by the end of the month. There's always an amount of cash that's in transit and so that's sitting in this like, it's not even really a bank account, it's sort of like a fake account, but it's this merchant, we call it a clearing account, but it's a cash in transit account. It's like customers have paid an order on your Shopify store on Amazon, but that cash has not been batched and sent to your bank account yet. those are the three or four things that I see all the time and if there are one...

Mel (18:24)

Yeah.

Yes.

Exactly.

Jon Blair (18:46)

Usually we see like, usually we see all of those issues or at least three out of the four, but there's ways to dig in deeper from there to basically confirm that they're doing cash basis, expense recognition and or cash basis revenue recognition. for those of you like who want to understand why that's so important, and I would be interested to hear the settle capital perspective on this, but that is, Cash basis means that revenue is recognized when the cash gets deposited in your bank account, right? And that the expense gets recognized when the cash is paid. As opposed to what's called the accrual basis, which is you record revenue and expenses when the economic benefit has been consumed or created, basically, right? And why is that important? It's important because cash gets received and paid on all different kinds of timing schedules and not necessarily aligned with this expense created this revenue and vice versa. Do you guys see a lot of cash basis financials? And like what are your underwriters? Think about that.

Mel (19:55)

yeah. I know.

I would say that it's kind of like sometimes a mixed bag where they're sometimes doing accrual right? And so, and then sometimes doing cash basis. Like I think the example that you said about inventory, for example, is a big one. So we'll see like, okay, like they're managing their AP correctly, right? But maybe the inventory not. And so I kinda, I think it just depends, right? Cause I think a lot of people think, hey, I have ChatGPD now.

I know how to do my accounting, right? And so there are certain things that like they do that is probably a little easier to do. And then other things where there's definitely a lot more complexity involved.

So definitely something that we do see all the time and I see all the time because as somebody who works at Settle, I'm usually like the first line of defense when it comes to looking at financials. And my job is to make sure that if I'm gonna pass this over, it's going to be worth their time to take a look at. So that's something that I do see all the time. given like my accounting background, like I'm able to make sense of it and figure out, what do I need to, what questions do I need to ask them? Like clarifying questions or what other accounting reports could I ask for to take a closer look? Because I know they're going to potentially ask for it as well. So yeah, absolutely. I would say all the time. All the time. Yeah.

Jon Blair (21:16)

You know, it's interesting that you guys that Settle recently launched an IMS, and again for listeners, that's inventory management system, basically in a nutshell software that helps you manage your inventory, right? And it's interesting because there are other, there's tons of IMSs out there, right? And different IMSs that are verticalized and some that are more horizontal and try to serve multiple industries.

Mel (21:46)

Right.

Jon Blair (21:46)

But all of the IMSs that I have encountered, I've always come to the conclusion as an accountant of like, this has to be integrated with accounts payable. And the reason why is that they're inseparable. Like the cutting of a purchase order, which is a step in the IMS, is actually the first step of accounts payable, of the procure to pay process for, they need, and,

Mel (21:58)

Absolutely.

Right.

Exactly. They need each other. Yes.

Jon Blair (22:15)

It has to be reconciled, the inventory transaction has to be reconciled back to an actual accounting transaction that ultimately at some point got paid, right? And so when you're talking to brands on the capital side, obviously Settle also has the AP solution, which is now integrated with an IMS solution. Are there any sort of like, like how frequently is it when you're,

talking to someone on the capital side that you're like, hey, I see the opportunity for our AP software or our IMS and are there any kind of specific triggers that cause that to go like, hey, I think we can help you with this whole stack, so to speak.

Mel (22:59)

Absolutely, yes. I would say like with our IMS in its current state because we are planning launches for like the rest of 2025, SPS integration coming soon. And so like that's kind of like an evolving thing, but I would say that right now a lot of the questions that we ask are like as working capital folks because

Jon Blair (23:11)

Hahaha

Mel (23:26)

A lot of times, most people want to chat capital, right? That's usually a really pressing need. And so I can dig a little deeper to see, what is their AP process like? And there are a couple triggers that I hear when I'm talking to founders where it's like, let's assume they're maybe not on an AP platform and they want to start considering it, right? So it could be things like, hey, like the velocity of AP payments, right? That's a big one, right? How many bills are you processing, right? I would say the second is international payments because there are a lot of different payments out there where, hey, they have interesting ways of charging you and then interesting ways of making money off of that payment in transit as well. So that's another thing to consider on top of like,

Yeah

for sure.

Mel (24:23)

foreign transaction, currency exchange rates. And so that's another big one. I would say another one is internal controls, right? You may or may not have a good relationship with your accountant, right? And if you don't, and they're fairly new to you, right? No, there's some funny stuff that goes on, right? And if you're like, hey, I don't want my accountant to have access to my bank, because that's what I'm currently paying my bills out of, but I don't want to pay my bills anymore.

Jon Blair (24:31)

Yeah.

You

for sure.

Mel (24:51)

Bill Pay Solution is like a really good idea. And then I would say, I want to say the third thing would, like the third or fourth thing would just kind of just getting a streamlined process that will equal better and faster bookkeeping. So it's just kind of like the way that you would create rules in QuickBooks on like how to tag certain expenses and categories, right? You want.

Jon Blair (24:54)

100%.

Mel (25:19)

You wanna really just start automating a lot of that stuff. So Settle can help with that as far as just creating a process for your AP from that PO that you just mentioned, from that PO generation up until you pay that vendor and on top of that, giving you the option. Like, know, when you go pay for groceries, right? You choose between debit and credit, Settle's the same way. You can either pay out of your bank account, right? Or you can pay using credit.

And so that process in its entirety is gonna really save you time. It's going to help you sleep at night knowing like, I am in control of my bank account and only me. also just a better streamlined process as far as from procure to pay. That's all being managed in a way where it's gonna make your life easier. It's gonna make your accountant's life easier, right? And also just, I think one of the biggest things is

Jon Blair (25:55)

for sure.

Mm-hmm.

Mel (26:18)

I think it was like 70 % of consumer brands are still operating out of spreadsheets for a lot of these things, whether it's PO generation or inventory management. The big thing is like just reducing errors, right? Not creating duplicate POs, making sure you're paying the right bill. You don't have a software solution that can kind of figure that out for you. Hey, you paid this, maybe you pay this bill twice. Maybe you already named a PO this, this...

Jon Blair (26:32)

for sure.

Mel (26:47)

number or letter or whatever is not new, right? So I think just managing that once the velocity really increases, it's like a huge time saver for sure. Yeah.

Jon Blair (26:59)

That's interesting, so there's a couple things I want to kind of double click into. I think the first one is the internal control piece, like with a solution like Settle. And so here's the thing, we tell all of our, we help manage the AP process as an accounting firm, but we don't ever press pay. And there's a couple of reasons for that. From a...

Mel (27:09)

Yeah, it's huge.

Jon Blair (27:26)

Generally accepted account. Well, actually this is more from an auditing standpoint, but from like a gap standpoint I know I don't like my my my my auditing classes are coming back to me from from back in the day But like here's the thing you don't want someone you don't want the same person to be able to enter a transaction So in this case enter a bill right or create a vendor, right? Create a vendor enter a bill and then hit pay cuz guess what they can create a vendor that is actually an

Mel (27:29)

You're really getting in the weeds now.

Now you're... Yeah.

Jon Blair (27:55)

LLC that they own, right? They can enter a bill for them and then they can pay that bill. it's a segregation of duties is what it's called is like a separate person should create the vendor from who enters the bill from who pays the money, right? And here's the other thing. We're an outsource accounting firm. So like we can make mistakes. We'd rather make a mistake on entering a bill than hitting pay, right? And

Mel (27:57)

Yep.

That's the term, yeah.

Totally.

Jon Blair (28:20)

And I think also there's the nuance side of AP, which is that like you as the brand founder and maybe other people on your leadership team, there's discussions you're having with vendors and you're maybe working out payment plans or you work, there's context behind AP, right? That you really want the right person pressing go, pay, money leaves the bank account, right? So that's the one thing, the first thing I wanna highlight. The second thing is this is where the overlap of this bookkeeping accuracy discussion we've had.

crosses over into the IMS side of what Settle is doing and it's all around accurate landed cost per SKU, right? And so people ask me all the time, like all the time, hey, how do I get a more accurate, how do I get an accurate landed cost by SKU every single month? And I'm like, well, at least in today's world, February 24th,2025, the answer is an IMS. However, the challenge for most brands that I see, at least in the lower to middle market where we sit, is some of the big robust IMSs, they're so rigid, you have got to comply with them, meaning you have to put good information in to get good information out. And if you put garbage in, you just get garbage out and you're better off having an inaccurate spreadsheet, right?

Mel (29:42)

Right. Garbage out. Yeah. Right.

Jon Blair (29:49)

What is interesting about what you guys are doing is kind of rolling out your IMS in kind of baby steps, right? Like let's get this first key functionality and then let's roll into the next one, let's roll. And what I find to be interesting about that is it doesn't force brands into this very, like it is challenging for them to all of a sudden be beholden to this very rigorous workflow that if they don't do it perfectly the whole way,

they actually run the risk of just having bad information that comes out of it. That being said, like what are some of the, I know you're on the capital side, so I'm probably gonna put you on the spot a little bit, and you're not necessarily the IMS expert, but like how do you guys view internally at Settle of the value add of the IMS, as well as like why is it so important that you guys don't just launch everything all at once, and you're launching it kind of sort of in phases?

Mel (30:31)

It's okay.

Yeah, great. Just wanted to take one step back to just kind of define landed COGS together because I think it's like another metaphor coming. So you can think of like landed COGS as like maybe if you've ever bought a house for the first time and you were just a renter your whole life, right?

Jon Blair (30:58)

For sure.

Mel (31:08)

So you might think, I just have to pay for my loan. And it's like, well, actually, that's not true. Right. You have to factor in closing costs, property taxes, home insurance, mortgage insurance if you don't put less than 20 percent down, HOA dues, moving expenses, renovations, utilities that your landlord was paying for. Now you have to pay for all of them. Right. And among so many other things that you don't think about. Right. But guess what? Your landlord, they know all of those. Like,

Jon Blair (31:11)

Hahaha

Mel (31:37)

I like to call landed costs like shadow fees, right? Because you don't really know, right? Because I think most founders are thinking, it's just like the cost of my product and a couple of other things. And it's like, there's a lot of other things and those things are constantly changing, right? We can get into the tariff change for Canada, Mexico and China as well, because I feel like that's so relevant today. But ultimately, it's like...

Jon Blair (31:38)

for sure.

Hahaha

Mel (32:03)

every like expense that gets your product into your customer's hand need to be included. And so some of the big ones that I think are going to make a huge difference in calculating like your true landed costs are we say duties, shipping and freight. Those are big ones that we see all the time. A couple of times I think we see like insurance.

as well, certain inspection fees feel surcharged. There's a lot of different things. It really just depends on how your like, logistics supply chain is currently set up. But we need to take that into consideration. And so to answer your question on the first piece, I believe was, you know, how settle

Jon Blair (32:50)

or like how do you guys

view, how do you view the value add of you guys having an IMS?

Mel (32:54)

of

yes, my God, so big, right? Because I think when we talk to accounting partners, one of the biggest problems among like, there are a few ones, like one is calculating the sales tax, right? What is like a huge accounting problem. Another one was calculating landed COGS, right? And I would say just profitability analysis is such a big, big.

big thing when you're running a consumer brand, right? Because you need to be able to truly understand what your margin is to make lots of decisions, right? So that can be just general profitability analysis. It can be pricing strategies, right? Who's gonna get hit when these tariffs change, right? It's gonna be the consumer, right? Somebody is gonna have to increase their price as a result of changes. And then another one is just making more informed purchasing decisions, how you purchase, you're good. So I would say that when you think about what our financing allows our founders to do, what our AP allows our founders to do, this felt just like a natural third step where we were kind of like, hey, everyone keeps talking about landed COGS. And so it was just when, similarly to how you guys were like, wait a minute, like...

Jon Blair (34:05)

Yeah, yeah.

Mel (34:13)

we should kind of include bookkeeping, right? Like we're seeing these brands are not giving us the information we need to make decisions, right? We wanna make sure that we're doing the same. And so it felt like a natural progression in that way. And then also we just felt like the big, I think the big thing too was providing as much as we can as like an ERP for consumer brands. We call it ERP Lite.

Because that is the magic of the ERP, right? It's really bringing all those tools under one platform, albeit many bells and whistles that you probably don't need. But there is a secret sauce to that, right? And making sure that I think all of those modules are in one place. So yeah, I think that we also just saw a lack in the market because it's kind of like, well, on the sales side, a lot of the merchants are handling that pretty well as far as giving.

Jon Blair (34:46)

for sure.

Mel (35:05)

brands like Shopify and giving brands a way to manage our sales, direct to consumer brands. So I think the biggest need was just that inventory management that did not forget about the AP side of things that gave founders the ability to finance those POs. That was huge. So yeah.

Jon Blair (35:20)

for sure. it actually

this goes back to I'm one of the other most common. You asked me about the common bookkeeping issues that I see and I mentioned cash basis cost of goods sold underneath that as like a sub point is expensing freight and duties straight to cost of goods sold. So what we'll see oftentimes is that maybe a brand was managing the purchased costs. So just the supplier invoice cost.

Mel (35:39)

Yes.

Jon Blair (35:49)

in their inventory account, so they're actually adding that to inventory when they purchase it, and then they're decrementing inventory as they sell, but just for the supplier invoice costs. But when they get a bill from their freight forwarder for duties and freight, that whole bill is just going straight to cost of goods sold in that particular month. And let's double click into why is this important from a financial analysis standpoint. It's because,

Mel (36:11)

Yeah.

Jon Blair (36:15)

Let's say that you have seasonality, which like what consumer goods brand doesn't have some bit of seasonality. That means there's seasonality in your sales, you likely have seasonality in your purchasing, meaning that like there's a few times a year when you have way more freight and duties bills than you do in other times of the year. And actually furthermore, you're probably getting billed not even in the months where you have the most sales, because you're probably buying ahead of the months where have the most sales. So that means,

You have all these freight and duty bills you're expensing to cost a good sold in the month that you got billed for them, not in the month that those got sold. So your gross margin is going to be lower in the month that you expensed freight and duties. So it's going to be understated. But then later when you sell that product, your gross margin is going to be overstated because the freight and duties is sitting back in a previous month. And so how do you know what your gross margin is? And actually maybe you can, you know, one work around is

Mel (37:05)

Mm-hmm.

Jon Blair (37:12)

Let's look at a trailing 12 month period and let's like remove the cash basis distortions. Okay, but how can you tell every single month if it's getting better or worse? The only way to do that is to track landed cost every single month on every PO, on every bill that's inventory related so that you can see every month, my gross margin got worse. My landed cost is going up on these SKUs or vice versa, right? And so this is really important, but again,

It has to be connected to AP because AP is where the landed costs get introduced into the business's general ledger. You get a supplier invoice for 10,000 units you purchased. You get a freight forwarder invoice for freight. You get a freight forwarder invoice for duties. You get an insurance invoice. You get an invoice from your 3PL for the handling cost to unload the container and put all that stuff away.

the AP that's in this case getting entered into Settle, that's where those costs exist. And what the IMS is doing is basically like helping you connect this invoice to that invoice to that invoice to this SKU and it rolling up the landed cost for a SKU somewhat automatically for you, right? But the key is you do it in the system, the AP system, where those transactions are already being processed. Because if you do it separate, which I've seen brands do this,

Mel (38:18)

Exactly, yep.

Yes.

Yeah.

Jon Blair (38:40)

They'll get a separate IMS, but you're just having to enter information again. And where are you having to look for all this information? Your AP bills, you're going back to your bills and trying to put all the pieces together. So I'm just saying that because one, it's an issue to expense your freight and duties that distorts your margins, which means you don't actually know how to make sound decisions based on margin data. And then the second thing is,

Mel (38:52)

Yeah.

Totally.

Right.

Jon Blair (39:09)

The IMS being native or connected to the AP system is a no-brainer because that's where all that data already exists in your AP workflow within your business already.

Mel (39:18)

100%.

Yes,

and so the way that Settle's features works is it's so seamless as far as what we do is when you're initially entering that PO, we give you the ability to enter an estimate for those duties and costs so that they're still getting, you can kind of think of it as like a little landed COGS cushion, but once you actually receive the real bill, you can attach it to that PO.

for that freight duty handling fee, you can actually attach it to the PO, record what the actual expense for that was, and properly adjust your margin again. So all we're really doing is working off of an initial estimation, but then giving you actuals once you receive that bill immediately. And so you're just seeing these ebbs and flows of your margin a lot more accurately than you would.

and doing it in a quicker way because the AP is embedded. And the second thing I want to highlight is we do have the ability to do what's called a three-way match, where we can, like, it's an accounting dream, right? Because it's an accountant's dream, right? Because you think about accountants on their eight screens. And so what we're able to do is say, hey, we're going to put...

Jon Blair (40:27)

Ha ha.

Hahaha.

Mel (40:34)

your invoice on one screen, your PO on one screen, and the goods you actually received on one screen, right? And then we're going to see, are there any discrepancies here? Because if you underpaid or overpaid your vendor...

your COGS are wrong, right? And so another ability to provide you with accurate profitability around your COGS, your landed COGS as well, because that's all taken into consideration. And so we're basically giving founders and accountants the ability to reconcile things in a seamless way, in a faster way, and in a way where, one, accountants can make their clients happy because they're like, hey, we caught this thing that...

you otherwise probably wouldn't have been able to see, and then on the founder, and if they're managing that themselves without an accountant, it's a huge help.

because it's something that had you had the extra set of hands, like this is making this more efficient for you. So I would say those are two really interesting features that we offer that that is going to set us apart as far as being an AP solution. When you think of Bill.com, Brex, Melio, and all of the large AP vertical agnostic solutions that exist, they are working with tech brands. They are working with service-based brands. We are building solutions for brands that hold inventory, for consumer brands that hold inventory mostly, but we also just, in any inventory, we can help you with that, right? And so I think that's just the Settle plus is we're building tools for your business model, right? That's so important, yeah.

Jon Blair (41:55)

Yeah, for sure.

Totally.

Yeah, yeah, there was something that you were saying, I lose my train of thought. Nope, here it is. Okay. So when you're talking about the three way match, what, what, what are most brands or what do I see most brands do that don't have an IMS or don't have a legit like AP like management system for their COGS? What they're doing is they're using an estimate. At some point they took a snapshot and they pulled some bills and they said, okay, this was my line of costs.

Mel (42:20)

Right.

Yeah.

Yep.

Jon Blair (42:28)

and they're using that on a monthly basis until they do another periodic update. It's called the standard costing method, right? The problem with that is you only reconcile it. You don't reconcile it in real time like what you just walked through, right? You reconcile it whenever it is you decide to reconcile it. And in fact, there's a brand that we have that's a mutual client and I was just talking to them on like last Thursday or something and they're working on getting onboarded to the IMS and he cited this exact challenge which is like, he's like, hey Jon, we've been doing this like, calculating a landed cost or estimated landed cost like twice a year. And he's like, that's great when costs are stable but like, when are costs ever stable in the DTC world? Costs are never stable in DTC, everything. The only thing we know about DTC is everything's always changing all the time and so.

Mel (42:56)

Woohoo! Yeah!

Right. Right.

Totally.

Jon Blair (43:20)

Having a real time reconciliation within the AP system is really important to get dynamically accurate COGS by SKU. So I'm gonna give you a chance to ask one more question if you have any more on your list before we gotta land the plane.

Mel (43:28)

100%.

Yeah, I definitely do.

to talk a little bit about the tariff situation going on right now and if you've seen any of your brands impacted by that and kind of how you're advising them.

One, and then two, can you think of a scenario, well, because so much of what you guys are doing is like this profit analysis, right? And getting brands to healthier margins. And so can you think of a scenario where you got a brand to a specific place when it came to their profitability and seeing accurate margins? And what decision

or impact was there as a result of that. So kind of like a case study, if you will, just to highlight a specific brand that you've worked with.

Jon Blair (44:13)

for sure. Yeah.

So really quick on the tariff side, we've definitely seen an impact, especially because we're vertical, we're verticalized focusing on DTC, right? And in the DTC world, there's a lot of brands who set up shop in Mexico to basically take advantage. A lot of people don't know this, maybe heard it called section 321 like exemption. What it is is the de minimis exemption, which is that if you ship direct into the consumer,

Mel (44:33)

Yep.

Jon Blair (44:48)

And the value of that order is below this de minimis threshold. I think it was $850 USD. don't quote me on that, but it's something close to a thousand. like, so, so like if you're shipping, you know, clothing from a 3PL in Mexico direct to the end user, and it's a $150 order, you could fall under that de minimis threshold and pay no tariffs. Whereas if you brought that container in and it was $50,000 worth of apparel,

Mel (44:54)

Okay, educate me. This is a new one for me. I love that.

Got it. Okay. Right.

Jon Blair (45:16)

you would pay the tariff, right? when these, so there's two things that changed related to, or that we're seeing is impacting our potential clients the most. One, if they were using a 3PL in Mexico and they were shipping stuff duty free under that de minimis threshold, that de minimis threshold got removed. So it's not helping you any to ship those. Maybe it's helping a little bit.

Mel (45:17)

get you're getting hit with that 25%. Yeah. Yeah.

Jon Blair (45:44)

in the fact that you're paying the duties one at a time as you're shipping it in instead of all upfront when the container comes in, right? So maybe there's some cashflow savings there that you're, and there's a case to be made for that, that that's still financially helpful, but you're ultimately still paying the duties. So that's one thing. The second thing is this extra 10 % on China, goods imported from China. like, depends on what product category you're in, but a lot of people are paying 25% on top of whatever the tariffs were pre Trump's 2020, you know time in office and now he added another 10 on top of that. So you're basically paying whatever your normal tariff rate is historically for China and you're paying an extra 35 % on top. it is now everyone has already priced in the 25 % because it's been around for several years. So the 10 % it's an impact, but it's not, it's much smaller incremental impact than when that 25 % got slapped on several years ago. But unfortunately, some brands who were doing the fulfill from Mexico under the de minimis rules, they're getting tagged twice effectively. Like if I'm a brand that was bringing in containers in the US from China, my incremental cost difference is the 10%, which sucks, but it's just the 10%. But if I've been fulfilling from Mexico, I'm now paying the 25 % again the extra ten and so it just depends on how your supply chain and your fulfillment network is set up and Then on the what was the other question you asked?

Mel (47:16)

Wow.

around a case study of where you've kind of seen Free to Grow in action and profitability in helping businesses make smarter decisions.

Jon Blair (47:26)

Yeah.

For sure, we have a ton of examples of this. Honestly, we do a terrible job of highlighting this in our marketing. It's something that I'm working on, because we have 30 plus really happy clients, and we just, we haven't done a great job of telling their story, but I'll tell you a recent one that comes to mind. So because we're vertically focused on DTC, a big, we always think about what makes DTC, DTC?

There's a few things, but one of them is, understanding ad spend profitability, right? It's a big thing. And so we actually break down, yes, we give you visibility into your contribution margin at the company level and at the sales channel level, so you can see Amazon versus Shopify versus whatever, walmart.com. But most, more importantly, on the DTC side, we dig down into metrics around how profitable a new, a first time customer is versus a repeat customer. And that's really, really important because depending on how much repeat purchase you do or don't have, we view repeat purchase as a subsidy. What is it a subsidy for? It's a subsidy that gives you extra dollars to acquire new first time customers. First time customers are expensive because you have to spend ad dollars to acquire them.

Repeat customers come back with little to no ad dollars having to be spent on them, right? And so, depending on how much repeat purchase you do or don't have, you either do or don't have a subsidy to plow back into faster new customer acquisition, which means we can actually tell you how fast you can grow, because we can tell you how much repeat purchase subsidy you do or don't have. And I was doing an analysis with a brand where we're breaking down these economics, and what we saw was margin dollars from new customers was like negative $100,000 a month. So they're losing money, 100K a month on new customers. And they were like, oh, but we're getting repeat purchase. But I was able to show them, yeah, but your repeat purchase margin dollars is only $25,000. So you're still losing $75,000 in contribution margin. So what I was able to show them was the trend over time of how much they were losing on first time customers versus repeat. And what we saw was,

Mel (49:24)

Wow.

Right, when you net that, yeah.

Jon Blair (49:49)

Their repeat purchase wasn't happening fast enough to pay back that loss on new customer acquisition. So what we're gonna have to do is help them figure out how much they might need to scale back new customer acquisition to bring ad spend down and hopefully make it more profitable and to better balance repeat purchase profitability with new customer unprofitability. And so that's a real game changer for these DTC brands to be able to have that.

Mel (50:16)

Yep, that's huge.

Jon Blair (50:18)

kind of visibility on their P&L.

Mel (50:21)

100%, yeah. And contribution margin is huge from a debt and venture capital perspective as well. Like if you want more money, they're going to be looking at that too. So that's really important. That's a great use case. It's something that I hear brands talking about all the time and I just never thought about kind of segmenting those two out and it definitely paints a different story. And it's kind of like, let's scale back so that we can figure out where the problem is, right? And then we can decide, yeah.

Jon Blair (50:55)

Yeah, and ultimately, like how to figure out either there isn't more profitable scale in new customers or what do we have to do to make it profitable? Is it a product thing, a pricing thing, you know? So, okay, we gotta land the plane, but you've already done the what's the little known fact question. And so, I actually made this up when we were talking before we hit record because we were telling like, stories about kids. I want to hear what is the best hack that you figured out this winter because you're in Chicago, cold Chicago, to keep your kids entertained in the freezing cold.

Mel (51:36)

My gosh, I know, yeah, no, I have to shout out the trampoline park in West Loop.

So like, like Jon, I am a native Southern Californian and sometimes I'm like, why did I move here? But Chicago is lovely. is truly a wonderful city. But figuring out how to adapt in the cold with a toddler is wild. So we basically just were like, like, let's get museum memberships. Let's figure out like what to do because we live next to if you visit Chicago, we like live near like where the museums are. So it's like perfect. And so

Jon Blair (51:44)

Hahaha

Mel (52:13)

That was the hack. It's like $50 a month, unlimited jumps, like for the whole family, a great way to bond as a family. he burns so much energy, he makes friends, like so socialization is there, so that right there, right? Because we went from like six months of going to the park every day to now, you know, not.

Jon Blair (52:20)

Super worth it.

one degree

outside. Yeah.

Mel (52:38)

Yeah, one degree outside, our faces are burning. So definitely that has been a huge hack for sure. And yeah.

Jon Blair (52:45)

I love it. I love it. Well, before we close out here, remind everyone where they can find more information about you or get in touch with you and Settle.

Mel (52:53)

Yeah, honestly really reachable via LinkedIn. You can reach out to me there if you type in my name, Melissa Cafagna it's very unique. Maybe you have to throw in the keyword Settle. And then also if you are in need of some solutions around capital inventory management, BillPay, Settle.com. If you are a consumer brand, Settle.com is the way to go. So yeah.

Jon Blair (53:20)

Definitely check it out. Remember, the key takeaway here is that your bookkeeping, inclusive of AP and accurate inventory is incredibly important for sound decision making, right? And as you scale, it gets more complicated to manage it and keep it accurate. And if it gets out of hand, you're gonna have bad data. And if you have bad data, you're not gonna make great decisions. So, a lot of really great nuggets in this one.

Mel (53:25)

Yes.

totally.

Absolutely.

Absolutely.

Jon Blair (53:44)

Before we shut it down though, I just want to remind everyone that if you want more helpful tips on scaling your profit-focused DTC brand, consider following me, Jon Blair, on LinkedIn. You'll see some of Melissa's comments, I'm sure, on my posts. And then if you're interested in learning more about how Free to Grow can help your brand scale alongside healthy profit and cash flow, check us out at FreetoGrowCFO.com. And until next time, scale on.