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.

Mini Episode: My Profitable Cash Rich Brand Doesn’t Need a CFO Right? Wrong

Episode Summary

In this mini-episode of The Free to Grow CFO Podcast, Jon Blair challenges a common misconception among DTC brand founders: that a profitable, cash-rich brand doesn’t need a CFO. Jon breaks down why these types of brands often need even more strategic financial support—especially if the goal is to build long-term wealth. It’s not just about managing ad spend and inventory. It’s about turning profits into smart capital allocation and sustainable wealth creation—both inside and outside the business.

Key Takeaways:

• Just because your brand is profitable and sitting on cash doesn’t mean you’re set. It may actually mean you’re flying blind without strategic guidance.

• Wealth doesn’t just come from exits. It’s about using your brand’s cash to buy assets—stocks, real estate, maybe even other brands.

• Profit is only powerful when it’s used well. A CFO helps you determine how much to reinvest in the business vs. how much to pull out to diversify your wealth.

Episode Links

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

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

Transcript

~~~

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, founder of Free to Grow CFO. So your brand is super profitable, you have a ton of cash on the balance sheet, that must mean you don't need a CFO, right? Wrong. I keep hearing this from super profitable cash rich brands, and I gotta be honest with you, it's just a lie.

If you are super profitable and have tons of cash, you actually need a CFO even more. Why? Because you need guidance on how to strategically allocate that capital. So I think oftentimes, especially in the DTC world with how challenging it is to grow profitably, brand founders think of a CFO as someone to just help manage the P&L or just help me decide how much inventory to buy or decide how much ad dollars we can spend, very tactical operational finance type decisions. CFO's 100% needed for all of those things. So do not discount that. That's a core thing that I do as a fractional CFO and that our DTC expert CFOs do at Free to Grow CFO. But if your brand is super profitable and super cash rich, you actually stand to lose even more money over time if you don't have a strategic finance executive like a CFO in your business.

Here's why, because you need to actually perform even more complicated analyses to understand where should you allocate that capital. Should you allocate that capital back into the business? Should you take it out of the business and use it or wealth How are you grooming your P&L and your balance sheet to ultimately be able to sell the business for the ultimate payout one day? The more and more brands that I encounter as I do sales for Free To Grow CFO, and as Free To Grow continues to serve more and more fast-growing DTC brands, the more I do that, the more I realize that a CFO is key to help brand founders who have super profitable cash-rich businesses build wealth. I think a lot of brand founders think about using their brand to build wealth basically one way, and that's an exit, selling the business, the ultimate payout.

Is that something that you should execute towards, that you should build your business towards? Sure, but what if it doesn't happen? There's so many different things that could happen in the market that you have no control over, no matter financially viable and healthy your business is. So you never know when, how, or for how much you might sell your business one day. So what you do is build a cash generating machine in your brand and you work with a CFO to decide how much cash should be allocated internally for additional growth versus taken out of the business so that you can build wealth outside of your business. How do you build wealth outside of your business? You buy assets. It's the classic Robert Kiyosaki, Rich Dad Poor Dad. You buy assets. So you buy things like stocks, real estate, maybe you invest in startups, maybe you acquire other brands.

And so, what do I want you to take away from all of this? What I want you to take away is that one, you don't hire a CFO for your DTC brand just because it's struggling or you're experiencing challenges and you need help with tactical day-to-day financial decisions. That's important and it's a key reason to hire a CFO, but it's not the only reason. Another, possibly even more important reason is that if you are already profitable and cash rich, you need someone to help you allocate capital. Why? For the purpose of building wealth. Building wealth is the ultimate game, right, when it comes to building a DTC brand. We're playing a money game as we build a business. And so we wanna make sure we're building wealth. And who is honestly your key partner in your business who can help you build wealth? A CFO.

The Truth About Trump's Tariffs - What You Should Do Now

Episode Summary

In this episode of the Free to Grow CFO podcast, Jon Blair speaks with Izzy Rosenzweig, founder and CEO of Portless, about the evolving landscape of cross-border fulfillment and the implications of recent tariff changes. They discuss the benefits of the de minimis exemption under Section 321, the impact of new import tax regulations, and strategies for managing cash flow and inventory in a rapidly changing economic environment. Izzy shares insights on how American brands can leverage Portless's model to enhance their operational agility and financial performance. In this conversation, Izzy Rosenzweig and Jon Blair delve into the complexities of the postal system, import duties, and trade laws affecting brands today. They discuss high-level recommendations for brands, including tax deferment strategies and the importance of consulting trade lawyers. The conversation also covers the significance of customer experience in supply chain decisions and the potential for global business opportunities. Izzy emphasizes the need for brands to optimize their operations and explore every advantage in a competitive landscape.

Key Takeaways

• The future of de minimis and global trade is uncertain but evolving. The postal system has complex import duties that can be misleading.

• Exploring global markets can provide new opportunities for growth.

• Transaction value is key in determining import duties, not retail value.

• Brands need to adapt to changing regulations to remain competitive.

Episode Links

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

Izzy Rosenzweig - https://www.linkedin.com/in/izzy-rosenzweig-13653846/

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

Portless - https://www.portless.com/

Meet Izzy Rosenzweig

Izzy Rosenzweig, a 10-year veteran of the DTC industry, launched his first company, Browze, in 2012, successfully shipping over 2.5 million home and kitchen products worldwide. After opening a China-based fulfillment center to improve customer experience, he identified an opportunity to help other e-commerce brands with direct shipping, leading to the creation of Portless. With Portless, Izzy is revolutionizing e-commerce by optimizing direct fulfillment to significantly boost cash flow and profit margins for businesses.

Transcript

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00:00 Introduction to Portless and Current Economic Climate

03:00 Understanding the Cross-Border Fulfillment Model

05:53 The Impact of Section 321 and De Minimis Exemption

09:05 Navigating Changes in Import Tax Regulations

11:48 Cash Flow Management and Inventory Strategies

14:58 Comparing Shipping Costs and P&L Implications

18:06 Future of De Minimis and Global Trade Dynamics

20:44 Understanding Postal System Complexities

22:55 High-Level Recommendations for Brands

25:20 Navigating Trade Laws and First Sale Law

26:11 Assessing Import Duties and Transaction Value

30:41 Evaluating Supply Chain Decisions

32:08 Crawling Before Running: Testing Supply Chains

34:14 Balancing Cost and Customer Experience

35:42 Creating a Localized Consumer Experience

38:40 Exploring Global Business Opportunities

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 here having quite the timely conversation with my friend Izzy Rosenzweig, founder and CEO of Portless. Izzy, how are you, man?

Izzy (00:26)

Doing good, I say it's definitely been a fun couple weeks, not boring. I can't say it's good for the economy, but definitely not a boring couple weeks. Doing good, thanks for having me.

Jon Blair (00:31)

Yeah.

For sure, depending on when you're listening to this episode, what we're referring to, let's see today as of this recording, it's April 7th, 2025. We're just days after, you know, big announcement of a bunch of big sweeping Trump tariffs that have been enacted. There's been several, you know, actually enacted changes over the last several days. And then some, there's a lot of confusion about what is in place, what isn't in place, when does it happen, right? And so we're definitely gonna get into some of that stuff today, but the reason why I mention this is so timely, know, Izzy and I had this interview scheduled many weeks back before this was all going on, and this couldn't be a better time to bring Izzy on given his background and what he's doing over at Portless. you know, with that being said, Izzy, before we get into the meat of the conversation, run the audience through your background, your journey to founding Portless and what you guys are doing over there.

Izzy (01:34)

Absolutely. So I ran a consumer business for over 10 years and I ran almost all of those 10 years I ran it through the cross border model. So people might be familiar with the cross border de minimis model. There's a few ways to run the de minimis model. You can run it through Mexico, Canada. The other popular one is directly from China. So I ran it directly from China for the last 10 years. That model is essentially instead of manufacturing your goods, putting on a boat, waiting two months to get it, finally getting it, paying import tax at the port day one, then selling your goods and shipping your goods on the four to seven average delivery time from across the states.

Jon Blair (02:07)

Mm-hmm.

Izzy (02:12)

We take a different path. We say instead of putting in a boat, send it to our facilities. We have two in China, one in Vietnam. We'll probably get it one to two days post production. Then you could start selling your orders. We have Shopify integrations or integrations with any tech stack you're on, ERPs. And you'll sell the order. We'll pick pack either in a custom poly bag or a non-branded poly bag. We'll have a last small carrier on it. Think USPS OnTrack, LSO, things like that. And we'll deliver the goods on average of six to seven days across the United States dates. The customer gets a tracking number within 24 hours. They'll have, you know, anywhere from five to seven days later, their local driver dropped off at their front door, a 100 % local DTC experience. But the brand just went from, you know, cash conversion cycles that were terrible, that were months later, to now days post-production, getting cash out of inventory. But it also means you could restock. So if you're seeing good sales data on one of your, on a best-selling item during Christmas season, let's say November, go back into production. You can

Jon Blair (02:59)

Mm-hmm.

Izzy (03:12)

still catch Christmas season. So the idea of going out of stock is a thing of the past amazing cash flow, game changing from a cash flow perspective, again, months lead time to days, and many other advantages. So that's how I built the consumer business. Over the last three years, we actually shifted the consumer business to a B2B business. We no longer run a consumer business, but all what we do is we empower American brands to leverage the same model. So if you're American brand doing eight, nine figures we could support you. You could go from a cashflow, is again, months to days. Your customer gets the same local experience, but now you're a way more agile business. So that's what Portless does. We work with many different DTC brands, hundreds of DTC brands, and they can leverage this direct model where consumer gets the same experience as the as yesterday, but the brand has an extremely strong edge when it comes to cashflow, tax deferment in the new world, and agile inventory.

Jon Blair (04:14)

Okay, so there's a lot that I wanna unpack there. That's a great introduction to our discussion. So when you're first walking through that fulfillment model, right, you were referring to de minimis. A lot of the brands that we work with, there's definitely a handful that moved their fulfillment to Mexico or were fulfilling direct from China to take advantage of this de minimis exemption.

Izzy (04:25)

Yes.

Jon Blair (04:37)

some of you listening probably have heard this, referred to as Section 321 right? Can you walk everyone through before Trump changed things recently? What was that exemption and why does that enable this, cross border model or fulfilling direct from another country?

Izzy (04:55)

Absolutely. To give the high level, Section 321 is a law that is almost 100 years old. It says any package, again, the value of the package change over time, but any package since 2016 that is worth under $800 retail value comes into the country import duty free. It is not a loophole. It is the law of, or was the law, it still is a law today actually, of the United States of America, which means you can ship a package, the consumer gets it, and they drop the import tax.

Under Section 321, there's many different components. There's two that are important. One, de minimis, which is the law around anything under $800 is import duty free. And then there's the method of clearance, which is called Type 86. Type 86 is the method where you get into the country, you give certain data points. In the early days, there wasn't that many data points. They asked for more data points over time. But method of into the country, Type 86, under de minimis, no import duties. Those are the two things that really matter to a lot of people. Now, it actually started before Trump.

It started with Biden. Biden in September announced, we plan to remove de minimis because we don't like Shein and we don't like Temu Easy Chinese owned companies, fastest growing companies in the history of commerce because of this model, not because of the taxes. And we'll get into the details. But either way, Biden says we're going to remove it. Now, Biden followed the traditional path of removing any taxes through Congress. cannot just remove import tax because you want to with one exception, Emergency Act. But Biden wasn't taking the Emergency Act path. He was saying, I want to go to Congress. We're going to give a 60-day comment period. And it would probably have taken six to nine months to remove it. But there was guidances being removed. Trump got to office and says, no, I'm not waiting that long. I am enacting an Emergency Act. It was the IEEPA Emergency Act and saying, and that is the only exemption to skip Congress. And what did he?

Jon Blair (06:45)

Interesting.

Izzy (06:46)

What did he tie the emergency to? Fentanyl. Fentanyl is horrible. Everyone agrees it's horrible. But he used fentanyl to give the emergency act not only on China, which is probably the worst part of the whole thing, but also to Canada and Mexico. And Canada probably has their issues on fentanyl, is probably a fraction. Is it really emergency? Probably not. But either way, it was enough of a legal emergency to say, do not need to wait for Congress. I am taking it away. So he took it away on February 5th.

Jon Blair (07:05)

Yeah.

Izzy (07:17)

But what happened was, so then the model moved to a different model. I'll just quickly, before I talk about where the model moved, just kind of give the full what happened. Quickly, the CBP was not ready for this new model, which we'll talk about in a second. And on February 9th, Trump said, we're gonna bring back to de minimis until the CBP is ready. Interesting enough, it got posted on February 9th, but it was officially back on the 7th. So, know, funny timelines across the board.

But that was, that is what was existing. So we knew it was going away since September. He sped up the process and he brought it back until CBP is ready. And now he's removing it again on May 2nd. Now let's talk about where the model's going. The model's going, if you remember under Section 321, there's de minimis and Type 86, so the law of under $800, but also the method of entering the country. Type 86 has no way to pay import duties. It is not built for an import duty paying mechanism. There's two other main ways to enter in the country. It's called a Type 11 and a Type 01. These are the type of customs clearance into the country that have more data, HSCodes, descriptors, more on your raw materials and transaction value. More data in brackets helps fight fentanyl, which is a great thing. And also has the ability to pay import duties. Type 01, every Maersk ship that comes across the shipping ports is using mostly, a Type 01.

But if the value of goods is under $2,500 value of transaction value, you actually go under Type 11, which is easier and a little faster. One other side note, Type 11, if your goods are under Section 301 from China, it actually goes down to $250 maximum. But either way, Type 11 and Type 01 is very traditional method of CBP. And it's the method shipping containers use. So we, since September out of China, have been ready doing experiments with Type 01 and Type 11, and it works excellent.

Jon Blair (09:04)

Mm-hmm.

Izzy (09:11)

It is just that.

Jon Blair (09:11)

I saw your LinkedIn post about it and I watched your videos of you talking through this stuff. It was fascinating.

Izzy (09:17)

It's really just a different entry. So you need to have better data. So if you're a Temu you probably have no data, which is, you know, they got to their act together. But we only work with American brands and let's say European brands. Let's have very clear data, understand their factories, understand their supply chain. So we have all the clean data. We've been using Type 11, Type 01. They both work really, really well. The model's moving towards more of a Type 11. the fundamental difference between pre and post, could you pay import taxes? And at Type 11, you could. As Portless as the facilitator of moving goods,

We lay it out and we bill it, we invoice our customers accordingly. Prices doesn't change in our model. It's simply, you must start paying import tax. So that is the high level. Now I'll throw in Mexican Canada a little bit. Mexico had its own problem where the president of Mexico said, I am done being the warehouse of United States. Cause people would basically boat in, in a free trade zone in Tijuana, store the goods and do Section 321 to the United States. What the president of China wants is, I want to manufacture. So you may have seen data points, Mexico is, you know, one of the highest parcel of trade with like apparel. They weren't manufacturing in Mexico. They were bringing it from China and Vietnam. So she wanted to say, I don't want it into the country. So there's two parts. She says, you want to come to United States, go Section 321, pay me import tax. No free trade zone for you guys. So that was a Mexico problem. Canada didn't have that, but Canada was still able to lever Section 321. So, but either way, in the world where Section 321 goes, there's less of a value in Mexico than Canada.

Jon Blair (10:22)

Yeah. Yeah.

Izzy (10:46)

There still is value, there's still tax deferment, but you still have that two-month lead time, right? So again, the whole model's moving towards a Type 11 model, Type 11 slash Type 01, Type 11 being the main model, and you can no longer avoid taxes, you're gonna have to pay your tax, but at least you only pay your tax after you already sold the goods to your customer in our model. So A, we're right near your factory, be more agile with inventory, you could get an order.

You're sitting in our facilities not paying import tax. Only when you got the order, collect the money and then you ship it, then you're paying import tax at entry.

Jon Blair (11:21)

Okay, let's break this down really quick, because this is fascinating. This is something that we've been talking about with several of our clients who were leveraging the de minimis exemption within Section 321. So let's talk about the taxes, and I'll break this down for the audience to understand here. What Izzy is saying is that the, not loophole, it was legal, but the ability to not pay import tax on goods that had a retail value of less than $800. That's been closed or removed for now, But let's differentiate two different scenarios. One is the scenario where you put all your goods that are made in China into a container, right? You ship them to the US, you store them in a 3PL at the US. That's scenario one. Scenario two is you use a service like Portless.

Your product gets made in China, it stays in a warehouse in China, and it gets shipped as orders get fulfilled direct to the consumer, right? You're still paying import taxes in scenario one and two. But in scenario one, let's say you've got 10,000 units, you're paying the per unit import tax times 10,000 units just to get the goods in. So by the time they're at your warehouse, you have been billed for and paid import taxes on all product that you're holding.

What Izzy is saying is if you fulfill direct to consumer straight from say a Portless warehouse that's in China, you're paying it one unit at a time or one order at a time, right? As that single order gets imported into the US. And so if you think about the cash flow impact, right? On the US fulfillment scenario, scenario one, you're actually hanging up thousands of dollars on the balance sheet, right, that you've paid in import duties that are sitting in that unsold inventory. Whereas if you're doing the Portless model, the cross-border model, you've taken the order on Shopify, you've collected the cash, right, and so you actually have cash from a customer order to pay that single order's worth of import taxes. Do I have that right, Izzy?

Izzy (13:25)

You nailed it. And these numbers are crazy because you think about the tariffs he announced on April 2nd, it was 34% on top of 20% on top of Section 301 on top of traditional import tax. So we know a brand that was about to put about 400 grand on the boat. They would have had to come up about three, because there were close to 80% import tax. They were going to have to come up with $300,000 they didn't count for. And not like that. So either it's tax deferment, but then there's always excessive inventory that you liquidate or you try to shift to other countries around the world.

Well, you paid import tax on that. Now what? That's gonna hit your, not only your cash flow but your bottom line.

Jon Blair (13:57)

Yeah, and you're not getting it reimbursed when it leaves the country, you know?

Izzy (14:02)

You could do it by the way, it is complex.

Jon Blair (14:06)

I know some people who have done it and they end up having to hire a service to process it for you because it's so complicated. Okay, so this is interesting, right? Because I think everyone is for sure super concerned about the P&L impact, which generally speaking, in this case, we are talking about the per unit landed cost increase of these additional tariffs.

Izzy (14:11)

Yes,

Jon Blair (14:35)

Don't get me wrong, that's a significant impact. But what Izzy's laying out here is that you actually have to think about the P&L and the balance sheet, right? And this tax deferment kind of aspect to all this, that's a balance sheet. That's a balance sheet management tactic. Now, that's super important because in both of those scenarios I just laid out,

Izzy (14:51)

correct.

Yep.

Jon Blair (15:00)

the P&L impact is generally about the same. It might be slightly different because of the, you you've gotta actually move it twice. You've gotta do inbound freight to get to your US 3PL and then outbound freight. So we have to consider that as well. But if we just remove the freight for a second and we just talk about the duties impact, there's a much bigger hit to the balance sheet when you're buying big lots of inventory, importing them, paying the taxes all at once upon import and then those taxes are sitting on your balance sheet in the form of inventory that hasn't moved yet, right? Let's talk a little bit, I'm curious about the shipping cost, right? So if we sit down and we kind of compare, and I know it depends on brand specific and product category, but what do you generally see? If you had to compare the two scenarios, scenario one is just, one outbound freight cost that basically goes from your 3PL directly to the consumer and then maybe a small inbound freight cost because it's a domestic move from the factory to your 3PL. Comparing that to scenario two, which is like a much larger inbound freight cost because you're importing it, you're sending it over on a boat or even air shipping it to the US and then you're fulfilling it again out of your 3PL. What are you guys seeing? When you're talking to prospects or clients, when they're analyzing those two scenarios, how is that playing into these decisions?

Izzy (16:23)

Yep,

so let's move into P&L. I wanna answer this question, I wanna wrap up the de minimis, because there's one area we didn't finish. But let's first answer this question specifically. Freight costs for most of our customers, our value lives in lighter weight goods. So think of apparel, shoes, we don't do fridges and we don't do furniture. Now, for the lightweight goods of our business, it's usually close to apples now, apples and apples, sometimes we're cheaper. But how does that work? If you have an East Coast and West Coast, East Coast or West Coast or East Coast and West Coast, you still have Zone 1 through Zone 8 through United States shipping zones, which means you're gonna ship in New Jersey. If you're in New Jersey, you'll be cheaper Zone 1. But if you're shipping it to San Diego, all of a sudden you're paying Zone 8. So you got shipping rates all across the board, you're gonna have an average. In our model, we're always Zone 1, Zone 2 because when we hand over through aircraft, we're always handing over seven injection points. LA, Chicago, New York, Arizona, Texas, Miami, Atlanta. Which means your rates are always Zone 1, Zone 2. Never beyond that, or very rarely beyond that, very little. So those rates last month were always much better. But then there's air cargo.

Well, let's give extreme example. If let's just say you're in the jewelry business, you're selling earrings, you can have 100,000 individual orders in a single pallet. And that flight is not to stop over into your US facility that has US OpEx and US labor. The flight is halfway to the customer's front door, right? So our shipping rates started under $5. We can ship a pair of earrings for about $4.90. Door to door, customs clearance, everything baked in. But as the item gets bigger, then it gets more expensive.

Jon Blair (17:58)

Yeah.

Izzy (17:58)

T-shirts, you know, might be six bucks with us. So Zone 1, Zone 2, last mile you might find, if your item is very light, you actually might find savings with us. If your item is in that apparel shoe space, you're probably looking apples to apples pretty similar. So it's less of a P&L impact, but there's other ways to look at P&L. It's more about cash flow, lead time. So we would more say, how much excess inventory do you have? In our model, you should go from double digits to single, low single digits. Which also, the excess inventory also has a world of tariffs who's also hitting your P&L. Because now you're gonna write off inventory which you pay tariffs on.

You're not getting that back. It's in your country, you're dumping your liquidate again. So that's on freight costs. I would argue most cases, most industries, pretty similar, very light, cosmetics, jewelry, accessories, potentially the savings. Now I want to go deeper into P&L, but I want to go back for a minute to de minimis So de minimis is around until May 2nd. May 2nd it's meant to be turned off only to China and Hong Kong. It is still open to Vietnam and every other country in the world. So right now, if you would ship a container out of Vietnam, you're going to have 43% import duties. But if you did de minimis with us, you'd have 0% import duties. And the direction is, it does plan to go away, but only when the CBP says it's ready, its systems are ready. Which begs the question, are the systems not ready? Which means you might see further delays come May 2nd, right? I'm not going to say, but it's either way,

Jon Blair (19:23)

Hahaha

Izzy (19:29)

So and to tie that to Mexico-Canada, if you have Vietnam product in Mexico, it still works. Until they take away Vietnam, right? So only China's being turned off on May 2nd. I don't care where you ship it from. I don't care if it's France or if it's from China or from wherever you ship it from, Mexico, Canada, China country of origin where it's manufactured. And that's a whole other long discussion, what defines country. I'd like to say country of origin where it's manufactured. That's what's being turned off. If it's manufactured in Vietnam, it is still operational. You can still do it, until there's direction that you can't do it.

Jon Blair (20:01)

Interesting that I did not know. and I, I think this is fascinating. This is exactly why I wanted to have you come on the show. Cause there and like, there's so much nuance, right? And unfortunately brand founders being so busy. A lot of times they can only consume news headlines or, know, whatever information is in any given article that they stumble upon. There's a lot more nuance. Like, are there any other.

Izzy (20:29)

kinder please.

Jon Blair (20:31)

big misconceptions about de minimis or any of the other tariffs that you've seen get enacted or not enacted.

Izzy (20:32)

Yes.

There's one other subject, which I'm literally giving context to reporters so they get their stories accurate, but I don't blame them, it's so complex. You'll see in the fact sheet that says any packages that's going through the postal system from Hong Kong or China is either 30% import duties or $25 or whatever is greater. So people are like, oh, one second, $25 per shipment, that's not sustainable. It's through the postal system.

Jon Blair (20:44)

Totally.

Izzy (21:06)

The postal system is under the UPU, the United Postal Union. That is where if I was in Canada, I'd give a package to Canada Post, it was delivered in the United States by USPS. That is country to country postal agreements. China and Hong Kong have Hong Kong Post and China Post. The early days of this model, de minimis, was actually built under the postal system. But in 2015, it actually shifted from the postal system, because the postal system sucks. The second you're doing government entity, it sucks. So it was a three week delivery, and it was Mandarin everywhere. So.

Jon Blair (21:30)

Yeah.

Izzy (21:34)

But the model we do is we do, just like Maersk does shipping containers, we do air cargo. There's no difference. We enter the country through a Type 11 or a Type 01 or a Type 86. It is not the postal union. We don't touch China Post. So there are noise about there, minimum $25. That is incorrect. It is under the de minimis. Almost nobody uses it. The only people that use it is bad actors. Why? Because the postal union has almost no data requirements. So you're shipping goods that meet FDA requirement. The postal system doesn't care.

You're shipping fentanyl, harder to find. So what that was trying to do is get rid of the post, you only should be shipping letter mail in the postal system. With de minimis, you're doing normal entry, you're just paying import duties, whatever you have done by shipping container. That's another thing that people are getting wrong.

Jon Blair (22:21)

That's fascinating, So what are, this is a loaded question, but let's just talk about some things that come to mind here. Like given what you've laid out here, and obviously the deep understanding that you and your team at Portless have about the current situation, what are some of the high level recommendations that you recommend a brand either consider, like to just consider at this point?

Izzy (22:47)

Yes.

Well, the one that we that like we've had more inbound than we've ever had since we founded the company. And this is baking into tax deferment for multiple ways. One we talk about the balance sheet, you know, you need cash to pay your employees and do marketing and do all that stuff. At a minimum, delay the taxes. Don't pay the taxes until you collect money from the customer. But by the way, it also plays into the future wild cards. We hope this is all negotiation. But if you brought a container today before the negotiation has been finalized, you're not getting them.

That was a legal tax requirement. It might land at 30%. It might land at 22%. We don't know. But don't expose yourself to all this, day one needs to give up. At a minimum, have better balance sheet, better cash flow, and defer to hopefully what will be a settled, wherever it may land. That's one. Two, this is a little more sophisticated for bigger brands, but there's something called the first sale law.

The first sale law is quite complex, but I'll give a very basic example. People very often don't realize when you're paying your factory, your factory has two entities. They usually have one in China, one in Hong Kong. They do that because taxes is better in Hong Kong than China. Which means there's different line items. In first sale law, both those entities are legally allowed to make money. Which means let's say your factory had one entity and it charged you $10 and had a gross margin of 20% and it did a little bit of marketing and it did a little bit of...couple other things. Well, in a first sale, but they also have a trade partner in Hong Kong. That factory is legally allowed to keep some of its profits in Hong Kong and some of its profits in China. It's legally allowed to have a marketing budget in Hong Kong, which means some of your baked in COG of your $10 t-shirt is allowed to stay in Hong Kong. And the first sale law is you're allowed to pay transaction value on the $7, let's say out of seven of your $10 t-shirt, there's...10% is gross margin that stays in Hong Kong, another 10% is a marketing budget that stays in Hong Kong, then you're only paying transaction value on $7, not on $10. So whatever import duties is, it could reduce it by let's say 20, 30%. It is complex, you need to know what you're doing. Some of the big accounting firms and law firms can help you set it up. But if you're at enough level of scale, you could be saving millions of dollars by implementing something like a first sale structure.

Jon Blair (24:59)

Yeah.

Izzy (25:12)

That is something, if you're big enough, talk to a trade lawyer, even if you're a decent size, talk to a trade lawyer. know, everything you do, you should be talking to trade lawyers now more than ever.

Jon Blair (25:19)

And those trade lawyers, look, they cost a pretty penny, but the good ones are good and they're worth their weight in gold. that's another thing, because I've dealt with this before at Guardian Bikes. Do not cheap out on trade lawyers when you're looking into this stuff, because it's very complicated.

Izzy (25:24)

They're good. They're good.

Because if you're wrong, somebody will knock on your door and say, is there arm's length? If it's not arm's length, how are you structuring the cost? What's the cost breakdown? It's not a problem. You just gotta go deeper. And very often, factories won't share the line item cost, so they do want a third party. So you're gonna look at, again, we've seen companies charge, let's say, $25,000 $35,000 per factory, but you might be saving a million dollars by doing first trade. that is, again, if you're big enough, definitely look at that.

Jon Blair (25:57)

Totally.

There's one other question I have that came up as you were talking, and this is something that one of our clients who was taking advantage of Section 321, fulfilling direct from Mexico, product made in China as apparel, they were confused about whether or not the import duties are going to now be calculated based on, so if they imported everything into US warehouse, they would pay the import duties at their cost, right? Whereas if they're fulfilling direct from Mexico, their assessment was that they would actually be paying duties at the retail value. How is that gonna play out from your understanding?

Izzy (26:37)

Yep. Yep. I just did an hour webinar with ST&R which is one of the largest law firms that, and the lawyers used to work at the CBP. And if everyone wants, can go on our website, you can submit, and it talks about this exact question the lawyer answers. And I'll give you his answer. Of course, I encourage everyone to talk to their own trade lawyers. And there was a lot of noise on LinkedIn, but they're not trade lawyers. That's just like, yeah, everyone's smart, but like to talk to a trade lawyer. The guidance we are getting, it is on transaction value. And why people have the word

Jon Blair (26:57)

Yeah, yeah, for sure. Yeah.

Izzy (27:06)

People don't like the word COG. What's the definition of COG? Is it the cost of raw materials? Is it the cost of raw materials plus the manufacturing? Does it include the marketing? Back to a first sale discussion. Transaction value. CBP will knock on your door and say, show me your invoice. On the import of record. On the Type 86 that was based off retail. On a T11, T01, it's who's the import of record and what is your transaction value. In a first sale, it could be the invoice on the first sale between the factory and the second entity, not even the trade partner.

What is your transaction invoice? Show me your invoice and show me your proof of payment. Those are the two most important things. So I'm not gonna say the word COG, because that confuses people. It is transaction value, which is a legal term, which the trade lawyers in which our webinar, they talk about it very clearly. Show us the transaction value invoice, the invoice where you paid it. So it lets us argue it is definitely not retail. Is it COG? Well, what's your definition of COG?

Jon Blair (27:48)

Yeah.

Izzy (28:06)

Are you using first sale, are you not using first sale? So of course talk to a trade lawyer, but it's definitely not retail. So transaction value, yes. It is, let's say closer to what you would expect on the word COG, but I don't want to use that word. I'll use transaction value. Show me an invoice.

Jon Blair (28:06)

Yeah.

That's interesting.

No, understood. Yeah, yeah, because cost of goods is a, really it's an accounting term and like, you know, there's varying definitions, informal definitions of cost of goods sold, but the GAAP accounting, right, definition of cost of goods sold is landed cost, right, which is inclusive. Basically, it's the total cost of everything that it requires to get the good into saleable and fulfillable state.

Basically, and that includes receiving it inbound and to the, to the final fulfillment location. Right. And so that, which, which, mean, when you're importing the container, you're not, it's not based on landed cost, right? You're actually duties are a part of the landed costs and those are being assessed on a different value. Right. So that

Izzy (29:09)

The lawyer said like this, if you want to put a higher price, the CBP will gladly take it. You're an idiot. So, so speak to a trade lawyer. It's on terms of transaction value, not COG to your point. It's an accounting term, not a import definition term. It is the invoice you're paying for the goods from your supplier, from the buyer and the seller. Now, who's the seller? Are you doing first sale? Are you not doing first sale. So, yes, it is not retail because there was a lot of direction like that.

Jon Blair (29:14)

For sure. Yeah.

Fascinating.

Izzy (29:38)

I'm not a lawyer, but we work with lawyers. You watch the webinar, you can hear it from the horse's mouth. It is not your retail. Nowhere near it.

Jon Blair (29:42)

Yeah, that's interesting. I definitely have a few clients to recommend, maybe they check out that webinar. By the way, if anyone's interested in that, do you know where that webinar is published?

Izzy (29:49)

100%.

It could be on our website already, Portless.com. We have lots of blogs and we have podcasts. Let me find out. Yeah.

Jon Blair (30:02)

Okay, we'll definitely direct people there for sure.

This is stuff that's changing, right, by the There's a couple things I want to touch on now. I was managing the supply chain for Guardian Bikes during the last Trump tariffs that were enacted during his first term as Izzy and I were talking about before we hit record here that like, you know, the founders are, and this is part of what makes them successful, they're very action oriented, right? They're very biased towards action and your gut reaction is to take swift action immediately to offset these tariffs, but you have to do so in a smart manner. You've gotta do your homework and you really have to assess the total effort and the total cost of making a full supply chain or fulfillment network shift. I'm not saying not to do it. I'm saying to not take them lightly. At Guardian, during the first round of Trump tariffs several years ago, we actually chose not to leave China. And a bunch of our competitors did and went to less developed countries. And even though we're paying a higher, you know, quote, landed cost, we just had more certainty in our supply chain. We were getting better quality. We were actually getting a steady flow of inventory. And we were actually able to gobble up some market share because some of our competitors stocked out because they were dealing with this lower cost but less reliable supply chain, right? So like that's one thing that I want to point out.

The other thing that I wanted to ask you about is like, you've got brands now, like you mentioned you guys have more inbound than you've had ever since you started Portless because of what's going on. What are some of the major questions that you get from brands when they're trying to effectively confirm that there's not gonna be an issue from the customer experience standpoint if they move to a cross-border model with someone like Portless?

Izzy (31:48)

100%. The first thing we say is crawl, walk, run. Like any supply chain to exactly what you were saying about your previous company, know, experience it. So we send samples first, you get the experience. Then you start onboarding maybe a drop or a portion of a business. Try it out. We do this, again, we've been doing this for 10 years. We do it for enterprise business and publicly traded and we do it for, you know, eight, nine figure brands all day. But you should get exposure. Expose yourself. At a minimum, expose yourself. So you have another tool in your toolbox.

And then regards to diversifying supply chain to your other point, I 1,000 % agree with that. And actually, I would say most of the brands that we're engaging with are not doing any big shifts. The people that have over the last five, you know, five to 10 years, you know, look at where they are now. Like, you know, 43% out of Vietnam. That being said, will it stay 43%, probably not. I don't know. even even so from a tax perspective, you may or may have not made the right move. But I do think from an ecosystem perspective, like what you said is so underrated. I'll give you example in the apparel space. So we do we have customers in China, we have customers in Vietnam. In the Vietnam ecosystem, it is good, not great. It is nowhere near China.

You know from embroidery to even getting fabric. And one example is the fabric ecosystem in Vietnam does not match the output of Vietnam. That means they say if you want to buy fabric from Vietnam you have to order 400 rolls. But in China you can order one roll. So if you want a new collection new design then they're buying it from China which means you have a 7 to 14 day delay of getting your fabric to your factory so you could do your new design and your new idea. Then once it's done how many embroidery suppliers are there how many zipper suppliers how many button suppliers are there. So Vietnam is good.

Jon Blair (33:13)

Yeah.

Izzy (33:28)

It's just knowing you're as sophisticated as China or even the expertise. The cost of labor is cheaper, but you're not necessarily gonna have the same output. So, you know, like you said, just I don't know if we should make any huge changes today. know, arguably if you did it in the last little bit, I don't know if you're better off both on ecosystem efficiency or even what Trump is doing, but it's always good to have a plan, a plan in place. It just doesn't always mean it's the better plan.

Jon Blair (33:54)

Totally.

Well, and I think if I could sum up a lot of the discussion we've had here, it's that there's not a single factor that dictates you should take a specific action, right? Like I think the kind of prevailing emotional responses, costs go up, like move supply chain, get costs down. That's a single factor, right? That's like making a brand feel like they should make a change. It's an important factor.

Don't get that wrong, right? But you have to look at P&L considerations and balance sheet considerations, specifically not just cost of goods sold, but cash flow, right? And what's really important in the DTC world is customer experience, right? Customer experience is ultimately, you know, I always say like,

You're not just selling a DTC product, you're creating a DTC brand and brand implies repeat purchase and repeat purchase implies relationship and relationship implies an exceptional experience, right? And it's not all just cost. So when you have someone who's concerned about something coming direct from China and I've heard this before, they're concerned about it looking like it's coming from China. Explain really quick the Portless process, which I think is great of like how you provide that more, that very domestic feeling experience to the consumer.

Izzy (35:20)

100%.

Okay, so I'll just give one example. This is a tracking number that a customer that we serviced got. They made the order on March 13th, it was delivered on the 19th. It's a USPS tracking number, it's a USPS label, and it was either a non-branded or branded packaging based on what the customer wanted. This is a typical supply chain experience. This is it. Local delivery, And origin is LA, where we inject it.

Jon Blair (35:45)

Totally. Yeah, and what the origin looked like LA, right?

Yeah, got it.

Izzy (35:50)

because there is no scan. There was not a single thing of Mandarin. There's not a single thing of a tracking number outside of USPS. The scan, the brands see the scan of our injection points. So they're like, okay, you have a hub in LA, you a hub in Chicago, have a hub in New York, have a in Arizona, Texas, Miami, Atlanta. So it is a 100% a local experience, and that, I built this because I built a brand, not a business, brand for 10 years. So.

Jon Blair (36:16)

Yeah. So

you had to think about that firsthand. What does this feel like to the consumer?

Izzy (36:20)

I had to think about it. I'm not just a logistics provider, I was a brand builder, right? And I built the logistics off being a brand. And I thousand percent agree. If you can, and which is why this model, by the way, only got very efficient last couple of years. If you go back when I started, it was under, like I said before, the UPU. The UPU, you couldn't, you saw a Mandarin and it was a three week delivery. That is unacceptable from the experience. But since 2016, I went to the direct injection model where you're buying air-carburetor space, which means goods are in the United States within 24 hours or could be with a plan, you know, it could be two, three days, but you're also Zone 1 the second it hands over. So a thousand percent, the experience must feel a hundred percent local. And a lot of that, this is just the U.S. We have a five day delivery to the United Kingdom. And back into the tariff world, we're seeing brands saying, you know what, we're going to lean into marketing spend to these other countries. Cause there's de minimis in Australia, there's de minimis in Europe and in UK and Canada.

So we're seeing brands with one hub in Portless, sure they do in the US business because tax deferment and cash flow. But now you can spend your CPMs in cheaper countries and you can start shipping it. You know it's five bucks to Europe, it's six bucks to Germany. There's a very big world out there. And what's happening now is brands are saying I need to look at every single possible advantage I could have. So edges in many different areas. And I just got a call right before this call with another brand. says they actually are excited for this.

Because most of the competitors do not have operational excellence. But if you are a competitor and you're an entrepreneur and you could look at every single thing like, it's first sale for me, maybe I'm too small. But maybe I could do tariff engineering. Tariff engineering, the example we give is there's a very big shoe company that adds, I forgot what they were, fuzz or like a soft part of their sole to over 50%, which changed their classification from a shoe to a slipper, which went from 20% of import duties to 60% of import duties HS code, how good is your HS code? Is your HS code on a microwave where it should have been an air fryer? Well, that's a difference of 15%. Historically, your mergers just working, you're doing what you're doing. The operators got to step up. You got to look at every single advantage you could possibly get from the balance sheet to the P&L. How can I run better cash flow? How can I least tax a firm and should I do business in other countries? As crazy as it sounds, it's easier to do business in other countries than it is in the States. We're in a wild place to say that, but that's what it is.

Easy to do business in Europe and United States. Insane. But facts, it is true. Then you can look at tariff engineering. You can look at de minimis, HS code recommendations, doing a project around that. There are things you can do to hit both your P&L efficiency, cash flow efficiency, and maybe think beyond the United States.

Jon Blair (39:02)

Bam, mic drop, I love this. Izzy, this has been a fascinating conversation. We're gonna need to talk some more, I'm sure, at some point, if you're up for it. Before we land the plane, no pun intended, no, that wasn't a Portless joke, where can people find more information about you and Portless if they're interested in what we've been talking about here today?

Izzy (39:21)

Absolutely.

I post a lot of content on LinkedIn. So every time something's happening, I'm posting about it. I'm posting our opinions. I'm posting, you know, the conversation to have with trade lawyers. So I'm on LinkedIn at Izzy Rosenzweig. I'm on Twitter as well, or X at Izzy Rosenzweig, as well as Portless.com We're constantly doing blogs. We're constantly doing webinars like we just did with the trade lawyers. And our mission is to educate. There's lots of paths, you know.

I'd like to think at a minimum in this world, you should expose yourselves to all the different areas. Don't make any crazy bets, like move, I don't think you should move your supply chain overnight, but you should look at optimizations, because that could be your edge against your competitors. And we still live in a capitalistic world, and you should use every edge to up your competitors.

Jon Blair (40:01)

Totally.

100%.

Definitely check out Izzy's content. I'm not joking, I follow it myself. It's super informative. So definitely check that out. 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 Free to Grow's accountants and fractional CFOs can help your DTC brand increase profit and cash flow as you scale, check us out at FreeToGrowCFO.com Izzy, thanks for joining, man. And I look forward to chatting soon.

Izzy (40:39)

Thanks so much for having me, I appreciate it.

Mini Episode: The Danger of Using a Blended ROAS Target

Episode Summary

In this mini-episode of The Free to Grow CFO Podcast, Jon Blair breaks down a common mistake he sees in DTC brand financial strategy: relying on a blended ROAS target to guide monthly ad spend. While a blended ROAS might appear to show healthy contribution margins, it can actually mask losses on new customer acquisition—especially when repeat customer revenue is propping up the numbers.

Jon walks through how to break down contribution margin by customer type and why attributing ad spend correctly is essential for truly understanding performance. This episode is a must-listen for founders who want to scale profitably and avoid misleading metrics.

Key Takeaways:

• Using a blended ROAS target can be misleading.

• It's essential to separate new and repeat customer contribution margins.

• Communicate specific targets for new customer acquisition to ad buyers.

Episode Links

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

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

Transcript

~~~

Jon Blair (00:00)

Hey everyone, welcome to a mini episode of the Free to Grow CFO podcast. I'm your host Jon Blair, founder of Free to Grow CFO, and today I'm gonna talk about the danger of using a blended ROAS target to guide your monthly ad spend. So I'm coming across a lot of brands who are giving their ad buyer a single ROAS target for the month. They're basically saying, for example, hey I want you to hit a 3 ROAS across the business. And so that may look like, hey, I'm giving you $100,000 ad spend target and I want you to hit $300,000 in revenue at the business level. Now, you may look at your fully loaded gross margin or what we call at Free to Grow CFO, your contribution margin before marketing, which is revenue minus all your variable costs before ad spend. You may look at that and say, 50% of revenue.

So after all variable costs except for ad spend you have 50% of revenue left and if you're blended ROAS is a 3 that represents of revenue for marketing costs, so you take 50 minus 33 you have 17% of Contribution margin which appears profitable at the contribution margin level the danger when you dig in deeper and you split out your contribution margin between new customer contribution margin and repeat customer contribution margin, what I keep finding is that oftentimes brands don't realize how low or negative their new customer contribution margin is. So what effectively is happening is to create that 3 blended ROAS, repeat customer sales, which have a higher profitability because there's little to no marketing spend attributed to them.Those are covering up the inefficiency of new profitability, or in the worst case, complete lack thereof.

And so what is my recommendation? My recommendation is to do what we do at Free to Grow CFO, which is break out your contribution margin into two separate segments. The first segment is new customer contribution margin dollars, and the second segment, is repeat customer contribution margin dollars. How do you calculate new customer contribution margin? You take your new customer sales, which you can pull right out of Shopify, you multiply it by your margin before marketing, which in the example I just went through is 50%, and then you subtract all ad spends. What we do at Free to Grow is we actually attribute all ad spend to new customer sales. Now, is there some ad spend that effectively gets customers to come back and repeat purchase, certainly, but it's usually nominal. And we in our modeling attribute all ad spend to new customer contribution. So revenue times your margin percentage before marketing and then subtract all ad spend. That's new customer contribution, margin dollars.

So what's repeat customer contribution, margin dollars or returning customer. It's returning customer sales times that same margin before marketing, in the example we just went through, 50%, but subtracting no ad spend, because we've attributed that all to new customer sales. And so if you start tracking this on a monthly basis, what you're gonna see is if you even turn a profit on new customers. But what's more important is you're gonna actually be able to look at your new customer ROAS, right, and see what your break even or profitable ROAS is for new customers only. And that's incredibly, incredibly important.

Because what we try to do at Free to Grow, CFO, is help our clients communicate to their ad buyers, hey, I don't want you to just look at blended MER and ROAS. Now we may set some guidance around that, but I want you to look at new customer ROAS and new customer CAC. Because we ultimately want to understand the economics of new customer acquisition versus repeat customer acquisition. This interplay is really important.

I'm gonna be talking about it a lot more on future episodes and in a five minute mini-pod, you know, we can't get into all the nuances, but just know, like, what's the big takeaway from today's mini-episode? Do not give your ad buyer simply a blended full funnel or full sales channel ROAS target, which ultimately reverse engineers revenue and ad spend. Instead, give them a new customer ROAS target and a new customer CAC target and figure out how profitable or unprofitable you need to be on customers.

If that's a daunting task, that's where an e-commerce focused CFO can really, really so anyways, I hope this was helpful. If you're interested in learning more about how we can help with this type of analysis, feel free to reach out to us at FreetoGrowCFO.com and don't forget to check me out on LinkedIn, Jon Blair for more helpful tips about how to scale a profit focused DTC brand.

Good Debt vs. Bad Debt: How to Fund Your DTC Brand Without Sinking It

Episode Summary

In this episode of the Free to Grow CFO podcast, Jon Blair and Keith Kohler discuss the intricacies of financing for DTC brands, focusing on the importance of understanding good versus bad debt, the journey of K2 Financing, and the common reasons consumer goods brands require debt. They explore risk assessment between inventory and accounts receivable, the nuances of revenue-based financing, and the critical factors beyond just cost of capital that founders should consider. The conversation also delves into maturity matching in debt financing, multi-layered debt strategies, and the essential diligence items needed for successful lender conversations.

Key Takeaways

• Capital is essential for scaling DTC brands.

• Availability of capital can be more important than the cost of capital.

• Multi-layered debt strategies can provide flexibility and growth opportunities.

• Maturity matching is key to ensuring debt aligns with asset consumption.

Episode Links

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

Keith Kohler - https://www.linkedin.com/in/keithkohler1/

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

K2 Financing - https://www.k2financing.com/

Meet Keith Kohler

Keith Kohler is the Founder of The K2 Group LLC, a finance consultancy specializing in helping CPG founders secure the right financing at the right time™. He has originated and closed over $100 million in financing and authored the CPG Financing Guide, covering debt financing options for CPG companies at every stage. Keith also offers a 30-minute strategy call to help founders develop a 2-3 year financing plan.

A sought-after speaker, Keith has led financing webinars for the Specialty Food Association, Hirshberg Entrepreneurship Institute, and Emerging Brands Summit. He created both CPG Financing Month, a series of conversations exploring the financing and mindset journeys of CPG companies, and the Making the Numbers Work® for You retreat (www.makingthenumbersworkforyou.com) where he helps founders overcome anything holding them back from the successful management of their business finances.

Keith supports CPG founders in several other roles, including as a member of the selection committee of Nutrition Capital Network and a Wharton Venture Lab Expert in Residence and Mentor.

Transcript

~~~

00:00 Introduction to DTC Financing Challenges

03:10 Understanding Good Debt vs Bad Debt

05:57 The Journey of Keith Kohler and K2 Financing

08:49 Common Reasons for Debt in Consumer Goods Brands

11:44 Risk Assessment: Inventory vs Accounts Receivable

14:58 Revenue-Based Financing and Its Implications

18:06 Factors Beyond Cost of Capital

21:11 Maturity Matching in Financing Strategies

23:41 Navigating Multi-Layered Debt Strategies

26:02 Understanding Debt Financing Options

28:27 Capital Efficiency and Profitability

29:20 The Role of Lenders in Growth

32:51 Crafting the Perfect Pitch to Lenders

38:54 Preparing for Debt Conversations

42:48 Fun Facts and Closing Thoughts

Jon Blair (00:00)

Hey, hey, hey, 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 here with my pal, Keith Kohler, president and financing strategist at K2 Financing. Keith, what's happening, man?

Keith Kohler (00:27)

Hey, good day, Jon. Happy to be with you today.

Jon Blair (00:30)

Yeah, thanks for joining. mean, you're at the tail end of your CPG financing month of February, correct?

Keith Kohler (00:38)

I am, yeah, this is my second year and what I aim to do is provide a survey of topics touching debt financing in various different ways. So for this year the theme was how to, so I got a bit more practical and tactical about not just types of financing but how do you go about getting it and what are the perspectives and kind of key insider ideas you could be equipped with so you have the best chance of success.

But this week, the last week, I'm launching my podcast, How I Financed It. And so those are the three final episodes. I hope you'll all tune in.

Jon Blair (01:09)

I love it.

I can't, hopefully I'll get lucky enough to be able to join as a guest, because I've got some fun stories about how we financed some crazy things at Guardian Bikes when I was scaling that brand.

Keith Kohler (01:23)

Well, consider that your self-invited invitation for a future episode, Jon, really, that's well done. That was a clever one. So yes, the answer is yes, because those are exactly the stories I wanna be telling is where do people start from beginning through the financing lens and kind of where does it go from there in strategy and ups and downs and all those different types of things.

Jon Blair (01:26)

Yeah.

Ha!

Awesome. Well, I'm stoked to get into our conversation today because as you and I both know me being a fractional CFO in the DTC space and you with your debt financing background on the service you provide, when you're scaling a CPG brand, and I would say even furthermore when you're scaling a DTC brand that is from an asset perspective mostly or only has inventory, and by virtue of being a consumer goods brand, you're capital intensive, right? Which means what?

Keith Kohler (02:04)

Hmm.

Inventory.

Jon Blair (02:17)

You need capital to scale and unfortunately, as you scale fast, you need more and more capital. And the thing is, out in the debt world, as you know, there are so many outbound sales contacts that are happening. Founders are getting hit up left and right on LinkedIn, email, even text message with all these different debt financing products. And the challenge is knowing what is good debt versus what is bad debt, right?

Taking on bad debt is just maybe even worse than not taking debt on at all and not having the money that you need to scale. And so today we're gonna talk about good debt versus bad debt, how to fund your DTC brand without sinking it. So before we get into the weeds on this topic, I'd love for you to take the audience through your background and your journey to ultimately starting K2 financing.

Keith Kohler (03:10)

Yeah, thanks, Jon. When I think about what my own journey has been, because again, I am a business owner myself too, offering financing and financing consultancy. And my journey started a little over 20 years ago. And at that time, I was doing various different projects. I really wasn't lighted up by anything. I would tell you, I didn't know it at the time, but I know it now.

I'm very much a purpose driven founder. I have to have a high level of a reason why to do what I do. Not just for myself and the solutions I provide, but the type of people I work with. So I'm naturally drawn to this mission driven, better for you products, the types of products you would see in a Whole Foods or people who are disruptive in what they're offering to the world. A better mousetrap is the old cliche. And those are the people that tend to find me.

20 years ago, actually, this last month, I was diagnosed celiac, which is gluten intolerant. So when you see the word gluten-free on a packaging, that's relevant to my community, the celiac community. And at that time, I was actually the business development director for the gluten-free certification organization. The first one hired outside the organization, and it was still when gluten-free was nascent and growing. We know now it's a bit different than that. It's ubiquitous, quite everywhere. And what happened was, is I was talking with founders

Jon Blair (04:23)

Yep. For sure.

Keith Kohler (04:31)

many of whom were in a classic American metaphorical sense, garage based businesses, people who didn't have a lot of resources. They were just trying to make a product for a family member or a relative or something like that. So not surprisingly for a lot of them, supply chain, we know that's a big topic, was difficult, but finance was too. And that set off a light bulb in my head saying, wait a minute, if I can help these companies get financed, then I'm doing something for me to have more access to products that I can use and to a community I care deeply about. And that's what kicked me off. So gluten-free led to broader natural organic world, such as Expo West, Nutrition Capital Network, I became a member of that. And then it all just cascaded out from there. But it was only until about five or six years ago where I really got incredibly laser focused and serious. And the pandemic was incredibly helpful for me, it gave me a chance to really reset and think broadly about how I want to serve our community, both in transaction, getting the money, and transformation, how I help them think about managing their business finances.

Jon Blair (05:39)

I love that, I love that. Free to Grow was born out of a fairly analogous kind of like purpose driven kind of soul searching journey that I went on. I was part of the founding team of a fast growing econ brand and about three years ago was really feeling like how do I do good in the world? I'm a Christian and so I believe that like God creates, like uses business to make the world a better place. And I was like, okay what?

Keith Kohler (05:57)

you

Jon Blair (06:08)

Who is the group of people that I can make the biggest positive impact in their lives, right? And having been on the founding team of a brand and expanded my network with so many other brand founders, I'm like, man, the most stressed out group of people I know is brand founders because they get into business, they're usually, like you mentioned, they're product-centric, right? Usually there's a problem they see in the marketplace and they find a product to close the gap that they see in the market and they're really pumped because like,

Keith Kohler (06:24)

Big time.

That's it.

Jon Blair (06:38)

it serves some really important purpose to them. And then they start scaling and they're like, shoot, managing the money is like something that I see the importance of, but like that's not what lights me up, right? Like I'm the product person, the marketing person, maybe the sales person. And so I saw the stress around that for scaling brands and was like, well, hey, me having an accounting and finance background, like let's package what I've done in house as a CFO.

Keith Kohler (06:51)

100%. Yeah. Yeah.

Jon Blair (07:06)

and controller and accountant over the last 15 years and let's bring it to founders in a fractional kind of product ties way where they can get the CFO and the accounting support they need but without the full-time, you know, full-time overhead or price tag of building that team internally. So I love that. Let's talk a bit about consumer goods brands. Obviously DTC being included in that but consumer goods brands.

What do you see are the most common reasons why they need debt? What is it about a consumer goods brand that drives the need for debt capital as they grow?

Keith Kohler (07:44)

Yeah, sure. So just by way of background, I like to look at companies in different funding stages and I named four of them. First is the startup and early stage. And I define that as up to say 500K in revenue. look, I'm getting the thumbs up already. I must be doing something right, Jon. Then the biggest bucket and the most nebulous to define, I'm calling growth to pre profitability. And that can be a big, big, big, big, big range, as we know.

Jon Blair (07:57)

Yeah.

Got it. Yep.

For

sure. For sure.

Keith Kohler (08:13)

DTC brands with high margins. That's a more compressed one. They have a better chance of getting to profitability because the next stage is break even to profitable and that Again break even can mean some things for some people and other things for others whether it's EBITDA net income trailing 12 run rate That there's there's all kinds of ways to look at that and then there's multi-year profitability

Not surprisingly for a lot of the folks I deal with, and it might be you as well, it's heavily weighted in the earlier stages, right? Lots of people coming through, lots of founders starting up businesses.

Unfortunately, not all of them make it to that bigger level. And in fact, it's a small amount that make it to multi-year profitability. So a lot of the discussion I get to have with founders is that growth in early stage and growth to pre-profitability and often break even to profitable because founders are more often managing to profitability now than ever before. Right. So what are they using the money for? The most common use case for me is Keith, I got to get my product produced.

How am I gonna commit my product produced? Because their cash conversion cycle, which Jon, you probably go up with them, talk about this all the time with them, right? From the time they're laying out that first dollar, till the time it's sold, and happily in the direct to consumer space, that's gonna be more compressed than in retail. But big time. That's it. Yeah, versus, hey, I'm putting up a new fresh marketing email today. I have this list of a thousand people. I have a good sense of my ROAS.

Jon Blair (09:23)

Yep. Yep.

Yeah, where have to wait to get paid, right? 60 days, 90 days, sometimes even longer.

Keith Kohler (09:48)

I know that if I send out one email, probably 100 people will buy. Some people with as little traction as six, nine months a year will have a good predictability on what they can get whenever they reach out to their community or when they're running ad campaigns in some other place. So again, producing their product is the main thing. And here's the pro tip for everybody. Almost everybody starts out with a 50% deposit upfront, 50% before your product ships. If for any reason you can possibly get better deal terms, not just in dollars, but mostly in timing. Some folks, particularly if you have a product that doesn't have a lot of specialty processing or specialty ingredients, like let's say you were making the world's greatest potato chip. Well, that's not hard. What is it? Oil, potatoes, and salt, and maybe seasonings. They probably all have that on hand. So maybe they won't require you to pay the 50% upfront. Maybe you can get away with paying 100% before shipment, or dare I say, if you're really fortunate, having payment terms.

If that happens, that's such a game changer early on. So yeah, so.

Jon Blair (10:50)

totally. People don't, so I even tell brands actually, I think, and I'd be interested to see if you agree with this or that you see the same thing in your experience, but like, I think a lot of brands get hung up on trying to go from like, hit a home run on their terms negotiations, like go from 50 % down, 50 % upon completion to like net 30. I'm like, hey listen, if they say no to that, let's like incrementally make some improvement. Let's work on the deposit first. Even going from a 50% deposit to a 25% deposit can be an absolute game changer. I mean, people don't realize that. And when you model that out, we as CFOs, when you model a change like that, you still have a deposit, but we looked at in our cashflow projections, you have basically half as much money tied up on average in deposits all throughout the year. So whatever that represents.

Keith Kohler (11:18)

That's right. That's right.

I absolutely can.

Jon Blair (11:44)

is money that's in your bank account instead of in your vendor's bank account, right? So yeah, that's huge. One thing I wanna ask you is, and you I know a lot about this because I have a deep debt financing and debt fundraising background, but like I know that when you bring a CPG brand that is say heavier in B2B versus heavier or maybe exclusively DTC, the big difference from an asset stack standpoint is accounts receivable or lack thereof. How do lenders look at the risk of financing accounts receivable versus inventory and what do brand founders need to understand about that?

Keith Kohler (12:19)

That's right. That's right.

Sure. Just very, very tersely, inventory, of course, is inherently more risky than accounts receivable. Accounts receivable means you've issued an invoice, there's some type of promise to pay. Inventory, we don't know, right? We don't know when it's going to sell through or when it's going to, you how quickly you can turn it. We just don't. So, of course, inventory is more risky and therefore on a standalone basis,

Jon Blair (12:39)

Yeah.

Keith Kohler (12:57)

If you were getting financing just on the basis of inventory, you're going to pay a higher price than you would against accounts receivable. And there are some places out there and often this is commercial banks won't do inventory only lines of credit or what we call revolving lines of credit. Cause to be honest with you, they just haven't caught up with the times. And also, yeah, I mean, they still might be living in the 1980s. And it's also true that when they're looking at risk broadly defined,

Jon Blair (13:12)

Yeah, for sure.

I know, I know, it's crazy.

Hahaha

Keith Kohler (13:27)

It may be outside their box or outside their regulatory acceptability or even their bank owners to put themselves in a riskier category. But there's a robust alternative market. I want to go back to one thing, Jon, for a lot of your founders at the earlier stage, financing receivables and inventory really isn't all that relevant. In the beginning, it's more they're going to have Shopify show up in their inbox once they sell $20,000 on their platform.

Jon Blair (13:34)

for sure.

Keith Kohler (13:54)

When they get, and they might have some local folks talking about SBA loans offered by CDFIs, which do happen at the early stage. That's a bit complex. You have to be projections based. This usually have real estate collateral have pretty good credit. There could be local organizations that are helping founders that may have issues somewhere else, such as credit, but they feel that the business has good potential. That's usually a local solution offered by different types of governments or specific organizations in a geography. But mainly what I see our direct-to-consumer companies using is Shopify first, almost all the time. It's easy, it's in your inbox, holy cow, I get the money, let's go. And then they graduate into something a little bit different. Usually at the 250K level, 250 trailing 12 month, Wayflyer shows up, Kickfurther shows up, perhaps some others that are dancing around the direct-to-consumer space.

And all of those I've seen used for product. Now, they're not caring so much about the assets, right, Jon? They're looking at revenue. So these are revenue-based financing models with bespoke payback periods. Bespoke, for everyone's purposes, means custom. They're looking at your data and saying, quick, off of his or her Shopify sales, how quickly can I get paid back? But then it's when you get to the larger levels. When you get in stage two, growth to pre-profitability,

Jon Blair (14:58)

Yep, yep, yep.

Keith Kohler (15:20)

That's when usually AR and inventory take more hold. There are some exceptions. If you're selling to retail and you know you're going to have purchase orders of 5,000 or above, factoring can come in at that early stage. But usually it's in the larger stages when you're talking about larger factoring or even possibly an ABL when you're maybe at about a million in revenue.

Jon Blair (15:43)

Yeah, I see the same thing.

And actually I would say even more broadly, we tend to see revenue based financing or merchant cash advance type structures from, you know, the big three, like the Shopify capitals, the Wayflyer, Clearco. We see that usually brands that are doing up to like even honestly, five or six million a year in revenue. Some of them don't get off of that. A lot of times when they come to us, they should have already graduated.

Keith Kohler (16:07)

Mm-hmm.

Mm-hmm. Mm-hmm. They haven't.

Jon Blair (16:12)

from MCAs or from revenue-based financing, but they haven't, and they haven't been given the advice to do so, right? Yeah, exactly. And where we see, well, I know it's kind of like a drug, it's kind of like a dopamine hit that you press a button and it's like, it's done, Well, and here's the thing, so I think as you, I know you've seen this, like if you...

Keith Kohler (16:20)

Right. Yeah. They often don't know and they're just, they're not aware. And guess what? It's easy. It's easy to keep renewing. Yeah. Yeah. All of a sudden it's right there. Yeah. And now I can go back to what I really love to do.

Jon Blair (16:40)

follow whatever, consume content in any of the various social media channels. There's a lot of people talking about how incredibly expensive revenue-based financing is on an annualized basis. And generally speaking, it tends to be very expensive. But that in and of itself doesn't mean that you should or shouldn't use it. That is a factor to consider, but it's not the only one. And actually, I used to think that MCAs were just always evil because of how expensive they were. But as we started working with more more brands at Free2Go, I started to see like,

Keith Kohler (16:59)

That's right.

Jon Blair (17:10)

No, there is a use for those at times, right? There are stages for them. There maybe is even a short season for them. And I wanna use this to kinda segue into a deeper discussion about like, what I see the biggest challenges for founders in CPG and DTC is like, they latch on to these very simple kind of like heuristics or mental models about like how to think about what to optimize for debt. And oftentimes I see them fall into a trap of like lowest cost of capital is what I should optimize for. Now the problem is with us sitting in the earlier stage, lower to middle market, usually, generally speaking, I would say for us it's at least two thirds of the time, lowest cost of capital options are not the best option for that brand in the season that they're in.

Right? There's many other factors that need to be considered. What are some of the ones that first come to mind about other factors beyond just cost of capital that need to be holistically considered as a founder's trying to figure out what's the best option for debt right now for my brand?

Keith Kohler (18:22)

Yeah, it's a great question because when people are only thinking maybe about interest rate, that can be very limiting, right? The opposite of that, or the one that I try to ask people to focus on is total availability, right? So let's say, Jon, you have 100,000 at 8%, you have 150,000 at 12%, right? What could you do with that extra $50,000, right?

Jon Blair (18:30)

Totally.

Mm.

Keith Kohler (18:50)

If you have a very narrow and quick cash conversion cycle, and or if you light it up when you do an ad campaign and you have tremendous ROAS, in theory, the idea should be who cares what it costs, give me that money. Particularly if your metrics are really banging, and if you have high predictability, if you have good gross margins, if you have a good deal with whoever makes your product. Again, in theory, almost all cases,

Jon Blair (19:06)

Yeah.

Keith Kohler (19:18)

It's about availability, not interest rate. Now, merchant cash advances you alluded to. Again, I tend to avoid them if I can. It is the last resort, but in a pinch, if that's all you got, as long as you are on top of your cash requirements, you know how it's gonna happen, and hopefully you know how you're gonna get out of it. That's a key thing. So, the key thing, the key thing, how are you gonna get out of it?

Jon Blair (19:36)

Totally.

Mm-hmm.

That's actually the most important thing. How are you gonna get it? Because what I see is brands get stuck in it because they're not adequately planning out, they're forecasting their cash flow when they take it. They don't realize that by the time they pay it off or get close to paying it off, they need more capital again. They don't have cash flow from operations to pay it off and be done with it. And so they get on the cycle of just continuously taking the next advance. And that's where it can get.

Keith Kohler (19:48)

Yeah.

That's right.

Yep.

Jon Blair (20:12)

And where I see the challenge, this is another factor to consider, you know, for the founders that are listening is like, one, besides just cost of capital and availability, which Keith just alluded to, is what I call maturity matching, right? It's like the asset that you are financing, the maturity and or payback schedule of the debt that you use to finance it should match the consumption of that asset as much as possible, right? Because when you have a, so I'll give you an example that we saw recently. We saw a merchant cash advance get taken to purchase inventory that if you projected out sales, they were gonna pay that cash advance back in probably two to three months, but they were buying six months of inventory and needed to do so to gear up for the holiday season. So they were financing six months of inventory with a piece of debt that was only gonna last two to three months and if you've forecasted their cash flow, they didn't have sufficient capital after paying off that merchant cash advance to continue financing that inventory purchase. So the maturity matching is like a really, really important concept for founders to understand. Do you see that too?

Keith Kohler (21:19)

Yeah.

100%. Making sure another way of saying that is that the use of proceeds, whatever you're to use the money for, is appropriate. Again, I think it ties back to that larger topic, Jon, is how hard is it for us and for you, who are working with founders on this, to really look at their cash requirements as they move forward with a lot of confidence? And I think my observation is that if you do it not more than, 12 months,

Founders can, that's bite size. Most people can say, okay, I can think that that could be what it looks like. And so I tend to like to go out into the future and then work my way backwards and say, okay, if this is what you need over the next 12 months, what are the right financing products? Recognizing as you're alluding to that it's not one and done, especially for our growth minded folks, the ones going some 500 to 2 million, which is a trajectory I see a lot in DTC.

Jon Blair (22:12)

for sure.

Keith Kohler (22:30)

What we can get at the 500 level might already be refinanced out even before you get to the 2 million. Or can you do more of it? Or wait a minute, what's gonna get stacked in addition? And in fact, that's one of the magical things I try to do. Dare I say it's magic sometimes. Is figure out, yeah, figure out what can stack, what plays well with each other. Sometimes people might think,

Jon Blair (22:36)

Totally.

Keith Kohler (22:56)

Jon like, hey, get Shopify, get Shopify. There's nothing else I can get. Well, that's not true. You can get an SBA loan to go with it. You might be able to get another person in the FinTech. You definitely can get factoring to go with Shopify. So the question is, is like, which of these levers do you pull? Do they all make sense? What's the, not just cost of capital, what's the availability? How's it going to grow your top line and produce more gross profits? So that's really the dance. And more opportunity to have more people at the dance, dare I say, particularly in that growth phase. And a lot of the founders have just incredible missed opportunities because they're not aware. It's also a function of the fact that Shopify can't do SBA loans. They can only sell what they sell.

Jon Blair (23:31)

for sure.

Yeah, for sure. Well, I wanna

dig a little bit deeper into the multi-layered debt stack strategies because this is something that, although I think it's still challenging for founders to think through a single debt product to use, when you're starting to talk about hiring a fractional CFO through us or the service you provide, you're hiring consultants who have...

Keith Kohler (23:50)

Yeah.

Jon Blair (24:07)

We do debt financing day in and day out, right? We know all of the different providers. We understand where they feel comfortable sitting in the collateral stack, meaning like what rights do they have to collateral in the event of a default, right? And so I'm gonna tell a story and I'm sure you have some interesting stories too about something that we did recently for a brand. They had placed a big order for the holidays using a Flexport Capital Inventory Financing, which was basically 90 days float that they were given, right, for a fee. They ended up buying way too much, came out of the holidays and it was clear that they bought way too much. So I sat down and I helped them refinance that into a 12 month term loan, right, that had an amortization that we felt that they could afford with a balloon payment at the end of 12 months. And then on top of that, FlexPort Capital let us take a Shopify capital advance. On top of that, which was unsecured and sat behind them on the collateral stack and they were comfortable with the amount that we took. And so over the next nine to 10 months, we liquidated that inventory little by little and we had several strategies for how to right size that inventory. And 12 months later, we paid off that term loan. The Shopify capital was gone and then we went and refinanced them to an ABL, an inventory.

formula-based ABL, which they can now use with a lot of flexibility going into 2025 and beyond. But had they not had our advice on how to stack debt, they actually maybe would have gone out of business, potentially. But we knew how to bring the right partners in who could get comfortable with the situation and figure out where to put them in the debt stack. So what other thoughts or stories do you have about something similar? Because I'm sure you see things like that plenty.

Keith Kohler (25:55)

Right.

Yeah all the time and I think when you look at that It's hard to expect that a founder unless they have our type of experience would ever know that It's just hard My little shameless self-promotion of my book here CPG financing guide, right? I write about 20 types of debt financing, right and to even understand three or four of them is tremendous and as I said

Jon Blair (26:14)

for sure.

Keith Kohler (26:30)

each of these 20 types per se, they can't do any of the other types except with rare exception. So they're not going to be able to tell you, an SBA lender is not going to say, hey, Jon, what I really think you should go get is a Shopify loan because that's going to supplement mine. It'll help you do that. No, they're not equipped to do that. And newsflash, most of them don't want you taking on additional debt because it elevates their risk or their perceived notion of risk. A downside thinking versus the other side, which is, wait a minute,

Jon Blair (26:55)

for sure.

Keith Kohler (27:00)

If my founder gets more capital, she can grow her business more. And then actually it lowers my risk. But I guarantee you, no one's having that conversation. it's up for us to introduce that and to coach people to say, because a lot of times when they sign a contract, it says, you can't go out and get any other debt financing unless you tell us. Right? How many founders actually tell them? Well, small percentage. I'm not signing that deal, but they could get

Jon Blair (27:09)

For sure, for sure.

Yeah, yeah.

Hahaha

Keith Kohler (27:30)

shot down, but the nature of the conversation has to be no, I need it for growth. It'll do this for me. You're gonna be in a better spot. I'll be better able to pay down my debt. Anyway, that's a very nuanced discussion, but broadly what I see, Jon, is now that founders are more interested in a capital efficiency, moving towards breakeven to profitable, usually if I have a company that I'm talking to, and most of them fit into this, who think that at least by 2026, I'll be profitable. Now I'm not talking about my super early stage folks, but in the growth stage, right? If they're 500K right now and they think they can make it through the year be a million and next year be two million, if they're direct to consumer brand, there's a good chance they could eke out profitability. So if we go two years into the future, the best cheapest cost of capital with good availability is an SBA 7A loan.

Jon Blair (28:06)

Yep. Yep.

Keith Kohler (28:27)

And that's one year profitable on a filed business tax return. Can't stress that enough. It's not trailing 12 month. It's not run rate. It's filed business tax return. So in that example, and I've got a lot of them on that path, if they're profitable in 26 and they have say $150K in profitability based on current interest rates, their loan can be as high as $900,000 based on ability to pay it back.

Based on cash flow, collateral is a whole different thing and we don't have enough time to go through all of that. But there can be uncollateralized exposure. But the bottom line is, if that's the right combination, how do we get from here to there? And how do we keep ratcheting availability and interest rate? So for most people, until they get to that term loan time, they're looking at some combination of all the things we talked about, right? So.

Jon Blair (29:05)

Yeah, yeah, yeah.

Totally.

Keith Kohler (29:20)

Factoring sometimes also against AR sometimes also with an inventory component on the retail side on the DTC side Shopify again and again and again and again often PayPal sometimes Wayflyer sometimes Kickfuther. That's usually the mix of all the usual suspects I see I will add one last thing to the mix is that given that equity is still not as a lot of times people who got angel money

or friends and family money might go back to them and ask for some type of private debt financing style instrument as if it were an institution to be refinanced out in the future. Because SBA loans, of the acceptable uses is refinancing debt.

Jon Blair (30:04)

We did that at Guardian Bikes at one point. We went to our shareholders, which was largely angel investors, and we pieced together a couple million dollars in an interest only loan over, it had like a two or three year term, and we ended up refi-ing that. We looked at refi-ing it with a SBA loan, we ended up refi-ing it with an ABL because at that time we had reached eight figures in revenue and profitability in the ABL.

Keith Kohler (30:11)

Yeah.

Mmm.

Jon Blair (30:34)

was gonna fit our needs the best at that time. So there's a couple things that I just took note of as you were chatting. So we were talking about what are the other holistic factors to consider besides, there's the obvious interest rate, cost of capital, availability, you cited lenders that can grow with you, right? Or at least that's huge, right? Especially for us, it's like, if you don't have to go to another lender, right? A year out.

Keith Kohler (30:36)

Yeah, that's great. Yeah.

Big, big time.

Jon Blair (31:03)

or two years

Keith Kohler (31:04)

Right.

Jon Blair (31:04)

out, or even worse, man, I've been in situations where it's like, we're midterm, we're not even at the end of a 12 month term, and we're like, this is not working. It's not working for us, it's hamstringing our growth, it doesn't work for the lender, and like figuring out how to get out of that, so like, knowing a lender can grow with you, and again, utilizing someone like Keith's services, or working with a fractional CFO, you know,

We're the kinds of people that have experience working with these various lenders and we've seen the deals that they've done in the past we've seen them grow with other brands and I've even seen like I know a few ABL lenders that I'll say hey look They'll tell you they won't do in transit financing and right they won't they won't give you in transit on a regular basis But I know that if we talk to them, they'll give it to us one time or twice Just to get the initial inventory buildup. Right? And so the point I'm making is

We can help, guys like Keith, firms like Free to Grow can help you to actually get more mileage out of your debt partners than you could otherwise. Because like Keith mentioned, they're not, they're probably, the lender probably isn't going to pitch the strategy to you. They'll tell you what fits their credit box based on their underwriting. They'll say this is what we can offer you. You gotta ask them.

for more, but know why you're asking it and how to justify it, right? So this actually brings me to another question that I have for you, which is like, when you're going to a lender to ask for something, above and beyond what they're offering, what are some pieces of advice that you can offer about how to go about having those conversations and how to justify your asks?

Keith Kohler (32:51)

Yeah, going back to what you said at the top of the comments, there are cases where, again, we're calling it, a credit box, right? These are, for our listeners, what that essentially means is what are the rules of engagement? What can they do within their standards that are either set by themselves, by their thesis, if they're backed by investors, by the banks who give them warehouse lines, with SBA loans, by the SBA SOP? So everybody has to color within the lines.

for some amount, right? Or some amount of time. The question is, is how do you get what we often call policy exceptions? How do you get them to look at you differently? And it's not easy. But when you think of all the levels of strength that someone can show, clearly it has to begin with the financials. So if the financials themselves are not clean and accurate, that's one thing. But secondly is,

Maybe when a founder has a conversation, they know that they're not, they're putting their best foot forward. If you've just came off of a season and it's not a good season for you, you have to have them look at it, not just in the last three months. It's our responsibility to say, it's seasonally that way. It's always that way. Let me show you prior years. I am actually really strong. So one way is helping people look at the timeframe in which they get to see you. It's not like right now.

Jon Blair (34:09)

Yep.

Keith Kohler (34:18)

If it's only right now, which is what a lot of lenders base their decision on, you need to know when the best right now is. If it's like SBA lending and they're three years in the past, mainly, well, 23 was rotten because I lost, in other words, controlling the narrative based on the timeframe is super critical. And a lot of founders miss out on the opportunity, particularly in the fintech world, which is very algorithmic based, to sell their future.

Jon Blair (34:24)

for

For sure

Keith Kohler (34:47)

So Jon, again, if you have Jon's pizza company and you did 500K last year and you had a ton of losses, why? Because you spent money investing and you did this and that and the other thing, and it just shows up at the expense of it looks like loss versus investment, it's our responsibility and your responsibility to sell that, well no, wait a minute, that was investment, and it's that dance between where have I been and where am I going? yeah, yeah.

Jon Blair (35:09)

I love that, no it's so true. like,

so the other thing that goes alongside this that I always tell founders is like, hey we need to show clearly in the projections how we're gonna pay them back, right? Debt needs to be paid back. So we can't just say, hey we have this collateral base that you're willing to collateralize the loan through, but how is, how,

how are we gonna generate cash flow to service the debt? And showing that in the projections and then like you said, telling the story of like, well how are we doing this? Well, these are the assumptions behind this. This is where we're spending ad dollars, this is the return on those ad dollars, these are the overhead costs we're cutting, this is what, know, and like when you go through the level of the detail in your projections to show them how you're gonna pay them back, but tell them the steps that you're taking, the actions that you're taking.

Keith Kohler (35:43)

That's right. That's right.

Yeah, yeah, yeah, yeah.

Yeah.

Jon Blair (36:08)

That gives

lenders a lot of like peace of mind that like that this this business is being run well from a planning perspective which can allow them to go the extra mile on how they structure your loan. I've seen that time and time again.

Keith Kohler (36:23)

Yeah, it's really true. And not everybody has the opportunity to make that sales pitch, but I think for our founders, it's really, you kind of need to insist upon it. Particularly if you know the future is bright moving forward, get in there and say, hey, I'd love to share 10 minutes with you of my growth story and how we're getting stronger. Use the words that make sense.

Jon Blair (36:32)

Yeah.

Keith Kohler (36:47)

we're gonna be more profitable, we're increasing our top line, our metrics are stronger and they'll get better. All those things that contribute to an underwriter, because remember I think a big distinction, there are business development officers and then there's underwriters in credit. Not the same people. You have yes, yes, yes and no, no, no, right? And they often conflict, they're not allowed to unduly influence each other. They're just not allowed to.

Jon Blair (37:01)

For sure, not the same people.

Keith Kohler (37:14)

and they have to stand alone. So the business development offers bringing deals in, but it's ultimately credit. And we may or may not have access to that person. And sometimes we won't even have a call with him or her or the team. So the narrative, how you present yourself in writing. As you said, Jon, it's great to send a bunch of projections, but truly they're looking at the assumptions.

The assumptions are the most critical part because the projections are going to be wrong. We just know that. But if the assumptions, the assumptions look fantastic with thoughtful analysis, detailed, dare I say, correct grammar and spelling and all those good things that matter to people or don't, but put your best face forward. And if there is uncertainty, talk about it. Hey, we think this is how it could be. Sure, this could happen, that could happen, but it's kind of like.

Jon Blair (37:43)

for sure.

Keith Kohler (38:06)

dare I say controlling the way they look at you. Because they're comparing you to the big wide world out there, they have to. They're comparing you people in your sector, in your geography, and those other people might be horrible or rotten or had bad results. Well, you have to prove that you're the outlier who can essentially at the end of the day, pay it back.

Jon Blair (38:25)

Yeah, well, and

you have to, if you don't help them draw the conclusions that they should draw, they'll just draw their own, right? And you can't blame them as an underwriter. They're analyzing all kinds of businesses all day long, right? And so it's very easy to miss the context or the assumptions or the drivers or the actions or the strategy. And so it's actually interesting. The last question I wanna ask actually is like, if a brand is ready to go like pitch,

Keith Kohler (38:29)

That's right. Correct there will. That's right. No, at all.

Right.

Yeah.

Jon Blair (38:54)

a lender or go look for debt. We're not talking about the MCAs where you just click a button and you've got the, but like actually go through an underwriting process with a lender. What are kind of the major things they need to have ready in terms of diligence items to at the very least get conversations started and maybe even just get a term sheet.

Keith Kohler (39:12)

I'd say broadly the most important thing is clean and accurate data. I can't stress that enough and Jon you've inherited a lot of things where you go holy cow, right? Yeah, and again, this is not a fault of founders. I'm not blaming founders for this Well, sometimes they get the blame but a lot of times it's ignorance They're not aware of what might be what a true a clean and accurate Financial statement looks like and and we understand that we know it's not necessarily one even one the top ten things you like

Jon Blair (39:32)

Totally.

Keith Kohler (39:42)

to do. That said, if you know it's not for you, get the help to make sure that you can at least have accurate and clean proper categorized financials, proper organized, right? What goes into a stack of documents that you would have to have ready? I'll use the SBA example because that's the most extensive one and then you can cut from there, right? If it's SBA, here we are February 24th, they're going to want the last three years tax returns.

So 22, 23, 24, if you have it. If you don't, take 21. Just even go back and make sure they're correct. I can't tell you how many times I found mistakes in tax returns. And it's often just because founders don't review them. But remember, you're the one signing it. That's a key thing. Interim financial statements, year end 24. Again, this is time of year, making sure that they line up. You know what I suggest too, Jon, is do it month by month.

Jon Blair (40:36)

Yeah, for sure.

Keith Kohler (40:37)

like have all 12 columns of 24, the reason being if there are seasonalities or if there was something that happened that's an event, it makes it easy to explain it and point it out. So month by month 24. And then other things could be based upon the type of financing you go for, an aging AR report. We care that eligible ARs that aged 90 days or less, age more than 90 days, it's ineligible.

Jon Blair (40:47)

Totally, totally.

Mm-hmm.

Keith Kohler (41:05)

Aging AP, if AP is aged over 90 days, so what's the question? Why are they not paying that person? So those all tell a story. Cash flow model maybe and projections maybe for some uses not always as a starting point But I think just making sure that hey if you from an outsider were looking at this company Would you deem it to be healthy?

Jon Blair (41:28)

For sure, for sure. Yeah, and so like the important thing that you're drawing out here, Keith, is that the P&L's important because you have to understand profitability, but the AR and the AP tell a story about your cash flow health. It actually doesn't tell the complete, some lenders will also ask for like an inventory listing and if you have it, the aging of your inventory. And what are they basically doing? They're basically going.

Keith Kohler (41:47)

Yes, of course.

Jon Blair (41:51)

What are your AR days? What are your AP days? What are your inventory days? That's the cash conversion cycle. Those are all the numbers you need for your cash conversion cycle. So they're going, here's your P &L, but then let me see how you're managing the balance sheet, right? So that they can understand cash flow. And so the important thing is having the right people helping prepare your books and this data. I mean, that's a key thing that we do at Free to Grow. We have two services. It's the accounting and bookkeeping service, which is a solid P &L and a balance sheet.

which lenders need both, right, to assess both profit and cash flow. And then the CFO service is more the forward-looking strategy. And so both of those things are really important, but you can't even do the CFO service or go out for debt financing or debt raise if you don't have the foundation right, which is the bookkeeping and the accounting, right? So unfortunately, we have to land the plane. I wanna come on your podcast for sure, and I might need to have you back to talk about all the things we didn't get to.

Keith Kohler (42:39)

Absolutely true.

Okay.

Jon Blair (42:48)

But before we do, I always like to ask a fun question at the end. my question to you is, what's a little known fact about Keith that you think people might find shocking or surprising?

Keith Kohler (43:00)

Well, how about that? I've performed on both the Carnegie Hall stage and at the Vatican.

Jon Blair (43:07)

That's awesome, man.

Keith Kohler (43:08)

as part of a combined choir and one of the recordings charted on the billboard's classical charts.

Jon Blair (43:15)

That is so rad. I'm a musician whenever, sometimes the guests will turn around at me and say, hey, what's the shocking or surprising thing about you? I started a thrash metal band in business school with a bunch of business school friends and we got signed to a record label back in 2010, was it? 2009, 2010? Fate's Demise, check out Fate's Demise. There are videos.

Keith Kohler (43:37)

Where are the videos, Jon? I gotta see them.

We're down

with that. Financing and fate's demise, they go perfect together.

Jon Blair (43:45)

Yeah.

So, but yeah, man, this conversation was awesome. do, man, I think we gotta have you back, because we only like scratch the surface. here's what I want everyone to.

Keith Kohler (43:55)

Yeah, and we can go very deep

on specific uses and types of loans and all kinds of things.

Jon Blair (44:01)

Yeah, I think we should definitely do that, because it's important stuff for founders of consumer goods brands. If there's one takeaway that I want everyone to have, it's that there are tons of options out there, right? Navigating them is not as simple as just finding what's the cheapest product or has the most availability. There's multiple factors, and like Keith mentioned, debt financing is not a point in time, like we close the deal, we're good. It's a continuous journey.

Keith Kohler (44:17)

It's not.

Jon Blair (44:30)

Do we always have the capital stack we need to reach our goals and to achieve our strategic objectives? And so, I highly recommend, if you have any questions about debt or you're thinking about getting some for your brand, reach out to Keith. Keith, where can people find more information about you and K2 financing?

Keith Kohler (44:49)

Yeah, one of the best ways to reach out is through LinkedIn @KeithKohler1 And then also I have a website, financingman.com and k2financing.com, several right now. But I'd say start with LinkedIn, that's always the best place.

Jon Blair (45:03)

and get The CPG Financing Guide. How can people get that?

Keith Kohler (45:07)

if they just reach out to me, I'll send them a PDF copy.

Jon Blair (45:10)

Love it, definitely, definitely do that. Well Keith, I appreciate you coming on. I definitely think we gotta have you back. This was a super insightful conversation. Yeah man, and look, don't forget everyone, if you want other helpful tips on scaling your profit-focused DTC brand, consider giving me a follow, Jon Blair, on LinkedIn. And if you're interested in learning more about how our Free to Grow DTC accountants and fractional CFOs can help your brand increase profit and cash flow as you scale,

Keith Kohler (45:17)

Thank you, Jon, for this pleasure being with you.

Jon Blair (45:38)

check us out at freetogrowcfo.com and until next time, scale on. Thanks Keith.

Keith Kohler (45:45)

My pleasure, Jon. See you all soon.

The Secrets to Scaling Ads Profitably:From a Rebel Agency

Episode Summary

In this episode of the Free to Grow CFO podcast, Jon Blair and Chris Pearson discuss the principles of profitable growth marketing for DTC brands. They explore the philosophy of Chris’s company, Three Beacon Marketing, emphasizing the importance of questioning traditional marketing practices and focusing on alignment through the North Star Strategy. The conversation delves into key metrics for growth, the interconnection of acquisition and retention, and the challenges brands face when scaling without repeat purchases. Chris shares insights on common mistakes in paid media strategies and the necessity of continuous testing in marketing efforts, ultimately highlighting the significance of retention marketing best practices.

Key Takeaways

• Acquisition and retention must work together for sustainable growth.

• A strong testing process should never stop—it’s the key to long-term success.

• The difference between growing and scaling? Profitable repeatable systems.

• Don’t just listen to what customers say—watch what they actually do.

Episode Links

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

Chris Pearson - https://www.linkedin.com/in/pearson-chris/

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

Three Beacon Marketing - https://threebeaconmarketing.com/

Meet Chris Pearson

Chris Pearson is an email marketing strategist, retention nerd, and co-founder of Three Beacon Marketing.

For years, he watched brands treat email like an awkward first date–too pushy, too desperate, or just completely ghosting their list. The result? Wasted potential, burned-out subscribers, and millions in lost revenue.

Then, he discovered a way to turn email and SMS into a predictable, scalable sales machine–without sounding like a sleazy used-car salesman or blasting discounts until customers develop banner blindness. He calls it the Waypoint Email & SMS Strategy®, a system designed to make email & SMS feel less like spam and more like money in the bank.

Now, Chris helps 8- and 9-figure brands stop treating their email list like an ex they only text when they need something and start turning it into their most valuable asset. His system has generated millions in additional revenue for businesses that finally want email & SMS to pull its weight.

Chris lives in Windsor, CO, with his wife and their dog, Sylvie, who has no idea what email is but still gets more engagement than most brands. When he’s not optimizing retention strategies, he’s probably outside, lifting something heavy, or overanalyzing why people do the things they do.

Want to stop leaving money on the table?
Get the 75-point checklist to make more sales with email & SMS.

Transcript

~~~

00:00 Introduction to Profit-Focused Growth Marketing

02:02 The Rebel Agency Philosophy

05:50 Understanding the North Star Strategy

09:36 Key Metrics for Profitable Scaling

15:10 The Importance of Repeat Purchases

20:29 Building Sustainable Brands and Relationships

24:31 Common Misconceptions in Paid Media

27:07 The Importance of Testing in Scaling

30:40 Understanding Customer Value and Retention

35:20 The Role of Product in Retention Marketing

38:42 Bridging Brand and Data in Retention Marketing

40:22 Final Thoughts

Jon Blair (00:01)

Hey, 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 outsource finance and accounting firm for eight and nine figure DTC brands. And today I'm here with my friend, Chris Pearson, co-founder of Three Beacon Marketing.

Three Beacon Marketing is a boutique marketing agency in scaling DTC eComm brands, particularly in the health and wellness sector. They offer tailored strategies and paid media, email marketing, SMS marketing, and direct mail. yeah, man, Chris, I'm super pumped to have you on the show. How's everything going today?

Chris Pearson (00:47)

That's going well. I'm excited to be on and share and hopefully get some value.

Jon Blair (00:51)

Yeah, man. So today we're talking about tips for profitable growth marketing from a rebel agency. We'll talk about in a little bit what where the rebel agency comes from. But I met I met Chris, I don't know, maybe a couple months back and was very interested in some of the things we chatted about. I did some more research on his agency and I thought it would be great to have him on the show because as you know, as you know,

If you listen to the show with any sort of frequency, we're here to talk about growth, scaling, but with a profit-focused mindset. Because if you're scaling and you're just spending more money than you're bringing in as you scale, you really are doing yourself a disservice because at the end of the day, a business exists for what? To turn a profit. Because if it doesn't turn a profit, as I like to say, then it's just an expensive hobby.

Chris, before we get into diving into some of the specifics around scaling profitably, I'd love to hear a little bit about your background and your journey to co-founding Three Beacon Marketing.

Chris Pearson (02:02)

Yeah, for sure. So myself and Aaron and our third co-founder who left the business about a year ago to get into mental health and stuff and to help in the health industry there. Aaron and I started the business about four years ago, going on our fifth year now. We're all working in an agency together, a big international agency, nine figures, working with brands that are mom pop down on Main Street and then also brands that are selling products across multiple countries.

So a wide breadth of wisdom and just experience there. And we just got frustrated. We got frustrated with it because it was a churn and burn agency. The typical one founders run into, they say, hey, we need help with marketing. And they end up in a six or a nine or 12 month contract that they want to get out of because nothing's happening. They're spending money on marketing and it's just a black hole. So essentially what we did is a Friday happy hour essentially had a couple of drinks and just said, hey, what if we did this differently? What if we did it better?

Jon Blair (02:49)

Mm.

Chris Pearson (03:00)

What if there was a way to make it so that founders could actually scale profitably and marketing was an asset, not an expense? And so we just started asking those questions and that's how we ended up basically taking a leap and starting 3BM.

Jon Blair (03:13)

I love it, I love it. Okay, so you guys call yourself a rebel agency. Run me through that. What does it mean in practice? And I think most importantly, how does it set you guys apart from, you know, one of those dime a dozen, you know,

Chris Pearson (03:29)

Yeah.

Yeah. I think the main thing is we question everything. So it does take a little more time. It does slow things down a little bit at the beginning, at the start, but we question everything. So our primary goal is when we're, when we're helping brands scale or grow, depending on how you want to define those things. cause we do think those two words are different in definition, so we can get into that later. But the way we rebel against how traditional marketing and just marketing in general is typically done is we're not trying to scale at all costs. we're not trying to.

fix the problem with more spend. We're trying to do this efficiently. We're trying to do it profitably. And typically the brands we work with have a mission or a value set or some kind of principles behind them that are driving their energy and action in the market. And we want to amplify that. And if that business can't keep its doors open, gets not profitable, it doesn't exist. So we definitely question everything. We don't just go with the status quo. don't say, hey, we're going to run some static ads. We're to send some design-based emails. We're to do X, Y, and Z. Because that's what everybody else says to do.

Jon Blair (04:09)

Mm-hmm.

Chris Pearson (04:29)

We test as many things as we possibly can to find the profitable path forward for them.

Jon Blair (04:36)

Yeah, so interesting. We can get into talking about the difference between growing and scaling in a second, because I've got some other questions for you about the agency. I think when a great question is, Why scale? Right? I'm talking about like, this is like a philosophical question as a brand. Why scale? Right?

Chris Pearson (04:41)

Yeah.

Jon Blair (04:57)

You should be able to answer that question, I think, on a number of different levels. One of them is kind of a guiding principles level, like that usually has to do with impact, right? Solving true real problems, making a difference in the world. But I would say that when I think about why scale from a business model perspective or a financial model perspective, well, it's like it's because you want to multiply.

Chris Pearson (05:02)

of them.

Mm-hmm.

Jon Blair (05:22)

your profitability, right? Like if you figure out how to be profitable on a unit level, like on a small level, like cool, but why scale it if you can't scale those units of profitability across more units of output? What would be the point? You might as well financially speaking, stay small, right? And so we'll talk some more about the difference between growing and scaling in a second, but your website,

Chris Pearson (05:26)

Okay. Yep.

Exactly.

Jon Blair (05:50)

Mentioned something called a North Star Strategy as like an emphasis or core tenet of the way you guys do things. Walk me through that a little bit. What does that mean?

Chris Pearson (05:54)

Mm-hmm.

Yeah, yeah. So it's for us, it's just a different term for alignment. So something that when we, when we step in and help brands, there's really like three main areas that typically we try to get in alignment before we start actually doing marketing for them. The first one is what is the actual hard number goal? Like what is the goal? Is it 10 million? Is it 15? Is it X percentage of growth month over month? Like what is the actual number? Cause if we don't have that number, then we don't know what we're measuring ourselves against. And, you know, really any, any agency can spend more money to get more customers.

Jon Blair (06:16)

Mm-hmm.

Yeah.

Chris Pearson (06:30)

But when we actually look at the margin, we look at the P&L, when we look at COGS, when we look at all those things, we wanna know what the number is. So we get an alignment there. So that's your hard number. And then your soft goal is more so of like, what's your mission, what's your values, what's your principles? How do you wanna show up in the market? How do we wanna position your products? How do your customers buy in the market? How do they see your brand? So essentially what we're doing is we're just trying to figure out what the alignment and what direction we're heading in and how do we come up next to the brand and help them with the marketing piece.

Jon Blair (06:58)

Yeah. So this is interesting because this concept of alignment is something that I talk about a lot in my content. And there's a couple of different core tenants of, of alignment from my perspective. The first one is there's a lot of terms in e-comm that have more than one definition between depending on who you talk to. Roas, MER, you know, there, there are, there are

more than one definition of those terms, depending on who you're talking about. People will ask me, hey, Jon, what's the right definition, right? Another one is like gross margin. What's included in gross margin? Depends on who you're talking to. I am of the opinion, now at Free to Grow CFO, we have specific definitions for those terms, right? That we educate our clients on. But for your brand, I don't care what...

what your definition is, as long as everyone on your leadership team and everyone in your company and all the resources that you rally around your strategy, that they all have the same definition. That's what's important, right? So like very, very similar to your North Star strategy. The second thing is people ask me a lot of times, like, what is the one metric that I need to rally my company around? It depends. And I actually don't

care which one you choose as long as everybody on your team is aligned. Now, now a CFO, a good CFO can help you think through what is the appropriate metric to measure some desired outcome, right? That you have, it's not uncommon. Founders usually know what they want. They may not know how to define it, but they, they can, they have this vision of what they want. A good CFO or a good agency should help you be able to choose the right metric.

Chris Pearson (08:25)

Yeah.

Jon Blair (08:49)

to measure success or failure of that thing, right? But like, again, it all comes, which one's right? The one that's right is the one that rally that your team can be aligned around. So from your perspective, Chris, and this is like a, this is kind of a, this question can lead us down a number of paths of how, like how far we want to go into this discussion. But from your perspective, you and your co-founder's perspective,

Chris Pearson (09:02)

Exactly.

Jon Blair (09:18)

When you guys are looking at a brand and you are looking to help them scale profitably, what are the first things that come to mind as the core tenants of areas that you guys need to help brands navigate and be focused on to scale but do so profitably?

Chris Pearson (09:36)

Yeah, yeah, that's a good question. So there's different layers to it, at least two layers to it. The first one, we're looking at CAC, AOV and LTV. So customer acquisition costs, average order value, lifetime value. Those are like the three core that we look at from an acquisition and retention standpoint. And that's before we look at the rest of the P&L, like the COGs and everything. We look at those and see what kind of range they're in. We kind of see what's based on our experience and what we've been through of if the AOV is high enough, is your CAC low enough? Like, what does that look like now?

What have we been able to get other brands to in a similar space? And we kind of look at that. The second layer is we, if the brand is willing at the start when we're doing like discovery calls and things like that, what is their overall ROI? Like what is their overall return and margin when it comes to the P&L and just the whole sheet? Because if they'll give us those numbers, then we can essentially bolt on our marketing and say, for marketing, same point, ROAS is this, this is what our returns are gonna look like, roughly speaking.

take everything else in and the rest of P&L, here's the ROI overall. And so then the conversation becomes, what does it take to acquire a customer? What does it take to keep one? And what's the value of each of those pieces? And that's one of the things too, that we typically don't see a whole lot is we see a lot of acquisition agencies and a lot of retention agencies, but we don't see them together. There are some, but that's why we did both is because yeah, you can get a cut. If you get a customer break even, but your retention system's not great, you're not making money. So you're front and back and matter.

Jon Blair (10:54)

Mm-hmm.

Yeah.

Chris Pearson (11:05)

how they retain and keep customers and what cost you acquire them at. We look at those numbers and try to determine from just a spreadsheet standpoint, does it make sense for us to help and can we actually help?

Jon Blair (11:17)

Yeah, the more e-comm brands that Free To Grow helps scale, the more that I look at personally, because I run all of our sales and I do all of our free CFO audits. So I mean, I'm personally analyzing financial statements and LTV to CAC and even AOV data for dozens and dozens of brands every single year. The more that I do that, the more that I'm realizing

That it like, you just cannot separate acquisition and retention. they're a part of an entire like closed loop system. And if you want to use kind of like a, a leaky bucket analogy, it's actually not any different than actually thinking about like your funnel, right? Like when you're talking about the acquisition funnel, you can drop a bunch of traffic into the top of the funnel. But if your funnel has a leak, like a leaky bucket, right.

There are people who are going to leak out before they make it to the bottom and can convert. You can look at your customer base the same way that you look at like an acquisition funnel in my opinion, which is like you acquire someone, right? But then there's the funnel of like retaining them effectively. And if you have leaks in that, you can spend all this money acquiring customers. And then that customer just leaks right out of the system. And what are you stuck with? You're stuck with having to pay to acquire another one.

And what, what we're, think this is a, so here's, here's the thing about e-comm. The beautiful thing is, is low barrier to entry, right? Like meaning you see a problem in the marketplace that you as a founder or a passion about solving and you find a product that can solve it. You can, you can go get that product made pretty easily and you can start a Shopify store and you can get that thing to market. That's the good news. The bad news, it's that easy. So, so can everybody else, right?

And, and meaning that as you're starting to scale in the, like a Shopify store using Meta as your primary, like, you know, top of funnel ad driver, so can all of these other people in the same product category. Right. And so what's scary is I see, I see this so much. And by the way, like I have empathy for this. Cause when I was on the founding team of Guardian bikes, like 10 years ago, I didn't know anything about e-comm.

And I thought Ecom, I mistakenly thought DTC was this channel where like, if you just find the perfect product, the perfect time, you can have a nine figure brand and you can just crush it, right? Here's the reality of what it turns out. DTC has started to mature. It's here to stay. It's not going away and it's still growing, but there's a lot of competition. So how do you withstand the test of time? Grow big, but stay profitable. You've got to be able to re-

not just acquire customers in a cost effective manner. You have to be able to keep them because the brands that I see in audit, they'll get to 10, 20 million. They have no repeat purchase. They're profitable, profitable, profitable, profitable. And then one day the acquisition cost just goes through the roof and they can't turn a profit anymore. And they've got nobody coming back. The product category depends on the product category, but I see this happen between roughly 10 and 30 million.

Again and again and again. And so what's the point I'm making? Acquisition and retention are all part of a single system that have to be firing on all cylinders, like you said, front end, back end, right? And if you want to scale to tens of millions of dollars in revenue and stay profitable, you have to have both of them working. So here's my question to you, Chris. I'm curious. Do you see examples of brands with no repeat purchase?

continue to scale profitably? I do I have a do I have some sort of a bias in or like, do you see what are what are some examples of you seeing a brand get to a point they have no retention and things just start falling apart?

Chris Pearson (15:25)

Yeah, it's roughly the same range that you mentioned, the 10 to 30. We come across brands in like the 12 to 25 range is what we typically see. And they hit a plateau. And no matter how much they try to spend, they just can't get that profit to stay as they try to get more customers. And it's almost like they've hit a sub niche of like the total addressable market and they just can't break out of it. And so there's this momentum from like roughly 15 mil to 50. There's that gap there.

Jon Blair (15:33)

Yeah.

Totally. For sure.

Yep.

Chris Pearson (15:54)

The repeat purchase is what pushes you into 50. And then the 50 to 100 is a whole different set of problems and a whole different set of things to address, right? You have to go to a bigger market, a bigger addressable market, you have to push out more. But yeah, it's that 12 to 24 range. And it's surprising because founders, and I definitely empathize with this too, because they're trying to grow something and they're trying to achieve a mission and live and build this business with values and principles, but they hit this plateau. And the issue is typically between the first and second or first and third purchase.

Jon Blair (15:57)

100%.

Chris Pearson (16:24)

And it's not about getting more new customers. It's about solving the one to two to three purchases in roughly a three to six month period. If you can figure out that problem, we see this pattern too, Aaron and I do is once they get to the third or fourth purchase, the customer does the retention of that customer goes up. So it's like, it's like first purchase. Yeah, they're bought in. Yep. Yeah, they're bought in. like that second to third purchase is like, that's where the problem is. And they're looking over here, trying to like, they're looking at, can we spend more? Do we need a different market?

Jon Blair (16:24)

Mm.

For sure.

Makes sense. They're bought in. bought in. they're, they are, you've got them. They're a loyalist, right?

Chris Pearson (16:53)

Do I need to launch a new product? Do I need a new category? Like, do we need to rebrand the website? It's like, no, that's not the foot, like, here's the problem. It's the second to third purchase usually. And if you solve that, that's the next level.

Jon Blair (17:01)

Interesting.

That makes a lot of sense. I haven't seen that same data point myself, conceptually, that makes a lot of sense. What's interesting is that there may be times when you need to launch new products or maybe expand into a new ad channel, but you should be asking how that's going to impact acquisition and retention.

Chris Pearson (17:09)

Mm-hmm.

Jon Blair (17:30)

You shouldn't just be doing you should go like, I'm gonna push I'm gonna launch this product because there's something you've learned about. You're something you've learned about your customer base that's going to drive retention and you're going to launch that product because it's going to help you get to that third or fourth purchase like you're talking about, right? So the point I want to make to everyone is like, it's not that like long moving into new channels or launching new products that that should go out the window. That's not what we're saying. What we're saying is you should be asking

How does this serve my acquisition and retention economics? I want to make a move in product or channel selection because I believe that it's going to impact acquisition and or retention in this way. Now I'm starting to become, I hate saying this because there was actually a brand I was doing an audit for maybe six months ago. They had gotten to about 15 million in revenue and they were quite profitable.

punching through eight figures. like getting through 10 and then that 10 to 15 started to get really challenging. They sold a durable consumer electronics good that no one repeat purchase. There was no need to repeat purchase. And I was doing the audit with the founder and I was reviewing on a call his findings and he goes, or my findings. And he's like, Hey man, I think I'm reading between the lines here. Are you saying we're just screwed? And like, and I felt bad because in some ways

I didn't want him, like I don't, I didn't want this audit to like, you know, like remove all hope from that. Cause, cause I have seen, I have seen like some crazy anomalies. Like I've seen a durable electronics good, like it was high AOV. It was in an, hindsight, it was in a nascent market, right? Like this market was not, they were one of the first movers online, but they got to almost 50 million before there, and they had no repeat purchase.

Chris Pearson (19:02)

discouraging or something.

Jon Blair (19:27)

But they got to almost 50 million before their acquisition costs really went through the roof and their profitability just started getting decimated. But that's not the rule. That's the exception. They got lucky that they were, they were the first to market online in a nascent product category, right? But eventually everyone saw their success and a bunch of Chinese knockoffs and all this competition started diving in, spending money on Meta.

Chris Pearson (19:52)

this one.

Jon Blair (19:55)

And eventually things just died. And so the point that I want to make here is I'm not saying it's impossible to grow a brand with no repeat purchase. I'm just saying that it's a risky game. At some point. You will reach like the ceiling and the law of diminishing returns on incremental ad spend will come and bite you in the butt and your profitability will get destroyed.

And I think that's just the law of scaling. I'm realizing I've seen enough brands that it's just it's a law of scaling, right? Do you agree? And do you have any any like other thoughts on that?

Chris Pearson (20:29)

Yeah.

Yeah,

I think it is too. And there's, haven't come across like a formula or some way to like tell where that ceiling is. It seems like it's whatever the market will tolerate with that one product and that, you pushing into the market and being able to go from the market you're in to a broader market, to a broader market and those different levels, that's going to determine roughly speaking, how far you can go with that one product. And also too, if you take brands like AG1 or what's that other women's supplement brand that's blowing up right now.

I can't remember the name, but they're essentially taking one product on the front end and just running it as much as they can, but they have the plan in the back end to have the multiple products. I don't know if you have or anybody else that's listening has bought an AG1 product, but they have a dozen products in the back end that they're selling for repeat. it's like, there's really no formula to know where that ceiling's gonna be, but at some point you're going to hit it. And it just depends on where the market's at and how you're pushing the product into the market.

Jon Blair (21:30)

Totally. I would say too, like there's just market forces that you can't control that can jump out and bite you when you weren't expecting it. Like that one brand that I was referring to, there was no competition, no competition, no competition, no competition, and then a flood of competition. Had that competition been slower to get to market, they maybe could have scaled beyond 50 million and continued to see really strong profitability, right?

Chris Pearson (21:50)

Yep.

Jon Blair (21:59)

but eventually, so what, this really is about is like, are you building a long-term sustainable business here? Right. And I would go even further to say, like, there's a reason why all of us in the space, you know, your agency, other agencies, Free to Grow CFO, we don't say we work with DTC companies. We say we work with DTC brands. The word brand means something, right?

Chris Pearson (22:22)

Mm-hmm.

Jon Blair (22:26)

in some ways, like a synonym to brand is like, is like loyalty, right? Like a brand exists to hopefully drive loyalty in a customer base. Another way to say loyalty is what? Repeat purchase. So like, I've actually said this a few times in my LinkedIn content and like got a bunch of people upset about it, but I'm like, if your brand, if your brand doesn't have anyone repeat purchase.

Is it even a brand? It's like if a tree falls in the forest and no one hears it, did it even happen? If no one buys again from your brand, I actually don't know if it's a brand. And I know that sounds, I'm not trying to be harsh. I'm just saying that like part of going to market DTC, creating a brand is it's something that people will come back and buy more stuff from you again and again, right? So, go ahead.

Chris Pearson (23:15)

Right? Yeah, that's

something too that like to us brand is relationship. So if it's a one time, maybe a second time purchase, that's a transaction. When it gets to three, four, five and more, that's a relationship. And so like when we think of on our side, at least when we think of it, we're like, we're trying to build a relationship with the customer. And ultimately we're trying to build a hundred year brand with you. And that relationship is going to last over lifetime. Like that's what we're aiming at. And as those market forces come in and out,

Jon Blair (23:22)

100%.

I love that.

Chris Pearson (23:45)

if you don't have a catalog of products or you don't have your business set up in such a way that can tolerate or withstand those things, that's where the issues start happening. Because if one product or maybe you're going to a market that's too niche or you don't have a set of catalog in the backend that you can shift to if something happens or payment processes or whatever the problem may be, you're always looking at what's the 100 year plan and what's the relationship we're creating.

Jon Blair (24:10)

love that, I love that. That is a very, I think that's a great way to think about it, that someone buying once or twice from you is a transaction. Someone coming back and buying three, four plus times, that's a relationship and that's what defines a brand. I really love that. Let's chat really quick about common mistakes.

Chris Pearson (24:23)

Mm-hmm.

Jon Blair (24:31)

that you see when you have new brands coming to you, what are some of the most common misconceptions or mistakes that you see again and again that brands are making on the paid media side of things?

Chris Pearson (24:33)

Hmm.

Yeah, I think you'll appreciate this one. But there's been maybe two or three brands over last four years of the dozens that we've audited and the handful that we've worked with, they're tracking. So when it comes to where are they tracking their data and how they're tracking it is 97% of the time it's messed up in some way, shape, or form. And essentially what that means is the brand is essentially making decisions off faulty numbers or data that's not actually accurate.

Jon Blair (25:04)

Mm-hmm.

Chris Pearson (25:11)

And so that's something Aaron, he's on the acquisition side of things. That's the first thing we do once we get in there and say, Hey, we're going to essentially look at how you're tracking things. We're going to rebuild and do server side tracking. We're going do all these things that make sure that at the end of the day, we can trust the numbers that are coming out of the machine. Like we can, we can bet our money on this data that it's actually accurate. So that's the first mistake is they just don't either don't understand or aren't aware, or the agencies are working with, haven't gone that deep yet with the tracking piece. They just use Facebook or Meta.

Jon Blair (25:39)

Mm-hmm.

Chris Pearson (25:40)

or whatever platform they're advertising on, we go a step further and fix that mistake because that data is super important. The difference between a profitable ad and a non-profitable ad could be that tracking. We've actually fixed tracking before with some brands and found out that some of the ads they were running prior that were not profitable were actually profitable because tracking was messed up. And so we were able to help them scale that ad, obviously test and put some new ones in the system, but tracking is probably like the biggest one that we start with.

The second thing is typically a system for testing. So something that we've come across over the last couple of years is the testing methodology for paid ads is typically not there. They usually do like campaign sets or just like they kind of message, creative and audience into one ad set and then say, cool, this one worked, but they can't tell you why. So that's one of the other mistakes with ads that we remedy or we put in place is we test message, creative and audience in separate ways so that we know

Jon Blair (26:21)

Mm-hmm.

Chris Pearson (26:39)

with high confidence that when something's profitable, we know why. We know the message, the audience, and the creative. We know what that combo is, and we can scale it and iterate on it and keep making profitable ads. So that's something that we come across quite often is they're just essentially, they'll make 25 pieces of creative, throw it into an ad set, let it run, these three win, the rest don't. Let's just make more of those. And they can't really tell you, they can't say why they won or why they lost.

Jon Blair (26:49)

Interesting

Interesting.

Chris Pearson (27:08)

Yeah, so.

Jon Blair (27:09)

The wheels are turning in my head. That makes a lot of sense. Let's talk about testing a little bit because I have seen, in my opinion, you know, like, to summarize one of the truths, I believe, of scaling profitably that we've been discussing thus far is you've got to get retention figured out and that is...

that runs in alignment with building a brand, which is a relationship, which means people come back and buy multiple times, right? The second truth is that the brands that I see scale and withstand the test of time of scaling profitably, they have a well-defined.

and never ending testing process. Never ending. Like when people ask me like, often do, or like how long do I have to test for? I'm like, for the rest of your existence, you'll never be able to stop. You'll never be able to stop. And cause the second you stop, we made this mistake at Guardian. We would do like starts and stops. This is the early days and we're trying to figure out eComm You start, you think you figure something out, you scale it. By the time that stops working,

Chris Pearson (28:00)

Yep.

in perpetuity.

Jon Blair (28:22)

You better have like several other tests you've completed that are pushing out the next set of things that are going live. And so you, it's, actually, it's like a funnel. just like a sales funnel. If you stop prospecting at some point, there'll be no one to convert. Right. So you can't turn it on and off. It's always got to be on, besides the segmentation of testing, creative audience and messaging, what are some of the other best practices or, or like advice that you have for people listening about like.

Chris Pearson (28:23)

Yep. Yep.

Jon Blair (28:52)

how to test well.

Chris Pearson (28:54)

Yeah, I think a way to humanize the testing process is that what we're testing for is a connection with a customer. So when we put something out in the market, it's like asking for somebody's hand to say, follow me, right? So that's essentially what we're testing for is that's why you have to always be iterating is because every time you put your hand out and say, hey, follow me, I have something that you might like, somebody's gonna grab your hand for a different reason, or there's gonna be something in the news or there's gonna be something happening in the world. It's gonna shift how they see your ads. So...

Jon Blair (29:05)

Mm-hmm.

Chris Pearson (29:23)

To answer your question, different ways to test things is one, the testing methodology we use is four phases, message, audience, creative. And once we find a profitable combo, we'll scale it. that's step four. Inside of that, what we're actually doing is we'll rotate products, we'll rotate creative, we'll rotate all those things and find what customer is actually buying. Another thing we do on the retention side, mostly on the retention, but we also push it into acquisition is what we call our star customer. So it's somebody who we typically start out with an AOV of like 3X, what the average AOV is.

And that group of customers, we basically optimize marketing for those people because they have high LTV, they're spending more and they're buying more often. So we test different ways to figure out who those customers are. So we'll look at past customer data and say, okay, who's AOV of 3X or more, take that data set and say, cool, who are these people? And then we say, cool, can we acquire more of them? Can we retain more of them? What's their buying path? What's their buying sequence of products? And we just, test through all of those things from

Jon Blair (30:17)

Mm-hmm.

Chris Pearson (30:21)

first contact on paid ad to sixth, seventh, eighth purchase of a product, kind like a horizontal funnel, and just that process, journey, and we just test those different places. It could be ads, it could be landing pages, it can be emails, flows, mean, anything in between those things, that's what we're testing to figure out what's gonna optimize for that highest value customer.

Jon Blair (30:31)

Interesting.

So is that 3x? Is that 3x like the average AOV?

Chris Pearson (30:44)

Yeah, so if

AOV is 50, typically we look at 150 and above. it's just, it's a starting point, because some brands it might be two, it might be seven, it just really depends how the brand is and how many customers they have in that group. And that's another red flag too, is if you put in 3X AOV and you have 100,000 customers and you only have 100 people that are 3X AOV, there's a big repeat purchase problem. There's a group.

Jon Blair (30:49)

Got it.

Yep.

Hmm, I see what you're saying.

So you're like, you're like, like, how big is that subset of customers, right?

Chris Pearson (31:12)

Yes. Yeah. So we're aiming

roughly between like 3 to 10% is where we want that group to land of your total customer. And if it's more than 10%, then you have higher value customers increase at AOV to get that 3 to 10 % range. Because ideally it's the 90/10, 80/20 rule, right? It's kind of the leverage point. And so just depending on what those numbers are, we're going to test your system to see where we can get those 3 to 10 % of your total customers, more of them. Ultimately,

Jon Blair (31:29)

Yeah.

Chris Pearson (31:42)

Fewer customers at a higher value means you can spend less to get to your same revenue goals. So that's the other thing too is, you're spending, spending, spending, but if we get one better customer than 10, you're spending less and they're spending more for you. So it's an efficiency thing on our end.

Jon Blair (31:46)

Yeah.

Well, and I would even say furthermore, like if you think about scaling over time, what's one thing that we all know as you continue to incrementally add more ad spend, it's that you're gonna see a law of diminishing returns, CAC is gonna go up, right? And so we on the CFO side oftentimes like to think about, we'll convert AOV to...

Chris Pearson (32:12)

Mm-hmm.

Jon Blair (32:24)

uh, margin dollars, right? So what is the margin dollars per order before ad spend that's available? So for example, I was looking at an audit the other day and this brand had scaled from like $1 to $10 million in about 12 months. Um, like in terms of run rate, very impressive, but their CAC tripled as you would expect, but it started at nine and it ended at that 12 month period at 27. Totally not.

Chris Pearson (32:25)

Yeah.

Yep.

Jon Blair (32:49)

I first off still I was like at the spend levels. I was like, man, 27 CAC. That is fantastic. I don't, I don't see that a lot, right? Like I'm like, please. Yeah. Like let's, but, but if I looked at margin dollars, right. At a $27K if I looked at contribution margin per order after subtracting 27 in, in, uh, in CAC, there was only 25 bucks left over. So what do I see as a CFO?

Chris Pearson (32:56)

Yeah, can I get that please?

Jon Blair (33:19)

You only have 25 bucks left to absorb the next round of CAC increase because over a 12 month period, your CAC just went from nine to 27. If it goes from 27 to 50, we're close to turning $0 in profit, right? On every single order. How long, this was an inevitable next question that I, well, how long is it going to take to get to 50? I don't know how long it's going to take, but I can tell you,

If you keep spending, you'll get to 50 eventually, especially when I look at the range of CAC that I see with all the other brands that we work with. Like 50 is still, and again, I know this depends on a lot of different factors. I'm not trying to overgeneralize here, but a $50 CAC at scale is pretty damn good. We have a lot of brands who deal with a $90 CAC or a hundred or $120 CAC and survive off that. the point I'm making for this particular brand is like,

Chris Pearson (33:51)

Yeah.

Mm-hmm.

Jon Blair (34:18)

There's a lot of risk. Now keep in mind, they don't have much repeat purchase. And so the question then becomes, how can we drive repeat purchase? Maybe we have some retention marketing issues that we need to get shored up. There's always, I like to say generally, retention or repeat purchase is more of a product problem than anything. Now you need to have sound retention fundamentals.

even if you have a product that lends itself to repeat purchase, if your retention marketing sucks, then there's low hanging fruit there, right? But if your product does not lend itself to be repeat purchased, you can do all the retention marketing you want and you will not get someone to buy something again, right? So I'm curious, do you agree that retention is more a product problem than a email and SMS problem or

I believe they're both important, but what is your thought on like the importance between those two things?

Chris Pearson (35:20)

Yeah.

Yeah, that's probably the second or third tough conversation we have with brands when we start working with them is yes, it could be a product problem. And, and I get it too, like that, that's kind of a hard thing to take because the products, your baby is the thing you're building your business off the back of. It's a connection with the customer, right? But the product can be the problem. So there's three things when it comes to just in general marketing that we look at when we're trying retention, especially, but it's the three things we look at to see what we can adjust and maneuver and what levers to pull.

and it's offer, audience, and message. So very, very similar to how we test on the front end with acquisition. But with the offer, we're essentially looking at what's the product, what are we offering? Is it a bundle? Is it a loyal program? Is it a subscription? Like, what are we doing there? Do the customers repeat purchase if they do? Why? If not, why not? And so we just dig into the product and say, you know, is the product a repeat purchase product? If not, what do we got to do to make something that is or find some way to do a different market? Like, where do we put this thing to get more purchases?

Jon Blair (35:54)

Mm-hmm.

Chris Pearson (36:16)

With the audience, that's that question too, is like, it wholesale? Is it affiliate? Is it direct consumer? Like, what are different ways to address that? And then message is essentially positioning. Like, how do we push this into the market? How we position it? What makes it different? How does it make it beneficial to the person who's looking at it, whether it's across those different audiences? And so, yeah, I would agree that typically the product is where you want to start and then connecting that to the customer is the next step. If you can figure that out, whether it's a repeat purchase or not, you can typically find a path forward.

It might not be the most comfortable one if you don't have a repeat purchase product, but it's going to help keep your business and your doors open.

Jon Blair (36:51)

Totally. And I want everyone to hear this clearly. If you don't have repeat purchase, the game isn't over. If anything, use this conversation as a catalyst to go like, okay, how do I get there? Like really the game is only over if you've already reached the point of diminishing returns to the point that you're losing money left and right and you just have limited cash on hand.

That's the point where it's over. But there's a lot of runway between where a lot of brands are today. And when they hit that ceiling, we've been talking about where like the lack of repeat purchase, and really rising acquisition costs start, like decimating your margin and ultimately your bottom line profitability. like the call to action is like, start now start now with like figuring out and strategizing dive into your data.

Chris Pearson (37:33)

Bye.

Jon Blair (37:47)

figure out, do you have a product problem with repeat purchase or do you have a retention marketing problem? Chances are it's a mix of both of them, right? But start working on them now so that you can get out ahead of the demise of scaling a brand that has no repeat purchase. hope is not all lost unless you're at that point where you're just bleeding cash.

and you don't have enough cash to keep things afloat long enough to launch new products or a fixed retention marketing. Chris, the last thing that I want to ask you about is about retention marketing. What is your approach to best practices as it relates to email and SMS marketing? Or even you can approach it from the opposite perspective, which is like, are the

Chris Pearson (38:20)

Mm-hmm.

Jon Blair (38:42)

What are the things that you're usually seeing brands screw up on retention marketing that you guys are coming in and advising on like improving?

Chris Pearson (38:51)

Yeah, I think there's a gap between brand and data that we typically fill. So something we come across is either a brand will be really heavily in the brand and their design and their layouts are just gorgeous. They're beautiful designs and email SMS is everything's scheduled appropriately and it's all organized really well and it has a very nice brand to it. The other side is they're really, really data heavy and they're like the only way we're going to send an email is if it hits this data point and they're very strict on that. We try to blend those.

Jon Blair (38:55)

Mm.

Chris Pearson (39:20)

So something that we've come across with at least the last couple of brands in the market we're in now, at the time of the recording, is the market shifting based on politics, based on the news, based on something happening overseas, whatever it may be. The market shifts and we want the customers to tell us what they want. And we also want to deliver that to them. So a principle we typically follow is don't listen to what they say, look at what they do. Because the customer will say, I don't want any more emails. Yet they open the next dozen emails and they buy something. And so it's like,

Jon Blair (39:48)

Yeah.

Chris Pearson (39:50)

Okay, you told me don't want any more, but you're opening and engaging in buying, so it's like, don't listen to what they say, watch what they do. And that's where we take the data piece and we say, cool, this product for a second, third, or maybe fourth purchase, the repeat purchase ranges between 40 and 50 days. Cool, we're gonna drop a flow email saying, hey, you should restock five days before that range, the middle of that range, and after that range, so you can get a repeat purchase. So we're taking that data and we're combining it with the relationship on the brand side.

And I don't think brands are connecting those two things either lean heavily into brand or heavily in the data. And when you mix those things, you have a relationship. The relationship gets stronger because you're listening and watching what the customer's doing and you're actually delivering on what they actually want. So we fill that gap in our attention. The customer journey is relatively the same in D2CE Ecom. If you have a repeat purchase product, it's a 20 to roughly 60 day repeat purchase. If you have something that's longer, maybe if you have something shorter, okay, great.

but there's a cycle, there's a life cycle if you will, that's kind of a common term, retention is life cycle marketing. But that's the gap we typically fill is we take that relationship, we tie it to data and we give the customer a unique experience.

Jon Blair (40:57)

I love that. love that. Well, unfortunately, we're going to have to land the plane here. Although this was a fantastic conversation. Before we do land the plane, I just want to kind of draw out a summary for everyone. So look, what we talked about a lot here today is that acquisition and retention are the front end and back end of a very important profitable scaling system, right? You have too much of one and not enough of the other.

Chris Pearson (41:03)

Yeah.

Jon Blair (41:25)

you will run into issues at some point. Exactly what issues, I can't say at what size, I can't say, but it will happen. Having healthy acquisition economics and repeat purchase and retention economics together, those are the one, punch of profitable scaling. so just make sure that you are, when you're thinking about what channels you're in, when you're thinking about what...

products to release when you're thinking about where to spend the next dollar in advertising or what agency to bring on. You should be asking yourselves, how is this going to enhance and improve my acquisition strategy and economics and my retention strategy and economics? have to have, you have to have a strong system in both of those areas. so before we end here, Chris, I always like to end with a, I always like to ask a personal question. So what's a fun or little known fact about

that people might find shocking or surprising.

Chris Pearson (42:24)

shocking or surprising. A buddy and a buddy and I are currently working to qualify for men's to sand volleyball for the professional toolkit. Yeah. So I was an athlete in the past life. He and I are working towards that this summer to try and qualify for a tournament. And that's essentially pro volleyball on sand. So that's something that we're working toward. I don't know if we'll make it, but we'll find out.

Jon Blair (42:33)

nice.

Heck yeah.

That's awesome,

man. I always love the reason I asked this question is because I always love hearing about like personal endeavors. Um, at the end of the day, you know, we're not, you know, I'm not the founder of a, of a fractional CFO firm. I'm former heavy metal musician, a husband, a dad, you know, all those things. We're all people, right? So it's always fun to hear about.

Chris Pearson (43:09)

Yep.

Jon Blair (43:13)

what people are working on outside of work, because work is just a part of our life, it's not our whole life. So where can people find more information about you and Three Beacon Marketing?

Chris Pearson (43:18)

Yep, agreed.

Yeah, if they want to check us threebeaconmarketing.com, just go there. And then pretty much anywhere on the site, if you guys want to book a call, you can find that link there and just click a button to book a call. If you do, you'll be speaking with me directly. I'm the founder led sales team. So it's myself, Aaron. Yep. Yep. Aaron's on the fulfillment side. He's the organized one. He loves spreadsheets and he puts everything in order. So I create relationships like an acre of people.

Jon Blair (43:41)

Same, that's me, man. That's founder of Led Sales team right here.

Perfect. That's my co-founder, Jeff. Like, gotta have the yin and yang. If I was running all of our service delivery, you don't want that. I'm the relationship guy. Although Jeff is fantastic at that as well, but he is the organized one out of the two of us. So I love that man. Well, look, this was a fantastic conversation. If anything that Chris said, you found interesting, I highly recommend reaching out to him.

Yep. Yep.

probably a BMS, a BMS.

Yep.

Jon Blair (44:17)

Don't forget that if you want more helpful tips on scaling your profit-focused DTC brand, consider giving me, Jon Blair, a follow 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 flows you scale, check us out at FreetoGrowCFO.com. And until next time, scale on. Thanks for joining, Chris.

Chris Pearson (44:42)

Thanks.

How to Fast Track Profitable Product Launches

Episode Summary

In this episode of the Free to Grow CFO podcast, Jon Blair and Clay Banks discuss the essential strategies for successfully launching a new product in the e-commerce space. They emphasize the importance of customer discovery, the process of moving from concept to prototype, and the critical steps involved in sourcing and setting up a supply chain. The conversation also covers best practices for launching a product effectively, overcoming financial constraints, and the significance of maintaining strong relationships with customers and suppliers. Clay shares valuable insights from his extensive experience in product development and entrepreneurship, providing listeners with actionable advice to minimize risk and maximize success in their product launches.

Key Takeaways

• Customer discovery is crucial and should never stop.

• Always aim to reduce risk before making capital investments.

• Ensure every new product is designed for profitability upfront (not just market fit).

• Continue learning by answering support emails and gathering real user feedback.

Episode Links

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

Clay Bank- https://www.linkedin.com/in/claybanks/

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

InPaceLine - https://www.inpaceline.com/

GloriLight - https://glorilight.com/

Meet Clay Banks

Clay Banks is a seasoned entrepreneur and growth strategist with a proven track record of bringing ideas to market and scaling them to success. Over 23 years, he has co-founded or led eight companies, raising more than $7 million in seed and venture capital. Specializing in go-to-market strategy, Clay has successfully launched over 23 hardware and software products, driving their adoption across direct-to-consumer and B2B channels.

In 2022, Clay achieved a successful exit, selling his equity position in HavenLock—best known for its appearance on ABC’s Shark Tank and features in Forbes, TechCrunch, and Entrepreneur—to a venture capital firm. Today, Clay focuses on advising and investing in early-stage startups and short-term rental properties, leveraging his expertise to help founders navigate growth and achieve market fit.

Passionate about enabling visionary entrepreneurs, Clay offers mentorship and consulting in growth strategies, eCommerce scaling, and operational excellence. Outside of business, he’s a five-time Ironman, published author, and dedicated advocate for turning big visions into impactful results.

Transcript

~~~

00:00 Introduction to Product Launch Strategies

06:48 The Importance of Customer Discovery

17:05 From Concept to Prototype

23:47 Transitioning to Sourcing and Supply Chain Management

28:50 Building Relationships with Manufacturers

37:24 Launching Like a Pro

45:49 Overcoming Financial Constraints

52:22 Key Takeaways and Final Thoughts

Jon Blair (00:00)

Alright, 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 are the go-to outsource finance and accounting firm for eight and nine-figure DTC brands and today I'm here again with my good buddy, Clay Banks. Clay, what's happening, man?

Clay Banks (00:26)

What's up Jon, glad to be back on the show with you. Happy New Year!

Jon Blair (00:29)

Yeah, happy new year. think we were talking... I think we talked on Cyber Monday. I remember that distinctly, last time. And you were, you were chatting... You, you mentioned...

Clay Banks (00:39)

Yeah, probably the craziest time of the year for an e-commerce brand to step out and do a podcast. But we had everything kind of planned and everything was working pretty smoothly, so it worked out for us.

Jon Blair (00:51)

Yeah, so for those of you who haven't heard that episode with Clay, it's a few weeks back. I highly recommend going and checking it out. A lot of really great meaty conversation. Clay has a really extensive entrepreneurial background and definitely in the e-commerce world. Most recently, he's the founder of an e-commerce brand called GloriLight and he also runs a consultancy called InPaceLine. You know, if you want a more comprehensive background on Clay, I highly recommend going back and checking out that episode.

But I wanted to bring them back because what we didn't get into that episode, we kind of touched on a few times, but Clay has a really extensive background in his new product launch. And so today's topic is we're gonna talk about how to fast track your first product launch, going from idea to market. And this is super, super important because we see time and time again at Free to Grow CFO, we get asked all the time, like, hey, can I launch this product? And here's the thing, you as a founder, I would say 95% of the founders we work with, they're very heavily product oriented. They're super excited about the problem that they're solving in the marketplace with their product. And so with that comes what? Comes the propensity to launch too many products or to just always be excited and always be thinking of product ideas. And the reality is, is there a place for new product launches in scaling an e-com brand? Of course there is, but there's also a great danger in doing it the wrong way and not having a framework to use. And Clay is hands down the most knowledgeable guy I know, especially in the e-commerce world when it comes to thinking about new product launches. So really quick, Clay, before we get into the meat of this, why don't you just run the audience through briefly your background as it relates to launching new products.

Clay Banks (02:43)

Yeah, Jon, glad to be on with you again today. Launching products and building things that don't exist is a big passion for mine. I've been starting...

Mostly physical good product companies ever since I was 20 years old in college. That was 24 years ago I've taken I'm guessing probably 30 different products to market all in the everything from consumer electronics to food products to my first I kind of show some of them for it because I'm like a show-and-tell kind of guy When I was in college, we published this book called A Vols Walk

Jon Blair (03:18)

Heck yeah. Heck yeah.

Clay Banks (03:24)

This was when Amazon was just a bookstore. So put yourself back into 2002 and and the nuances of selling a book that had you know, the power tea on the book and the color orange collegiate licensing from Selling it into Borders Books, Barnes and Noble, Books-A-Million and in learning about working with other my co-founders in that business and and ultimately a

Jon Blair (03:28)

Yep.

Clay Banks (03:54)

less than learned about margin in that one but probably most famous for building a company starting a company called Haven Lock. We and my business partner and I invented and patented a home security lock that could detect and prevent home break-ins. It would alert you through an accelerometer back to a to a mobile phone through an app or to your Google Nest or to your Alexa.

And ultimately that product had other peripherals that went with it such as fobs and internet gateways that had to connect to it wirelessly. That whole company kind of spun out and created a product that we sold into schools and churches to prevent active shooters from getting into classrooms which had its own set of peripherals and own set of wireless protocols. Through that company we created this battery. It's a 20,000 milliamp rechargeable battery to run things like lights or small electronics or charge things like your phone or something like that. We sold these on Amazon, our website, big on QVC. We sold a bunch of these on QVC.

Jon Blair (05:15)

Mm-hmm.

Clay Banks (05:18)

Right now I'm running a company called GloriLight. It's a kids nightlight that projects Bible verses on the ceiling. So we kind of use this as an example of everything we want to talk about today and kind of how to get a product idea to market as fast, as cheap and as efficiently as possible so that you don't build something that no one will buy or you build something that is broken from the first place. So I'm going to be using GloriLight as an example throughout most of the concepts and strategies that we're going to be talking about today.

Jon Blair (05:50)

Yeah.

Yeah, and actually another layer that I want to add to like why this episode is so important. Why can product development failures be so costly to a business? Think about it. Product development is one of those functions in a business that requires resources and collaboration with every single function in the business. You have to collaborate with accounting and finance. You have to, they're involved in sourcing and, you know, replenishment planning and product design and marketing, sales channel selection, right? All of these different things. And here's the thing, if you design the wrong product at the wrong time, you may be designing in, right, the failure financially of that product. like when we as CFOs talk about unit economics and margins, or you talk about the ability to scale advertising, so much of that is designed into the product upfront. And so you actually have to consider, you don't just have to consider the technical engineering aspects of getting a product made. You have to consider every single piece of the business and design accordingly.

Right. And so there is a lot at stake and it's also the reason why it's so easy to do wrong. Right. And so with that being said, let's chat first about kind of stage one as you've laid it out for us as like concept to prototype.

Clay Banks (07:33)

Yeah, and you bring up a good point. If you're an established business with all of these different teammates, so you talked about marketing and accounting and whatnot, right? If you're launching a new product or a service on top of what you're currently doing, then it could be a distraction, right? But it can also be a big opportunity for new growth. If you're a first-time founder and this is your first product or service, you're kind of wearing all the hats.

Right? You are the marketing guy. You are the accounting guy. You are the designer. You are the product dev guy. You are the salesperson. So when we think about this, I'm trying to limit the impact on that one founder to get to market as fast and as cheaply as possible. And same thing for a bigger business that might have more people on the team. And they're all common struggles, whether you're a one man band trying to launch a brand or you're an established brand trying to add on or create something of value to your existing customer base. And really the concepts and the things that we're talking about today are gonna correlate to both. ultimately we're gonna be taking and talking about how we turn an idea into a tangible product or service. Okay, and kind of the steps that we go through and and Yeah, we'll kind of dive in Jon, when talking about GloriLight okay, it's this brand here I'm going to use this one as the example for most everything today. I at the point of launching this one in 2022 a friend of mine who I knew and had an existing relationship for over a decade kind of came to me with the idea. It was not my idea. And his basic concept was, hey, how could we put Bible verses into a kid's nightlight so that it shines a Bible verse on the ceiling? And when I'm thinking about this, before I even start to consider if I'm gonna put my time and resources into something, I'm first gonna go to do customer discovery. Okay? And for sake of this call and this podcast today, we don't have time to do customer discovery.

However, it's so important that it starts with customer discovery and maybe that's a different call that we do later. I have an entrepreneur community and I coach a lot of people on customer discovery and it's super important that before you ever even think about spending an hour or time or resource, dollar resource to a product idea, it starts with customer discovery. Yep.

Jon Blair (10:34)

Can I add something really quick?

when I first, I got an accounting degree, but I never went big four. I worked for an entrepreneur day one who designed and brought to market consumer electronics products that he saw like some sort of white space in the market, right? And he told me, he told me when I was 20 years old working for him in my last year of getting a business degree, he's like, Jon, I don't care what you do. I don't care what space you're in.

always do your marketing homework first. Always. Always, always, always. And if the marketing homework doesn't pan out, don't spend any more time on it.

Clay Banks (11:16)

Yeah, and another good thing to think about exactly on top of what you're saying, don't get so deeply emotionally connected and involved and ignore the real numbers and the real signs coming from that customer discovery. Because sometimes we can have this sense of passion and ownership once we start talking about something to our customers or perceived customers that we put these blinders on

Jon Blair (11:44)

for

Clay Banks (11:45)

and that can easily derail you into the value or the superpower that you're creating. I always tell founders this, and it's a goal that I try to live by when I'm thinking about building a product, starting a product, or iterating on a product, the 10:1 ratio. So I'm gonna spend 10:1 of my time doing customer discovery interaction.

And like I said, we don't have enough time to go through all the customer discovery stuff today and what types of questions, how to get to pricing, how to get to the real value prop of what you're trying to get. But 10 to 1. So if you're spending 10 hours doing customer discovery, then you can spend one hour on actually building and engineering and designing and crafting that product or service. So if you spend 10... Yeah.

Jon Blair (12:40)

That's a really easy kind of like rule of thumb to use and I will say to further elaborate on what you're saying like the trap Psychologically is like I think it's called a confirmation bias right that like if you do everything in a bubble like like let's say I go do my own research just online and I'm not I'm not soliciting the perspective of a customer or potential customer I can just go research my way through confirmation bias to confirm my initial assumptions and hypotheses are correct, right? Whereas when you get out there and you go talk to a third party and most importantly, someone who is a potential customer, you can still trick yourself, right? Into thinking that you're right through, you know, something like a confirmation bias, but at least you're, if you're doing what Clay is talking about, 10 to one.

Clay Banks (13:29)

Thank

Jon Blair (13:38)

10 to one, you are spending 10 times as much time getting third party perspective to hopefully fill in the blind spots that you have, right?

Clay Banks (13:49)

Yeah, and definitely put that perspective, so you're out there talking to customers and.

This is kind of leading us more toward a customer discovery exercise But if if if they're giving you good feedback and you're nodding and you're agreeing and they're listening and they're agreeing with you that that's sometimes a good sign, but really are they pulling out a credit card to buy it? Are they are they anxious to pre-order it? Those are the types of things you want to try to get told and if you're not ready for that pre-order state Or you're not ready for that transaction state then at minimum

Jon Blair (14:11)

Mm.

Clay Banks (14:24)

Ask for an email address or some way to follow back up because if they're willing to give you their email address and they don't know you then the likelihood of what you were talking about building with them resonated enough to say I'm willing to stay connected to learn more. And that's usually your first launching base to when you do launch your product. So when we were building HavenLock.

We literally started with a wooden prototype and then we moved took a foam prototype and then we hired a CAD designer and this is all kind of way before AI and stuff but we we started taking pictures on our phone of the CAD designs and when I was standing in line at a coffee shops or waiting on a meeting or whatever I would just spark up conversation like hey, we're trying to solve home break-ins happens every 13 seconds in America we're creating this product that does this and I'll show it to him on my phone and I'd start asking them questions. But I would always try to end that quick conversation with, do you mind if I grab your email address? Because when we launched on Kickstarter,

After doing that customer discovery stuff for about nine months, we had a good sized list to let those people know to go back us and fund the Kickstarter campaign. We did like $116,000 in 30 days. The bulk, like 70 of it came in the first day. So all that kind of led up to having a sounding board to launch.

Jon Blair (15:55)

Wow.

Clay Banks (16:04)

the product, right? When we're talking about...

Creating a product or idea we want to have a clear problem and a clear solution to that problem unless it's like a food product and you're trying to solve like a savory or a a delicacy type of thing But usually 99 % of the time a customer has a problem and you have a product or service that solves it, right?

Jon Blair (16:26)

Sure.

So really quick, just to kind of summarize a little bit of this, we're talking about going from concept, idea, to a prototype. Be as early prototypes, quote, right? They can be as simple as sketches, mock-ups, something very simple and cheap and something that you can probably iterate on really, really quickly and just get it in front of people and start gauging feedback and reactions and all of that before you go on to physical prototypes unless for some reason you need one, right?

Clay Banks (17:11)

For sure, absolutely. Start, I mean, now with AI, there's all these image generators that you can create to get to concepting faster. Stuff in Canva that you can kind of design and layout. We actually, back when we started HavenLock, we had to hire a CAD engineer right and and the the rapidness of what AI has brought and the cheapness at scale you can start to really get some really good ideas in a visual state that you can start to do your customer discovery with and for sure sketches and mock-ups for is always the starting point don't actually go to a physical state yet or do what we did and go to Home Depot and buy some wood and carve it out or some foam. We got the foam at like a JoAnn Fabrics or something like that. I coach a lot of high school entrepreneurs and I'm like go to hobby lobby.

Jon Blair (18:02)

Mm-hmm.

Clay Banks (18:16)

and just, they don't have any money, right? I'm not asking them to go buy this stuff. But this is an exercise that I take them through. Go to Hobby Lobby and list out the items that how you would build your prototype. There should be enough things inside of Hobby Lobby only to be able to pretty much get some sort of concept idea built, right?

Jon Blair (18:38)

I love that.

Build out the concept so that you can demonstrate, so you can have conversations about it, right? Do it as quickly as you can and iterate quickly. What, do you have any other advice on iterating quickly and being efficient or even effective with your iteration?

Clay Banks (18:57)

Yeah, so.

Absolutely, you want to get that first that wooden that raw prototype out into the hands as many people as possible remembering the 10 to 1 ratio right and And you're going through that customer discovery asking them certain questions. They're giving you certain feedback You're also gauging and trying to get qualitative and quantitative data that can help you guide the next iteration of that prototype and ultimately whether you're getting all the way to a final finished good in production, it's multiple iterations as fast as possible and as cheap as possible so that when you do take it to a manufacturing state and you're actually having to buy tooling and molds and jigs and stuff like that, when you go to put that type of capital upfront, you know your customer is aligned. You have a higher degree of confidence that they're willing to buy it. You know the price point and all of your pricing strategies already worked out at that point before you go make that capital investment in tooling and equipment.

Jon Blair (20:05)

Okay, so really quick, I want to point something out here because I've been having a lot of conversations about this recently and actually had one on the episode I recorded right before this. This actually, what you're talking through is, I would say in my opinion, it is universal sound investment strategy and let me give you let me take that a step further to make it a little more tangible. I have some I'm also a real estate investor and I also have one client that I coach there we're not fractional CFOs for them I'm an EOS coach for them and they're one of the biggest ground up multi-family real estate developers in Texas very sound investors and they always talk about what's the next amount of capital we have to go hard on when that means like what money are you putting down for the next stage? Like when they get a property under contract to just do diligence, they're trying to put the least amount of money down to get it under contract and give themselves as much of a diligence window to spend as much time doing diligence before they have to go hard on additional earnest money because they're taking the next step on that investment, right? This is actually no different than that. It's just in the investing in a new product. What you're saying is, generally speaking, when it comes to investment strategy in new products, let's not, let's be careful, let's be sound and strategic about how much capital we're committing to, right, before we go on to the next stage. And here is the series of actions that we want to take before committing more capital so that we have removed risk.

Right? We've removed risk and we've given ourselves some sense of additional probability of success. Would you agree?

Clay Banks (22:00)

A thousand percent. That's a great analogy. In most cases, if you're a first time starting a service or product, you don't have a ton of cash resources in most cases, right? So you're having to go raise money from some sort of outside investor or outside source. And the more data that you have from doing this due diligence, this period of due diligence, the better. And the more from a third party, public facing due diligence source it is, the better. I get that a Kickstarter campaign may not be the right avenue for every product or service. It's very male dominant blah blah blah. However you can go create online communities. I've got a guy that I coach created an online Facebook group and now has over 700 beta users into a service that he's built.

Okay, started from a Facebook group. Okay, you can do this through a Reddit thread. I had this initiative and this strategy I call Rent the Room. go through the exercise of renting a room in your community. like at some sort of like, it could be a restaurant, it could be just like a country club room or any kind of open space that you have to rent it. And you have to get warm bodies in the room that are one degree of separation from you. Okay? And you have to have at least coffee and water there. And you have to be talking about your product or service. So that's a hard exercise for people to go through but it makes you go through getting out there and filling a room with bodies.

Okay, and you can do that in a virtual state too. Maybe it's a webinar, right? I get that everybody may not live in a space or your customer may not live in your community, but in a virtual way, host a webinar to try to get that feedback and do that due diligence. And then when you go out to raise money or you go to put your capital at risk on the tooling and the next phases of development, you're making a more educated decision on that allocation of capital and that risk.

Jon Blair (24:21)

So if you, okay, let's now talk about like, how do you know it's time to start sourcing and set up a supply chain? You've gone through concept to prototype. How do know it's time and what do you start doing?

Clay Banks (24:38)

Okay, so I'm first gonna look at what's the minimum path of resistance to get a, what we call MVP, minimum viable product in the hands of my customers that they're willing to make a transaction for. Okay, and I've got to put aside my long-term big grand vision for what I think is the real key core value of my product right away. So with GloriLight, for example, my big grand vision is an app enabled communication tool for parents to teach their kids the word of God. And we send Bible verses and Bible characters to the light via Bluetooth and have a community around helping parents guide their kids spiritually. That's my long-term vision. That's a lot to build. I got an app, I got to write hardware, firmware, software, right? All that takes a lot of time and lot of resources. But how do I just build a light that takes these disks and I insert them into the light, right? Like what's the minimum viable product that I can offer and get to market as fast as possible?

Okay. That people actually really, yeah, almost broke a million in sales last year in our first full year of business. I'm coaching this entrepreneur. She's created a date rate drug testing kit, right? It's on a key chain. It's called Spiky, spikyfirst.com. She...

Jon Blair (25:56)

that people vote for with their dollars. That's what they actually, they'll purchase.

Clay Banks (26:17)

She has a big vision for this product, right? But for now, all she has done is gone out to Alibaba and bought simple key chains that she could put the test strips in. Okay, the packaging's not ideal, it's not perfect, but she's taking transactions. And by the way, she's a high school student.

Jon Blair (26:38)

I love it. When I always say people are voting with their dollars, that's the ultimate vote you want to get on your MVP, right? It's not just a verbal, yeah, I would buy that, that they voted yes for your product with their dollars.

Clay Banks (26:52)

And what we want to get to is understanding the outcome that that yes brings them.

Jon Blair (27:00)

Mm, yes.

Clay Banks (27:05)

when you buy a, let's call a smartwatch for example, right? I'm not buying, yes, I am buying it for all the features and benefits that it has, right? It's got GPS, it's got altimeters, it's got all this cool bells and whistles, but I am buying it because it is helping shape my physical future self.

It's helping me be a better athlete. It's helping me be a better performer. And the sense of pride, the sense of self-worth, the sense of confidence that that brings is the outcome.

And that's what I'm trying to coach people on is let's separate benefits and features from outcomes, right? And we start to say, what do we need to build to get the best outcome for our customer?

Jon Blair (28:03)

Yep, I love that. love that. So as you start transitioning into sourcing and building a supply chain, besides taking your MVP, your minimum viable product into that, What are some of the best practices around sourcing, setting up the supply chain? It's a big task. So what advice do you have there?

Clay Banks (28:28)

So let's go ahead and assume you've done a lot of customer discovery and you have proof of product market fit and some social proof. That's when we're ready to start getting quotes and estimates from manufacturers, whether they're domestic or abroad. If it's a domestic supplier and you're wanting to be made in America or your brand ethos has something to do with locally sourced type of products. For the manufacturers or the producers or the aggregators of those types of products here in America, they're gonna wanna have some confidence that you're worth dealing with. You're worth their time, right? And if you go to them prior to doing this customer discovery stuff that we're talking about, you come across as not yet ready for them to put time and energy into it. And I can tell you, building a product in America takes a lot of time and energy, whether you're contracting them out or not, whether you have the resources to pay them or not, for them to take you seriously, there needs to be some sort of third party validation of product market fit. Especially in America, not so much overseas. When we were doing HavenLock, we had data that we could present to different manufacturers on our Kickstarter campaign, we were starting to raise some capital. We had been featured in a lot of press publications, Forbes, CNET, TechCrunch, all these other types of publications, So when we went to a Berkshire Hathaway-owned subsidiary and said, this is what we're looking to have you contract manufacturer, they took us seriously. And we stayed engaged with them for...

well over more than a year, if not two years, keeping them apprised of our prototyping process. They weren't prototypers, okay, they were manufacturers, right? So when we get through the final prototyping stages, we have built a relationship with them over a couple of years that had built confidence and rapport so that they could really help us bring, go from a prototyping stage to a...designed for manufacturing and then ultimately designed for test phase, right? If you're sourcing overseas, not so much. Most, you go to China, any Asian, Vietnam type of countries, looking to buy something, they're gonna sell you whatever you spec them, okay? So your specs.

Jon Blair (31:14)

Yeah, even if it's the wrong, even if your specs are wrong or, or I mean, I'm sure we saw this all the time at Guardian Bikes, because at the time that I was there, we were making our bikes in China. Having to, not that this challenge doesn't exist with US manufacturers, because it definitely does, but the extra level of care that you have to put into making sure that they are actually making the spec that you have provided to them.

is a huge, huge challenge with dealing with, specifically, factories in China.

Clay Banks (31:49)

Specifically China there they don't have the I'm gonna call it just for lack of a better term They're not gonna push back on you the cut their customer on the spec they're gonna assume you've already dialed in your spec to a thousand percent accuracy and Then they're they're just gonna make it if once you get past, you know the terms and the payment and and all that stuff

They're just gonna make it. A US manufacturer that you've built rapport with and have a relationship with, they're gonna say, this spec or this specific piece of the spec in your best interest? And they're gonna contest you, which is good. You want that, right? As a founder, they may be looking at something from a different perspective that you don't know you know or you need to know.

They're just the nature of Americans. They're gonna be more, I'll call it friendly facing in a way that says, hey, before we go spend time here, are we sure we want this design this way? Or would it be, are there better options or there alternatives to this? Because downstream it's gonna cause this other problem, right? That's a big thing, right? You may design something in on CAD, it looks great and it works and functions great, but actually when it comes time to assembly,

Human being can't do it or it's very very labor consuming so like we built a product with HavenLock and it had nylon straps woven through steel a steel base plate and Delrin which is this thermoplastic that was flexible and we sewed it together with nylon. All right in CAD it worked great

Jon Blair (33:38)

Yeah.

Clay Banks (33:39)

on the production floor and on the assembly line, it was very difficult and we had to train people on how to do that and we had to buy a really expensive sewing machine. Like who would have thought you would have had to buy a sewing machine, right? And...

Those are just things that come up in the complexities of manufacturing. What I like to do first is, is there a white label opportunity for me to get close to what I wanna build? So I'm now, I'm probably more, there's more ways to go about white labeling than just putting your logo on another product, right?

I look for first, before I go out and build the big dream, how do I find the real core value in something? And if I'm testing my brand in the market and trying to get more product market fit and proof of transactions, I really look at is there a white labeling opportunity, somebody making something similar.

Or can I combine two or three things that are already being manufactured for a different use case? And that's kind of how you leverage the next step before you go out and custom build something that requires a lot of tooling and a lot of capital expenditure.

Jon Blair (34:54)

Totally.

Yeah, man. mean, dude, this, it takes my mind back to that like real estate investing example, right? Which is like there's multiple stages in a real estate deal. What's the minimum amount of capital that you can invest to get to the next stage? But what's the reason you want to get to the next stage? You want to learn a new set of, you want a new set of learnings. And what is the point of that new set of learnings? It's the reduction of risk before you put down the next piece of capital. And so when you're talking about like white labeling, it's like, hey, for very little capital outlay, can I test selling this product that exists that gets the point across, right? Allows me to learn and confirm that, yeah, I think that I have removed a layer of risk and I'm willing to fork out the next dollars to make my own version of this, right? And so all of this is thinking about creative ways

Look, like the complete opposite of this is to go, hey, I've got this product in my head, it's got all the bells and whistles, I'm just gonna make it, I'm gonna order 10,000 of them, I'm gonna bring them in the US, and then we're gonna try to sell them. And it's like, you either kill it, totally flop, or somewhere in the middle, right? And you learn all those, you end up having to learn all those hard learnings anyways, right? Just in a, but you've quite possibly outlaid a lot of time, capital.

an actual physical like monetary capital, right? And so, everything that Clay's going through is just like little tidbits of wisdom that he's, you know, accumulated over the years of like, how do we learn the next set of learnings with the minimum amount of capital outlay to reduce risk before we outlay the next amount of capital on launching a new product? So, if you've got the initial sourcing done, an initial, least initial supply chain set up, and you're ready to launch, what are the best practices that brands need to be thinking about when they're getting ready to launch or what you say is launching like a pro?

Clay Banks (37:24)

So, but as we lead into thinking about how we launch or actually deliver the product or the service for a transaction, we want to make sure that we understand our build of materials, right? The list of items that go into manufacturing that product, right? That list can be two or three items, or it could be with Haven Locks, thousands of items.

and understanding the lead times per each item. And I'll make a simple example. If you're making a cake, you've got to have eggs, sugar, and flour, right? But if it takes you a week to get flour and two weeks to get sugar, but it takes you six weeks to get eggs, you've got to work backwards from that longest lead time, right? In Haven Lock's case, we had a 52-week lead time. It was miserable.

Jon Blair (38:20)

Man, we had that at one point

at Guardian.

Clay Banks (38:23)

It had to do with we were we had to buy Bluetooth chips and you guys probably remember in the news when when all the automotive companies and everybody using Bluetooth couldn't get Bluetooth chips Well you as a cash flow exercise In some cases you have to put out that cash to be able to buy that item So you have to go and say in six weeks. I got a I got to have eggs at my facility So I'm gonna buy the eggs now

Jon Blair (38:52)

sure.

Clay Banks (38:53)

Right

and then now the clock is ticking on that capital right cost time money It's capital boom boom boom right you can be doing something else with that cash, so You've got to really get good at negotiating those longer lead items where you your payment terms are in it more in your favor to help that cash cycle Okay, so you got to really have what I call a costed BOM of a build a BOM is build a materials every single item that goes into your product that's boxing that's charging cables that's plastic baggies that's late that stickers labels printed inserts everything right you you list all that out and what does it cost per piece okay that's ultimately later on how we will

Find efficiencies in scale is on a per piece line basis Do we know another printer or can we go find another printer to make the printed insert because we're now doing it at scale And we're charging a dollar a piece now, but we can get it down to 72 cents Whatever right so we want that costed BOM and that costed BOM is a living breathing document every It has your timelines with it. Okay your timelines are

Jon Blair (40:05)

for sure.

Clay Banks (40:17)

How long does it take if we place an order today? How long is it going to take to get it and? Then on top of that you got it You need to know what the payment terms are and what the MOQs are minimum order quantities

Okay, so keep all that in a spreadsheet. There's a few other things that are tracked in that BOM outside of time and Things like tariffs and duties and stuff like that all have to be accounted for if you're gonna be importing But let's just say you're now you have a product that I would like to say is not your foot your full dream product, but it's you're more than halfway there and you're ready to put that product in the hands of customers. over the period of time, however long it took you, whether it was in GloriLight's case, less than 90 days, in Haven Lock's case, it was almost five years. So we had connection points of collecting email addresses of every person that we'd interact with, whether that was on our website or in person, to launch our Kickstarter campaign.

Like I said, not everybody has a Kickstarter campaign. It has a Kickstarter type of process to launch it, but you want to be building your what we call owned media list so that you do have a established base to be able to put that out to, right? And owned media comes in the form of your Instagram, Facebook, YouTube, TikTok account followers, your email list, your SMS subscriber lists, or do you have a launch partner?

somebody that already has an established customer base that is willing to maybe put out your product to their customer base in the form of some sort of commission or some sort of

Jon Blair (42:01)

Mmm.

Clay Banks (42:10)

joint venture. If you don't have a sounding board, your customer acquisition costs are going to go up much higher because you don't yet have an established brand. You've got to go find new ways to establish your customer acquisition strategy. So a lot of times founders will go, I'll just start running Google ads and Facebook ads and I'll put it on Amazon. Okay, yes, that's definitely doable. Don't get me wrong. It takes a lot of time and training those algorithms to be able to start working in your favor and build some credibility and social proof on those those types of platforms. So what I try to do is find some sort of affiliate network or build an affiliate network before I launch a product so that that can get those engines started where I don't have to go out and necessarily acquire every customer.

Jon Blair (43:06)

Yeah, that's interesting. It's sort of akin, I think in my mind, it's akin to the idea of using a white label product first, right? To test product market fit and get people to buy before creating your own. When you're talking about launching with partners, whether they're affiliates or otherwise, you're selling through their established network and social proof and following and whatnot. And you may layer on your own you know, over time through your own, you know, meta and Google and, you know, top of funnel paid advertising. like, again, launching through someone else's following or platform can minimize the capital investment to get that first round of learnings, right? And again, it's all in the name of learning to reduce risk before the next capital outlay, right?

Clay Banks (44:04)

and you might be an established business, I've got a client right now, we're building, I'm not gonna go into exactly what we're building, but it's a new, better version of something he already sells and distributes, but he's buying it from another party. Okay, so he already has a customer base, he already sells about three to 500 units of these a month.

Jon Blair (44:18)

Hmm.

Clay Banks (44:26)

He already knows the buyer and has the relationship with the buyer and he is going to build something better than what he's currently selling to that buyer. He's already got that customer base established. Now we're now looking at what other channels are out there to sell besides going to that one buyer.

Jon Blair (44:50)

Got it. Yep.

Clay Banks (44:50)

So you

might be a bigger business and already have a customer base and that's why you see big companies get bigger faster. They have access to a customer base. If you're building a customer base from the start, you've got to find creative ways to leverage other brands or other affiliates or other influencers or whatever that already have access to potential customers in your core demographic.

Jon Blair (45:20)

So as post-launch, you know, we, kind of preparing for this episode, you outlined some common hurdles to overcome. What are those and what are some, like what's some of the advice? We can start with like financial constraints is one that you outlined. What are some typical financial constraints that you see during launching a new product and what are some thoughts around how to overcome them?

Clay Banks (45:48)

My biggest thing over my 20-something years is thinking I was hiring the right engineering talent when and after spending a lot of money a lot of time found out they didn't have the expertise or They didn't know the next step of the game, right? So I might have hired like a firmware developer or embedded developer, but

Jon Blair (45:59)

Mm-hmm.

Clay Banks (46:17)

They didn't know how to get that design that they created into a circuit board manufacturing protocol process that included, you know, bed of nails testing and all this other stuff, right? And you gotta kinda look at yourself and go, okay, what is that I don't know, don't know? And...surround you and the people that you're hiring with with other competitive or other types of, I don't know, competitions, not that right word. So like in this case, if I'm hiring and working with an embedded developer on the design of a circuit board, go ahead and bring in who you think is gonna be the manufacturer into the meetings and the conversations because the two of them will figure out each other's problems or deficiencies or gaps or something that might have been missed. A lot of times we take where I've made the most mistakes, I would hire an engineer to do something, something that I couldn't do. I'm not an engineer. And they would give it back to me.

Jon Blair (47:15)

Yeah, that's interesting. That's interesting.

Clay Banks (47:31)

And I would think it's perfect. Whether it's in CAD or it's actually, they prototype something and I would take it to the manufacturer and the manufacturer would go, you're nowhere near ready, I'm like, wait a minute, we just spent hundreds of thousands of dollars in engineering. I've got a prototype that shows that it works. And then they're like, yeah, but there's no injection molding designs for these pieces, the radiuses and the molds aren't called out. And you're like, whoa, whoa, whoa, I didn't know that needed to be done. And what I'm saying is try to put all the pieces together in a way that they each hold each other accountable for the next step. if we put this into, let's just call it a sports term, right?

Jon Blair (48:06)

for

Clay Banks (48:25)

Like running around a track passing a baton, right? I need to know that batons gonna be coming and where I say it's gonna be put right you guess I know we're gonna be listening to this but like if I'm taking if I start to take off running and I put my arm back that baton needs to go right in that

Jon Blair (48:34)

for Yep.

Clay Banks (48:43)

hand right and that is the exact same way manufacturing is done and if someone drops the baton or it doesn't show up on time or doesn't do something then the next person putting the leg of the relay together is not going to be able to do their job

Jon Blair (48:44)

for

Yeah, well, so there's another thing that comes to mind here, another way to illustrate this point. A lot of brands that are doing, you know, 10, 20 million in revenue that we work with that are launching new products, the real savvy ones know that they need to create a cross-functional NPI team, new product introduction team. And so they'll get someone from marketing, someone from ops and supply chain, someone from finance and anywhere else they need a pull, maybe manufacture, you know, there's usually the manufacturers and they'll bring them together on a cross-functional team that meets regularly from the very beginning of the process. And it's because, you know, there may be, you're talking about the interchange between or the handoff between engineering and manufacturing, which seen that multiple times, we had to bring our engineer to China with us one time to meet with the factory because they both saw like, oh no, you can't do that. That's not a steel safe mold change, right? Like all kinds of different things, right? But the other thing is there's other functions involved as well. Like hold on a second, I can't sell that through our 3PL because they have constraints on packaging size, right? Or hold on a second, the finance guys, like hold on a second, we can't do that because of this. And the point I'm making, going back to the very beginning of the episode, we're like, what's at stake?

If you're, whether you're like Clay said, a one man show, getting a product off the ground for the first time, a company off the ground, or you're an existing brand that's launching new products, you have to think about the impact on marketing, sales and marketing, operations, and then not just supply chain, also fulfillment and logistics, finance. You to think about all of those things when you're developing and launching new products. And it takes a very, I would say it's actually the hardest function in the entire business because it is, it literally draws on every discipline within business to get it right and even furthermore to get it right and do it right continuously, right? And so that's why all of this stuff is so important. That's why we wanted to chat about this is because there's a lot of capital.

There's a lot of capital, explicit capital outlays during the new product development and launch phase that are at stake, but there's a lot of future capital outlays that are at stake as well, right? Because you bake so much into your business in the form of the decisions you make on new product development and new product launches. So, you know, I think...

Unfortunately, we have to land the plane soon here and obviously like, man, we might have to have an episode for just each one of these stages because there really is a lot. But again, because it's a multi-functional and multi-discipline disciplinary like, you know, process to launch new products. But before we like fully land the plane, key takeaways, like what are the big points that you want to make sure that the audience remembers from our conversation today, Clay?

Clay Banks (52:22)

Yeah, it starts with customer discovery and customer discovery is never not done. And it continues even when you're in a fully manufactured state. To this day, I've been running this brand for two years. I, as the CEO and co-founder, still answer every one of our customer support tickets. And I do that not to say it's like that customer support is below me as the founder. It is pivotal in to me understanding how do I make my product better? How do I make my instructions better? How do I create better online videos to sell my product better? So when I'm, we get, let's call it 10 to 20 on a normal day tickets a day. So let's call it 20 tickets a day. That's 20 customers that I get to actually have an interaction with. And not only does that build brand, meaning they get to talk to the founder and it, it could be something as simple as where's my order, where's my tracking number? Or it could be something as, hey, when I insert the disk, if we put it in upside down, it gets jammed. Real life case, right? It happened.

So it started to happen more frequently. So then we designed a video to show how it was supposed to be done. And then we put up arrows on the disks to teach people how to put them in right. And then we created a video to teach people how to unstick, basically disassemble the light to get the tray unstuck if they put their disk in upside down, right? So if I would have farmed out customer discovery, I mean sorry, customer support. It's a lot of people go, you can farm this out to the Philippines for eight bucks an hour you lose the connection to the customer and then therefore you start losing on how to build the product better and how to build the brand better. those are things that all comes back to customer, getting involved with the customer and then iterating over time to...

Basically get it perfected right so now we can build now on a customer support. I can start building in automations With macros to say if somebody puts in their stuck disk disk stuck Whatever form of writing that I now can send them back Automated videos and instructions on how to get their their trays unstuck without me actually getting involved you know, as you're building out your supply chain, it really comes down to relationships. I buy stuff container load from China and I buy stuff in different brands and work with small stuff in America to big stuff in America. And ultimately, the better the relationship I have, the more willingness they're willing to help find problems, solve problems, cut costs when I need them. Like my manufacturer in China, I went to him right, it was during the election in November, and we're putting out a lot of cash to order inventory for Christmas. And I'm like, look, we're having to compete on a CPM basis with all the political ads. My advertising costs have gone up because we're just having to compete to buy it, right, on a cost CPM basis.

Is there any way if we order more or we work out a relationship, a little more of a longer term relationship, can we come down on cost?

Jon Blair (56:10)

Yeah.

Clay Banks (56:11)

Well, I've got a two-year relationship with the guy and now he's like, yeah well for this we'll do this and I'm like, okay That's perfect and then something and then we had a tariff come in unbeknownst to us We weren't planning for 25 % tariff got it was under exemption We had a 17 I think $17,000 bill hit us on that on that shipment. It's not good right before Christmas, but nonetheless those are things you just kind of have to you know, start learning sometimes the hard way and then plan for them in the future so they don't happen again or ways to get around them.

Jon Blair (56:41)

Yeah.

So start with the customer, stay with the customer, Leverage relationships, real relationships, and I'll say my last takeaway and summary is like, remember, we're trying to make the minimum capital investment to learn as much as possible to reduce risk before making the next capital investment. If you can remember that, you'll make better decisions around launching new products. Before we close, I actually realized, Clay, I don't know why, this is the only podcast episode, the last one we did, that I forgot to ask this. I want you to tell the listeners where they can find more information about you and InPaceLine because I think there's a lot of people that are gonna listen to this that might benefit from potentially getting some help from you.

Clay Banks (57:31)

Yeah, first and foremost, I'm an entrepreneur. believe in...practicing what I preach and staying in the game keeps me on my toes and keeps me active. So first and foremost, I run a company called GloriLight. It's G-L-O-R-I light.com. But I also run and help other entrepreneurs and help other companies build up, scale up. And I do that through an organization I created called InPaceline. It's I-N-P-A-C-E-L-I-N-E.com. Socials especially on Instagram @inpaceline and I'm trying to trying to put out more content to help other people kind of going through those same things that I've gone through and Jon quite frankly you've gone through as it's kind of a founder so that people don't make the same mistakes and same delays that I've had over the years and yeah I'd love to connect with anybody at InPaceLine.com

Jon Blair (58:33)

Yeah, definitely check out Clay's content. I highly recommend following him. And if you want any more helpful tips on scaling a DTC brand with a profit-focused mindset, you can consider following me, Jon Blair, on LinkedIn. And if you're interested in learning any 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 Clay, I'm gonna have to have you back on maybe many times. Maybe we'll have to co-host a podcast sometime soon. We have a lot that we could chat about, but I appreciate you dropping some knowledge. I know that this episode's gonna be helpful for our audience. So thanks for coming on and everyone, until next time, scale on.

Clay Banks (59:18)

Scale on.

Beyond Shopify: How to Win on Amazon, Walmart & Target

Episode Summary

This week on the Free to Grow CFO podcast, we welcome back Tana Cofer, co-founder of Glitter Faced and RosieRai, alongside her husband and business partner, David Cofer. Together, they dive into the realities of launching a brand on Amazon, navigating Walmart, and leveraging emerging marketplaces to drive profitable growth.

With DTC brands facing rising CAC on Meta and Google, alternative channels like Amazon, Walmart, and TikTok Shop offer a compelling way to reach new customers—if done right. Tana and David share their firsthand experience in scaling their own brand and guiding clients through marketplace strategy.

Key Takeaways

• Defining a strategy is crucial for measuring success in marketing efforts.

• Best practices for launching on Walmart include simplifying the process and leveraging reviews.

• The competitive landscape of e-commerce requires intentionality in spending.

Episode Links

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

Tana Cofer- https://www.linkedin.com/in/tanacofer/

David Cofer - https://www.linkedin.com/in/david-cofer/

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

RosieRai - https://rosierai.com/

Glitter Faced - https://www.glitter-faced.com/

Meet Tana Cofer

Tana Cofer is the founder and CEO of RosieRai, an e-commerce growth agency focused on helping small to medium size businesses launch and scale profitably on any online Marketplace. With a passion for driving online business success, Tana leads her team in creating innovative strategies that deliver remarkable results for their clients. She is also a wife and mother of 3 children and enjoys spending her weekends in her jeep out in the Utah mountains. 

Learn more about RosieRai and request a free Amazon Account audit here: https://rosierai.com/contact

Meet David Cofer

David Cofer is the CRO and Co-Founder of RosieRai, a marketplace growth agency focused on helping small to medium size businesses launch and scale profitably on Amazon, Walmart, Target and many more. David focuses on building great teams. He has built out the RoseRai team and many of their partnerships, working to create powerhouse relationships that work to propel RosieRai and their partners forward. He also loves reading and playing games with his family.

Transcript

~~~

00:00 Introduction to DTC Finance Myths

02:33 The Journey of Glitterface and RosieRai

07:08 The Value of Operator Experience in Consulting

11:00 Strategies Tested on Glitterfaced

15:05 Walmart's Growing Marketplace Opportunity

18:34 Best Practices for Launching on Walmart

24:00 Exploring Other Marketplaces Beyond Amazon and Walmart

26:51 Challenges in Brand Growth on Marketplaces

27:42 Target vs. Walmart: Market Positioning and Strategy

30:47 Understanding Acquisition Costs Across Channels

36:32 The Importance of Strategy in Marketplace Decisions

39:52 Navigating Business as a Husband and Wife Duo

43:00 Closing Thoughts

Jon Blair (00:01)

Hey, 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 are the go-to outsource finance and accounting firm for eight and nine figure DTC brands. And today I've got my first ever duo on the show husband and wife duo so a couple of firsts Tana's been here before her husband David hasn't but i've got David and Tana Cofer co-founders of Glitter Faced and that run an amazon growth agency RosieRai together Tana welcome back David welcome how are you guys

David And Tana Cofer (00:45)

Pretty good, pretty good. Thanks for having us on. Yeah, we're great. Doing well this morning.

Jon Blair (00:50)

So I'm excited for our conversation. You know, those of you who follow the show have probably heard Tana talk all things Amazon growth several months back, which is a great conversation. Today, we're certainly gonna talk about some Amazon, but we're gonna be looking at this from the perspective of launching a brand on Amazon. And I also want to get a little bit into...

talking about some of the opportunities and some of the other emerging marketplaces. Obviously when we think about marketplace channels, Amazon's kind of the big behemoth, the one that everyone knows about, but there's definitely some interesting emerging opportunities in other marketplaces that are growing. And I just wanna like set the stage for why we're having this conversation, it's so important. In the DTC world that Free to Grow CFO operates in, one of the common challenges that all brands are facing, are increasing marketing costs on channels like Meta and Google. And so in the face of increasing customer acquisition costs, one of the kind of profitable growth levers that you can lean into as a growing DTC brand is adding on Amazon and other marketplaces to your strategy. It's not the only one, but it's certainly a big one, right? That if done well,

David And Tana Cofer (02:07)

Yeah.

Jon Blair (02:09)

can continue to launch your growth and maintain profitability in the face of increasing customer acquisition costs. So before we get into this, Tana, David, I don't know who should dive in first, but I'd love to hear about your journey to first co-founding Glitter Faced and then how you guys decided to join forces running your agency called RosieRai

David And Tana Cofer (02:16)

Thank

Yeah, great questions. To try and make it short for the podcast, I'll start with the beginning. When I left the agency world to stay home with the kids in freelance, I was helping brands launch and scale on Amazon.

And this was early 2023. And then I just, I've always wanted to be, I always wanted to be the CMO. That was kind of like my dream was like, I want to run the marketing strategy for like a super cool brand, right? And I was like, man, I don't think I'm going to get this opportunity with all of my e-commerce knowledge with marketplace growth and strategy. I just, not sure I'm going to get this opportunity for quite a while unless I make it for myself.

Like that was at the end of the day. Like I just need to make the opportunity for myself. And so I kept, and I, like other entrepreneurs kept writing ideas.

for years in my notepad on my iPhone, like my list of product ideas, right? And I was finally going through it and then doing some research with the tools that I use. And I realized there was quite a gap in this edible glitter space. It was really hot and trending, but there were so many negative reviews because of the messiness or the dyes or just questionable, where does this product come from? Can I really digest it? What's gonna happen to me? And I just felt like that was an area.

that I could come in with my expertise and I could learn and grow and I could launch a really fun brand. And so I actually reached out to one of my great friends, Zach, who is also a co-founder of Glitter Faced. And he and I were kind of the front of it actually before David even got involved. And we were like, let's go. And this was end of 2023.

And so that's kind of where it all got started. And then I would say middle of last year, when we realized the growth potential, we needed another person, but we couldn't afford that other person. And so naturally you then think, well, my spouse, like I got someone here who's supporting me. it was like, okay, we're going to get free labor. That's like totally legit. It's your spouse or your kids, right?

Jon Blair (04:34)

My spouse is free.

Yeah

Yeah,

I love it. I love it.

David And Tana Cofer (04:47)

And so that's what we did. I was like, okay, my kids are old enough that they can come to activities, they can come to events and such. David, you're going to help me set up the booth. David, you're going to help me make this product this weekend. David, I need you to go approve the label with the manufacturer. David, go to Salt Lake and grab the glitter. I just had him as the person kind of going and then it just naturally he was involved in the everyday conversations. And that's kind of how I would say that got started. Do you want to talk about how you got involved with RosieRai?

Yeah, I mean, for me, both of these were kind of a spectator sport for a long time. I watched her build all these ideas. She bounced a lot of them off of me and was like, sure, honey, you know, that all that sounds great. Like this just wasn't what my world's at all. And, you know, I was just I did a bunch of different things. I just kind of looked for what kind of new skills I could learn. And then Tana in the middle of 2024, kind of said, all right, you know, these things are picking up some steam. I had been helping out with Glitter Faced, you know, just cause I was around, but middle of 2024, things are kind of picking up steam and she asked me to step in and leave my thing full time and to work on RosieRai. wasn't specifically Glitter Faced. It was more RosieRai.

But naturally because I had more time I kind of started stepping in more on glitter face as well But with RosieRai that what we've started telling people is I'm just the first hire at everything So I'm the first salesman. I'm the first bookkeeper. I'm the first, you know, whatever so and doing it badly and figuring it out and and She basically she hands me projects that are gonna take her too much time and says to go figure this out Yeah

Jon Blair (06:24)

Hahaha

I love it. I love it. I love it. Yeah, the first employee for anything early stage, it doesn't matter if it's a brand or it's an agency or whatever. It's literally just like, you have to wear whatever hat needs to be worn that day. And there's a lot of ambiguity and vacuums, like leadership vacuums, process vacuums, all the vacuums, and you just have to figure it out, right?

David And Tana Cofer (07:08)

We will.

Jon Blair (07:09)

I love that, well okay, so a couple things. I'm a big, and Tana I think we talked about this the last time I had you on the show, but when I think about service providers that provide a service to growing e-comm brands, one of the things that I see again and again and again is the service providers that have a background as an actual operator themselves have the ability to, really understand what it's like to be in the shoes of their clients and they're actually far more valuable than the career consultant will call it, right? So walk me through a little bit of what comes to mind when you think about how having your own brand in Glitter Faced has helped you be that much better of a consultant at RosieRai on the Amazon and marketplace like ad buying and growth strategy side of things.

David And Tana Cofer (08:04)

Yeah, it's a good question. One of the things that I always saw when I worked in the agency world before was even though we had access to all the same data, the account, weren't the admin over it. We weren't the main email. So sometimes the brand from Amazon, again, I did most of my Amazon work, would get an email about a listing issue and we wouldn't see it immediately. And so then they...

Jon Blair (08:32)

Mm.

David And Tana Cofer (08:33)

would maybe not inform us because they assumed we knew, but we didn't get that email because we don't own the account. There are different things that happen when you're in the agency world where you don't see those. Another one is when the placement fees for Amazon increased or when fees change, the head, the owner of the account gets those notifications, not always the agency, right? And so there were things like that that I would say previous to me launching my own brand,

I, it would take me several days, if not weeks to have found that issue, caught it and made the change. and whereas as an owner, I would get those same emails. Okay, the placement fee is changing for all accounts. Here are the details. But as opposed to waiting or finding in a LinkedIn, like I got the email the same time the brand did. So I was immediately going into my account, Glitter Faced, how is this going to affect me? How do I make a new shipment? And within like an hour I was emailing all of my brands saying, okay,

Jon Blair (09:08)

Mm.

Interesting.

David And Tana Cofer (09:33)

with this email that you received and this new change, here's how we're gonna go about this process. And so I felt like I was much faster to changes or I have been much faster because I'm getting those notifications and I'm seeing how it will affect me. And although I wanna say I was a very passionate consultant before and I loved the brands I worked with and I was very involved, it's another level when it's your own money going into the brand.

Jon Blair (09:59)

Absolutely.

David And Tana Cofer (10:00)

Right? It's another level when the fees get changed from 15 cents to 50 cents a product, right? It might seem small, but when it hits my bank account, like, it feels different. And so I think I have way more empathy because of that. And then on all of my sales calls now, we can answer questions, I would say, better. We can answer them differently. And we have that natural, like, I totally get it. When that happened in February, that really hit me hard or...

when I launched in this space, here are some of the things that I learned. So I would say now we're signing more brands that are similar to ours, like in grocery, for example, because we get, that's the space that we launched our brand in. So they trust us in that space, if that makes sense.

Jon Blair (10:45)

Totally.

Yeah, I'm curious, are there any like strategies that you tested on your own brand before applying them to clients that you found like especially insightful or powerful?

David And Tana Cofer (11:00)

Yeah, there's a lot. Let me think of a really good one to share. I would say the one that impacted us the most was, and again, we're mostly an Amazon business, so I'll stick to an Amazon example. Every category has different, are called referral fees, which means how much you pay Amazon. So every category pays Amazon a little more or a little less based on the category that they're in.

things that we, well David actually figured this out. When we launched into grocery and gourmet, we learned that if you were at $14.99, you actually only paid 8%, but we launched at $16.99, so we were paying Amazon 15%. So that's almost like a double jump in how much we're paying Amazon based on that price. There's a similar thing in shoes and beauty. There's this different, there's different levels that I wouldn't say there's necessarily like a PDF file for.

Jon Blair (11:44)

Interesting.

David And Tana Cofer (12:00)

or you can just see, you have to kind of learn and test. And so once we figured that out, our brands that were in that category, I immediately was on the call, hey, how can we adjust your pricing to get you more money back? Because we've just learned this, do we need to go from a two pack to a one pack? Do we need to run a sale and see if it works? Yeah, that was a big one I would say. We immediately were able to test on brands and they were really happy with our ability to do that.

Jon Blair (12:29)

interesting.

David And Tana Cofer (12:30)

Another one actually is within Walmart. We learned that you can actually, if you know the right way, you can actually upload your reviews from your DTC site, your DTC site to Walmart. They have a syndication that is free and approved. So I had one brand who wanted to launch on Walmart, but was so nervous because the competitors had a thousand reviews. And I was like, what's your DTC? And they're like, well, we have like 3000. And I was like, download that. I'll upload that.

Jon Blair (12:44)

interesting.

David And Tana Cofer (12:59)

and they were like, the previous three agencies we tried never knew that. And I don't think I would have, unless I had my own brand, that I was scrolling for days trying to figure out how to amplify my reviews to find that hidden gem. Does that make sense?

Jon Blair (13:15)

Yeah, no, I love that. It's another example of this concept I talk about a lot on the show, which is that when you find a good consultant, a good service provider, they help you go further faster. Their fees are not just for clicking buttons and buying ads in your case. You're actually paying for many years of experience that you don't maybe have on the brand side. And so you can go further faster because of these little nuggets.

David And Tana Cofer (13:28)

Yeah.

Jon Blair (13:45)

That's a big value add that Free to Grow brings to the table. It's like our CFOs, including myself, like we are former e-comm operators. We've been running businesses on Amazon and Shopify for a decade plus each of us. And so there's just, there's a lot of insight we have into things that you can do and you can't do or you should be concerned about or that we've seen work.

David And Tana Cofer (13:59)

Yeah.

Jon Blair (14:14)

And again, and additionally, when you're an agency like ours or yours that's working with a bunch of eComm brands on the same platforms all the time, you can also share learnings not just from your own brand, Glitter Faced, but what's working with the other brands that you're working with, right? And that's worth its weight in gold as well. So I love that. I'm curious, you brought up Walmart and I have heard from you guys and from others in the space that,

Walmart has got some momentum in terms of marketplace opportunity. What is your sense and experience from actually being out there and buying ads and whatnot, what is your sense on the marketplace opportunity in the Walmart channel?

David And Tana Cofer (14:50)

Yeah.

Yeah, I would say I would say with with Walmart. It's the hardest one to start building momentum. So like if you're if you're a newer brand, it's the hardest one to to gain momentum off of just that channel alone, if that makes sense. But if you're a brand that's coming on to Walmart with some momentum, we've seen we've seen some pretty explosive growth with different brands that we've been able to bring on in different categories. So

It's just, it's growing a lot better than it used to in the past. And in the past, it was something where you just kind of, it would just be another channel. You'd just kind of be on there to be on Walmart, let's say you're on Walmart. And now it's a real growth channel and that's really exciting to see. Yeah, I would say, you know, getting into more specifics, Walmart has done a lot of things to mimic Amazon. And so it actually has made it a lot easier now when you're live on Amazon, have momentum to move a lot of that content over.

To Walmart so it's a slightly faster launch and then of course they have this review feature So you can you know amplify your reviews pretty quickly? And I would I think that the stats for from last year to this year like the search Starting your search on Amazon actually went down like five to seven percent and starting your search on Walmart actually went up over seven percent So that doesn't mean Amazon's still growing massively, but it's a matter of there's actually more brands considering Walmart. For me, I consider it for that immediate delivery. When my kids are sick, I go to Walmart because there's a Walmart right here and they'll deliver to me in an hour or I can go pick it up because it's right there and I can see where it's at. So like for me, it's the urgency of the item and that's where Walmart will win that and in grocery. And again, a lot of our brands that are coming are interested in grocery because it's the same category our personal product lies in.

Jon Blair (16:49)

Yeah.

David And Tana Cofer (17:00)

So we see a lot of brands who want Amazon, Walmart, Instacart because they are more of that consumable, want it right to your door with their bananas and their eggs type brands.

Jon Blair (17:12)

Yeah, that's interesting. It's kind of, a friend of mine named Matt Ezyk was on the podcast a few months back, and we talked about the marrying up of the kind of digital ad experience with physical delivery or physical retail. And so it sounds like there's a bit of an opportunity there with Walmart that you're advertising online digitally.

David And Tana Cofer (17:36)

Absolutely.

Jon Blair (17:39)

but you can kind of blend the experience with physical retail a bit in the way of either like in-store pickup or the like, you know, one hour delivery or, or, you know, like few hours delivery within a few hours. So that's, that's pretty cool. What you mentioned, like the start, I know that one blocker or concern or challenge that we see with a lot of DTC brands going to get Amazon set up is like, just like the uncertainty around the effort it takes to launch and launch well and all that. You mentioned like the barrier or the kind of effort for launching on Walmart has been kind of reduced relative to Amazon. Besides the reviews, there any other kind of like, you know, sort of like launch best practices that you guys are learning with like how to launch well on Amazon, or I'm sorry, on Walmart?

David And Tana Cofer (18:34)

Yeah, it's a great question. would say each platform has their own master file where you upload all the data. Amazon's is like 27,000 columns, half of which or most of what you need. And it gets more complex every single week. It's a new download. It's very complicated. Walmart's is super simple.

Jon Blair (18:48)

Yeah.

David And Tana Cofer (18:57)

and it works really well, their master file is, they've really thought about the consumer first. I think that's where Walmart always kind of won, is they always think about the consumer first. Amazon says that they do because they have the lowest price. Good for you, that's awesome, you can have that. I would say,

with my experience with the Walmart interface, they've kept things fairly simple and clean. So there's only a couple buttons you have to click, only a few permissions. For us, we have a Walmart rep, we have an Amazon rep, we have a Macy's rep. For all the channels we launch brands, we have a rep for. And I would say Walmart's, I have the most response from them and their reps. And I think it's because of this massive need for growth, and so they're always taking feedback and such. So I would just say overall the experience that agencies, at least I'm getting from Walmart, clearly showcases that they're gonna grow, they're willing to grow. They will within 24 hours give me a lot of data on the category I'm trying to launch a brand in to help accelerate that. Like, here are the keywords that were all trending. Amazon has some of this information available, yes, but they don't have the same competitor insight data and Walmart will hand it to you. They won't tell you what the competitors are doing, but they'll tell you the average in your category is X. Here are the things to emmulate.

Jon Blair (19:58)

Hmm.

David And Tana Cofer (20:14)

I just think there's a lot more hands-on experience with Walmart where they really want to help you launch And I think it's because they really do want to compete and beat Amazon and so for us we're like we're taking advantage of that We're like, okay, you know what else you got? What else you got to help me and my brands grow, you know, I'm not sure When I jumped on here, I'm not sure I was expecting Tana to get spicy and just call out Amazon like that

Jon Blair (20:34)

I'm curious.

Yeah.

David And Tana Cofer (20:43)

I've had some brands with very unique issues over the past couple of weeks on Amazon and Amazon is not budging. I do feel, yeah.

Jon Blair (20:50)

It's hard. It can be hard. mean, at Guardian Bikes, when I was scaling Guardian Bikes, we were on Amazon and there was a season where we were on Vendor Central, a season where were on Seller Central. Now, Guardian is not on Amazon anymore. But like, we had several different challenges and issues on each of those sides, both the vendor side and the seller side. And getting to the right person, first off, just getting to the right person.

David And Tana Cofer (21:18)

I know. Yes. Have a person.

Jon Blair (21:19)

is very challenging. Even if you have a quote rep, we've

had a rep before. We've had many a rep and not gotten anything out of it. And honestly, sometimes it can literally just be person specific that like, we've had a rep who's like, I know how to solve this issue. And then we've had another, they get swapped out. People are changing seats all the time at Amazon. Then you get another rep and you have the same problem and they tell you there's a different solution.

David And Tana Cofer (21:25)

Yeah.

Jon Blair (21:48)

Than what you've actually implemented before in the past because they don't actually know and so it is it is a challenge and it's it's kind of part of the catch-22 of like being on the big platform Right with all the volume because they're this large company and it can be hard to navigate but I mean, know, it's it's interesting because I would say in all realms of Business strategy at least in my experience the up-and-coming like the channel

David And Tana Cofer (22:01)

Thank

Jon Blair (22:17)

that like five years from now we're talking about is like made a name for itself and is like a staple doesn't feel like that in the early days, right? And so as a brand you have, whether you're talking about like, know, ad channels like Meta or like TikTok shop or whatever, like, and the brands that when that channel really gained steam and like has respectable volume going through it, like the brands that are a lot of the brands that are doing a great job at that time, when everyone finally realizes is like they got in it on in the early days and figured it, you know, spent the time to figure that channel out. And so I'm sure that we're gonna continue to see more of that kind of stuff with Walmart over time. that like, maybe it doesn't feel like it's near like Amazon eclipses it in terms of volume, right? But like, I'm sure five to 10 years from now the brands that figured out Walmart and that Walmart is a good channel for. The ones that were diligent and figured it out will be reaping the benefits many years from now. I'm curious because Walmart, would say in, you know, at Free to Grow, that's like when we look at marketplaces, the brands we work with primarily start DTC, then they usually generally go to Amazon Next, right? And then Walmart's like generally the next most popular one. Other platforms and marketplaces like Macy's, Target, Wayfair, what are you observing there and what are your thoughts on the opportunities now and kind of over time in some of these other marketplaces?

David And Tana Cofer (23:51)

Mm-hmm.

Yeah, so I want to say I feel like Amazon and Walmart will most likely always be numbers one and two in terms of marketplace expansion off of a DTC. And I think that that's smart. You know, they are the ones that are seen for most growth. I would potentially argue you should consider TikTok Shop as your third. We'll wait and see what actually happens with all of that this year. But I would...

Jon Blair (24:22)

Yeah, yeah for sure

David And Tana Cofer (24:26)

Right, I would likely say that would be the next step. For the other channels, we run brands on them. And I will say, in my experience, Target usually is that next one. And then it's the Macy's, Kohl's, Nordstrom, like, it's in that line. We do quite a few apparel and beauty brands though, so I could be a little bit biased there. But one of the reasons why I would say it kind of goes in that order is Target is considered one of the other bigger names.

Jon Blair (24:41)

Yeah.

David And Tana Cofer (24:55)

However, in my experience, Target, their API doesn't sync with a lot of the other tools that are out there to help with growth. So for example, we're considering moving from our current tech stack to a different one, and they will take all of, they take Amazon, Walmart, and all these little smaller marketplaces, but not Target. And they're like, we can't take Target. And it's true, a lot of other ones I looked at, they can't take Target. So unless that changes,

Jon Blair (25:03)

Interesting.

interesting.

David And Tana Cofer (25:24)

That may go down and target you have to still apply and be accepted online right now. Whereas other channels you don't have to. So I think that that's the barrier, but that I would say is the next one everyone wants to do. And then last would be all the, I would say all the others are kind of secondary. If you're in apparel, it'd be that Macy Nordstrom Kohl's, which we do. And if you're not apparel, it would probably be the eBay or the Instacart if you fit one of those demographics and most of which all have an API that is common within a lot of tech stacks. Would you agree? I definitely agree. I was just thinking while you were talking about that, and I was thinking about what you were saying, Jon, about brands figuring out Walmart and reaping those benefits over the next few years. I was thinking about the target strategy from Target's perspective, and I just don't think I understand it.

They're trying to play like an exclusive game where they try to keep everything. They're trying to be like an Apple, I guess of the e-commerce world where like you have to, if you're going to be with us and you have to play like us, you have to use all of our stuff and it's exclusive. Like you have to apply to be with us and everything. But then they're like the products that they're selling are not any different or any more premium or anything. So there's nothing that sets their marketplace apart as far as like quality, but, yet you have to jump through way more hoops in, and they put active like roadblocks in the way of growth of a brand's growth on Target. I just, I don't see Target doing, not to call anyone out, but I don't see Target doing well, like 10 years from now, if they don't, if they don't change their, like their practices.

Jon Blair (26:57)

Yeah.

Yeah, it's interesting. I actually didn't know. I learned some, one of my favorite things about this podcast is I learned all kinds of crazy stuff from the people that I'm interviewing and like I feel like I keep up with e-comm by having this podcast and talking with all my friends, you know. But yeah, it's interesting because when at Guardian Bikes, I use Guardian a lot as an example because that's where I cut my teeth in scaling a brand and I learned a lot about both Target and Walmart because

David And Tana Cofer (27:21)

What?

Yeah.

Jon Blair (27:42)

Target and Walmart are the biggest bike retailers to the mass market for kids' bikes, right? And Walmart's way bigger than Target. Target is number two and they're not even really a close two. But they do, Target does fancy themselves higher end than Walmart. They do, like internally, I know that for a fact. they, at least then, because we did a lot of research and talked with Target buyers and like,

David And Tana Cofer (27:53)

Hmm.

Yeah. Yeah.

Jon Blair (28:12)

the Target buyer for bikes claimed that the average customer at Target has like a 30 % higher disposable income than the average Walmart customer. How true is that? I don't know for sure. And I don't know how that plays into kind of this like closed ecosystem strategy that you're talking about, but I wouldn't be surprised if they were doing it to try to kind of set themselves apart.

David And Tana Cofer (28:33)

Yeah.

Jon Blair (28:40)

quality wise and say that everyone who sells on Target.com is vetted by us. Probably trying to keep, this is just speculation. But I'm sure there's plenty of, one problem Amazon has and probably Walmart has by it being kind of this open ecosystem. There's a lot of these like Chinese brands, right? That just like, they have no physical presence in the US. They,

David And Tana Cofer (28:45)

Yeah.

Yeah, for sure.

Thank you.

Jon Blair (29:07)

drop ship from straight from China and Amazon's their storefront or probably Walmart's their storefront. So I'm sure they're trying to keep some of that stuff out as well. But it is, it's a good point, know, that like, if you can openly as a brand get on these other marketplaces a whole lot easier, you know, then it opens up the opportunity to scale those channels and maybe never even utilize Target, you know.

David And Tana Cofer (29:36)

And the brands that do get approved on Target, I've had a brand tell me just a couple of weeks ago, they got an email saying they were pre-approved. I was like, oh, okay, interesting. That's new to me. I didn't realize you could be pre-approved for a marketplace, like a credit card. No hit to your credit score. And so I was like, oh, okay, well then you're probably going to be one of the only ones selling your product on there. That is amazing. That's great.

Jon Blair (29:50)

It's like a mortgage. It's like, it's like a mortgage. Like, yeah, exactly.

for sure.

David And Tana Cofer (30:03)

I think Walmart, if I remember correctly, Walmart was a marketplace before back in like 2019, 2020, where I want to say to do the Walmart marketplace, you had to be approved. And then they opened that up. That could be a total lie. I want to say that was the case. But as they've opened it up, I'm sure they're having similar problems that Amazon does where you need brand registry so that no one else sells your product. I'm sure they're facing those same things, but they still have way less brands within every category online.

Jon Blair (30:25)

Sure. Yeah.

David And Tana Cofer (30:32)

it's easier to rank number one. It's a little bit easier to be top of mind and top of the page on Walmart. There's just less search volume in general. So there's less right now money to grab there.

Jon Blair (30:46)

I'm curious to get your thoughts generally on like a very common challenge that the brands we work with face on marketplace strategy is like, okay, this is kind of the sequence. It's like they've scaled to a certain level on DTC, they're feeling that they strategically need to open another channel to reach more eyeballs and help kind of bring down the...

David And Tana Cofer (31:10)

Yep.

Jon Blair (31:14)

multi-channel, full funnel, blended marketing cost, right? When you guys look to Amazon and these other marketplaces relative to DTC, I know it can depend on the brand and like categories and stuff, but like generally, should brands be expecting like lower acquisition costs than DTC about the same?

What are the ways that from your perspective brands should be thinking about acquisition costs on these marketplaces relative to what they're used to on DTC?

David And Tana Cofer (31:49)

Yeah, if we're removing the advertising dollars at first, let's remove those and just say like dollar for dollar. I would say it is about the same if not Amazon's a little more expensive. And that's if you leverage Amazon's.

When Amazon takes it just naturally they take 8-15 percent. So even though you could see more velocity they're going to take a little bit more and then it depends on the size the weight of your product whether or not using Amazon FBA like their fulfillment system will be cheaper for you or more expensive. A lot of brands think it's more expensive for them but it actually is cheaper because they get the prime one day.

Especially if you're smaller, you can literally be in a box this small, right? And so I would say it's pretty close. When you add in the advertising costs to that, I would say that Amazon is a more expensive pay to play space as opposed to some of the more scrappy options. From a DTC perspective, I mean you have email marketing, which is a fantastic opportunity for DTC. You don't really have that same option for Amazon.

You have a little bit of retargeting, but have to pay for that more so than email marketing, right? It's just for retargeting, for subscribing, save, things like that. Where I would argue is I would say Meta's cost per acquisition costs are higher than Amazon. So when we think about like a dollar for dollar, like PPC ad cost play, it depends on the channels that you're using and how scrappy you are. You have millions of opportunities of how to gain customers through DTC and through Amazon.

I would think you have a select few options. And so that's kind of where I would say when you're talking about scale and cost, that's why it makes sense for a lot of brands to start DTC. For Glitter Faced, we started Amazon. And it's because one, it's what we knew, but we knew, also that's where the search volume was. That's where the people were looking for it. And we wanted to test the market, test our product, right? We had

Jon Blair (33:48)

Yeah.

David And Tana Cofer (33:55)

where our first product was a failure, had to relearn right with our second. And for us, we didn't want to spend a bunch of money to drive traffic at the beginning, we wanted to go where the traffic already was.

Jon Blair (34:07)

That's a good distinction.

Like that's important. Like, I think one thing I want to draw out here for listeners is that like the way that we used, I think Amazon well at Guardian Bikes was deciding on a specific strategic use of Amazon, right? You just mentioned like quick go to market, cheaper, quick and cheaper go to market. But most importantly, a part of that is like

getting the product in front of actual legitimate customer eyeballs cheaper and faster to then figure out and iterate like on the product side and make sure that you have tight product market fit. That's a great way to use Amazon. Where we did Amazon, I would say poorly at Guardian in the early days was just offering all the same, just doing the exact same thing on Amazon as we did on our DTC site. And that was cannibalistic, we found out. And it's not cannibalistic for every brand, but it was for us, right?

And some of the other things we did was like, let's offer certain SKUs on Amazon, like introductory lower price point SKUs, right? Where you're getting more eyeballs that we didn't feel like were cannibalistic based on what we could see in the data. So it actually was expanding our reach outside of like the meta advertising. Now, keep in mind, depends on how much you're spending on top of funnel. Like we have some brands we work with that are spending seven figures a month on meta.

David And Tana Cofer (35:14)

Mm-hmm.

Jon Blair (35:34)

And so does that mean there's no new eyeballs on Amazon that you're getting? Not necessarily, but there's probably less because you're just spending so much, right, in other platforms. People who probably aren't, the proportion of people finding out about you on Amazon's probably much lower. But we've seen that when you open up Amazon and you do a good job on the listings and kind of defending your own turf, that you can get overall conversion, you know, cross channels to increase.

If you're spending heavy on meta, you get some people to convert on Amazon that wouldn't have converted on your dot com either because of whatever, shipping lead times, or they just trust Amazon more and they already have an account set up, right? And so the point that I'm making is it's smart to have a reason why you're using Amazon at any given point in time, right? Or Walmart, or any of these marketplaces. Don't just blindly go into them.

David And Tana Cofer (36:17)

Right.

You're welcome.

Jon Blair (36:32)

It's about understanding what to strategically use these different channels for, right? And so that they're accretive to your business and not cannibalistic to your business.

David And Tana Cofer (36:43)

I'd like to call that out too, because like people hear the words. I feel like sometimes people hear the word strategic and they just kind of their eyes kind of glaze over because they're just so used to hearing it. But I'd to call out your use of that word because I think it's really, I think it's really apropos to this specific like business, type of this playground honestly is if you are, if you're thinking about being on

Jon Blair (36:54)

Yeah.

David And Tana Cofer (37:11)

Well, honestly, if you're a brand period, it doesn't matter if you're thinking about being on a marketplace or doing anything else. Strategies being strategic has to be like your number one focus. feel like because margins are so tight. There's so much competition. There's so many different places that you could be putting your dollars like every single dollar needs to have a very specific purpose and strategy behind it. There's no, there's you.

Jon Blair (37:36)

100%.

David And Tana Cofer (37:39)

people who do the, unless you've just got more money to blow than I know what to do with throwing stuff at the wall and seeing what sticks is not going to get you through, you know? And so that, you know, if you understand exactly what it is that you're trying to do with this, you know, with this portion of your time and money, then

Jon Blair (37:46)

Not these days, not in this market. That's old school.

100%.

David And Tana Cofer (38:08)

Not only are you going to do a better job with that, but you're also going to know what the markers for success are. You're going to know when you should stop, when you should pour more into it. Like everything is just going to go a lot more smoothly if you really focus on that keyword there.

Jon Blair (38:24)

Yeah, no, mean that what you brought up is very well said is that when you go in, now your strategy is wrong sometimes, right? That's okay, but the fact that you defined it, which you just pointed out, the fact that you defined one helps you measure success and decide if you stop and pull back or if you keep charging ahead, right? You can't, if you don't have kind of like a strategic thesis or hypothesis going into turning on Amazon or any of these marketplaces, then, any decisions you make to go any direction while you're there is litter, I mean, you're just, they're disconnected, just kind of like, you know, spur of the moment stream of consciousness decisions, right? And again, the point, I think where people get hung up on the word strategy, in my opinion, is that one, it's used a lot, right? It's a buzzword. But two, it's that they don't use the word strategy for what it's meant to be used for, meaning that like,

David And Tana Cofer (39:23)

I agree.

Jon Blair (39:23)

When you're defining a strategy, you're saying a strategic decision is one that you are saying, if I believe that if we do this, this is the outcome that we'll get. And I believe that outcome is good for my business because this and this and this. And when you have that cause and effect relationship defined into your strategy, it breeds a level of intentionality.

with the moves that you're making. They're not random acts, know, random acts of marketing, right? And so, yeah, no, I think very well said. Look, I do want, before we get to the end of this episode, I actually wanna move away from your brand and marketplace growth, and I wanna talk about being a husband and wife duo, and that's what we're gonna end the podcast with.

David And Tana Cofer (40:15)

you

Jon Blair (40:18)

I grew up with a family business where my parents worked together. They've been working together for like 40 years. So you guys have some interesting parallels to my family. My mom also is a competitive bodybuilder, just like what we talked about Tana, yeah, which Tana is. But being a husband and wife duo, chat with me a little bit about like...

David And Tana Cofer (40:23)

So,

yeah, I remember that.

Jon Blair (40:44)

the ups and the downs, the good and the bad, and ultimately like what it means to your business and to your family to be at this together.

David And Tana Cofer (40:56)

Can I take the lead on this for a sec? Yeah. So I feel like it's been an interesting journey. I kind of got yanked into it. You're welcome. Very much so. I feel very blessed. And honestly, I think that makes a really big difference. There's no like...

Jon Blair (41:10)

Hahaha

David And Tana Cofer (41:23)

There's no like rancor on my side that, you know, I'm not doing what I was before or anything like that. And there's a lot of, there's a lot of effort on Tana's part where she says, she can, she can see, you know, the learning curve and the amount of effort that I'm putting in. And she can see what I, what I am bringing into the business. So there's a lot of.

There's lot of gratitude on both sides and a lot of humility where we learn to work together. So we really don't have any issues where we have to like fight things out or anything. There's things that she recognizes that I'm a little bit better at, even if I don't have some of that business training that she just kind of lets me, she understands, okay, this is a project you can handle. I'm going to step back and let you do that.

And she listens when I think that she's kind of, because the, I'd say that one of Tana's biggest strengths is that she's really passionate about her clients and the people that she wants to grow. And obviously she's extremely skilled in growing those clients. So she sees between the passion and the skill, she's like, I can do this. I can grow this brand. And when I'm looking at, you know, when I'm on the backside, looking at the numbers and like,

Also, as I'm watching her as a husband and seeing the amount of effort and stress that she's putting into one particular brand, for example, at some point it's time to back off. And at other times it's kind of that intentionality we were talking about a minute ago. So I apologize if I'm rambling a little bit, there's so many different points that I feel like we work so well together.

Jon Blair (42:59)

Yeah.

No, not at all.

David And Tana Cofer (43:10)

where I'm able to balance her and she's able to balance me. And obviously this is not my world. So obviously I've had to humble myself a little bit and step back and take a little bit of a supporting role to Tana. And again, I think that gratitude has been the biggest key factor for that because she's grateful that I am doing that, that I'm giving up what some of the things that I would like to be doing in order to be helping her.

Jon Blair (43:10)

Yeah.

David And Tana Cofer (43:38)

And I'm grateful for the opportunity to learn these new skills and be able to be with my family more and do all these wonderful things that I get to do now. And so there's that gratitude greases a lot of wheels in my opinion, as far as like things that could be fights that just aren't because we're on the same team. Like that's our mantra every day is we're on the same team.

Jon Blair (44:03)

I that. We're gonna do something fun right now. Okay, I've been wait I didn't I'm springing this you on you guys I didn't I didn't inform I didn't inform you before the show so normally we end with asking like about a like a Little known fact that might be shocking right to the audience Tana shared last time that she's a competitive bodybuilder So we're gonna do we're gonna do like the husband-and-wife game show version of this, right? I came over this like last minute. Okay, so So here we go. You ready?

David And Tana Cofer (44:06)

God.

That's

Yeah.

Okay.

Jon Blair (44:33)

And this was not pre-planned. is raw and unedited, right? So, Tana, if David were to share the most shocking little known fact about himself right now, what would it be?

David And Tana Cofer (44:38)

Okay, yes.

Shocking little known fact about David. man, okay. Do you have one in your head? Yeah. Do you want one? Man, I was gonna say something related to books, but that's kind of clear behind it. These are all his, so man.

Jon Blair (44:54)

David, get in your mind what you would be sharing if I asked this question, because we're going to ask afterwards if she was right.

Yeah.

David And Tana Cofer (45:15)

I am going to say that David wants, I'll say that if David could stop and do anything, like, you're on the right track, you're on the right track. Stop and do anything. was going to say career wise, maybe that's not it, but he would go and he would be a professor of something in politics, something like that.

Jon Blair (45:30)

here we go, here we go.

David And Tana Cofer (45:42)

You're close. The one I was thinking was my dream eventually would be to be a professor of philosophy. Something like that.

Jon Blair (45:51)

Nice dude, there we go, that was pretty good. There you go. We had to do the little husband and wife dating game show version of asking my final question. I love that. Well, unfortunately, we do have to land the plane. This was an awesome conversation. I wanna remind everyone, the reason we had this conversation today is because in the wake of increasing acquisition costs on the DTC side of the world, Amazon being the most quote famous marketplace, Walmart and some of these other marketplaces, they represent opportunities to get new eyeballs on your brand, right? Expanding in new channels to continue to accelerate growth, but enhance hopefully marketing efficiency instead of making it worse. So you know agencies like RosieRai, I highly recommend you check them out. But before we end here, guys, where can people find more information about your brand Glitter Faced and about your Amazon and Marketplace growth agency, RosieRai?

David And Tana Cofer (46:58)

Yeah, Glitter Faced you can find on Amazon or on Instagram. We're decently active on TikTok. You can find us there. And then I would say for RosieRai if you own a brand and you're interested in the kind of content and how we do things, you can check out our LinkedIn or our Instagram. If you're interested, you know, we have a website and really, I just like to chat with everyone. So if you just like DM me via Instagram or LinkedIn, I'll just check out your website, like give you my thoughts if you're ready.

Jon Blair (47:01)

Yeah.

David And Tana Cofer (47:28)

We happily run average fees for people to see if this even makes sense for you margin wise. But yeah, honestly, I think we're pretty approachable. So we're just people. So does the LinkedIn message us is what I would say. We'll reply. We're not making this up.

Jon Blair (47:41)

I love it. I love it. If you have any questions about Amazon growth, ad buying, as well as Walmart or any these other marketplaces, I highly recommend reach out to Tana and David on LinkedIn. And don't forget that if you want more helpful tips on scaling your profit-focused DTC brand, to consider following me, Jon Blair, on LinkedIn. And if you're ever interested in learning more about how Free to Grow's DTC accountants and 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.

Don’t Fall Victim to These DTC Finance Myths

Episode Summary

In this episode of the Free to Grow CFO podcast, Jon Blair and Jeff Lowenstein discuss common finance myths in the DTC (Direct-to-Consumer) world. They focus on three main myths: the necessity of a 13-week cash forecast, the need for overly granular financial projections, and the advantages of working with e-commerce specific firms over horizontal firms. The conversation emphasizes the importance of understanding the purpose behind financial models and forecasts, advocating for a more strategic and less rigid approach to financial planning in the e-commerce space.

Key Takeaways

• You Don’t Always Need a 13-Week Cash Forecast

• Granularity in Financial Models Should Serve Decision-Making, Not Complexity

• Ecom-Specific Finance Firms Deliver More Value Than Generalist Firms

Episode Links

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

Jeff Lowenstein- https://www.linkedin.com/in/freetogrow-jeff/

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

Meet Jeff Lowenstein

Jeff was previously leading M&A efforts at ecommerce aggregator Boosted Commerce where he was the 5th employee. He built processes across M&A, finance and operations to support rapid growth from 0 to 30 brands under management in 2.5 years.

He previously co-founded and exited an app for Shopify merchants and spent time in the Strategic Finance departments of Etsy and Caesars Entertainment. Jeff holds a BA from the University of Pennsylvania and an MBA from Harvard Business School.

He’s worked with hundreds of brands over his career and founded Free To Grow because of his passion for supporting entrepreneurs and helping them succeed. The analytical and financial tools he has developed over the years are specifically crafted for the modern consumer brand.

Transcript

~~~

00:00 Introduction to DTC Finance Myths

01:29 Myth 1: The 13-Week Cash Forecast

12:38 Myth 2: Need for Granular Financial Projections

26:49 The Importance of Financial Modeling

30:06 Myths in Financial Forecasting

31:05 E-commerce vs. Horizontal Firms

39:15 The Value of E-commerce Expertise

44:57 Leveraging Network and Experience

48:00 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 DTC brand with a profit focused mindset. I'm your host Jon Blair, founder of Free to Grow CFO. We are the go-to outsourced finance and accounting firm for eight and nine figure DTC brands and today I'm here with my co-founder and partner in crime, Jeff Lowenstein. Jeff, what's happening brother?

Jeff Lowenstein (00:28)

Good morning Jon, Happy New Year everyone. Glad to be back on. Let's do it.

Jon Blair (00:33)

So today we're gonna have, I think, a really fun conversation. We're gonna talk about what we see time and time again are very typical DTC finance myths. And so the point of this episode is for us to bust, myth bust, so to speak, three very common finance myths that we come across again and again in the DTC world, because we don't want you to fall victim to these.

So honestly, we're just gonna dive right in today and we're gonna get into myth number one and Myth number one. I mean this is something that we come across I mean constantly and I would say I'm even seeing it come come up more and more frequently this myth is I must have a 13 week cash forecast now before we get into talking about some examples of Where we've seen this?

come into play and how we've actually helped our clients in a different way. I'm just curious, where do you think the 13 week thing came from? Cause it's just like everyone seems to say 13 week. I have no idea, but I find it funny that that's such a pervasive idea. Is it cause it's 13 weeks is one quarter? I don't know, man.

Jeff Lowenstein (01:54)

I mean it must be 13 weeks is one quarter for those who don't know 52 weeks in a year Divided by 4 is 13 right and so that's an easy nice number But you know you could do it longer you could do it shorter

weekly cash flow is important for sure in some situations but there's no rule that every single brand needs exactly 13 week cash flow all of the time and in fact it's definitely a bit of a it can be a waste of time if it's not needed for your brand.

Jon Blair (02:30)

Well, okay, so here's something that's interesting. The reason why I asked that question, I was kind of joking, but it's like, where did that number come from? Who came up with that number in finance land and made that the prevailing idea? The question you should be asking yourself is, how many weeks of weekly cash visibility do I need and why? Right, you need to have a good reason. You don't just make an

This is gonna come up time and time again in this conversation, but what's the reason behind why you're creating such a forecast or such a report? Jeff, do you have any thoughts or like examples of where you've seen weekly cash forecasting being needed or not needed?

Jeff Lowenstein (03:21)

Yeah, it's a good question and I mean there's a couple brands that we work with that come to mind. Just recently this question came up. When you're fighting...

day to day and cash is real tight, then yeah, it makes sense to have a weekly cash flow plan to show all the ins and outs, right? It's gonna show all your receipts coming in, all your payments out, meaning could be for inventory, could be for overhead like payroll, could be paying off credit cards. It's important to get the timing of those right when you are in a cash crunch.

But that doesn't mean it needs to be 13 weeks exactly. In fact, it often is really only helpful in the next four to six weeks, I would say. You don't really have such great visibility beyond the next four to six weeks, and the accuracy drops off substantially.

when you don't have that visibility, right? So I think that's an important caveat is like shortening the timeframe, making it easier on yourself and having much more conviction in the numbers is one area where it could be very helpful. And then I would also add, like there's another nuance here, which is a lot of businesses are very seasonal and in your slower months.

you have less revenue coming in and you're also building up inventory ahead of the busy season. And so in those times of the year, it might make sense to make sure you're not flying too close to zero in your...

in your bank accounts. there could be like seasonal times, there could just be tough times where it's needed. But I would never say that like it's always needed all of the time as like a blanket rule. What do you think, Jon?

Jon Blair (05:12)

Yeah,

a couple of really great points there. One is seasonal use of weekly cash flow. I have a client, one of the very first clients at Free to Grow CFO. I served them as a fractional CFO for like the better part of two and a half years. And there was twice that we needed to use it. And we, in that case, we tried six week visibility. And we said like, hey, six weeks is really easy to pull together. We can pull together quickly.

If we decide we need more, let's tack on additional weeks, but let's not like pour over spending all these hours on a 13 week cash forecast if we really need to know how are we gonna do in the next two to six weeks, right? And so we activated this forecast twice and guess when they both were? The weeks leading up to Black Friday, right? Where we had a lot of inventory on hand and we knew sales were coming, but we were...

Things were tight because we had a lot of cash tied up in inventory, but we knew it was for a good reason. That was Black Friday, Cyber Monday coming up. And as soon as, you know, the, the faucet of cash inflows turned on during the holidays, we stopped running that weekly model. And again, so like it had, there's a good why behind that. There's specific situational questions we were seeking to answer as a management team. Right. I do want to point out one other thing too. That.

is we're assuming, Jeff and I are assuming here, that you have a monthly financial model that you're using at the same time, right? So like, I don't want to differentiate, lot of the brands, and I think you'll have something to say about this, Jeff, because you have a couple very recent examples. There are several brands who come to work with us and they have no monthly model and they only have a weekly model, right? And so, and it's 13 plus weeks, I've seen one that was 53 weeks, which is crazy. And...

Jeff Lowenstein (06:58)

Yeah.

Jon Blair (07:05)

And so again, this assumes, think about using both of those models for the time horizon that answers the questions that you want to answer with each of those models. So think about where they overlap, but don't waste time duplicating the visibility that you get in each of them, right? Like I know you've got some examples and thoughts around that too, Jeff.

Jeff Lowenstein (07:30)

Yeah, mean, so we started working with a brand just this past fall. I think we started in November. And there was both a very detailed weekly forecast.

for cash flow purposes and also a monthly financial model. And what we found was that the monthly was not really getting any attention and was basically not used, even though people were spending time preparing it. The weekly one was very detailed and it had a lot of assumptions, a lot of...

complexity. And when we, you know, we had an honest conversation with the owner and we said like, Hey, you're in a good enough place where you're not fighting every day to make payroll. We think there's a lot more strategic value in this monthly model. If you can look out three, six, nine, 12 months, understand seasonality, understand your margins from a higher level, you're probably going to get a lot more out of that. And so we actually, in this case,

put both the weekly and the previous monthly to the side and started from scratch with our own Free to Grow version of the monthly. And it's been going great. It's been going much better. We can have really in-depth discussions about strategy and product launches and things like that, rather than just reviewing numbers. In this case, the weekly forecast, they weren't fighting to make payroll. they were reviewing all those detailed numbers, but it wasn't really moving the needle.

or the brand owner. So in this case, we found it helpful to put that to the side.

Jon Blair (09:15)

Yeah, and like going back to asking the question why. Why do I need any given financial model? What questions am I seeking to answer, right? So like if you're saying, hey, I fear I'll go out of business, then there's a use case for a more detailed, maybe longer time horizon weekly cash model. Do I need, or let's just say that your why is I needed to make AP payments this week.

Well, oftentimes I see a two to four week weekly cash plan is plenty fine for making AP payments, right? At Guardian Bikes, we didn't, the reason why I think the 13 week thing is funny is because we didn't go look up how far out our weekly cash model should go. We chose 13 weeks. I read this book called, it's actually called Future Ready. And it's not about the numbers behind forecasting. It doesn't teach you all these models.

Jeff Lowenstein (09:50)

Sure.

Jon Blair (10:13)

It's about the theory and the strategy behind forecasting and what it tells you amongst many other things. It's a fantastic book. I recommend anyone read this because it's not just for finance. It's not just for finance nerds. It's also, you know, it's very applicable to like a founder. But is that the time horizon for any forecast in this case, we're talking about a weekly forecast.

Jeff Lowenstein (10:16)

Yeah.

Jon Blair (10:39)

That time horizon should exist because strategically you need to have visibility at the furthest out that that forecast goes. And if you don't need visibility, if the visibility you need stops before your forecast time horizon, you're wasting time, right? And you're making something more complicated. Because at the end of the day, forecast exists to make decisions around. They don't exist to predict the future. We chose 13 weeks. Why? Because our manufacturing lead time.

was 13 weeks. And we were in a very tight season of building a lot of inventory and we needed to see how these really big vendor payments were panning out on a weekly basis going out 13 weeks. As 13 weeks was the furthest out that they're, like if we committed, if we placed a PO today, a payment would be due in 13 weeks more or less, right? So that was the.

Jeff Lowenstein (11:37)

Yeah.

Jon Blair (11:38)

There were there were no payments that we could even forecast beyond 13 weeks because we hadn't placed POs for that yet So again have a strategy behind why you're using this and really figure out Where is weekly needed? Versus where is monthly needed and at Free to Grow our financial models forecast the P&L and the end cash flow and balance sheet so you have a weekly or you have a sorry you have a monthly view and so you know

Asking why the time horizon should be X number of weeks, what questions you're going to seek to answer with that, and being willing to activate and deactivate weekly cash flow situationally is actually just a wise use of time and resources.

Jeff Lowenstein (12:28)

I was going to go deeper on something you just said actually. Our second myth, I think, on the list, why don't you share that before I share my next one.

Jon Blair (12:38)

Yeah, yeah, for sure. Nice segue here. So the

second one, and we've talked about this a little bit, but we'll go deeper. Myth number two that we're gonna bust here is I need a super granular, sophisticated financial projection model to make sound decisions. Jeff, take it away.

Jeff Lowenstein (12:55)

This one gets me jazzed up because I feel so strongly. So the answer is you don't, obviously. You need a model that's detailed enough to get you to make decisions, informed decisions, right, about...

levers to pull in your business, right? And that's really the North Star that we as Fractional CFOs are trying to achieve and help our brand founders with. But really, what we were just talking about, the length of your weekly cash flow forecast, also whether you need one at all, is in asking those questions, is in service of saving time and effort. And I want to talk about time and effort.

Myth number two, not having too much of a granular forecast is also saving you time and effort. And why is that so important? As an ecomm founder, you have so, so, so many things to do on any given day that you don't have time to sit, even if your fractional CFO had endless hours to sit with you for two hours a day and go through every detailed financial.

metric and number. You as a founder don't want to nor should you be spending time on all that stuff. You need the highest quality financial information in the shortest amount of time that can lead to a good decision. And that's really the service that we're trying to provide and the end goal that we're trying to provide. It's not about just saving you time for the sake of time, right? It's giving you your hours back so you feel confident.

in those decisions, right? And that you're walking away from that meeting, not spending more time trying to figure out stuff that you're still wondering about or asking other people for other information. You have the ability to go and make decisions fairly quickly, right? So that's like something that I care a lot about because that's really what we get excited about as CFOs is like, okay, the analysis was done well. We saved time by simplifying it and only focusing on what matters.

therefore the brand founder was able to quickly and confidently make a decision about something in their business. So yeah, that's that's that gets me excited. How about you?

Jon Blair (15:21)

way.

Yeah, man, there's too much that we could talk about on this. This is probably a whole episode, seriously. Couple things. We need to stop asking, can I analyze this? And start asking, should I analyze this? Right? And why? Because an e-comm speed wins. Things change constantly in e-comm. So you over-engineer a model or a report.

Jeff Lowenstein (15:46)

Yes.

Jon Blair (15:50)

Dude, we see this all the time. We saw this all the time at Guardian Bikes. We see this across our existing clients. You over engineer this crazy report and then guess what? Something changes and that structure doesn't work anymore, right? And so here's what we're not saying. We're not saying make this super rudimentary financial model that is not useful. We're saying build the granularity where the granularity matters. Use the 80-20 rule. What are the 20 % of variables?

levers that you actually want to act on and should act on as the founder to produce the 80 % of the results that you're looking for and I gotta be honest with you. I'm not trying to like 80-20 is a cliche that we see it time and time again. There really is only 20 % of the levers that you're polling, right? And in our world, generally, this is a little bit of a generalization, but it holds fairly true across most our clients. It's

It's ad spend profitability and it's inventory, right? And I would say even oftentimes people come to us with the ad spend profitability being like the thing they're trying to understand first and foremost. And so what might this look like in practice? It might look like, hey, let's not waste a bunch of time going line by line on everything that makes up your fixed overhead. Let's use the recent trend in the financials and put one number for fixed overhead, but let's dive deeper on the marketing analytics, right?

and the marketing model, and let's look at LTV and first order versus repeat orders, right? Now, can we build out granularity over time? Yeah, but let's be, we look at it from the startup perspective, like the classic lean startup is like MVP and iterate, right? MVP and iterate. So we actually try to get a model out, and I can say this with a lot of confidence without making Jeff who runs all our operations feel nervous that I'm saying this in the marketplace.

We get the first model up in a few days. It's up in a few days from when you sign on with us and we put it into action. We start having conversations around it with the client immediately. So you can start taking action and then we iterate every month. Every, there is not a month we're not working on the financial model. Right? And so after working together for months or years, we're crafting it into what is needed to make decisions, but we're always only changing the variables.

Jeff Lowenstein (17:46)

Yeah

Jon Blair (18:14)

that we're seeking to make decisions on. I know you have a lot more to say about that though, Jeff.

Jeff Lowenstein (18:20)

Yeah, I mean, you nailed it. But yeah, thanks a lot. Now everyone's going to say, hey, I you can start a model in 24 hours. So thanks for that, Jon. But I mean, it's true. We are very particular about having a really, really solid core model that we can get up and running very quickly and answer initial questions. And from there, we iterate. Literally, later this afternoon,

Jon Blair (18:27)

Hahaha!

Jeff Lowenstein (18:48)

we're reviewing the second version of a model with a new client that we just started with literally just last week. And this second version has a lot more detail than the first one about their inventory ordering plan. And so we're to go really deep and help them understand their cashflow dynamics much better. And it's interesting because in this call later today, I actually don't think the numbers in the model that we show up with are going to be

What's interesting? Sure, we'll look at them, but that's a starting point. The real value is in when we look at the model on a screen share together, talk about, what if you do this? What if you do that? Push this number up 20%, that one down 20%. How does that flow through the rest of the model? And what does that do to our cash flow? And it's those conversations that I think are really valuable, where it's like,

What if we do this? How does that impact the numbers? And what if we do that? That's how you get more of an internal intuitive feeling of your own business, right? It's not like your fractional CFO is showing up and saying, here's the forecast and here's what you have to do. know, we're not, we're not prescriptive in that way. We're collaborative in the sense that like we're looking at the numbers and trying to all as a group, get an internal sense of the dynamics.

how a business behaves. It can be very different from one to the next. You could be in different categories that have different margins, marketing efficiency levels, different lead times, different payment terms. All those things play a big role in the cash flow dynamics of any given business.

Jon Blair (20:37)

Yeah, you know, one thing I always say is like, hey, building out a forecast or a financial projection doesn't just, doesn't predict the achievement of goals. People taking action against what that model tells us about if-then relationships, right? Cause and effect relationships. It helps you figure out where people should take action to achieve your goals. You don't just build out a projection and go, our goal's 10 million.

Jeff Lowenstein (20:54)

Great.

Jon Blair (21:05)

Looks like this projection says we're gonna hit 10 million. Sounds great, we're gonna hit our goals. It tells you what levers you can, it tells you if you pull this lever, this is what happens. If you pull this lever, this is what happens. So it's not a predictor, but the whole concept, the definition of a model, right, is that it helps us understand the world that we're in in a simplified manner so that we can take action, right, and hopefully pursue, hopefully,

create the desired outcomes that we want to create in our businesses. Another thing that I wanted to mention that we always talk about is just like another best practice, model should be as granular as is needed to make the decision that's at hand. Like with the decision you have right in front of you. Don't try to make it as granular as you need for every decision the business ever has to make ever in the future. The key decisions that are at hand. And the beauty is,

We don't do modeling from like a stat, what's called static budgeting, which is you just set a model for the year and you come back to it and that's your model for the entire year. We re-forecast every single month and by doing that, we then make the model for that month as granular as it needs to be for the decisions at hand in that month, right? And so it's all about taking steps and, and, and, and,

And not just iterating, it's about taking action and iterating as you realize there are new actions that need to be taken. Right? And so in many ways it takes the pressure off of you to have to get it all figured out. You have to get the whole future of the, of the business figured out right now as you build the model. And, and I like one other thing, what are, so,

This concept for me originally came about because I had a crazy model at Guardian Bikes. Like it was super crazy. It was so granular, SKU level. It was connected to the S&OP and inventory planning model. So it actually kicked out how much needed to be purchased at any time. And I actually like what what are your thoughts? What is your opinion or what have you seen an example?

about like issues that get caused when you join up S&OP or inventory planning models to the financial model.

Jeff Lowenstein (23:38)

So I've been dealing with this my whole career, I haven't always been in the e-comm world, this tendency, I've always been in corporate finance and strategy roles. And so there's always this tendency of if we just go a little bit deeper, we just do.

a little bit more analysis. we just break it down with this other dimension of looking at the data, the answer might be there. And I get it, and I've done it. As an owner of a business, you don't want to leave any stone unturned or you don't want to miss something for lack of hard work. And that's the tendency.

However, you can easily make yourself crazy with all that work. And it's not that helpful at the end of the day. And furthermore, you can't update it on a monthly basis or hold yourself accountable to it. It's just unwieldy.

Jon Blair (24:39)

Bingo. Bingo. That one's the tough one.

Jeff Lowenstein (24:46)

And so like, you can break everything down more and more and more granular on every single dimension, but especially in this ecomm world where you have so much data across so many different parts of the business, it's often not helpful to do the whole thing every single time. be clear, you do need to go super deep in certain areas at certain points in time. One brand that I am the CFO for, we've gone super deep on their shipping and fulfillment invoices, transactions,

like we're working with the 3PL to get like more data than just the invoicing and get like transaction level invoicing to really understand where some of the costs are going and if we can improve those. That's not something we need to do every month but it's super helpful to get a better understanding and make decisions on that you know this couple of months that we're working on it. So that's just an example like I've been through it throughout my whole career where like you can

yourself very crazy doing everything to the lowest level of detail but at the end of the day you know you have to consider what's going to move the needle.

Jon Blair (25:56)

Yeah, and you also come into play when you're joining inventory planning and S&OP models. For those of you guys that don't know what S&OP is, it's Sales and Operations Planning. It's basically the demand forecasting at a SKU level and then the replenishment inventory planning at a SKU level. When you connect that to the financial model, you also create interdepartmental-like dependency.

where if the inventory team is behind, the CEO or founder's like, hey, I need an answer to this question on cashflow. And whoever owns the FP&A model is like, dude, I can't update it. I'm waiting on the inventory team. And you don't need to, I used to think it had to be connected. Again, this book Future Ready completely changed my perspective. And it actually specifically says, do not ever connect those two models. Bring over the data that is needed.

Jeff Lowenstein (26:20)

Yeah.

Jon Blair (26:49)

to inform the financial model and also just get good at running scenarios like, if they buy this much inventory, you can sit down with your inventory team and say, what is the range?

of possible inventory purchase scenarios and they can usually give you something even if they're not done reconciling inventory or done calculating their latest PO and that's okay and there's one other thing that's been hitting home with me recently that I want to mention and this is like Jeff Bezos from Amazon just talks about this all the time and I think it's really really applicable to financial modeling and forecasting. Is a decision reversible?

Because if a decision is easily reversible with minimal impact, right? If it gets reversed, then you shouldn't really even model at all and you should just do it. Or you should do the simplest form of modeling and then you should go. And, but you should say, here's the point at which I'm going to reverse this, right? And I'm going to go back to what we were doing before. If a, now Jeff Bezos says on the other side of the spectrum, if something is really hard to reverse, and the cost of reversing it.

Jeff Lowenstein (27:35)

Yeah.

Jon Blair (27:58)

is large, then maybe you should make another pass at the analysis. And so I'm drawing and there's a spectrum that exists between those two points, right? But like that's really important. I sell a lot of times clients ask me to model something and I'm like, I don't think we need to model it, right? Or you can spin up a quick sub model, just a brand new sheet in Excel and just model that thing in isolation. And, that's okay for that decision. It doesn't have to be interconnected into the financial model. And so I think

Jeff Lowenstein (28:06)

Yeah.

Yeah.

Jon Blair (28:27)

Reversibility and difficulty to reverse and cost of reversing decisions is very important to consider in financial model and granularity as well.

Jeff Lowenstein (28:40)

I think it's, I remember that quote from Bezos, it's like a door one decision or door two decision, something like that, right? Yeah, I'm a big fan of the side calculations as well. Like you don't need to flow something through your full restatement model if it's just like an idea or improvement you're talking about. If you want to know the impact of adding an upsell app to your checkout,

Jon Blair (28:48)

Yeah, yeah, exactly.

Jeff Lowenstein (29:09)

pretty easy to do a side analysis to look at increasing the unit economics by some percentage or increasing your AOV. the right metric is, that's an easy thing to calculate on the side. It doesn't need to be fully baked in if you're just going test it out. So yeah, we do that kind of stuff all the time.

Jon Blair (29:36)

So as a recap, first two myths we've talked about, I must have a 13-week cash forecast. And then myth number two, I need a super granular, sophisticated financial projection model to make sound decisions. We've given you several examples, thoughts on best practices, mistakes we've made. What's the common theme? Ask yourself how granular and how far out in the future any forecast needs to go and why it needs to go.

out that far or be that granular. It should be in service of the 80-20 rule. It should be in service of getting visibility on the 20 % of variables that really, really matter. And most importantly, you should be able to take swift action. You should be able to take action quickly. And if your financial model, your monthly financial model or your weekly cash forecast are not allowing you to take good imperfect action on a regular basis,

because you're always waiting for the perfect action and never taking it, then you've got some issues with those forecasts. these are principles that we live and breathe here at Free to Grow. Quite frankly, we created these guiding principles for our team because we made these mistakes when we were working in-house at brands and we don't want to make that mistake for our clients. We want to help them take swift action quickly and on a regular basis.

So myth number three that we're gonna close up here with, horizontal firms that serve all industries can help my e-comm brand scale alongside healthy profit and cashflow. So we had a really cool episode several weeks back with Lio Pinchevski, he's the founder and CEO of FinalLoop, a really cool automated e-commerce general ledger accounting software. And he had a lot.

to say about this. And actually, funny enough, we know this, Jeff, because we run a finance firm, finance and accounting firm that specializes in e-commerce, but he actually said it in words that caused me to go like, huh, he's so right, and we don't pay enough homage to this. And so, since then, I've realized that we really need to be

Be willing to talk about this and be proud about the fact that Free to Grow is a bunch of e-commerce, accounting, and finance nerds, like straight up through and through, no exaggeration. What are your thoughts, Jeff, on like how much why an e-commerce focused firm like ours or any other e-commerce focused firm out there can serve an e-commerce brand from a finance and accounting perspective so much better than a horizontal firm that

quote, serves all industries.

Jeff Lowenstein (32:34)

Well, I have one word. Bench?

Jon Blair (32:38)

For sure.

Jeff Lowenstein (32:39)

No,

yeah. It's really interesting. mean,

It's only become more more clear as we've gone through building Free to Grow and working with more brands.

challenge and how poor some of the bookkeeping can be outside of vertical specific firms. you know, Ecom is an amazing industry because it's the easiest thing to start. Anyone with an idea can go in Alibaba, find a supplier, spin up a Shopify store. There's very low barriers to entry and that's amazing. But what people don't always realize is that the financial piece and specifically the bookkeeping

is actually much more difficult than other industries and so they don't think about the books when they're starting a brand, right? They say, okay, any old accountant can do this and there's real nuance to getting it right. I mean, sure, you can pay 200 bucks a month to a bench and you can get a cash basis version of your books but it's not gonna help you make decisions. Sure, you can file your taxes that way and technically

boxes checked, your books are done, but getting real insights into your business takes a whole different level of understanding and knowledge, right? Everything from recognizing revenue between...

gross to discounts, refunds, Shopify fees and getting those all booked appropriately, but also in the right date, timeframe. That's not straightforward. You need someone who knows what they're doing. And then furthermore, the whole balance sheet challenge is hard for people who don't deal with inventory based businesses on a regular basis. And it's detailed work, but it's super important to have a system to get all that stuff right. Otherwise, you you don't have good data

and the foundation of the house you're building is shaky, right? That's scary stuff. So it's super important. And I think there are some quality generalist firms out there, like they're good at what they do in general. But when it comes to e-comm, if you don't have specific industry expertise, it's gonna be really hard.

Jon Blair (35:03)

Yeah, 100 % we obviously we've talked a lot in our content about the traps that brands fall into using ecomm or using bookkeepers that don't understand ecomm and getting crappy books. On the FP &A side though, I'm starting to develop a very firmly held belief that I didn't have when I was just running one brand.

at Guardian Bikes, now that we've served dozens and dozens of brands, I'm starting to realize that, and you mentioned the balance sheet, right? There's the balance sheet, why does the balance sheet matter for an e-comm brand? That's the real question, right? Like, why does the balance sheet matter? Because as a DTC brand, or even a multi-channel e-commerce brand, even if it's not full DTC, but if you're heavily,

Jeff Lowenstein (35:45)

Yeah.

Jon Blair (35:55)

Selling straight to the consumer either through a marketplace or through your own Shopify store your own DTC site You are taking all the inventory risk yourself as the brand and you're placing the bet that you're gonna sell it Let's contrast that to a brand. That's heavy on the wholesale side So like maybe a food and Bev CPG brand do they have to manage a balance sheet? Of course they do but they get big POs from retailers and they're like, alright

This is committed, right, to a customer. And so I'm not saying that managing inventory is easy. It has its own challenges, but there's this real big added risk as an e-commerce brand. You're buying big bulk orders of inventory and you're selling them to the consumer one at a time. And so the pressure that that puts on your cash flow via your balance sheet is actually a lot, there's a lot more at stake there.

Jeff Lowenstein (36:27)

Mm-hmm.

Jon Blair (36:53)

for an e-comm brand. And then additionally, you look at ad spend. You know, when you have, again, a big wholesale or physical retail-focused brand, there are certainly sales and marketing costs, but your sales volume is not really tied to how well you can spend ad dollars. It is in the e-comm world, and you're spending big-time ad dollars as you continue to scale. And so, why am I bringing this up?

because really good e-commerce bookkeeping gives you transparency on like margins which help you assess ad spend efficiency, right? And it also gives you really clear transparency on inventory on the balance sheet which are both uniquely, they're uniquely e-commerce specific challenges, right? And so if you have a horizontal, I'll give you an example. I won't name any names, but we have two clients.

One is an early client that's a service business that we don't serve anymore because we're focused on e-comm now. And another one is an e-comm brand. Both of them, we parted ways like mutually that like it wasn't a fit for us anymore and it wasn't a fit for them. And they both ended up with a fractional CFO at the same exact firm. And funny enough, the same exact fractional CFO within that firm. And so this CFO

is now serving a service brand, a service business, and then also serving an omni-channel consumer goods brand. I'm not saying he can't handle it. I'm saying he has to solve two completely different sets of challenges in any given day when he's serving those two clients. Me and Jeff and our other fractional CFOs in our accounting team, all we talk about is the 30 plus e-commerce brands that we're serving every single day.

And so we see the same challenges again and again and again and again and again. We can share those learnings across our clients and we are abreast of all the changes in the e-commerce world because we are just immersed in that world. And so are all of our partners, our adjacent service providers and all that kind of stuff. And so we can actually, you may get an okay, you may get served fine at a horizontal firm, but you're definitely missing some value.

of with a team of nerds that are just doing e-commerce all day.

Jeff Lowenstein (39:20)

preaching to the choir here. I agree.

Jon Blair (39:23)

What are some things that come to mind for you when you think about opportunities that an e-comm focused firm has to take advantage of pattern recognition and shared learnings across the client base?

Jeff Lowenstein (39:36)

Wow.

Yeah, I mean, it's it's it's core to what we do. So we do have the internal process and mechanisms to share learnings, weekly meetings, biweekly meetings. I'll give a couple of examples. So 2025 planning was something we've gone through with most of our clients over the last few months. And we came together as a group and shared like, hey, here's how

we think best practices should be to set a plan and think about managing that throughout the year. Obviously, there's nuance for each client, but a general process is helpful for each brand. Another one that we did recently was Black Friday, Cyber Monday planning.

That was amazing, right? There's probably not many other groups that are coming together saying, hey, what are the best practices and analyses and support we can give our brands during such a crucial time while they're busting their butt? What can we do to support them? So those are a couple of examples of what we've worked on recently. trying to think. mean, we have templates for just about

every type of analysis we've done in the e-comm world. Sometimes it's a deep dive on demand planning, We have a template for that. Sometimes it's a deep dive on marketing efficiency and LTV to CAC analysis, right? And like, you know...

Every e-com brand has different numbers, but in general, it's the same overall analysis that needs to be done. So those types of things are not only available to us at Free to Grow, but it's part of our onboarding that we explain to new people on the team. Like, hey, here's where we keep this library of templates and analyses that we like to do for our brands.

Jon Blair (41:48)

Yeah, and I think one, I didn't realize this when we started the business and started growing it, but there's another real, actually, this is a huge advantage of working with an e-comm specific firm. It's the ecosystem connections that we have in e-commerce. And so actually most recently, top of mind, there's something about the turn of the year and people starting to look for, you know, new service providers and we get asked all the time.

What are the marketing agencies that you're recommending? What are the lenders that you're recommending? And the thing is, we can go and we can say, hey, go talk to this agency because we know that they did a really good job in your product category. Or they did a really good job for the stage that you're in, right? We've seen them solve the problem that you have before. Same thing with lenders. Like, hey, we're gonna have you.

we're gonna recommend this lender, but it's because we have three other clients using that lender and they have the same issue that you have, right? And so when you're in the e-comm world day in and day out, you develop ecosystem relationships. Jeff and I both had a really deep e-comm network before joining forces and then when we got to bring it together, you know, I feel like one of the biggest superpowers we have is we probably have one or more people

that we could connect you with to solve any problem that you're having that Free to Grow can't solve with our service, right? And you're not necessarily gonna get that at a horizontal firm. And I will say, Nick Kirby from Flexport, he's a local sales executive out here in Austin, I was on his podcast like a couple years ago, and he said something that again was like, kind of blew my mind. And I was like, I wonder if this is true or not.

But two years later, I can say it is definitely true. He goes, hey Jon, I think you're selling yourself short. I actually think that if an e-comm brand comes to Free to Grow, they get more value than the average full-time CFO. And here's why. Because an e-comm brand in the lower to middle market, from a full-time CFO perspective, has a budget where they're probably gonna hire someone.

who isn't that experienced, maybe they used to be a controller and this is like their first shot at growing into being a CFO. They're learning on the job, right? And they're figuring it all out. They're building the plane while it's flying. But you've got a team that's been in e-comm for years and years and years and years and for a fraction of the cost of someone full-time who's fairly junior, they're getting actionable advice really, really quickly. And I was like, huh.

I've never thought of it that way. But I wholeheartedly believe that, that we do provide more value for the lower to middle market than a full-time CFO for a cheaper price. But why? Because we're Ecom vertical specific. That is the superpower. So, is there anything else that comes to mind on your end, Jeff, in terms of just like the advantages of being vertical specific?

Jeff Lowenstein (44:57)

Thank

Well, I'll give, while you were talking, I thought of two specific examples to make it more tangible for people that I wanted to share. So on the ecosystem and our network, we had a really great example just recently where there's a brand we are the CFOs for.

It's not me or Jon, it's another person on the team who does an awesome job. And she was saying, hey, you're managing your own ads. This feels wrong. This feels like you're not nearly as efficient as you could be based on my experience in other places. And she brought that to the group and we discussed it. And we actually said, hey, there's an agency that we know does good work that

we can ask to do a free audit, a free recommendations without selling their own service. Because of the Free to Grow relationship with that agency, we were able to get free value provided to that brand. And everyone walked away from that saying, that was really helpful. And thank you so much for bringing them in. That was an idea that we actually brought to the brand. It wasn't them asking us. So that was a pretty cool example that we just had. And then the other thing I wanted to just

mentioned you're talking about is as a fractional CFO you see a breadth of different brands within the same industry so your experience might be better. I think we need to go calculate Jon how many Black Fridays we've been through as a firm.

Jon Blair (46:48)

For sure, for sure, man.

Jeff Lowenstein (46:49)

Because the

number keeps rising every year. And that's pretty cool. We have data that we can use. And we do use it a lot of the time for certain analyses, like, hey, how are my metrics compared to benchmarks? How am I doing? And we do some of that. But we probably don't even do enough of it, nor do we advertise it enough. So I think that's an exciting opportunity for us as well.

Jon Blair (47:10)

sure.

Yeah, and I mean, I could be wrong, but just thinking off the top of my head, if you think about each client as a Black Friday, right? Because like how many brands, like we've, think collectively, we've been through, and if we go back to previous jobs that we had in e-commerce, all of us like before this, right? We're for sure like close to a hundred or more Black Fridays, I'd have to say, like between the whole team.

Jeff Lowenstein (47:25)

Yeah, that's what I mean.

that's a good point too. Yeah.

If you include prior jobs

within the team, I'd say we're over 100. Yeah.

Jon Blair (47:48)

Yeah, and

that's important. You don't want someone who's been through their just one or zero or a couple Black Fridays, because everyone knows when you're scaling an e-comm brand really fast, guess what? Every Black Friday gets bigger than the one before, meaning what? More at risk with the ad dollars you're spending, more at risk with the inventory you're buying, and so you want people who've been through it before. Well, unfortunately, we've got to land this plane, but this is a...

Jeff Lowenstein (48:03)

Thank you.

Jon Blair (48:15)

This was an awesome conversation, even better than I thought it could have been. Just as a recap, what we're talking about here is don't fall victim to the common DTC finance myths out there. You don't necessarily need a 13-week cash forecast. You don't need the most granular, sophisticated financial model to make sound decisions.

Vertical specific ecomm or DTC focused firms are gonna serve you way better than horizontal firms that serve all industries You know if anything we talked about here piqued your interest and you're like hey, how could Free to Grow potentially help my DTC or ecomm brand? Consider going to our website and filling out the intro call request form because one thing we can do that's literally no risk and super easy to set up is an intro call and our free CFO audit

Our free CFO audit gives you as a brand founder a test drive of the insights and recommendations that we can make as CFOs. And it's all fully confidential. It's an NDA and giving us access to your Shopify store and your accounting system. And it's just a really low risk way to see like, am I actually missing out on financial insights by not having a fractional CFO? So.

You know, if you're interested in learning more, consider going to our website, freetogrowcfo.com and filling out that intro call request so we can do a free audit. But you know what? If for now you're just enjoying the content, consider following me, Jon Blair, or Jeff Lowenstein on LinkedIn. We're posting tons of helpful tips every week and month on scaling a profit-focused DTC brand. And man, this is fun. Jeff, I'm gonna have to have you back soon and we're gonna pick the next three myths.

and we're gonna bust them together,

Jeff Lowenstein (50:06)

This was great. Thanks, Jon.

Jon Blair (50:09)

Cool. Well, until next time everyone, scale on.

The Future of Ad Spend Attribution

Episode Summary

In this episode of the Free to Grow CFO podcast, Jon Blair and Michael True discuss the intricacies of scaling DTC brands with a focus on marketing measurement. They explore the transition from traditional click-based attribution to marketing mix modeling, emphasizing the importance of understanding the relationships between various marketing channels. Michael shares his journey from the music industry to founding Prescient AI, a platform designed to provide insights into marketing performance across multiple channels. The conversation also touches on the challenges of measuring retail performance, the impact of iOS 14 on digital advertising, and the role of AI in enhancing marketing strategies.

Key Takeaways

• MMM is essential for brands expanding into omnichannel marketing with significant top-of-funnel spend.

• Tools like Prescient AI can help scale profitably by uncovering relationships between channels that traditional attribution methods miss.

• The future of marketing measurement lies in combining MMM with other tools to create a full picture of brand performance.

Episode Links

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

Mike True - https://www.linkedin.com/in/michaeljtrue/

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

Prescient AI - https://prescientai.com/

Meet Mike True

Mike True is the co-founder and CEO of Prescient AI, which provides AI-driven marketing mix modeling solutions for omnichannel brands. Prior to starting Prescient, Mike was responsible for helping clients of App Annie, IBM, and Oracle generate millions of dollars in revenue through the implementation of various artificial intelligence and analytics solutions.

Transcript

~~~

00:00 Introduction

05:48 Understanding Marketing Mix Modeling

11:58 Navigating Post-iOS 14 Challenges

18:11 Insights on Retail and Delayed Sales Data

25:49 Understanding Diminishing Returns in Ad Spend

32:02 Integrating Prescient AI into the Marketing Tech Stack

38:07 Closing Thoughts

Jon Blair (00:01)

Yo, what's happening everyone? Welcome back to another episode of the Free to Grow CFO podcast where we're diving 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. Today I'm here with my buddy, Michael True, co-founder and CEO of Prescient AI. Michael, what's happening, man?

Michael True (00:25)

What's up, Jon? Good to see you, brother.

Jon Blair (00:27)

Yeah dude, I don't know if you guys are feeling the same way but we're like kind of in this sprint right now between Thanksgiving and and like the Christmas season in terms of like I don't know if you guys are seeing the same thing but in our world everyone has gotten through Black Friday Cyber Monday so they're starting to think about 2025 what improvements they they may need to make for us on the accounting and finance front I'm sure there's people thinking about how to measure their marketing better but are you guys

Are you guys kind of a race to the finish line before people start disappearing for Christmas?

Michael True (00:58)

It's interesting this year where, you know, we had, there was some brands, I would say that pre Black Friday Cyber Monday, we're starting to think about tech stacks for 2025. And then we've got some, some in bounds and some re-engagements post Black Friday Cyber Monday, really digging into 2025. We made it a pretty clear priority or a pretty clear like requirement. You know, during certain weeks, there was no outreach to anybody that was not a customer. Just let people, you

Jon Blair (01:09)

Mm-hmm.

Michael True (01:25)

stay heads down on one of their busier times of the season. So starting to pick back up now for sure.

Jon Blair (01:29)

For sure,

for sure man. Well, I'm stoked to have you on the show. Today we're gonna be talking about, well, marketing measurement, I'll say in general, but more specifically, getting more specific about marketing mix modeling, which you guys do over at Prescient AI, versus what I'll call the more traditional click-based attribution, which is what I would say the vast majority of founders in the DTC world that we operate in.

are used to using to measure marketing performance. But before we dig into that on a more detailed level, I'd love to hear a little bit about your background and your journey to founding Prescient AI.

Michael True (02:10)

Yeah, so my background has always been in big tech. was largely in the database world at Oracle IBM, then moved into the analytics world over at IBM and then into their Watson team, which was, I don't know if the folks might remember, is this little AI thing that beat Ken Jenner on Jeopardy, long time ago.

Jon Blair (02:25)

yeah.

Yep, definitely remember that.

Michael True (02:31)

So my focus is predominantly on like financial services and the healthcare system, know, deploy, flying around and deploying software across at that time, physical servers, like an x86 server. And then started to see the migration to the cloud. Yeah, it was just nothing to do with DTC for a long time until, until recently. I've met my co-founder, Cody. I had been dabbling around in some ideas in like the AI space and found myself into the music space, trying to predict tours for record labels. And,

COVID hit and touring went away. Got really lucky that that happened honestly, because the shift had, the focus had shifted for labels. When COVID hit everybody's inside. Well, what are people going to do when they're inside? They're not going to go to a tour. They're going to stream music. And so there's attribution in the music industry had not really existed because there's no Google analytics behind Spotify and Apple. So there's no last click. yes, I met my co-founder, Cody.

Jon Blair (03:10)

Mm-hmm.

Yeah, for sure.

Interesting.

Michael True (03:26)

I'd like to consider him the Michael Jordan of research science in this field. He's a very competitive researcher. We met and we started building, he started building models and I started selling models to a major label. And they did a really good job of being able to measure, forecast and optimize marketing spend for Cardi B and some really cool artists during their early 2020, 2021.

Jon Blair (03:52)

That's awesome, So I actually was a touring heavy metal musician for a number of years. And so I've, yeah, this is real. That's probably a whole nother podcast episode, but the music business is interesting in a number of different ways. you know, I'd love to, so how did you go from that kind of like marketing analytics in the like label world to, you know,

Michael True (03:58)

No way, is this for real? It's awesome.

Jon Blair (04:20)

kind of this focus on e-commerce, digital advertising in more of the DTC or like omni-channel e-comm space.

Michael True (04:27)

Yeah, great question. It was February of March of 2021. And we predicted Cardi B's number one single up at 96.3% accurate by recommending the label to ship from X channel to X channel to X channel X channel and then predict how many streams she'd get compared to their existing spend. Predicted at 96.3% accurate was like a big win for us. And we weren't too sure what we're going to do next with the technology.

But I'm sure everybody on here will remember April 26th of 2021, the day when Apple announced iOS 14.5. And my co-founder called me and was like, hey, which industry do you want to go to? He's like, I think we should go raise capital and I think we should build a SaaS platform. This model can work across any dollar spent online, like which vertical do you want to start with? So we talked to like healthcare and financial services and ultimately made the bet on e-commerce at the time.

Jon Blair (05:02)

for

Michael True (05:22)

because just like streaming, e-commerce was exploding and we had made a bet that the technologies that were being applied to solve for iOS 14.5 at the time was the right call, right? was Meta, people were still pumping on Meta Google and a pixel was really, could really solve for that. We had some Prescient, which means having knowledge of foresight and would have meant before it occurs that.

Jon Blair (05:37)

Yep. For sure.

Michael True (05:48)

brands would start to want to scale into top of funnel. They would want to go more omnichannel. And we're going to have about a two year head start on the research of these models. Because everything that matters is the math, right? All that matters is the math. And we have the math infrastructure. We had a head start. And so yeah, we started in DTC, shipping to Amazon. We're coming out with a retail model here in Q1 as well. Yeah.

Jon Blair (06:12)

Nice.

Dude, that's awesome. I love that. So I want to start with just like the fundamentals, because I think that, you know, we work with dozens of DTC brands and I think still, well no, I mean, it's very clear that still, you know, kind of the go-to is Triple Whale, which has a number of different issues in my personal opinion. But I think they're starting to

the vast majority of brands are starting to get exposed to this concept of marketing mix modeling. So like at a basic level, what is it and how does it differ from traditional kind of click-based attribution?

Michael True (06:56)

Yeah, for sure. first and foremost, it's like, the MMM is not the source of truth. The MTA is not the source of truth. Incrementality is maybe the closest thing at a point in time you're going to get to source of truth. Source of truth is the marketer. There's just a variety of different ways to measure something that are trying to give you the ability to do data like measurement triangulation. I'd say a good example, we send Triple Whale I don't know, two to five deals every week for sure.

Jon Blair (07:06)

Sure.

Mm-hmm.

Michael True (07:22)

and so I guess the difference of a brand that would come to us and say, Hey, we're on, we're on Shopify, we're on Meta and Google. They don't need an MMM. They're going to be onboard to our platform and then leave our platform because it's just, they don't need that sort of measurement at the time. Right. But when you're a brand that is starting to go into YouTube, TikTok, podcast, linear TV, new channels like app loving really hot top of funnel. If they have a DTC plus Amazon presence, even better fit for an MMM model. And so.

Jon Blair (07:44)

Mm-hmm.

Michael True (07:51)

What an MMM is not trying to do is trying to say, Jon Blair saw this ad, click this ad, click this ad and have a deterministic customer journey. What an MMM is trying to do, I always say like an MTA is going to tell you a lot about a little. So it's going to tell you a lot about some of the transactions that came through deterministically. Traditionally, a media mix model would tell you a little about a lot. So it's going to tell you a little bit about the relationships between all of your channels and your revenue on kind of a time series path.

Right. So one is a statistical model and then one is a deterministic model. So what is that causal relationship to, Hey, I'm increasing my spend. I'm sure a lot of the brands are seeing this. I'm increasing my Meta spend on my YouTube spend, but I'm starting to see some of my Amazon sales go up or I'm starting to see some of my retail sales go up or I'm starting to see, you know, our top of funnel for just our DTC store. Right. I'm starting to see like our last click is starting to take a whole bunch of credit where maybe it didn't deserve to have that credit in first place.

Jon Blair (08:50)

For sure, so am I correct in saying that like when we're talking about a brand where a tool like yours and just marketing mix modeling in general can start to become really valuable is when they have heavy top funnel spend and they have more than one channel where sales are potentially converting. That the more a top of.

funnel spending you have, the more sales channels you have, the more potentially valuable marketing mix modeling can become. Is that correct?

Michael True (09:23)

Yeah,

I wouldn't isolate it to being a requirement to be an omnichannel sales brand. But if you're a brand that's like four, we like to see five channels and above. call it like our sweet spot. Four to five is considered a good fit for us. Three to four gets kind of dicey. Anything less than three is just not a good fit for this. But you know, we'll have some brands. And then there's a sense of like, we have brands that are, you know, on Shopify and they're Meta Google YouTube. And we'll talk to them saying, well, we're planning to go into Tatari.

Jon Blair (09:42)

for sure.

Michael True (09:53)

you know, next year we're planning to have you in the podcast. We'll onboard them to the platform so our models can start learning their data from the channels they were spending on. And then as they start to layer on these new channels, we're able to pick them up, you know, at a much higher, much faster, if you will, to start being able to give them a pulse on how that new channel is performing.

Jon Blair (10:14)

So if you have a brand that is in that sweet spot, we'll call it five channels, right? Heavy top of funnel spend. If they are sticking with one of these more traditional click-based attribution tools like Triple Whale, what are some of the things that common pitfalls that you see that might get brands into trouble if they're just using.

something like that, and they're not considering using marketing mix modeling for measurement.

Michael True (10:45)

Well, the pixel or an MTA is not designed to measure a statistical relationship between, you know, views and, in revenue. It's really looking for that click. so when you get more biased towards bottom of funnel, it's not going to allow you to feel as confident in the measurement of, how is this heavily view based channel like connect the TV or YouTube actually driving our sales? And so

Jon Blair (11:01)

Mm-hmm.

Sure.

Michael True (11:11)

When we, quick aside on this, like when we first came in to decide to start with e-commerce, I interviewed close to a hundred DTC marketers. And the thing that I found out was, is I was trying to get to their why of like, measurement? Like, what is it? What is this why? A lot of people, like, I just got married. I want to buy a house. I'm paying off student loans. I have all these bills to pay and I'm coming into work.

and I'm being tasked to scale this business, I know that I can't do it anymore on just these two channels. I need to go into these top and funnel channels. And I just want to feel confident every day that like, I'm going to make the right bet, right? And so without leveraging an MMM, which they're designed to do, you know, that level of confidence is, you know, is not as strong when you're making those spending decisions.

Jon Blair (11:44)

for sure.

Totally.

Yeah, yeah, no, mean for sure. It's, in the post iOS 14 world, I'm always hesitant to say post iOS 14 world just because it's such a cliche at this point, right? But I've been in e-commerce for long enough to know what it was like then and what it's like now and how different things are from, in terms of having that confidence of like, I'm spending a dollar here and it's driving this. I feel confident in the connection to the revenue it's driving, right?

Michael True (12:08)

You

Jon Blair (12:28)

in the post iOS 14 world and I'll just say it's actually not iOS 14 in my opinion. It's that e-commerce is becoming more saturated, right? It's still growing. It's still growing at a nice clip, but there is a low barrier to entry to just fire up a Shopify store and fire up an Amazon seller account and start spending ad dollars. It doesn't mean that every brand is

you know, really sound with their marketing fundamentals or has really great products or even has a great customer experience, but there is a lot of competition, right? And so because of that, it's, it's driving brands to have to be really meticulous about understanding how profitable their spend is in any, any channel. And I would even venture to say that in many cases, the average brand is having to expand into more than just a Shopify channel a lot quicker.

than they used to have to say seven years ago. Seven years ago, you'd still could be like a first mover in a product category, DTC. you, and I mean like at Guardian Bikes, when I was at Guardian, we brought on a lot of people who left Tuft & Needle after the, they merged with Sealy Simmons. And they scaled to nine figures in revenue with very little top of funnel. A lot of it was Google.

bottom of, like, because they were the first mattress company to sell mattresses people were already searching it. That's a way different game than like, I need to find the next new set of eyeballs that I need to get to, right? I need to keep leaning into top of funnel and I think I need to get into a new channel and I don't have a lot of confidence of how that's gonna impact the bottom line. So it is, it is a stressful, stressful thing. I would say the one that we see most commonly and I've talked with Will Holtz who works with you quite a bit about this.

is understanding the difference between or how to think about how Shopify versus Amazon is performing when you're spending heavily on a top of funnel channel like Meta or YouTube. We see that all the time with the brands that we work with, And what I can tell you from a CFO's perspective is that there's no doubt that they're connected, right? But measuring the degree to which they're connected, right, is a different story.

What kind of advice do you have or maybe not even just advice, like how can a tool like Prescient help with understanding? You're spending heavily on top of funnel channels. You've got an Amazon store and a Shopify store. How can you guys help a brand discern how that top of funnel spend is driving each of those storefronts?

Michael True (15:09)

Yeah, and again, it comes down to the triangulation of, what are you seeing within your Amazon store, right? That's very deterministically based off the conversions that are taking place in there. With with Prescient and typically MMMs, you would see an MMM run once a quarter. And this is a big education thing we've been working people on. It's like once a quarter, maybe once a month, it's at the channel level and it's giving you a cross channel media measurement and maybe some recommendations on how to spend.

which unique to our platform, it allows people to test and iterate very quickly. So we have what we call halo effects, which essentially is we're taking credit from the bottom of funnel. So search across Amazon search across, you know, Bing and Google, and we're redistributing that credit up to the top of the funnel where we have the highest confidence that the likelihood that the awareness from this campaign is actually what drove conversions over onto Amazon. for us,

We do this at the individual campaign level. The models will run every single day. And so as you start to shift and test new spends based off of what you're seeing with our halo effects. a good use case of this would be, you know, a large cookware brand was spending on Mountain. And when they were looking inside of Mountain, the performance was not that strong, but we were showing incredibly strong performance. Well, because Mountain was only measuring over to their DTC store.

Right. And so when we started to say, actually, there's a lot of people that are sitting on, you know, their TV, probably on their laptops, they see your ad and then they go search, can we find a prime deal on Amazon and go search that way? So the granularity of what we're allowed them to do is being able to make very rapid and dynamic decisions on how to reshift their spend for non Amazon ads and then look at that impact and quantify that impact over time compared to, you know, how they were previously spending before. So.

Jon Blair (16:36)

Mm. Yep.

Yeah,

that's really interesting. Do you have any other examples that come to mind of like how you've helped one of your clients like really unlock but make decisions based off of the data in your platform to really enhance? I mean, obviously scale, but at the end of the day, profitable scale.

Michael True (16:58)

Thanks.

There was a brand, it's about a hundred million dollar beauty brand and they had Tatari turned on. He's become a good buddy of mine. Had Tatari turned on, actually down in Austin too. And he turned it off because they needed above a three row ass. And so it was like, I they have 2.67. So when they onboarded, they onboarded the Tatari and they can go back a year. And so he's like, I think that there were these two campaigns that were actually pumping that weren't getting credit. So we onboarded him.

We had all of like what the platform reported was being shown and we hadn't run the model yet. Bing was showing like a 22 ROAS and he's like, dude, that's way too high. I'm like, so what do think it is when we run the model? He's like, I think it's a six. So we turned on the model, ran a couple of days later, the insights come back and we had Bing at a 4.65. So the Delta between 22 and 4.65, we're gonna be redistributing that credit.

up to campaigns at the top of the funnel. Now they are DTC plus Amazon brand and their ROAS was actually just under 4.5. And so they turned Tatari back on and when they turned it on, they were able to go back and look at some of these like saturation plots, right? We'll be able to show them like, hey, where's your sweet spot of spending? know, you're oversea, if you spend two dollars and make $10, you can't expect to spend $2 million and make $10 million. Eventually there's going to be some diminishing returns. And so.

Jon Blair (18:38)

For sure. Yep.

Michael True (18:40)

our team would work with them and we started very carefully scaling and testing the Tatari channel after they onboarded. we'll be coming out with a pretty cool use case here in the coming weeks of how they're able to successfully scale that channel and continue to scale that to this day, continuously optimize the spend. And so there was a retroactive play of saying, hey, I onboarded to the tool. I was able to go investigate and confirm some of my hypotheses before with your MMM.

We turned the TV back on, worked with our team to scale it and we're seeing great problems and results from there.

Jon Blair (19:15)

So I'm actually curious, and I think probably maybe specifically in the retail channel, like physical retail, but there's probably some other top of funnel channels that I'm not thinking of that probably have the same issue. How do you guys deal with, we'll use retail as an example, you've got a channel where the sales...

the actual bottom of the funnel like sales conversion signal might be delayed depending on what retailer you're using and how quickly that data is available. How does that play into your models being able to provide insights about a channel where it may take a little bit to understand really what sell through is?

Michael True (19:58)

You're saying the example would be you have a brand that's selling in Target, Walmart, Costco, and that retail data might come in at certain granularity. You might get some DMA level data that comes in weekly versus just total sales that comes in monthly. Is that what you're asking?

Jon Blair (20:05)

for sure.

For sure. Sure.

Yeah, yeah. Like how do you guys deal, how do you guys advise brands on working with these data sets that come in? It's not like plugging into a Shopify store, right? Or an Amazon store. What is some advice or how do you guys work with some of those channels to get as timely insights as possible?

Michael True (20:36)

Yeah, so we leverage all of their existing media channels. So the data that when they onboard to our DTC chip platform, it's 12 to 16 minutes point and click and just all of that, you all of your paid social, your GA and your Amazon DTC data. For retail, it really comes down to, we have some retail clients that own their own POS and own brick and mortar stores. And that just data comes into a database. We pull it from there and we can run the model. but there's other examples where, you know, you're getting Costco data once a month.

Jon Blair (20:55)

Yeah, that's nice.

Michael True (21:04)

We've come out with what we call, it's like a configuration offering. It's more of a, you have a dedicated research scientist, right? You have a dedicated engineer and our team is working with you on just getting exports of that sales data. We ingest it, we run it through our models and then we actually come back with like a customized retail readout, which is going to show them the exact same thing as you would see with your DTC, within our DTC SaaS platform. So.

Jon Blair (21:17)

Nice.

Michael True (21:30)

Where are you overspending? Where are you underspending? What is that optimal budget? How accurately we back testing against the last 12 weeks of your sales? The last read we just did was at 98.2 % accurate, which was remarkable to see as researchers in this field. But it's a very similar output. It's just a human walking you through based off of whatever cadence you're going to be getting those sales data from. So it's a little bit more customized.

Jon Blair (21:47)

Nice.

That stuff's super important because we've worked with several brands that are in the higher eight figures pushing into nine figures and physical retail becomes kind of a like a must at that point, right? Like in this day and age, it's not to say that there aren't e-comm brands that reach nine figures. are, but I see them as the exception, not the rule. It's not like back in the day, Tuft & Needle could get to 150, 200 million and not have to get into physical retail where that ship has sailed.

But so, we're advising a lot of brands that are on the upper end of eight figures and pushing nine, like how to think about, how to think about the fact that these are all heavy top of funnel digital advertising spenders. Meta, YouTube, maybe even Connected TV, and that absolutely drives the physical retail channel to some degree as well, right? It's not a completely separate channel.

Michael True (22:54)

question.

Jon Blair (22:55)

So what, for you guys to able to provide some analytics about that is like, I think incredibly, incredibly important because in the past, I'd say like seven to 10 years ago, retail was kind of this black hole if you're a DTC brand expanding into physical retail. And I was like, hey, I'm sure we are driving some demand, but measuring exactly what we're driving is really, really hard. I would even venture to say, and I'd be interested to know if you have any,

kind of anecdotal kind of evidence of this, but like I've actually even seen if you can prove out, if you can start proving out a connection between your spend and sell through inside of a physical retailer, you can actually really start influencing the buyer's decisions on future purchase orders showing like, hey, you're getting free advertising spend from our efforts on Facebook and YouTube.

And here we've got this great model that Prescient AI put together for us where we can actually show you that. Like to me, I think that's a huge game changer when it comes to negotiating with buyers at Target and some of the big retailers.

Michael True (24:07)

Yeah, so we'll 100 % right. Because with the models, it's going to forecast out. And if they get in data, we have a mattress company. If you get data by the DMA level, we can actually start forecasting out what we think those predicted sales are going to be over the next quarter by DMA and start forecasting out what we think the change of CAC or new customers or ROAS is going to be by DMA or product category or SKU by DMA. And so it gives them a lot more ammunition to being able to go have those conversations.

Another interesting thing, think, just for folks and they're thinking about the omnichannel kind of retail spaces, we spoke with both Meta and Google and, know, Google Meta has now coming out with like a kind of think about it like an advantage plus shopping, like that sort of, you know, programmatic model, if you will, but doing it and being able to tie sales from their digital ads into retail stores. So the same thing with Google being able to do that. then, you know, if they're able to track your

Jon Blair (24:54)

Yeah.

Yeah

Michael True (25:04)

phone and have the IP address seeing a conversion in that location of that store. Now they're starting to trying to stitch together that relationship just as we're doing. We're just doing it across all channels, but Meta and Google are now starting to try to optimize for that as well.

Jon Blair (25:16)

Interesting.

That's interesting, man. So I'm curious, one, because, you know, Free To Grow, we work specifically with fast-growing, profit-focused ecom brands. They're not, they don't have a bunch of venture backing, right? So like, every dollar they, every incremental dollar they spend on ad spend, they need to have some confidence that it's driving incremental profit, right? Or at least incremental contribution margin dollars. One conversation we're always having with clients is, you know, to expect,

and being able to absorb diminishing returns over time because as you're scaling, we see diminishing returns. I'm curious, like, your models, do diminishing, when you talk about forecasting, do a lot of the diminishing returns get factored in based on, like, statistical models showing those diminishing returns in the historical data? Are there other methods you guys use? I'm just kind of curious about that.

Michael True (26:20)

Yeah, we'll plot out. It's one of our biggest, I would say, points is a quick aside on that is typically saturation plots have to use linear regression models. Everybody's seen the linear regression models where they're trying to show what is that plot. We figured out a way using some proprietary machine learning models to do non-linear regression models. so instead of trying to, what does that mean is a linear regression model is going to assume that connected TV and Meta.

Jon Blair (26:32)

Yeah, for sure.

Michael True (26:47)

have a similar shape of saturation, right? Because it's trying to fit that line to the historical data. What we try to do is we try to find the shape of the data so our saturation plots can look like a camel's back. They can look really wonky, right? What it allows us to do is really pinpoint historically what is that sweet spot of where you should be spending, right? But we also allow brands to do is run simulations. And so on the fly, right, you can type in, hey, well, what if I increase my spend to X amount, right?

Jon Blair (26:51)

Mm. Yep.

Michael True (27:17)

It's going to show you on the saturation plots where you end up and then what is the forecast over a certain time period compared to your existing spend. it's kind of like showing what is the incremental growth based off of adjusting my spend from here to here. So we allow the users to manually do that, but now our models just scan every single campaign factors in things like seasonality of the business, the buying cycles of the products, and it'll tell them exactly how much to spend on each campaign.

and then forecast out with a certain level of confidence what we think that predicted CAC will be. What do we think that predicted top line revenue? What do we think that ROAS is going to be? So it's a much more dynamic ability to look at saturation plots and then kind of tinker around and pull levers to see what will happen on the forecast.

Jon Blair (28:03)

That's interesting, man. That's super interesting. And I mean, it makes sense. Like the thing about linear, I've seen guys in their content on, you know, LinkedIn and Twitter talk about like these linear regression models to basically forecast the diminishing returns of your ROAS or MER. And like, the thing is they're just overly simplistic in my opinion. And such that like, these are real dollars that people are spending that they're nervous to spend. You can't have...

Michael True (28:29)

Yeah.

Jon Blair (28:31)

Like now every model is a model. Like the definition of a model is it is a simplified version of reality and it's not perfect, right? But it's gotta be close enough that you're not, that you've got some confidence in using it, right? I'm just curious, like obviously there's, there's, details that are like beyond the scope of this conversation and some of this is proprietary. So like, obviously I don't expect us to get into all this, but like walk me through how AI or machine learning.

is supporting what you guys are doing and how that is really kind of a game changer or like a, you know, a tailwind for you guys for having these really, really, you know, trustworthy models.

Michael True (29:13)

I would say the traditional a lot of the MMM's you'll see in this space have leveraged existing research papers that have been used since 1962, right? And some different sort of flavor of that, but they were always designed to do more longer term planning, saying, hey, well, here's how much you should distribute at your channel level. We'll run it a quarter later. We'll do something sort of retroactive and then being able to try to learn from this last three months to try to make a better season for next month.

These machine learning models, they call it, they leverage it like a Bayesian prior. So they have sort of prior beliefs based off of prior belief, meaning what is that saturation plot? What is that measurement? What is that seasonality based off of all of the learnings from your historical data? Now those priors can get updated with new data sets that comes in every, from in our case, they come in every single day from the ad platforms. So we're seeing what you made on Shopify. We're seeing all your GA data. We're seeing

how much you spent by channel, by campaign, what is the reported attribution from the platforms. And those will hit the models and the prior beliefs can change based off of the measurement, can change the measurement and the forecast based off of that new data that's coming in. And so it's kind of an always on robot that gets smarter and smarter as you go. the key thing, and I would just encourage any folks that are using an MMM or thinking about using an MMM is they do not like

Jon Blair (30:22)

Hmm.

Yeah.

Michael True (30:38)

consistency at the same spend thresholds. They want to see as much experimentation as you can. So you can start to see these saturation plots move. last point is the unique value of ours is I do that. We use the same dummy. It's an actual client, but we anonymize it. And sometimes we'll come in and do demos and I'll see three days before the saturation plots looked very different as they started to test their spend. So it's very unique to us. can almost

know, Cam from Hex Clad says it really well is like, it's kind of weird because yours runs at the frequency of an MTA, nearly every, it runs every day, almost at the granularity of going down to the individual campaign level. And it's doing all of these forecasting optimization models and halo effect models. And so, yeah, it's just a lot of statistical math that's learning from as much data as possible and looking for as much change as possible.

Jon Blair (31:32)

That's cool. what would you, what advice would you give if you got a brand that's healthy eight figures scaling their, you know, their, they've got multiple channels that say they're at five or they're approaching five and they're interested in getting something like Prescient going and they do. But what, what does the, what does Prescient replace in the tech stack and what does it not replace? What are some other things that you think that, cause I know that that can be a misconception with attribution, right? I see it all the time with like,

Triple Whale it's gonna do this. No, no, no, it's not gonna do that. It is good at this and I'll give it credit for that. But like, what will it replace and what will it not replace? And in your opinion, what are some of the other marketing tech stack tools that still should sit alongside a tool like yours?

Michael True (32:17)

I I kind of, I'll base it off of like what I see with like, you know, the guys at Jones Road and Hex Clad of like their form of triangulation. And again, they're very sophisticated in their approaches here, you know, Cody will, hey, Cody from Jones Road, I turned on YouTube, we ran an incrementality study, right? And just to validate like the incremental of this new channel, but it's only at a point in time.

Jon Blair (32:26)

Mm-hmm.

Michael True (32:41)

Then they match that up against what our measurement is and it matches up and it's like, well, now I feel confident in what Prescient is saying. And then they would use our optimization model, right? So now they've gained confidence in YouTube. They're looking at us for like, okay, well, what should we do next? Cause incrementality is only going to tell you what's happened at a point in time, but what do we do next? And how do we start to measure that in an ongoing basis where I have to continuously running all these tests. And so they looked at our saturation plot, scaled that spend, and then he ended up running a holdout, a three cell holdout after.

and the results match perfectly. And so now he's validated YouTube with us as this channel and he feels really confident in scaling that channel. Now on the other side, a lot of these brands, pretty much every brand we onboard is using an MTA when they start using us, but they realize they need to use us to scale top of funnel. The majority are large enough and they're hungry for data and they're using this from a triangulation perspective to look at creative analytics within Side Triple Whale because we're only going down to the campaign level.

Jon Blair (33:37)

Yep.

Michael True (33:39)

But I have

Jon Blair (33:39)

Yep.

Michael True (33:39)

seen recently some of the brands that they're like, hey, I have such a good pulse on my Meta in my Google, right? Through the platforms and just running these channels for so long. Like, do I really need an MTA anymore? If I have such a good pulse, I really need to be focusing on YouTube and TV and making more of an investment and focus on the MMM side of the house. And so I've seen a blend of it across different brands. Some are taking the trifecta of incrementality, MMM plus MTA.

I foresee the future being more of an incrementality plus MMM approach.

Jon Blair (34:12)

Yeah, you know what? I I think I totally agree with you that regardless of the specific tools you're talking about that there's this triangulation approach, right? That we recommend the same thing. Brands ask us all the time, what tool should I be using? I'm like, well, I do believe that the answer is different depending on what channels you're spending in, what channels you're selling on. But either way, there's not a single source of truth, right? And generally speaking, platforms...

Michael True (34:16)

Thank you.

Jon Blair (34:40)

Triple Whale and the like can be great for getting really granular, like you said, like creative testing and measurement of how creative is doing, right? But at the same time, no matter what, and even if you layer in like Prescient AI alongside that, we still as CFOs need to say, how many contribution margin dollars are we driving every single day? Because that's the financial North Star is that like, as you're scaling up and down, right?

that we're actually producing more or less profit and we know that profit is going in the same or different direction than what these other tools are saying. And so there's a financial, there's like a true financial measurement which for us tends to be contribution margin dollars. You may get really granular with something that's not, you know, an MMM, but then have MMM alongside that and you can get kind of, I think about it as like a three dimensional view about how your marketing is performing, right? And so,

Michael True (35:31)

Nice.

Jon Blair (35:35)

You know, the point that I wanna make for the audience is that like, don't get trapped in thinking there's a single tool that's gonna do it all. It comes back to strategically understanding your brand, the channels you spend in, the channels that you sell in, and understanding what you're trying to gain and achieve out of scaling, right? Different brands have different goals, and so you should match your tech stack with

the strategy and ultimately the goals that you're trying to achieve. Because at the end of the day, all of these resources and tools, they exist as tools to help you get to where you're trying to go, right? And so, what I was really hoping we could do, which you've done a fantastic job, is get people to understand where MMM should sit in the tech stack, when it's maybe you're not a good candidate for it, when you are good candidate for it, and then,

Michael True (36:15)

Yeah.

Jon Blair (36:32)

really what else do you use alongside of it? And I think this is super helpful in that regard. What other, just like, what other, I'm assuming you've talked with tons of brands who are considering using your tool. What are some of the common misconceptions you see out there about MMM where like brand founders are regularly kind of it wrong in terms of assuming that the tool can do something that it actually can't?

Michael True (37:01)

There's a shift of focus and education that we've learned a lot from. A lot of these brands were never familiar with an MMM before this, right? They came in the 60s and when the internet came, like they went away, MTA was there. You know, you could track everybody on the internet. Taking the time to understand and work with us or any MMM is what is the model trying to tell you and how does the model work, right? And not thinking about it in a lens of an MTA.

right? Shifting that focus and saying like, what is the larger story here versus across all of our spend versus really trying to like break apart the model, right? Because there's statistical models, right? And so making sure that when you onboard one, you're in the right time to use it. And like I mentioned, like, we will not onboard in any brand that is not in the right fit for an MMM, right? And it's the right fit is going to be when

Jon Blair (37:31)

Yeah, yeah, yeah.

for sure.

Michael True (37:58)

you're aggressively looking to scale top of funnel. You're going omni-channel and, or you have, you scale top of funnel in the past and you thought it performed better and you want to go back and look at, you know, you want to look at those results from a more holistic angle.

Jon Blair (38:12)

I love it man, this is super helpful. before we land the plane though, I always like to end with a personal question. And so my question for you today is, what's a little known fact about Mike True that people might find shocking or surprising?

Michael True (38:15)

you

A little known fact about Mike True that might find shocking and surprising.

Wow, that's a really good question.

Jon Blair (38:39)

You heard mine earlier with the touring metal band, so...

Michael True (38:40)

Might not be surprised.

I enjoy jumping out of airplanes and I still get petrified every time I'm about to do it, but I like jumping out of planes. And shout out to Hans from Broomate. We went in San Diego at the Seminan Conference. This dude walks up with his own gear and he was like, this is my 320th time jumping out of a plane. Craziness.

Jon Blair (38:51)

man.

I still haven't done that

man. Kudos to you for being able to do that. That is, I don't know if I ever will. Maybe I will, maybe I don't know, who knows. that's, okay, there you go. There's a way to connect for sure man. Before we do, no pun intended, land the plane here though, where can people find more information about you and about Prescient AI?

Michael True (39:13)

Maybe in Austin. Maybe we throw a DTC skydiving event the third week in Austin. I love it.

Yeah, I've been very active on LinkedIn this year. So hit me up on LinkedIn. It's Michael, Michael True of Prescient AI. I'm on Twitter now. And then, yeah, if anybody wants to just learn about MMM in general, hit me up on LinkedIn or can reach out to me directly. It's mike@ prescientai.com and we got a chat and make sure you've got the right people to support you as you think about it.

Jon Blair (39:56)

Yeah, I highly recommend reaching out to Michael if any of this piqued your interest. What they're doing is really, really cool stuff. as you're scaling your DTC brand and you're expanding into additional channels and you're leaning more on top of funnel, there is a place for the tool that they're building in your marketing mix to really understand measurement. And again, be able to scale profitably with confidence. So definitely hit up Michael if you're interested in learning more about this.

Also don't forget, if you want more helpful tips on scaling your 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, Michael.

Michael True (40:43)

Thanks, Jon. Appreciate you.

The Secrets of Elite DTC Brand CEOs

Episode Summary

In this episode of the Free to Grow CFO podcast, Jon Blair and KC Holiday discuss the challenges and strategies for scaling DTC brands, focusing on the importance of overcoming burnout, implementing effective systems, and the value of mentorship. KC shares his entrepreneurial journey, insights on the different types of burnout DTC CEOs face, and frameworks for improving efficiency and decision-making. The conversation emphasizes the significance of community and storytelling in business, encouraging leaders to embrace their roles as culture builders.

Key Takeaways

• Burnout can be categorized into upward, stagnant, and downward burnout.

• Continuous improvement of systems is necessary as the business evolves.

• Tenacity in initial problem-solving should be applied to all business areas. Scaling is fundamentally about removing constraints.

• Decision-making should prioritize reversibility and impact.

Episode Links

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

KC Holiday- https://www.linkedin.com/in/kcholiday/

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

Daily Mentor - https://dailymentor.co/

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Transcript

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00:00 Introduction

02:00 KC Holiday's Entrepreneurial Journey

06:00 Understanding Burnout in DTC CEOs

11:50 Frameworks for Overcoming Burnout

17:43 Building Effective Systems and Processes

23:51 The Importance of Focus and Prioritization

24:40 Removing Constraints for Business Growth

26:46 The Firefighter Analogy in Entrepreneurship

28:08 Decision Making and Reversibility

30:38 Forecasting Financial Outcomes

34:23 The Importance of Mission and Values

39:09 The Journey of Entrepreneurship and Community Support

41:07 Closing Thoughts

Jon Blair (00:00)

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 are the go-to outsource finance and accounting firm for eight and nine figure DTC brands. And today I'm here with my buddy KC Holiday, CEO, coach and head of Daily Mentor. KC, what's happening man?

KC (00:26)

What's up man, thanks for having me on, appreciate it.

Jon Blair (00:28)

Yeah, thanks for joining me like first thing on your Monday because you're Pacific time, right? You're on the West Coast. you are. Nice, nice.

KC (00:34)

No, I'm actually East Coast now, so you're good. Yeah, yeah, yeah, yeah, yeah. So I'm in

Raleigh, North Carolina, so you're good. You got me at lunchtime, so I put down the sandwich and figured I'd spend some time with you. You're good.

Jon Blair (00:40)

Okay, perfect. Okay, there

we go, there we go, we go. Well, we're both from Orange County, I think. So, I think that's where I, I still got the 714 area code. don't, 949, dude. For sure, for sure. Well, dude, I appreciate you joining, man. I know it's a busy week. all sprinting towards, you know, probably taking some amount of time off for the holidays. So,

KC (00:47)

Yes.

man, I'm 949. So there's a little rivalry. think there's a little internal rivalry that exists between those area codes.

Jon Blair (01:07)

But look, what we're gonna talk about today is something that's super near and dear to my heart. know, KC's doing something that I think is incredibly cool. Like I mentioned, CEO coach runs a business called Daily Mentor. But what KC's all about, you know, from my research on his website is how to become an elite DTC brand CEO. But I would say for me, more importantly, how to beat burnout and create the systems you need to be energized.

and high performing as a leader. And so, if you follow any of my content, you know that even though I'm a DTC finance guy, I'm talking about this kind of stuff a lot, so I'm pumped for the conversation. Before we dive into that stuff, I'd love to hear a little bit about your background and your entrepreneurial journey to joining and being a part of Daily Mentor.

KC (02:00)

Absolutely, man, I'm happy to share. And again, appreciate you having me on. my journey in entrepreneurship started...

Gosh, it's humbling to say this, but about 15 years ago. And as you mentioned, I primarily work with DTC CEOs. I've worked with CEOs in other industries as well, but sometimes I think your experience is the first place you look in terms of how you can best help people. And when I was in my early 20s, about 23, 24, I was trying to be an actor in LA. As you can see, that didn't work out all too well. But I had a different path, and I started my first e-commerce brand called Qalo, Q-A-L-O. We were the creators of the silicone wedding and I started it a few months after marrying my wife, realizing that wearing a metal ring was a pain and decided to just launch my own brand, bootstrapped it, had absolutely no idea what I was doing.

But had a lot of great people around me that were able to serve as mentors and advisors for me and come in and help me in the early days. And so I started that company with a buddy of mine. Fast forward a few years, we were number 151 on the fastest growing companies, Inc. 500 list. We sold a, I think by the time I exited in 2019, we'd sold a couple hundred million dollars worth of these silicone rings, which still blows my mind. I know it blows other people's minds as well that it happened, but had an incredible group of people that we built it alongside.

So that was my initial venture into DTC. We were also an omnichannel brand. So we sold in about 4,000 retail locations on Amazon and Shopify as well. So I cut my teeth very much in that industry and growing that company and ran it until 2019 just before COVID, which was crazy timing in hindsight, but sold in early early 2020 like like November, December 2019, January 2020 is when we sold it, which is nuts. Yeah. And then COVID I think hit in March of 2020.

Jon Blair (03:35)

Yeah.

Crazy dude, right before. Yeah.

KC (03:45)

So my wife's Australian so after selling Qalo I stayed with the company for about a year to transition everything and then I ended up picking up and moving to Southwest Australia so Perth Which is where my wife's family is and so I was there for a couple of years and I had the opportunity to Help manage a corporate venture fund for a billion dollar insurance company out there Which was really interesting because my background was in that eComm space for you know the six or seven years and then all of a sudden you get into venture capital and not a lot of venture capital in Ecom, know, a lot of SaaS, FinTech type companies, DevTech, which is a thing, which is crazy. And so I had the opportunity to work with this fund. We had about, I think, 20 companies under investment at that point. It about a $40 million fund. And then we also had, which was really cool, an internal venture studio. So we actually had full-time employed entrepreneurs that were responsible for spinning up business ideas that were funded by the fund as well, that they were responsible for scaling. And my job there was to help coach and work with the founders of the portfolio and then also to help coach and mentor the entrepreneurs internally that were part of the venture studio that we were running. And through that I learned very much, one, about how a lot of other industries work, which is great. And I think it provided me a lot of well-rounded experience in my ability to coach CEOs. But also that I loved the idea of coaching and the idea of mentorship. And for me, think very much looking back at my early days, people advised me and came in in the early days because I was a dude that had no idea what I was doing and helped and so the idea now of paying it forward from just like, like a, a good thing to do perspective but also realizing there's a lot of stuff that I wish I would have known when I was a 24 year old founder of a eight figure company. In terms of systems and management and practical applications to scaling a company that now that I have, you know, 10 years of experience and I can look back, I can actually really help people and so.

unexpectedly my family moved back from Perth when COVID ended because we were locked down over there. And then I immediately went into CEO coaching. So I did that for about a year and then Daily Mentor started. And so Daily Mentor started just more than a year ago. So in about October of 2023. So I've been running that for now about the last year and that's primarily where I spend most of my time.

Jon Blair (06:00)

love it. When we first met, there's a lot of parallels to your background and my background in terms of like, I was on the founding team of Guardian Bikes. We started in the e-comm world in 2015, 2016, selling on Shopify and Amazon. And we had no idea what we were doing in the e-comm. I mean, like, we were just trying stuff and, you know, we...

Did we learn a lot and did we come away from that experience like having a lot to offer other e-comm founders and operators? 100 % but we are learning the lessons ourselves and so when it comes to coaching, I always like to say like a coach helps you go further faster because you can learn, you can skip the mistakes that the coach has made, right? The coach has made the painful mistakes and they're there to offer wisdom based on these real life mistakes and learnings that they've made.

KC (06:42)

Yep.

Jon Blair (06:52)

And ultimately when I started Free to Grow, it was, I wanted to pay it forward as well, right, that I had made all these mistakes for seven, eight years in eComm I was like, hey, but I know how to do this from a finance and accounting perspective, so let me start a fractional CFO shop that basically, you know, takes this playbook that I developed of scaling a brand from an operator standpoint on the finance and an operation side, and let me package it up and come alongside these founder CEOs who,

They're more visionary leaning, right? They're more marketing leaning. They're more product leaning. A lot of them are product leaning because like they found this gap in the marketplace that got them really excited, right? And they found this product to close that gap and really do good in the world. But they don't want to deal with the numbers and the, and the financial systems, right? Or I'm sure as you see the operational systems, that's not necessarily their forte, but this thing they started out of passion and ultimately all of like trying to create freedom for themselves, right?

KC (07:21)

Yeah.

That's it. Yep.

Jon Blair (07:48)

actually they become enslaved to after scaling to a certain size if they don't have those systems in place, right? And that's where I see a lot of burnout begin, right? And so from your perspective, what are some of the common reasons you see DTC CEOs get burnt out?

KC (08:06)

Yeah, and I think there's specifics to DTC because we live in this...

weird obsessive game with Facebook marketing or meta market. It's like we are so addicted to what this is because it's such a massive growth mechanism for our companies, for a lot of our brands it's the only growth mechanism that we have. And so we have this addictive codependent relationship with Facebook advertising. Where not all companies have that, right? Some people see it in different ways as well. But the way that I choose to classify Burnout, I actually put it into three different categories that is what's the cause of burnout for founders.

Jon Blair (08:14)

for sure. Yeah.

Totally.

KC (08:40)

a lot of people view burnout through this lens of mental health. And I think yes, I think that absolutely plays a role in it. But when you hear burnout talked about online, on social media, whatever, a lot of times it's people that are working for companies that are overworking. Or they're like, they aren't fulfilled in their work. And as a result of that, they're saying that they're burnout. Well, I think if you're actually the owner of the company or the entrepreneur, it's a bit different. So I categorize it in three different types. So there's upward burnout, there's stagnant burnout, and there's downward burnout. Okay, so upward burnout is actually an interesting one that a lot of people don't

But it's the sneakiest one and that is that things are actually working and they're working really well And as a result of it you are doing more and more and more and you're committing to more and more things So I draw the the parallel of that where it's like if you go to the gym and you start to see those abs poke through You're now at the gym twice a day three times a day four times a day because you're seeing something that's working and a lot of people externally would look and go That's what he it's working. Why is that? That's not burnout. That's that's not a bad thing It's like yeah, but you nobody in their right mind

Jon Blair (09:18)

Mm-hmm. Yep.

for sure.

KC (09:39)

should be working probably the amount of hours that that entrepreneur is working, but also what starts to happen there is they start to prioritize that thing over other areas of their life. And I think an undiversified soul or mind is one that leads to burnout in that way. And what I mean there is all of a sudden it's like a drug. Like that notification on your phone of Shopify...

Jon Blair (09:51)

Mm-hmm.

KC (10:00)

Boom, another sale, another sale, another sale, and you just pour yourself more into it. So that's one. The other is stagnant, and that is where things aren't going anywhere. You're kind of just, yesterday looks like today, you're pretty confident tomorrow's gonna look like today, you aren't really sure of where to go, things are kind of working, so they're not necessarily broken, but it's more languishing is where I would put that. And then there is the downward, and this is more of like turnaround type stuff. This is nothing's working, I'm doing everything I can,

Jon Blair (10:01)

Totally.

for sure.

KC (10:30)

revenue down is down 50 % this year than it was last year. Now all of a sudden I am trying to will my way to a successful company and as a result of that, that's when you start peep see people start diving in devices. You see people start, you know, looking for escapes in other places because they're just doing so much to make this thing work and it's not happening.

Jon Blair (10:50)

Yeah, I actually really appreciate that you classify burnout in those three different ways, because I actually believe that burnout is not a single thing either. it is, and it depends on a number of different things. Like actually, I was listening to a podcast recently, there's this guy named Jon Acuff, who has written a couple really interesting books, and he claims, he believes that...

KC (11:01)

Mm-mm. Mm-mm.

Jon Blair (11:17)

The vast majority of people who say that they're burned out are actually bored and they more have not found something fulfilling, right? And so they're actually not overworked. They're not working too many hours. They're underutilized and they're under leveraged, right? But I would venture to say just from my experience and, you know, our business in a different service comes alongside the same group of people that your business does, right? And what I tend to see as

KC (11:21)

Mm. 100%. 100%.

Yep. Yep.

total.

Jon Blair (11:46)

Probably be and we also specifically work with growing eComm brands, right? So we're working with a lot of brands that things are working. They're working well. They're growing. They're profitable and What we see burning out CEOs as they got into the business again They a lot of them had a product a love for a product and ultimately they had a love for the problem that the product solves that got them really energized, right? totally totally 100 %

KC (11:50)

You

Yep. Exactly. Yeah.

Yep. And even the customer too, right? Like, hey, I actually want to help people. This is cool.

Jon Blair (12:14)

And then as the business starts scaling, at first they're doing everything. Maybe they have an EA to help with some of the admin stuff or like a back office person, but they're doing the inventory ordering. They're overseeing the ad buying. They're overseeing the product development and it works. It's at the beginning. And then they start getting into eight figures and they're like, dude, I can't hold all this stuff down. And they've failed to systemize and delegate, right? And focus themselves and the work that they do every day.

KC (12:34)

Mm-mm.

Jon Blair (12:43)

in the areas where they can be in the intersection of passion and proficiency. That's how I think about it. How do you think about what is the framework or frameworks that you use to get these DTC CEOs who may be experiencing burnout as they scale? While they're successful from an outsider's perspective, what are some of the systems or frameworks you help them think through to get them focused on where they can really thrive within the business?

KC (13:12)

Yeah, the first place I start is with empathy, which by the way, I think is a drastically overused term in life, especially in business. But what I mean by that is...

I've been in a situation, and you mentioned earlier experience is the best teacher. I've been in a situation where genuinely I'm trying my hardest and I don't know what to do. Because I've never done it before. So I always try and start, and the first question I ask people on coaching calls when they're bringing problems to me and they're beating the crap out of themselves because they don't know how to solve it. It's like, how many times have you solved this problem before? Well, I never have. So then why would you expect to have the instructions to do it? Right? And so I think I start there with the recognition of like, hey, you're not bad for not knowing how to do this. You just don't know how. So that's ultimately why it is that we're here.

Jon Blair (13:33)

Totally.

For sure.

KC (13:52)

So I try and break it down.

I'll give you kind of like a high level and then if you want to go deeper into anything we can. Because it's actually I think a bit simpler than people want to give it credit for. So I break it down into people, process and systems. Right? Now those words are again all drastically overutilized. So people I think, let's go a little bit deeper there. So that is how do we get this person help? Now what a lot of people I think do is they, one they don't ultimately know who is out there to help them. They don't know what it is in their current tasks that they can actually get help with.

and they don't know if they should hire somebody for $10 an hour or somebody for $200,000 a year. And so the first thing that I try and do is I basically ask them to audit their time. So like, let's just, what are you spending all of your time on?

Jon Blair (14:30)

for sure.

KC (14:38)

And then basically go put a dollar sign next to whatever those tasks are. And if you believe that that is a high leverage, high value task, that it's going to be really expensive for you to replace, I want you to put a lot of dollar signs next to it. And if you feel like this is a task that you could get off of your plate, that is easy to teach somebody else, that you feel like this exists out there, then I want you to put one sign next to it. And then you can actually look at that and we try and figure out how you buy back your time one step at a time. So the idea about hiring a head of growth for a founder or a head of is a pretty daunting task. So I say, don't we just start with what feels like the easiest thing to do? Maybe we just get somebody to do your demand planning for you, or maybe we just get a bookkeeper in that can just reconcile your finances in a timely manner and give you some insight into the finances of the company. Would that be helpful? Absolutely. So I try and just start in the people side, which is ultimately like people build companies. That's what it is, and no founder's ever done it by himself. So we audit there and we actually look, okay, what's the first thing you can do to get something off of your plate so you can continue working on the most important things. think what I see a lot in Daily Mentor which is very odd but I guess in theory it makes sense is people try and hire for what they're really good at first. So they go okay let's say I'm an incredible growth marketer. I understand Facebook ads, I understand creative, I'm building 50 landing pages a day but I hate finance and I hate operations but they feel like

Jon Blair (15:50)

Mm.

KC (16:04)

Part of them becoming a CEO, so making this transition from founder to a CEO is, I'm supposed to be doing the boring stuff because that's what business school teaches me is running a business is, right? And so what they'll do is they'll go, I got to hire a head of growth so then I can start focusing on ops and I can start focusing on finance, which to be honest, if you had a CFO, they would probably tell you to get the hell out of their office because you have no business being in there, right? Like, but somehow they think, and so they spend all this time trying to find a head of growth so they can work on ops and

Jon Blair (16:27)

Yeah

KC (16:34)

They're really bad at ops and finance so they don't enjoy it and then they micromanage the head of growth because it's actually what they care most about and so I kind of look and I go let's identify what you don't like doing, what you're not good at in your own company and what is a low-cost task that you can delegate and let's start there. So that's the people side. The other then is the let's go to systems again another vague term so practically what do I mean by that?

So I look at systems as categorized in three different things. So one is frequency of meetings. Now that might be with an external agency that you utilize. So how frequently are meeting? What are we meeting about? And what's the objective within each of those meetings? So that's like a collaborative team environment. Then there's a communication system. And this is mainly like a remote work environment, which most people are operating within. So how are we communicating with external partners? How are we communicating with one another as a team? A tool like Slack is a perfect thing to insert into that there. And then the other is the project management tool. So I call that the mission control center, similar to the way that NASA has a mission control center and probably SpaceX does too. That when somebody is responsible for getting to the moon, it's all the sweaty people smoking cigarettes in that one room, stressed about it actually getting there. Like that's the mission control center for NASA, right? So I think you have a project management tool that represents that. Now within that tool is a combination of the goals that the company has, the objectives that it's focusing on in that moment.

Jon Blair (17:43)

Yeah.

KC (17:56)

all of the standard operating procedures for how everything gets done in the company and then all of the training manuals, all of the links to the external resources, everything lives in that sole place. So if you as a founder can actually start to build that onboarding people becomes a lot easier, right? Because now you're just dropping them into the Commission Control Center, they can look around and find whatever it is that they need to and you trust that they have ultimately what it is that they need. And so it's a combination of those three things allows you to optimize a lot of the systems that you're working with as a company and

And then beyond that, you can throw systems as like your tech stack. So like, what are you doing for, how are you doing bookkeeping? You are you a QuickBooks company? Are you a Xero company? Are you using A2X? Are you using Jon Blair? The world's greatest CFO, right? So, like, and then what are you doing if you have an attribution tool? How are you, all of this, the performance of the company lives within that. And then finally, it's the process. And process is just a fancy way of saying who's responsible for doing what in what amount of time.

And so I break that down as it's I just call it your areas of responsibility sheet and the simplest way to do that if you're an early stage CEO is Literally write down every single thing that gets done in the company every single thing go put the initials of the person next to it Who's responsible for it? There's two names in that box Somebody else could probably be doing something different if your names and all of those you have to figure out whose initials you can get in there and if nobody's initials are in there then it's probably something you should be doing or maybe it's a good thing that it is you're not doing that but it creates a lot of clarity and all the things that actually need to get done.

Jon Blair (19:25)

Yeah. So, so I, in a former world, I actually still do this a little bit on, on the side, but was an EOS coach and EOS was what we implemented at Guardian Bikes. This EOS is just for those of you who don't know, entrepreneurial operating system. It's, it's very similar. I mean, very similar, almost the same. just has, there's kind of their own way of doing it. And it's, you know, they've got, yeah, exactly. But, at the end of the day, these are the fundamental, this is the fundamental blocking and tackling.

KC (19:32)

There you go. Yep, as an example of it. Yep.

Like their own language. Yeah, absolutely.

Jon Blair (19:54)

right of scaling. Scaling is not just spending a bunch on ads and driving revenue through the roof. Is that a part of it? Yeah, that's a part of it, right? But scaling, really scaling is building a business, right? And a business means something that's bigger than the founder. And it's, and like, it is the, I would say just being the founder of Free to Grow CFO and then also working alongside eComm founders.

KC (19:54)

Mm. Yep.

Yes.

Jon Blair (20:23)

Deciding to start a business, right, yourself or even with a partner, and then scaling it and needing to build a business that is bigger than yourself is just about the hardest thing in the world you could choose to do besides having a bunch of kids. You know, which is another form, I think. I actually think there's a lot of parallels between having a family with a bunch of kids and scaling a business. That's for probably another episode, but it is not...

KC (20:36)

Yes, I would put children up there.

Jon Blair (20:51)

What is key, right? What I'll like kind of, you know, draw out in the stuff that you just went through. What's key is that there's more people than just you, right? There is intention behind deciding who does what and there's clear accountability. And if two people own something, zero people own something. One person can own something, right? There are gonna be two different people that own producing the same result.

KC (21:01)

Mm.

Yep.

Jon Blair (21:20)

right, for a different set of customers or products or whatever, but they don't both own each other's work. That's incredibly important. And then the other thing is there's a way we do things here, right? Process, system, there's a way that we at this brand do things. Now, here's where I see a lot of people get frozen and kind of paralyzed by fear.

KC (21:33)

Yep. Yep.

Jon Blair (21:46)

and not starting to do some of these things that KC's talking about. And next, I want to get your opinion on this, KC, but it's that they overcomplicate it and they think that they have to figure out all of those things in their entirety all at the same time, right? When in reality, actually these frameworks that KC just laid out, you'll be doing this for as long as you're running that business and they will keep evolving. You have to start and it's actually more of a discipline. It's more of a journey.

KC (21:51)

Yeah, go.

100%.

Jon Blair (22:13)

that you revisit these things and you tweak them on an ongoing basis as you continue to scale. And so you can't get locked up by going, I've gotta figure out all the people, all the processes and all the systems. No, all you need to do is figure out what's obvious to you right now. Because then eventually that'll break down or pieces of it will break down and then you'll need to evolve it to what's then obvious at that time. And you just need to never stop, right? And as long as you do that, you'll be ahead of the vast majority.

of other businesses out there who don't take the time to develop this discipline. Do you agree or disagree and what else do you have to add to that?

KC (22:49)

Yeah, I think you gotta eat what's on your plate. I say that all the time, it's like...scaling companies is about solving the next problem. You know, and I think if you're at, like I grew up going to Sizzler, right? Like if you're at Sizzler, like you look at the buffet, it's overwhelming, man. It's like there's hundred problems that live there and it's like that's the next 10 years of your company, but just start with a couple of things that are on that buffet and start there because if those are the largest constraints in the business right now, you have to prioritize solving that thing. And then the really cool thing is that you do it once, you...

Jon Blair (23:04)

Hahaha!

KC (23:22)

probably you're gonna make a few mistakes along the way, none of them are probably gonna destroy the company, and you're gonna learn how to do it, and you're gonna do it better the next time. And I think to your point is, it's really interesting because I think that there are, and I see this as different qualities in people, some people are better at it than others, but they figure out initially, they do whatever it takes in the beginning to make it work, and a lot of times that's growth, right? I can sell, I can run Facebook ads, I figure out how to sell this one product. But then they lose...

like the spirit that helped them solve that initial problem, when all of a sudden it extends to other areas of the business that makes it feel more real than just that thing. You know, and I'm like, I had a call with somebody this week and I'm like, guys, the same tenacity that you started the company with, you have to take that tenacity and now apply it to the other areas of the business that are the current constraints of the business. And I think perhaps it's easier said than done, but that's where I see a lot of it is people get in their own heads about over-complicating it or making it harder than it needs to be. Like all of the conversations

Jon Blair (23:55)

Mm.

for sure. Yep.

KC (24:20)

with founders and Daily Mentor that are like stressing about whether or not they should be giving a thousand dollar bonus or a fifteen hundred dollar bonus to someone and genuinely that the service is better than what I'm about to tell you right now but genuinely they go I don't care move on go do something else like that's not that you know that's not the thing in the business that's going to stop it from being successful but because it's new we get hung up on it a lot

Jon Blair (24:36)

for

Yeah.

Well, there's a couple of things you mentioned that I want to draw out. Scaling is about removal of constraints. That's incredibly important, right? Because there are, there's there's a numerable number of things you could solve or address in the business. But you as the founder, and especially CEO, if you're going to sit in the seat of CEO, you have to be able to say, this is our biggest constraint. I'm going to, I'm going to be laser focused on removing this.

KC (24:47)

Yep.

Jon Blair (25:09)

And I'm going to allow by saying yes to being laser focused on that, you're saying no to a thousand other things, but you're saying no to things that are not as important as removing that constraint. And I will say as the founder of my own business and having scaled previous businesses before, I would say personally, that's the hardest thing is because at the beginning you do have to handle all those non-important things at the same time. Right. But as you grow,

The opportunity cost of you addressing something that is not the constraint, right? At the expense of not removing the constraint, the opportunity cost is ever increasing as you continue to scale. And the reality is what I've started to realize, and I actually personally believe this is actually more of a, this is more of a universal truth in life, not just in scaling a business. I think that everywhere in life,

KC (25:47)

Mm.

Yep. Yep.

Jon Blair (26:04)

You need to, what one of my previous pastors used to say is major in the majors. Don't major in the minors, right? And that meaning, focus your time wherever it is vocationally, family-wise, managing your health and fitness. Focus on the constraint. Focus on the important thing. Focus on the real thing of valuable and let all the minors, let them be out of hand.

KC (26:09)

Yep.

Jon Blair (26:28)

Let them be messy. Let them be unmanaged. Because if you waste your time trying to manage those minor things, you will die not managing the major things, which are the things that actually matter.

KC (26:29)

Yep. Yeah.

Yeah, yeah.

But yeah, businesses go away because people solve the wrong problems. That's why they do. Like it's not often because nobody's doing anything. It's often because people are doing the wrong things. And I think one thing that I want to highlight too as well because this is a new reality that I think is uncomfortable for a lot of people. And you touched on it earlier of like, you're going to keep this business doesn't necessarily have an end date to it. Like you're doing this thing and it's going to go as long as you want it to.

Jon Blair (26:46)

for sure.

for sure.

KC (27:03)

What people do in the, like if you use the analogy of a fire, if you're a firefighter as a CEO, and that's the analogy that's used a lot of times, it's your job is to determine what the largest fire is and to go put that fire out. But I think what, and this is the challenge of entrepreneurship, I think, is it doesn't mean that the small fires go out. They keep burning. You have to be okay with them still burning, right? Like it's like you're looking at your house and you're going.

Jon Blair (27:22)

For sure. Yeah. Yeah, exactly.

KC (27:27)

Okay, could save this room, I could save that room, I could save the umbrella by the pool. Like, we gotta let that thing burn, man. Like, let's let that thing go for the sake of saving this thing and stopping this from burning. But there are fires all around you. And I think that's where people get very distracted is they go, I want to put all of the fires out. And you can't. You have to be okay with some burning.

Jon Blair (27:42)

100%.

Well, okay, so here's another concept that I want to talk about related to decision making that your bonus example made me think of. So I listened to a interview that someone had with Jeff Bezos a number of years ago, and he talked about the importance of decision making and the reversibility of decision making. And he was like, look, the CEO should make very few decisions in the business. The CEO...

KC (28:08)

Yep. Yep.

Jon Blair (28:16)

Most, he goes, I would even venture to say that most decisions in a business, whether it's made by the CEO or not, just shouldn't even be made, right? Or the ones, and then I would go to say that the vast majority of decisions that do need to be made don't even need to be thought about. They need to just be made and then you need to move on. The ones that need to be poured over are the ones that have the biggest potential impact and the smallest chance of or ability to reverse them. If it's hard to reverse something and there's a big impact of it,

KC (28:42)

Yep. Yep.

Jon Blair (28:46)

then you should, he said, pull more data and analyze it one more time, right? But, so this has been really helpful for me with scaling and even advising some of my CFO clients with scaling. like, hey, okay, well how reversible is that decision? So let's take the example of hiring someone. I've actually used this many, many times. Hey, we wanna hire a head of growth, right? Like, gonna pay them 15K a month. Like, I'm really nervous that they're...

you know, if they don't do their job, they're going to put us out of business. go, wait, but hold on. If they wouldn't weren't doing their job, would we let them go? Or would we just pay them 15 K a month forever? And I go, and furthermore, can we clearly define what their goal is? Right. And how much time they have to achieve it. And can we make it very clear and measurable? And so can we say, Hey, you have 90 days to increase our contribution margin dollars per month by 20%.

And if that's not working, we have to have another conversation. So what's your max downside? 45K. Your max 15K times three. Will 45K put us out of business? No, we can reverse this quick enough that it won't put us out of business. So reversibility is very important to consider in, the impact of the decision. What are your thoughts on that? And like what kind of other decision making principles do you advise your, you know,

your people on it Daily Mentor.

KC (30:11)

Yeah, look, I think that's spot on. I think the gap where... And one thing I want to be very careful of is not to... Because we have experience doing it, not to oversimplify it for people that are also watching this that may not believe these things are as simple as we're trying to make them to be. Honestly, that's part of why Daily Mentor exists. It's because we sit here and we go, yeah, just choose the largest constraint. The problem is people go, I don't know what the largest constraint is. I don't have experience with these 10 different constraints.

Jon Blair (30:27)

for sure.

Totally.

KC (30:38)

So,

and a lot of it is the capacity to be able to predict the outcome of each of those constraints going away or continuing to exist. So this, and this goes to right up your alley. So.

The reason I think people struggle to make that decision in your example, and I literally have a video on my social media talking about that exact thing of like, three months in, if it costs you 10 grand a month, it's a $30,000 decision. You spent 30 grand in your ad account last week. And you didn't even think about it on a bunch of ads that don't work at a .7 ROAS. Right? So let's not try, let's hold these things with equal weight, because the dollars are equal weight, because ultimately it's about how we're investing those dollars. But I think that...

Jon Blair (31:07)

For sure. Yeah.

KC (31:16)

If you're looking at this decision, what people fail to do is they fail to forecast the impact financially to the company. Like, there are a lot of people in Daily Mentor, and these are brands, guys, that are seven, eight-figure brands. These are not first-time entrepreneurs in every case. They're not people that have never sold a thing. These are people that are really successful, really sharp people. And I jump on, and it's like, okay, well, hire them as head of growth example. 15 grand.

That's 45 grand. Okay, so have you forecasted what the future of this company looks like from a budget's perspective with that amount of spend as an OPEX against what revenue is coming in the next three months? No, I don't have any of that stuff. And I'll give you another example. There's a guy that is thinking about...

restructuring his manufacturing to either continuing to do it as it is, which is a really quick turnaround but not as high quality of product process versus injecting versus investing in a bunch of tooling. That's going to be a really expensive decision. And the first thing I said to him was map out both scenarios financially.

Jon Blair (32:14)

Mm. Yep.

KC (32:22)

And then based on that, and to your point, I think there's other things. There's reversible decisions, irreversible ones. There's, is this going to lead to differentiation or not? Is there IP associated with like, there's a lot of intangible assets that come along with that as well that I think you have to take into account, but.

The first scenario in a lot of these is map out the financial outcome of what's going to happen. And if you're comfortable with the risk of losing that money or placing that bet, then go ahead and move forward with it. But if you don't have that scenario, if you and your mind haven't played out what could happen, then I think it's really hard to make decisions. And so that's one of the first pieces of advice I have is create the scenarios.

Jon Blair (32:58)

Well, and you know, so that's funny that you mentioned placing bets. People ask me all the time, like, well, what's the benefit of a fractional CFO for my scaling brand? I'm like, being able to place risk adjusted bets. And what does risk adjusted mean? One aspect, I think a very important aspect of risk adjustment is that there's not an unlimited downside. It's not gonna drain every dollar in the bank account and put us out of business, right? We're limiting our downside, just like a great

day trader, a day trader puts what? Stop limits on their trades. Meaning that they could be wrong in the wrong direction, but if they go in the wrong direction too far, they trip that stop limit, it sells their position and they lost money, but they didn't lose every dollar. It wasn't a zero sum game, right? And scaling is a game of removing constraints and placing risk adjusted bets. And here's the thing. Here's what we know. We know that our forecast is wrong. We don't know 100 % of what's going to happen. But the value in forecasting is if this happens, if A happens, this is what B looks like. If C happens, this is what D looks like. And if B, which I really don't want to happen, happens, this is what I would do. This is what I would do to live to fight another day, right? And so a CFO more helps you play out scenarios, right? They don't have a crystal ball.

KC (34:04)

That's it.

That's it.

Mm.

Jon Blair (34:23)

But that's the game, that's a big part of the game is scaling is, I know another word that is really like used like or phrase is used way too much, test and learn, iterate, right? Like, but it is, it's a series of iterations, right? It's just that every time you iterate, you're not gonna place such a big bet that it could put you out of business, right? And so there's another thing that I wanted to get your take on related to burnout, which is you talked about, you know, communication.

KC (34:34)

Yep.

Jon Blair (34:52)

and part of communication is how you communicate like, you know, the business's purpose and guiding principles and things like that. What is the importance from your perspective of things like mission, purpose, core values as it relates to keeping a business on track and also helping find that tenacity that you referred to earlier, right, to see it through the next constraint or the next problem that you need to overcome as you're scaling your business?

KC (35:22)

Yeah. I- I would classify those components, right? So the, you these cultural statements or these things that help shape ultimately, you know, how we behave, what it is we're trying to achieve, and how we define success. So if I asked you just in any environment, would defining success, knowing how we plan to achieve it, and having certain behaviors that make sense in order to go achieve it, would that make sense to you? Yeah, absolutely. It would make sense to you for a children's birthday party to have certain things, right? Certain desired outcomes, things like that.

Jon Blair (35:50)

for sure.

KC (35:51)

So I think people can and it's funny people have a very visceral reaction to an adverse reaction to a lot of these terms right because I think what's happened is there's a lot of consultants that have come in and said well you guys need a vision and a mission and values and that's gonna solve all your business problems and the guys like dude I haven't eaten in a week man like so take your vision and put it somewhere but I do think that it is critical because you have you are a

Jon Blair (36:10)

Yeah, yeah, exactly. Yeah.

KC (36:18)

culture builder as the leader of a company. Whether you like it or not, whether you want those phrases or not, you at least in your head have an idea of what success looks like for you in the future. You have an idea in your head about why you're showing up to work each day and ultimately what you're trying to achieve. And you also have an idea in your head of the type of people that you want to come work for you. That right there is the vision, the mission, and I call them principles or the values of the company.

Like that's it. So I think just like you're talking about, people tend to over complicate these things. They over glorify these terms. What it is, is a clear tribal like cultural guide for the people that are basically signing up for what it is that you're doing. Because in the early stages of a company, people don't come to work for the company, they come to work for you the leader.

They do. And I think a lot of people don't realize that. They go, no, my, you know, this like foot fungus product that I'm selling is so exciting. Like everybody wants to come. No, they don't. They want to come work with you because they think you're building a really cool thing and they want to be coached by you and led by you and developed by you. But they also want to know where the company's going because everybody in this life, life collectively, movies, social media, business building, brands, it's all about storytelling. Everybody.

Jon Blair (37:05)

Totally. Totally.

KC (37:33)

And everybody in their life wants to attach themselves to a story every single day. And so you're the author of it as the founder of the company and other people now are going, I want to be a part of that story. So in five years, I can look back and tell everybody what I got to be a part of. So then it's your job as leader to say, well, then in five years, this is where we're going and this is the story you'll get to tell. Why don't you come help me write it?

Jon Blair (37:48)

Totally.

KC (37:55)

And that's ultimately what it is. So to your point of all of those, think that they're overutilized in the early days of a company because I think people are just figuring out what the heck they're trying to do in the early days. But I do think that they're critical to do even before you bring people on because it helps allow people to attach themselves to the bigger story that's being written.

Jon Blair (37:57)

Totally.

We had, and me having like run EOS for like the better part of close to a decade, I think one, I always tell this to brands when I'm coaching them on EOS and we do this within our own business as well, Free to Grow, which is like, don't sweat it. Just write down what you think the purpose of your business is. Write down what you think your core values are and guess what? It's okay if they change, right?

This guy, Jon Acuff, I mentioned earlier, he likes to talk about like trialing a goal, right? Like he's like, dude, why do we have to be like stuck with a goal that we write and we realize a couple of weeks later, like this goal sucks, it needs to change. He's like, trial it. Yeah, right. Like there's no reason, like you have the freedom, like trial your core values, trial your mission, trial your purpose, right? And then as you continue to the business, it'll start to become clear and clear. And there'll be some things from your first draft that's stuck, right? And never go away.

KC (38:53)

It feels suffocating,

Jon Blair (39:09)

And there'll be some things that you're like, this needs to evolve, you know? And so like, anyways, like I would say in all of the stuff that we've talked about here, just get started, like just get started and take the pressure off yourself to like nail it perfectly. But additionally, you know, I mean, look what, what KC's doing over at, at Daily Mentor, like get a coach, you know, they, you know, the saying goes, like you can't read the label from inside the bottle, right? And, and

you're busy, you're running an e-comm brand, you're a freaking busy person, right? So like, coaches can help you slow down and reflect, right? And see outside of your day to day. And so like, get a coach and just start, and start to just love the journey of trying to get a little bit better every single day. Because at the end of the day, that's what compounds over the course of two, three, four, five, 10 years. It's like, I'm just gonna start.

KC (39:46)

Yeah, 100%.

Jon Blair (40:05)

using these disciplines and I'm just gonna never stop. And it's actually, at least in my experience, it's the paralysis of wanting perfection that keeps people from continuing to go and just being free and like, I'm just gonna try to work on the next thing, the next thing that needs to be done today, right? And that will compound over the course of a decade in much bigger ways than most people realize.

KC (40:30)

100 % man and I think to your point about the paralysis of keeping people People and this is what social media is created in the world is people especially founders believe that all the other brands in the world have it figured out I'm the only one that has no idea what I'm and so you're like in this scene like I look I see that brand on Instagram or I saw them in Nordstrom last week like they must they're perfect. They haven't all figured out They've never had any inventory issues. They've got a bunch of cash. I'm the only one in the world that's struggling

Jon Blair (40:43)

Yeah, for sure.

KC (40:57)

And it's just not true. And that's been one of the coolest things about starting Daily Mentor, which just for anybody listening, if you don't know what Daily Mentor is, so it's a mentorship community for brands that are on a trajectory to a million dollars or doing over a million dollars of revenue currently in the DDC space. And what we do is we combine the founders of these brands.

into what we use as our Slack community. into a community and then within that community you have direct access to over 20 experienced DTC mentors. So that's everything from retail expansion to we have four Google mentors in the community. our goal is that there's no problem in the world that a mentor within Daily Mentor can't help you solve. And it's for a monthly fee. also have the other, we have about 300 brands currently in the community.

So the reason that I brought this up is that you get to get within this community, and I've even had great exposure to this as well, is there's 300 other brands and you go, man, like everybody in here is just trying to figure it out. And some people are really good at those things and they're not very good at that and I'm really good at that so I can contribute to this person there. So not only do you get access to all these great mentors and experience people that have been there before you.

Jon Blair (41:53)

Yeah, for sure.

KC (42:04)

You also get access to other founders as well and you start to realize that collectively together we can all learn and grow and develop but nobody's got it figured out.

Jon Blair (42:13)

Yeah, man, I mean, we work with nine figure brands that from the outside, they're like considered DTC darlings and we know what's going on internally. And yeah, is there financial success in some of them? Sure. But guess what? They're trying to figure out how to remove the next constraint. And quite frankly, in many ways, the next constraint at nine figures is actually a lot harder to figure out than the one to figure out at seven or eight figures. like, and by the way, not to discount those, cause those ones are really hard too.

KC (42:20)

That's it.

That's it.

Jon Blair (42:42)

But what I'm saying is that it's not all fun and games at the top. It's actually in many ways even harder, right? And so look, man, I love what you guys are doing. The heart in it is like super, super awesome. I highly recommend anyone who is interested in learning about joining this community. Definitely check this out. mean, KC is full of just like a ton of knowledge, but so are the mentors in the community.

KC, before we land the plane here, where can people find a little bit more information about you and Daily Mentor?

KC (43:11)

Yeah.

Yeah, so I'll start with Daily Mentor. So if you just go to DailyMentor.co, spelled all the ways that you would expect, you can get to the website. And through that, can, if you're interested in joining through that, can book a call with a member of our team that can give you more information on the community, how it all works. Feel free to also send me an email. It's KC, just the two letters, KC@dailymentor.com.au. Davey is the original founder of Daily Mentor, is who I grew it with. And so we're in Australia, and we have some members that are in Australia.

Australia, some members here in the US, but that's why the .com.au email address. It's also a global community, which is awesome. you know, we're about, you know, about 30% Australia, 70% the rest of the world. So it's incredible getting to talk to other founders. If you're thinking about expanding internationally, you can talk to a founder that's in France that can help you navigate that landscape. So feel free to email me or if you want to send me any messages on social media, it's ITSKC, just the two letters KC, holiday on Twitter or TikTok or Instagram or any of the platforms.

Jon Blair (43:53)

Yeah.

KC (44:15)

So feel free to give me a follow there. That'd be awesome.

Jon Blair (44:18)

Awesome, awesome. Alright, final question. What's a little known fact about KC Holiday that people might find shocking or surprising?

KC (44:27)

when you, when you, when I saw in the sort of the, the lead up to this call today, I saw this question, nothing stressed me out more. I can talk to you about, I'll talk to you about inventory. I'll talk to you about all the things. And then it was like, what's something interesting about me? My gosh. I think a fun one, I've been on two game shows in my life. That's kind of fun. So I was on family feud with my family back in the day and yeah, dude. And.

Jon Blair (44:38)

You

Dude, heck yeah.

Dude, you were. I watched that show religiously

when I was a kid,

KC (44:51)

religiously growing up, right? So I was on that and we smashed and then I was the reason that we lost. I was the third...

Jon Blair (44:59)

Hahaha!

KC (45:00)

It still haunts me to this day. So you can see I'm getting emotional talking about it. Where it's like we were up 292 to nothing and then it was the final round and like if they steal at the end they basically they give them all the points. I don't know why it works that way. But anyway it does. And so the question was, which anybody listening might find this interesting, is what's a profession somebody would go into in order to become famous?

And I was a young, impressionable, I think I was about 17 or 18 at the time. So the answers I think were on the board were like a musician, an actor, and a chef or something like that, right? Whatever it was. we strike, strike, and the third one came to me. I think I said like painter or something and I got it wrong. And the other family stole it. And I'll give you guys three seconds to try and think about what you think it might be in your head. Do you have a guess for what it might be, Jon?

Jon Blair (45:52)

Yeah. What? You're talking about the top one? Like, yeah. Yeah. the fourth one. So you as actor, musician, what was the other one?

KC (45:53)

What do you think it is?

Yeah, so just one of them. we had three of the four. And with the fourth, there was four total answers. And the fourth one,

actor, musician, and I think it was, I think it might have been a chef or something like that was the other one.

Jon Blair (46:10)

honestly, the only thing that comes to mind is president.

KC (46:13)

my gosh, he was politician, that's what it was. That's what it was. Okay, so this is, like I was a kid, like, I thought that was public service, man. People are just, we just want to serve their community, isn't that what it is? And fast forward to today, don't... Yeah, right? Yeah, so I was a politician. So anyway, that was fun. And then I was on a $3 million game show pilot for ABC way back in the day. And won a bunch of money from my mom. So that was pretty cool. So that was fun. So those are some fun facts about me, yeah.

Jon Blair (46:15)

my gosh, dude, that's funny.

Yeah. I don't know if I would have gotten it though. I don't know if I would have got it though.

Dude, that's awesome.

Dude, that is super awesome. Most people haven't been on one game show, let alone two, so that's pretty rad. That's pretty rad.

KC (46:45)

Yeah, it was a phase of my life,

I think. I was in that LA vibe, know, so that's just what they think everybody in LA does. I guess I did some of it.

Jon Blair (46:53)

That's awesome man. Well look KC, I appreciate you taking time out of your busy schedule to come chat about this stuff. Again, this topic's near and dear to my heart. This is super important. Like, there's a lot of great things to take away from this. If any of it interests you, definitely reach out to KC. But I would say generally, just remember, it's all about getting started, loving the discipline, loving the journey, and then surrounding yourself with other like-minded people and mentors that can help you along the way because

The end of the day, we all have problems that we're gonna experience and face that we've never solved ourselves. So surrounding yourself with the right people is a massive unlock as you're scaling your brand. Also, don't forget, if you want more helpful tips on scaling a profit-focused DTC brand, you can consider following me, Jon Blair, on LinkedIn. And if you're interested in learning more about how our Free to Grow CFOs, DTC accountants, and fractional CFOs can help your brand increase profit and cash flows you scale, check us out at freetogrowcfo.com.

Until next time, scale on. Thanks for joining, KC.

KC (47:53)

Thanks, appreciate it.

How to Navigate Debt Options for Scaling DTC Brands

Episode Summary

In this episode of the Free to Grow CFO podcast, Jon Blair and Melissa Cafagna discuss the complexities of debt financing for DTC brands. They explore various debt options, including merchant cash advances, lines of credit, and SBA loans, while emphasizing the importance of choosing the right financing partner. Melissa shares her journey to Settle and how the company provides unique capital solutions tailored for eCommerce brands. The conversation highlights the critical role of fractional CFOs in navigating financial decisions and the significance of understanding inventory management in relation to capital needs.

Key Takeaways

• Over-leveraging or picking the wrong debt partner can jeopardize your business.

• MCAs are often easy to access but come with high costs and risks to cash flow.

• Debt isn’t inherently good or bad—it’s a tool. The key is choosing the right type for your specific stage of growth and strategy.

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

~~~

00:00 Introduction

01:18 Melissa Cafagna’s Journey to Settle

06:01 Understanding Debt Options for E-commerce Brands

12:02 Evaluating the Pros and Cons of MCAs

18:01 Understanding Asset-Based Lending (ABL)

28:15 Navigating Cash Flow Challenges in E-commerce

39:34 The Role of Fractional CFOs vs. Accountants

44:37 Exploring SBA Loans and Their Limitations

51:07 Closing Thoughts

Jon Blair (00:00)

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 outsource finance and accounting firm for eight and nine figure DTC brands. And today I'm here with my pal, Melissa Cafagna like lasagna. She runs capital partnerships at Settle and also calls herself

Melissa (00:25)

Yes.

Jon Blair (00:30)

the financing fairy godmother depending on what social media channels you find her on. Melissa, you have been a fan of my content for quite some time and I appreciate that and it was great to finally meet not too long ago. And now to have you on the show, how are you doing today?

Melissa (00:40)

long time.

I am doing well, kind of just coming off the high of a wonderful break for Thanksgiving. So good to be around loved ones. And I feel well rested. So I'm so excited that we planned this on this day. I feel like so much gratitude. So thank you for asking. And I definitely don't run Capital Partnerships, but I like to think I sometimes run the show. No, but I totally don't. And yeah, is it okay if I introduce myself right now?

Jon Blair (01:17)

100%.

Melissa (01:18)

Awesome. So I get.

asked this question a lot, like how did I end up at Settle? I actually went to school for accounting and did the whole public accounting thing, pivoted to working at a modeling agency in LA and was there for quite some time doing accounting and kind of just had this quarter life crisis where I'm like, what am I doing with my life? And decided to pivot into sales after doing this amazing sabbatical in Europe, which that's like a whole can of worms that can be talked about another

but I sometimes feel like I've lived like four different lives, just with like the craziness that I've been through when it comes to like my career and like my personal life. But then I finally decided like I'm gonna go all in on sales, but I also wanted to stay close to FinTech just because it just felt like a, because they still definitely had like this, I would say like joy around like accounting and finance and helping businesses, specifically small businesses, but it definitely made sense with my

my background to pivot to fintech and worked at a couple tech companies related to like Ecom businesses, Amazon businesses, and then ended up at Settle, which I love the team there. We're an awesome bunch and we have the best manager, shout out to Chris. So yeah, that's basically how I ended up there. And now basically helping founders with capital and inventory software.

which has been a delight. We're solving some real problems. Like, who doesn't need money? Who doesn't need to try to optimize their inventory? It's such a nightmare for so many brands. So yeah.

Jon Blair (02:53)

Hahaha

I love it. So a couple things, the joy around accounting and finance. That brings a huge smile to my face because I always joke one of the core values at Free to Grow CFO is passion. whenever I talk about this with the team, I'm always like, guys, we're crushing this one because the deep conversations that five to six people will have on how to reconcile a Shopify merchant account and the arguments we'll get into to make sure it's done right.

is just about the most passionate, nerdy, joyful accounting and finance conversation we could be having. so if you listen to the show at all, you know we're nerds about that around here. so I'm looking forward to chatting because as Melissa mentioned, Settle actually has its hands in a few different areas in the eComm and CPG world. in particular, Settle has for quite some time now offered

Melissa (03:33)

I love it.

Yeah.

Jon Blair (04:01)

It's kind of like debt financing products. And we have several mutual clients with Melissa and the Settle team. And what we want to talk about today is just how to navigate debt options for a scaling eComm brand. There's, unfortunately, to be quite honest with you, there's a lot of misinformation out there in the marketplace about the different debt options and whether they're good or bad or how much they cost, what...

Melissa (04:13)

Yes.

Yep.

Jon Blair (04:27)

lender protections or liabilities you have as the borrower. I actually think that out of all of the topics that we encounter as CFOs at Free to Grow, the navigating debt options is actually the one where we see the most misunderstanding, misconceptions, misinformation. And we spend a lot of time educating brands on like what the different options really are, why they're different, what it means in terms of

Melissa (04:46)

Interesting.

Jon Blair (04:57)

what it means in terms of liability. And so today, we're gonna break a bunch of this down. There are, yeah, demystify with your financing fairy godmother, Melissa Cafagna So, all right, so to get started, we're not gonna get through it all, unfortunately. We might have to have you back. But let's talk about some of the, just outline what some of the different debt structures

Melissa (05:03)

Yes, let's demystify.

Happy too.

Jon Blair (05:27)

are that are out there, right? Why don't you go and just riff just the ones that come to mind. What are some of the different options I'll add any that that you don't put on the list and then we'll start talking about them further.

Melissa (05:32)

Sure.

Amazing.

Obviously, one of the first ones that come to mind are MCAs, just because I speak to lot of emerging brand founders who maybe it's their first or second time looking for capital, debt capital specifically. And so a lot of times these MCAs are pouring a ton of money into marketing and advertising. So oftentimes it'll be maybe like...

Jon Blair (05:44)

Mmm.

Mm.

Melissa (06:01)

Or it's just the ease of it, right? Like for a Shopify capital, for example. And so definitely, I feel like for a lot of folks, that's going to be one of their number one options just because they're getting targeted. Whereas a lot of totally, yes.

Jon Blair (06:15)

We see that constantly. I mean, almost every brand that we encounter

on the CFO side when they are either using MCAs or recently used MCAs. And by the way, for those of you that don't know the terminology, merchant cash advances, right? And we'll get into this in more detail in a second, but like super common. Why? Because basically because of Shopify Capital, ClearBank, or now rebranded as ClearCo and Wayflyer, which have those three have focused

Melissa (06:25)

Correct. Yes. Correct.

Yeah.

Yes.

Jon Blair (06:46)

on eComm as part of their, a big part of their go-to-market. And one of the reasons, at least from, in my opinion, one of the reasons they focus on eComm is because the transparency of, well, because of the daily receipt of cash, right, from merchant accounts, you know, hence merchant cash advances. They're actually just pulling forward future cash flows that you're gonna receive from the credit card processors, right, and they're lending you kind of like in bulk.

Melissa (07:00)

Correct.

Exactly.

Jon Blair (07:15)

ahead of time, right? And so that's MCAs. What are some of the other common debt structures that you see D T C brands encountering out there?

Melissa (07:21)

Yep.

Sure, definitely like line of credits, SBAs loans as well, ABLs, asset-based loans. I would say those are like primarily the ones that I personally see. I've seen some pretty wild debt stacks, we call them, where some folks have maybe like five or six different merchant cash advances that they're working with to stay afloat.

Jon Blair (07:29)

Mmm.

Melissa (07:53)

or a business that just has like one line of credit and that's it. So we like see so many different kinds of debt stacks or maybe you have credit cards. Like there's a myriad of ways to kind of make this work for your business. And that's why you need to talk to guys like Jon and Jeff because they're gonna like advise you on the best way to figure out what that debt stack's gonna be. Because it's like, do you wanna buy inventory with a credit card? I see brands do it.

Jon Blair (07:53)

Yeah.

Mm-hmm.

Melissa (08:21)

Sometimes it makes sense. I remember talking to this one founder who's very emerging still. But let's say she was like a one to five million in sales. But she was still buying inventory on credit cards and doing no interest credit cards. And she was getting really creative with it, which I love. But at a certain point, you need something a little bit more sophisticated once you get to certain levels for your business. So I think it really just depends. And I think it's great to have the advisement because if not, I'm going to say this like three times, feel like choosing the wrong debt partner could mean the failure of your business. so I think understanding who you're going to partner with, whether it's a short-term thing or a long-term thing, seek help, seek advisement. Yeah.

Jon Blair (09:00)

Yeah.

Yeah, well, yeah,

no, mean, I think obviously we're gonna unpack a lot here with this, but let's say it this way. I think first off, I have a lot of empathy for brand founders, right? Scaling an eComm brand is just about the hardest thing you could choose to do in the business world. And it's capital intensive. Why is it capital intensive? What does that mean? That means it takes a lot of capital. And what is one of the primary reasons?

Melissa (09:18)

Yeah.

Totally. No joke. Yeah, totally.

Jon Blair (09:40)

inventory, have to carry inventory. Service businesses generally are not capital intensive because they don't carry inventory, right? And so because of that, you have two major sources. You've started a capital intensive business, so you have generally two major sources. We'll say three major sources of capital. There's your vendors, that's accounts payable and trade payables. There's equity investors, right? And then there's debt lenders, there's debt providers.

Melissa (09:41)

Absolutely.

Jon Blair (10:09)

There's technically a fourth, is profitability and retained earnings, right? But those are kind of your sources of capital. Why do most founders not want to just sell a bunch of equity? Because the cost of equity is expensive. It's expensive to you as the founder to sell part of your business, right? And retained earnings, you may have tight retained earnings and seasons of scaling because you're focusing on growth. So there may not be a ton there, right?

Melissa (10:14)

Yep.

Absolutely.

Yep.

Jon Blair (10:35)

And

then when you're starting, especially when you're emerging and you're in the first several years of your brand, you probably don't have really incredible payment terms with your vendor. So your vendor payables are not like a significant enough capital source. So that leads us to what debt, right? And hence why we're having this discussion and why it's so pervasive with DTC brands to have to understand how to choose the right debt. So here's what we're gonna dive into. We've laid out common forms of debt, MCAs.

Melissa (10:43)

Exactly.

Totally.

Jon Blair (11:04)

lines of credit, ABLs, are somewhat related, SBA loans, and I kind of added term loans, which can roll up under one of those categories. But here's what you need to consider. You shouldn't pick a debt partner just because they say, we'll offer you the money that you need. It needs to be tied to your strategy, and you need to understand why you're going to use that provider. And you need to consider things like, what are the underwriting requirements?

Melissa (11:11)

Yes.

Yeah.

Yes.

Jon Blair (11:33)

What are the lender protections and what are your liabilities? Is the borrower, what does it cost the capital? And then what is the capital flexibility and the capital amount? It's not just one of those things. It's all of these things that you have to take into account. So let's start with MCAs. From your perspective, what are some of the most common reasons why people take on MCAs? And when considering strategy underwriting,

Melissa (11:44)

Yep. Yes.

Jon Blair (12:02)

lender protections, cost of capital, all those things. Where do you see MCAs being good and or bad?

Melissa (12:03)

Yes.

Yeah, great question. Honestly, think founders like going back to the empathy thing, they have so much on their plate. And the last thing they want to do is go through like a really lengthy underwriting process to get more money when they have a vendor that they're probably late on paying already and they need to get that inventory into their 3PL. So they just need money fast. needs to be easy. And so I like I get that.

Jon Blair (12:22)

for sure.

Melissa (12:38)

And so I think with the MCAs, it really is the easiest form of capital you could probably get. So I think that's why I have a lot of empathy for these founders, because it's like, have so many competing priorities, and you at the end of the day have to weigh, like, you sometimes when we make the decisions that we do, it's just like, do I want to pay more for doing the thing that's easier? Sometimes, yeah, that makes sense, you know? And so, but...

Jon Blair (12:53)

Yeah.

Melissa (13:07)

really, I think, understanding how this debt is going to impact your bottom line, which enough people don't talk about. Your cash flow, ultimately, as well, is really important. On that topic, what do you consider are the scenarios in which you've seen MCA debt work? Because we can't say that it doesn't. We know that it's very expensive. But can you like?

Think of a scenario where you've seen that successfully executed.

Jon Blair (13:38)

Yeah, you know what's funny is I used to just have this blanket opinion which is like MCAs are always bad. I will say 95 % of the time the way that I see them being used, they are bad and there's a better source of capital. But I have become a believer in the 5 % that I've seen where it's a good idea, which is if one, if it's truly a short term need and it's truly like to bridge you from one place to another, right?

Melissa (13:50)

Yeah. Yeah. Absolutely.

Yes.

Jon Blair (14:08)

And then the second thing is if you don't need the maturity or the payback to line up with your inventory levels. And so let me dig a little bit deeper to explain this a little bit more. The reason why if you just need the capital for a few weeks or a few months and you don't really see the need coming up again anytime soon, it might be okay to go to the MCA, which by the way, annual effective rate 25 to 50%.

Melissa (14:19)

Yeah, break that down a little bit. Yeah.

Yeah.

Jon Blair (14:38)

annualized

effective rate like that's actually how much these things cost. The cheapest I've ever seen it is 20. And that's because it took a long time to pay that back. But they're very expensive, but you might want to go that route because all you do is click a button and maybe answer a couple of questions and you get the capital. So there's like no underwriting. It doesn't take much time. It's unsecured. It is, in my opinion, it's not fully unsecured because they do have rights to the percentage of revenue or collections that they take from you. So

Melissa (14:48)

Correct.

Literally.

None.

correct.

Jon Blair (15:08)

Yeah, do they not, they're not filing a UCC one, which is a blanket all asset lien on the business, but they do have rights to your cash inflows. So it's not totally unsecured, even though they call it unsecured. But if you only need it once, maybe twice, and you don't see this recurring need, it may just be easier because if you go look at SBA loans, lines of credit, ABLs, other term loans, not always, but oftentimes the level of effort and your cost of

Melissa (15:19)

Totally, yep.

Jon Blair (15:38)

getting that thing underwritten, providing all the documents and the analysis, and then even paying upfront fees for getting those loans closed. If you're not using it regularly, those fees and that effort of getting the loan approved, that actually might make your annual effective rate against the capital you actually borrowed possibly really, really high, right? And so actually the MCA may be just a little more expensive, but just easier. Here's the problem.

Melissa (15:45)

Yep.

Yeah.

Jon Blair (16:06)

I rarely see brands only need debt just once and then never need it again. And why is that? It's because as you're growing and almost every eComm brand is seasonal, right? So there's peaks and valleys to sales, which means there's peaks and valleys to inventory. That means your working capital expands and contracts, right? As the business, as your sales seasonally go higher and go lower. And as you're growing,

Melissa (16:11)

Yeah.

Jon Blair (16:34)

to meet the next sales growth goal, you always have to buy more inventory than you did the last time. And so because working capital is expanding and contracting based on seasonality, but then it also overall is expanding because you're growing and inventory is growing, unless you're getting more capital coverage from retained earnings, equity investors, or your vendors, you need more and more debt as you continue to scale.

Melissa (16:41)

Right.

Jon Blair (17:02)

to finance your inventory as you're growing. So rarely do I ever see this one time need for MCAs actually play out. And that's why it's so uncommon. But I will say this. They will try to convince you that you can, what do they call it? What do they call, they have this term, that you can top up. Meaning like you can take another draw once you've gotten down to a certain percentage, right, of like paid back of the MCA.

Melissa (17:10)

Right, absolutely.

Mm-hmm.

Correct.

Jon Blair (17:32)

But if you're just gonna let it, that's called a revolve. If you're let it revolve like that, just get a line of credit that can actually revolve. You know what I mean? Because it's gonna way cheaper and way more flexible.

Melissa (17:37)

Right.

100%. And at that point, it is worth going to doing the due diligence that you need to do. And I think with the seasonality that these businesses have, use that slower season to apply for debt. Because that'll be the time where you can get yourself set up, and you will no longer have to worry about this.

Jon Blair (17:47)

Totally.

I'll make another comment on that as well, is if you the right bookkeeping and CFO partner, like Free to Grow CFO, we can do a lot of the heavy diligence information for you. Like when we've worked with Settle on the few mutual clients we have, the data that you guys need

Melissa (18:15)

Right?

Jon Blair (18:21)

we're the ones pulling it, right? And we're actually even the ones looking at it before we send it to Settle and making sure it does it make sense. Is there anything we need to explain to the lender that we know they're gonna have a question about, right? And so it can get a lot easier. The underwriting is a lot easier when your bookkeeping is clean and on an accrual basis, meaning you have a clean balance sheet. And when you have a fractional CFO,

Melissa (18:31)

Yes.

Totally. Yes.

Jon Blair (18:48)

who can help interpret it to, it can help be the interpreter between the lender and the brand. Cause oftentimes, well actually this is a great question for you, Melissa. I know this for a fact cause I know I'm friends with a lot of, you know, not just people at Settle, but other lenders. There's this, there can be this barrier between the lender and the founder where like the lender needs something and the founder without a CFO doesn't fully understand how to get the lender what they need.

Melissa (18:54)

Yes.

Totally.

Yes.

Jon Blair (19:17)

Do you

see that and what are some examples that you see?

Melissa (19:20)

That's a good question. I would say Settle is a bit of an outlier because we're like very education first. So we try to be like mini CFO for you as far as just explaining this. But a lot of lenders do not work this way because they don't have the business or financial acumen. And like for the folks that work at Settle, for example, they have been doing working capital for a long time. So they know what they're doing.

Jon Blair (19:37)

for sure.

Melissa (19:48)

But that's like a really good question. would say that from the stories that I've heard at other lenders, I would say it's more of like a transactional partnership where it's just like, I need to do and say whatever I need to get you across the line to close on this capital. And less like partnership where I'm like, what questions can I answer to make sure you feel comfortable with this? How do we differ from the other partners that you're looking at?

How are we better? How are we worse? Right? And being able to advise there. But I do think if you do not have a partnership oriented lender that you're talking to at like the beginning of that like sales cycle, let's say, you need to speak to somebody who can walk you through that process because, and again, shameless plug, Jeff and Jon at Free to Grow, because I was going to say like...

Jon Blair (20:18)

for sure.

Hahaha.

Melissa (20:44)

This is the reality, right? A lot of lenders, just they're not always looking out for what's in the best interest for you in the business, right? And like they have quotas, they need to make sure business is good on their end. Makes sense, right? You always have competing priorities, but at the end of the day, like I have heard of like absolute horror stories where, for example, there are a lot of lenders that they don't even look at your balance sheet. That means they're making an underwriting decision based on half of your business.

And guess what? They may potentially over leverage you with debt. And that means that they don't necessarily care about what is in the long-term interest of your business. Now, they may be a good short-term thing, but over leveraging you, there are times where unfortunately for us, like as a lender, we have to say no, because the business simply has too much debt. And we do not, though we could give them debt because of a myriad of other reasons, like growth is great. We have to say, sorry, we can't help you.

Jon Blair (21:11)

Yeah.

Melissa (21:40)

You're over leveraged right now, but let's speak in six months. consolidate that, handle that, figure out what you have to do, because we do want to work with you. I don't know if that answered your question, but yeah. Yeah.

Jon Blair (21:43)

for sure.

No, no, mean, no, there's some great, mean, I will take it a step further and say that like

debt is, think, I think that you can hear, you know, you can hear like voices, competing voices out in the marketplace about like debt, debt is good or debt is bad, right? Leverage is good. It enhances return on equity. Debt is bad because it's risky. know, Dave Ramsey, debt is evil, right? Which I'm a huge Dave Ramsey fan personally, by the way, but like,

Melissa (22:03)

Totally. Right. Yeah.

Right.

Right.

Jon Blair (22:18)

The point I'm making is that I actually believe that debt is neither good nor bad. It's a tool, right? And it's a tool to be utilized in the right way and responsibly, just like any other business tool. And just like with any other tool in business, you can use it in the wrong way and in a way that actually creates more risk than reward. And so part of that, like Melissa was just referring to, is that you do need to be mindful of how much debt you take on because

Melissa (22:18)

Yeah.

Exactly, yeah.

Totally.

100%.

Jon Blair (22:48)

I believe that to some degree, if you're going to grow your eComm brand quickly, even if it's profitable, you just are going to need some amount of inventory financing. And it's because very few, and I'm talking about like one out of a hundred brands that I encounter have a good enough, what's called cash conversion cycle, which without getting into like all the details, basically, basically it means how for an eComm brand.

Melissa (23:00)

Totally.

Jon Blair (23:16)

how many days of your inventory are being financed by your vendors, basically, right? Most of the time, very little, very few days of inventory are being financed by your vendors. And one out of 100 eComm brands I talked to has really aggressive payment terms and it finances a lot of their inventory. And so the amount of debt they need to finance their inventory is actually very little. That's very uncommon. And so,

Melissa (23:19)

Correct. Yeah.

Yeah.

Correct.

Very,

yeah.

Jon Blair (23:42)

So just be aware of the fact that you do need to be mindful of how much debt you take on and not all debts made equal and too much can be too risky. So I wanna talk about lines of credit next here. And I wanna talk about lines of credit and ABLs because there are asset-based lines of credit and then there are lines of credit that have nothing to do with ABLs. let me.

Melissa (23:55)

Yeah, absolutely. Yeah, okay.

Yes.

Jon Blair (24:10)

kind of define this and then we'll dive in to where we see these used well and not so well advantages and drawbacks. So a line of credit, just like it sounds like, it's something that you can draw up and pay down a lot of times kind of at will, right? Within certain limits. Some limits are what's called asset based and that's where ABLs come from, where they will only let you borrow a certain percentage of your accounts receivable.

Melissa (24:17)

Let's do it.

Jon Blair (24:39)

and or your inventory value at any point in time. So ABLs are kind of like a form of line of credit where they're tying the maximum amount you can borrow to some asset based, hence asset based lines or loans as the name. Where, just what comes to mind for you of what you see as like advantages, drawbacks, where they're used well, not used well.

Melissa (24:49)

correct.

Yeah.

Yeah, great question. I mean, definitely the biggest advantage I would say is cost. And generally a lot of brands will graduate from using something like Settle or maybe a basic line of credit to an ABL so that they can access more. Because sometimes like basic like lines of credit, let's just call them that. Those don't they aren't great at actually giving businesses like proper sizing.

Right? Like it's usually something very small. And so they generally have to graduate into that. So definitely cost. on the cost, the caveat is to make sure you actually understand your true cost of capital. Because ABLs will tell you like, you know, this rate. But then there is like a facility fee and, you know, auditing fees. yeah. And so it's like, and then like calculating your true APR based off of that. Because oftentimes you'll find, well, I could just go with this other provider who

Jon Blair (25:33)

yeah.

Underwriting fee. and maintenance. Yeah

Melissa (26:01)

maybe requires a little less due diligence on an ongoing basis because ABLs do require a lot of due diligence and you know, have to make sure your books are constantly clean and then they're going to the cons. There's sometimes like present to be an issue based on that valuation that you said where it's like, hey, I'm getting an amount of financing based on how much inventory I had, but shit like what do I do when I just like sold through all my inventory? Cause Black Friday's was bananas. And so being able to adjust from that.

perspective. So I think that's where it can be limiting. And so a lot of times what I'll see is at that point founders will then kind of have to take on like a second form of debt to kind of fill in that gap until they built up their inventory. And so that that's what I've seen. Yeah.

Jon Blair (26:49)

Okay, wait, this is a, no, I saying, so I have a lot of experience with ABLs because

of being in the CPG and Ecom world for so long. This is probably a whole episode. So I'm gonna try to be brief and be fair to the different ABL lenders out there, because I am friends with a lot of them. And by the way, I wanna be clear. All of these debt types serve a purpose for the right business, the right strategy, the right season, right? And again, coming back debt or even these, yeah, all of these different debt products, they are not good, they are not bad, they are tools, but understand these, these different components of them that we're walking through so that you can use them for the right reason at the right time. That's the whole point of this conversation, okay? And so let ABL's lines of credit, let's talk, from my perspective, where I see this work well, what some of the pros and cons are, one, that you brought up, in transit inventory. On ABLs, generally speaking, inventory that is not in a warehouse domestically, in the United States, is ineligible. And so if you have an advance rate, let's say it's 60%, meaning that you can borrow up to 60 % of the cost of inventory, you cannot finance 60 % of what's on the water or a prepayment you need to make to the vendor. what like Melissa was just referring to this, can get caught in this chicken or the egg game where you have not enough inventory, you're actually very profitable, you're crushing your sales goals, you're growing super fast, I've had several brands where I've had this issue. They're killing it. But they don't have enough cash to buy the next big container or containers they need to buy and they need to make payment for those while they're in transit.

the ABL will not finance that in transit inventory unless you convince them to give you what's called an over advance. Over advances used to be really common before COVID. They're much less common today. Now, you can ask. I always say, like you miss 100 % of the shots you don't take. I always ask as a CFO, right? And they're not impossible, but they're becoming less and less prevalent and it's why.

Melissa (29:00)

Hmm.

Yeah, absolutely.

Jon Blair (29:14)

Lenders don't want to lend against something that's in China, right? That they can't seize or that's on a boat that they can't seize or that's on a truck that they can't seize. If it's in a warehouse, then they have a lien on that, on the goods that are at that warehouse. They can go seize them if you don't pay the loan, right? So that's, so in transit inventory is a big, big, huge problem for scaling DTC brands. And it's usually the most common reason why I see an ABL get removed from the running for growing eComm brands where I tend to see it start to work is when they've reached a size and scale and enough profitability in the business, enough retained earnings in the business that there's this capital base that they have that if they momentarily need in transit financing, they can use that capital base for the in transit piece, or they've developed enough relationship with their vendors that they've figured out how to get 30 day payment terms and that 30 days can, that floats the in transit, right? But if you're an emerging brand, which is most of the brands that we work with, surprise, like, another misconception I guess I'll throw out there is I think a lot of brands think like, by the time I hit 10 million, maybe 20 million, I'm good. I have a brand that's doing 50 million a year in revenue and they still have this problem. So it depends on multiple factors. The other thing I wanna mention, you mentioned the sizing.

Melissa (30:16)

Yep.

Mm-hmm.

Yeah.

Jon Blair (30:41)

This is where the distinction in my mind of bank versus non-bank comes into play. If you're using a bank, so you're using a Chase, a Wells Fargo, a Bank of America, the advance rate on inventory is usually 50%. And I mean, yes, can you ask for more? Can you try to negotiate more? Yes, but they're usually not going to start there. They're very rigid. Non-bank, you can get up to like 75%, maybe 80%. The standard is probably starting at 55% and you can push them to get to 60, 65. And if you're elite, you can maybe get them in the seventies or the eighties, right? But that money is more expensive than bank, they'll, non-bank ABL lender will lend you more, they'll give you a bigger line. I mean, I love, I have friends at Chase and Wells Fargo and Bank of America, but they know that, they know, cause I've told them and they know, the emerging brands we work with, a lot of them are not in that box, where they'll offer a $30 million brand a million dollar line of credit for inventory. A non-bank ABL lender may offer that same brand $3 million, right? And like a 75 % advance rate instead of a 50 % advance rate. So those are just a couple things to consider. I can tell that you've got, the fairy godmother has some comments.

Melissa (31:42)

Mm-hmm.

Which is a big difference, yeah.

Yeah. No, I like, I know

I kind of want you to dig into like what that underwriting process is like so that, you know, founders are aware like how much time is this going to take? What am I expected to do on a regular basis to make sure I'm in good standing with my ABL? Things like that.

Jon Blair (32:07)

Mmm. Yeah.

Totally.

Yes, so ABLs are probably out of all the loans that are on our list, those are the ones that have the heaviest underwriting and require the most. Maybe they're fairly similar to like SBA loans on the front end of underwriting, but where they differ is the ongoing underwriting and compliance is I think far more.

Melissa (32:36)

Mm-hmm.

Jon Blair (32:46)

substantial with an ABL than other types of loans that have heavy underwriting on the front end. And here's why again, cause it's asset based, meaning that every time the lenders max allowable limit on the line or balance on the line is directly tied to the snapshot valuation of an asset on the day that you take the draw. And then they also test it periodically. Usually they test it monthly.

it's not uncommon to see them test it weekly though. and then they'll test it more heavily, quarterly or, or a couple of times a year. So what does that mean when they're testing it weekly? that means that you have to put together what's called a borrowing base report. let's say, let's just say that it's tied to inventory valuation. Cause for an eComm brand that doesn't have AR or has very little AR inventories, usually the asset based. That means you have to prepare a report of exactly what you have on hand and the landed cost value. Now I see Melissa cracking a little smile because the word landed cost value, that's like a whole nother podcast episode. that's something that, but like, so if the, getting into all the details, tracking your landed cost and what's on hand today, every week is a lot of work. Most brands don't do it. and if you try to do it, it's usually wrong and, and it's not, it's not the brand's fault. It's just a lot of work and it's hard, right? and so you have to prepare this borrowing base and you, whoever, usually the CEO founder, you have to sign it and you're signing it, certifying saying, I am certifying. This is accurate because the bank is giving you a percentage of that value of that asset value available to draw. So you have to do that every week or every time you do a draw or at least monthly, and then usually quarterly or at least a couple of times a year they do what's called an inventory appraisal where they request all of this. They basically re underwrite the loan more or less. It's a mini version of the underwriting you went through at the beginning. And it's because they're double checking that the economics are the same in the business, that your margins are the same. They'll even oftentimes send someone physically to your warehouse to do a physical count to test, to make sure that you're borrowing against an asset that exists physically in reality. And it's not some fake made up thing.

Melissa (34:51)

Yeah, what you just went through, yep.

Yes.

Mm-hmm. yeah.

Jon Blair (35:13)

And the reason this is all required is because everything's tied to the asset base. So they have to have, they have no other data feed to confirm that the asset base that they're using to borrow or to lend against is actually real. so when is this worth it? This is worth it when the advance rate is right. The partner is right. It matches your cash conversion cycle the right way. And the ebbs and the flows of your working capital, if there's a good match there, right. Then it can be worth the effort. And if it's a lender who is truly helpful, that can quickly expand line sizes and is willing to give you over advances when you need them situationally. We had a great partner like this at Guardian Bikes. And then at some point it stopped working because they couldn't do in transit and in transit was our need for that season. Right. And so what's the point of making all this? The level of effort put in, choose the line first and foremost that the actual capital availability moves in concert with your working capital needs. Don't use one that doesn't match and that fights against your working capital needs. Then and only then decide if you want to put in the work to get that loan and maintain that loan.

Melissa (36:18)

Yeah.

Yeah, definitely.

Absolutely. And I would also say looking into kind of vertical specific ABLs is super important because nine times out of 10, they will be more understanding of what a CPG ABL cares more about cold chain logistics on your supply chain and if you're managing that better, right? Versus somebody who, maybe, I'm not sure you guys were with at Guardian, but that is not an issue. So really finding somebody who understands what your specific supply chain for your specific, I would say like eComm or market vertical is, is super big. And that's why Settle is so big on helping CPG and eComm because we know it well. We understand the problems that those founders are going through and we really believe we have a solution that actually helps with that. So I would say that in every kind of lending product that you think about, at this point, right? In the era of fintech, there is likely a vertical type that will help you much better. And so that's definitely something to consider when you are shopping around. But yeah, my gosh, Jon, as you can see, is a wealth of knowledge when it comes to different financing products. I was also learning things here. When it comes to ABLs, a lot of the things that you said I was aware of, but other things that I was not aware of just because Settle is not an ABL, but we work

Jon Blair (37:31)

Totally.

Melissa (37:54)

and do like lot of trainings into understanding how they work. so absolutely spot on and definitely a lot of due diligence. I think, yeah, it's just really the saying comes to mind is the juice worth the squeeze when it comes to this financing product. And when are you at that level of sophistication where you're kind of comfortable with, yeah, totally, right. Yeah.

Jon Blair (38:09)

Totally.

be able to manage it. Yeah. Well, and that's another reason,

like actually, I think the vertical specific thing you mentioned is like, don't underestimate the importance of that. That's actually why Free to Grow. We are vertical specific. We are bookkeeping and fractional CFO for growing eComm brands. And it's because we can provide so much more value by understanding your business model and your scaling challenges at a deep, deep level than someone who's horizontal trying to learn those lessons with you, right? And the lending partner thing from a vertical perspective is just as important.

Melissa (38:45)

Yes. Absolutely. I know. Yeah. I know. Sometimes I'll go to like these. I love all of our accounting partners, but sometimes I'll go to their pages and the amount of verticals that they serve where it's like 10 to 15 different verticals. I'm like, sure, you can have a different accountant that has like a specialty, know, or CPA that has a specialty into that specific vertical, but make sure if you are going that route that they have somebody who knows their stuff, you know, and has like that background and can advise in that. But if not, I always recommend doing the vertical specific thing for sure. based on kind of the earlier conversation that you like were talking about, talk to me about like the importance of actually using a fractional CFO versus your accounting firm when it comes to making decisions like this, because I have seen, you know, accounting firms advise on capital, but sometimes, yeah, it's like, is that really the best thing where I've even seen certain accounting firms, you know, refer to settle, but we're probably not the best solution for them based on certain things that I see. So talk me through like how I guess what's your edge in that space? Because you talked about a lot of things that I think maybe if you are a CPA and hey, I used to be an accountant, so no shame or shade here. You know, exactly. Yeah. So which I think most folks are, right? And so kind of talk me through the advantages of going with somebody who actually has that CFO background, like fractional CFO, and that is what they've been focusing on versus kind of just saying,

Jon Blair (40:13)

Hey, so did I. So I was an accountant first too, so.

Melissa (40:30)

Yeah, we provide fractional CFO services, but that's not really like their specialty.

Jon Blair (40:32)

For sure.

Yeah, it's funny because I had a post a couple weeks ago about the difference between an accountant and a CFO and I believe you were the first comment and you said, woo, this, you said this, this was spicy, Jon. So, okay, so in its simplest form, accountants are focused on the past and CFOs are focused on the future. Now, unpacking that, there's a lot underneath those two bullet points but, accountants are specialists at recording what has happened in a way that it can be interpreted by various parties, right? To make different decisions about the future. So accountants are 100 % needed from a bookkeeping standpoint. And I'll even say in terms of tax accountants, they're needed as well because tax compliance and tax savings is a huge, important thing for a growing profitable brand. But.

Melissa (41:17)

Yes, totally.

100%.

Jon Blair (41:30)

It's not the same thing as a CFO, right? A CFO may have come from an accounting background, but a CFO also may have come from an FP &A or an investment banking or a private equity background. They don't have to have come from an accounting background. Now, they need to know how to use financial statements, which are prepared by accountants, right, to make forward-looking decisions, but they don't have to actually be the preparers of said financial statements, right? And so a CFO, there are a lot of people out there, hence the post that I made a couple weeks ago, and I talk about this a lot in my content. If your CFO is really just a glorified accountant, they're not a CFO. It doesn't mean they're useless. You still need the accounting. But a CFO is a strategist who helps you build the vision you have in your head as a founder of the future you're trying to build. A CFO helps enable that, right? They use...

Melissa (42:03)

Hehehe.

Yes. Yes.

Jon Blair (42:26)

Amongst other things, they use the data that accountants record to help make those decisions. But they understand things like forecasting, scaling in an, in an eComm from the eComm vertical perspective, they understand how to scale ad spend profitably. They understand how to build teams profitably. They understand how to manage inventory and they understand again, amongst other things, how they understand

Melissa (42:44)

Yes, so important.

Jon Blair (42:55)

capital structure. They understand how to think about retained earnings versus equity, outside equity capital versus debt capital and how to stack those things, going back to capital stack, to stack your capital in the most optimal way such that it meets your needs so that you have the capital you need to invest and achieve your growth goals. But at the same time, balancing that, against risk and liability to lenders and cost of capital. And so it's not optimizing for either one of those. I'm not optimizing just for capital availability or just for cost of capital or just for liability. I'm looking at all three of those things and I'm saying, how can I, as the CFO help the founder achieve their goals while keeping all of these three in balance? Right? And so CFOs are enablers.

of achieving your goals and we know how to take tools, debt being one of those tools, and how to advise the brand founder on how to use those tools to get from where they are today to where they want to go.

Melissa (44:05)

I love that. Look at that. I just want to start a business just so I could work with you guys.

Jon Blair (44:09)

man, so really quick, because I want everyone to get a chance to hear about Settle's Capital solution. what I'll do just in the interest of time is I'll give everyone a quick high flyover of SBA loans and term loans, and then we're going to go to Settle Capital. So SBA loans, I have a lot of experience with this because of being in the emerging brand world. SBA loans.

Melissa (44:17)

Yeah.

Yes, let's do it.

Jon Blair (44:37)

They seem, there's a lot of allure around them because they are lowest cost of capital because they're subsidized by the government. And it's like, man, I can get that much money for that little amount, but it's a trap if you're really trying to scale. And the reason is heavy underwriting, lots of restrictions around your cap table and other things that you could potentially trip, tons of liability and you can't really remove any of that liability. You're gonna have a PG, it's guaranteed. You actually can't negotiate that out.

A lot of stuff you can't negotiate because the government won't back it if you negotiate those things. So if you're willing to put up basically your personal net worth, it could be a great way to get a cheap source of capital. But if you're growing fast and you think you need to refi that SBA loan soon, it's probably not worth all the fees and all the underwriting because you're gonna end up replacing that capital source with a more expensive one. You can refi an SBA loan with an SBA loan.

Melissa (45:15)

Yeah.

Jon Blair (45:36)

But again, it comes with all those same restrictions and all those same liabilities. so it, I see SBA loans better for businesses that are stable and not growing super fast where you can actually keep that source of capital for a long period of time. They do have ABLs, but usually it's a term loan, meaning you're paying it back over an amortized period, usually five, seven or 10 years. And so unless that meets your needs and you're not growing super fast and you don't think you have to refi it soon.

Melissa (45:46)

Yes. Yes.

Right.

Jon Blair (46:06)

SBA loans tend to not be the greatest solution. I learned this the hard way. We got a couple of SBA loans at Guardian Bikes and we had to refile out of both of them because we were going so fast and they no longer met our needs. And where did we go after that? Non-bank ABL. And so that's a little bit about SBA loans, but settle capital. We talk about MCAs, lines of credits, ABLs, SBA loans and term loans. Where is Settle different? And how do you see the way that you structure your capital solutions as really providing an edge to brands and like actually meeting their needs.

Melissa (46:41)

Yeah, good question. Oftentimes it requires a lot of education. I speak to a lot of CFOs, fractional CFOs, accountants and founders. And it's kind of hard to wrap your head around Settle because I do think it's kind of unique in the way that it works. And the reason being is because I think it's a super valuable resource to brands where they're like, I don't know, this sounds too good to be true. It's really this simple. And I'm like, yeah.

One on the underwriting end, as far as it just not being like the super time consuming, lots of due diligence that we do, but we do enough to make sure we're going to provide you with a capital solution that is healthy for your business. So that's really important. So I would say that when talking to founders about this, I really like to kind of position us as far as like where you are with your business, where maybe you...

don't want to use MCAs anymore, right? And you're like, I can't do that anymore. It's sucking up my cashflow. I'm tired of giving a percentage of sales. But maybe you're not sophisticated or large enough yet for an ABL or a large line of credit. You don't have the sales yet for that because a lot of ABLs do have minimum revenue requirements. So that's kind of where I think Settle fits perfectly.

When it comes to cost too, we're nudged right there with much lower APRs compared to MCA and only a little bit higher compared to ABLs and lines of credit. what we honestly do is really provide a solution to founders, to CFOs who are just looking for a simple, meaningful solution to pay for inventory that makes sense for their business.

And so essentially you can kind of think of us, our founder Alec came from the company Affirm. You can kind of think of it as like a B2B buy now pay later for your inventory and ad spend. The fact that we even include ad spend shows you how like focused we are in helping eComm brands who are very focused on that as well. And the way we work is we finance your invoices to your vendors and then you pay us back later. What that allows us to do is provide you with better rates because some of our competitors, what they're doing is just advancing you money and charging you a premium for that. But we're taking a little bit more of a different approach when it comes to our risk. But what that does is allows us to provide value so that we can actually provide a cost for you that makes sense for your business and won't. I would say like...

compromise your margins too much compared to an MCA. And at the beginning of your business, that's super important to weigh that out when you're thinking about a debt solution, right? How does this actually impact my margins, my retained earnings, like Jon was talking about? So I would say if you are a business that is over MCAs, you don't want to deal with somebody taking a percentage of your sales. You don't want to deal with a daily, weekly kind of payback.

but you don't quite qualify for those larger kind of solutions like ABLs or larger lines of credit. Settle is the perfect solution for you. So I'm always happy to talk to somebody, even if Settle is not the right solution at the moment. Like I talk to founders all day about just debt in general, hence financing Fairy Godmother. I will have a conversation with you. Anybody on my team will have a conversation with you on how we can help. But last thing I wanted to say is we also rolled out our inventory management solution.

Jon Blair (50:17)

Yeah, I was gonna ask about that.

Melissa (50:18)

That also we're really looking to solve, because we understand the relationship between capital and inventory so much and how important that is to your business. But now we want to provide an additional tool to helping founders really get a good understanding of their inventory, how that's connected to AP, which we've talked about on different occasions. And we're really just looking to be a very CPG ECOM focused light ERP that really

is solving real problems for founders. so yeah, if that's something that you need to understand your land of COGS you need a one source of truth solution for your inventory, we're happy to also have that conversation as well. So yeah.

Jon Blair (51:03)

Yeah, I definitely recommend just checking it out because Settle can run your AP workflow, right? And you can just use it standalone for AP management as a solution, as an alternative to bill.com, right? But inside that, there is an IMS capabilities where you can actually purchase and track inventory at landed costs. And then if you need financing for purchasing inventory, you can do that all native in the platform as well. So you can manage your AP, your inventory and finance it all in the same place. So I highly recommend checking it out.

Melissa (51:31)

Boom.

purchasing cycle. Yeah. Yes.

Thank you, Jon.

That was beautiful. More to come, too. We're building more.

Jon Blair (51:43)

Yeah, yeah, I'm looking forward to it. so, I mean, we're gonna probably have to have another conversation on the show with you because we only got through, we didn't get through it all, but we got through a lot of really meaty stuff. And so, before we land the plane though, I always like to ask a personal question. So, in addition to being a fairy godmother on the side, what's another, what's a little known fact about Melissa that you think, people might find shocking or surprising.

Melissa (52:14)

Yeah,

I honestly, it's my go-to and it's so easy anytime I start a new company or I'm like meeting a new group of people. This always shocks folks, but I'm actually a triplet and so it kind of, yeah.

Jon Blair (52:25)

Wow, that's awesome.

Melissa (52:27)

It kind of comes with like a myriad of silly questions. Like, can read each other's minds and things like that. it's quite like the conversation booster because I got a lot of questions. I don't usually lead with it. we just did our our I don't even though I just brought it up right now. But like a lot of people, we just did our Settle offsite in Cedar Lakes. If you need somewhere to do a retreat, please go there. was phenomenal. But it a lot of people had no idea and they found out like after they've known me for like a year, like you know, or year and a half or however long it's been. They're like, wait, what? And I'm like, yeah, you know. But yeah, it's pretty wild. people are like, what's that like? And I'm like, I don't know. Like, what's it like being a single child or somebody with just like a sibling that's one year younger? You know, it's not that different, I guess. You know, but it's pretty wild. My sisters, yeah.

Jon Blair (53:11)

Yeah, yeah, for sure.

question is really for your parents.

What was that like? Not for you, right?

Melissa (53:16)

Right, I know, I know, totally.

Wild, wild, lots of love, but so much fun. yeah, was my sisters are my best friends. So we call each other womb mates. And yeah, so it's definitely a fun fact for sure. What about for you, Jon? What's I mean, does anybody ask you like what what's like a fun fact for you? Yes.

Jon Blair (53:30)

Hahaha!

Yeah, that's funny. I love having guests who actually like turn the tables on me. I mean, some

people know about this because I recently, I recently like, I guess announced this or like made it a part of my content. But 12 years ago, I was in a touring thrash metal band called Fates Demise. And I still write heavy metal music to this day. I'm actually working on a record, short one, four songs.

Melissa (53:58)

I love that.

Jon Blair (54:07)

almost done writing it and my hope, my goal is to launch it or to release it sometime in 2025. So when I'm not chasing around my three little kids and growing, Free to Grow and helping eComm Founders scale, I am writing heavy metal music and I thoroughly enjoy it.

Melissa (54:07)

That is so cool.

Amazing.

Ooh, full plate. I love that. You

know why I love that? Because I feel like sometimes folks in finance or accounting, and I get this bad rep that like, you're like right brain, da da da. But it's like everybody has a creative outlet, likely. They just sometimes don't know it. Sometimes it's as obvious as I am a musician, right? But like...

Jon Blair (54:36)

Totally.

Melissa (54:42)

Everybody has like the ability to be a creative and a logical person like in their trade maybe, but then they have like this amazing creative outlet. So I love that. Hopefully, you know, maybe when the kids get a little older, you can start maybe touring for that.

Jon Blair (54:47)

Agreed.

I have this dream that I'll somehow get a band together and we don't need to go on some really long tour, but even just like a week or something, I love playing music on stage live and so one of these days I will get a chance to do it and let my kids watch. Well, Melissa, this conversation was jam-packed full of...

Melissa (55:07)

Yeah, something. That sounds amazing. Yeah. I mean, yeah, that's the best. Yeah.

That sounds amazing. Awesome.

Good stuff.

Jon Blair (55:25)

really practical information about a topic, debt financing, that is front and center for every brand that I encounter. So I appreciate you coming on and dropping knowledge on some of these areas that quite frankly I don't think there's enough education in the marketplace about, so I appreciate your willingness to do that. Before we completely land the plane though, where can people find out more information about you and about Settle?

Melissa (55:43)

Yeah.

Yeah, you guys can find me on LinkedIn. Melissa Cafagna is my name on LinkedIn. And we'll make sure to link that so you guys can give me a follow. I love talking about CPG brands. I post about CPG brands all the time. Founders within the CPG world specifically, they're so inspirational to me. And Settle, www.settle.com. Do not settle for a lame capital solution, just kidding, all capital solution are great yeah, yeah, they are, they are. Okay, but Settle is the best, we're the best, I'm sorry. No, but yes, www.settle.com. You can also reach out to me on LinkedIn as well. You can slide in my DMs, I'm happy to just direct you in the right path, whatever you're interested in, yeah.

Jon Blair (56:21)

Yeah

Hahaha

Definitely reachout to Melissa if you have any questions about how Settle can help you guys with either AP inventory management and or inventory financing. don't forget if you want more helpful tips on scaling a profit focused DTC brand, consider following me, Jon Blair on LinkedIn. You'll see Melissa probably in some of the comments there. 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 cashflow as you scale, check us out at freetogrowcfo.com.

Jon Blair (57:10) And until next time, scale on. Thanks, Melissa.

Melissa (57:13) Bye. Thanks for having me, Jon.

How to Love the Journey Scaling to 7-Figures and Beyond

Episode Summary

In this episode of the Free to Grow CFO podcast, host Jon Blair and guest Clay Banks discuss the realities and misconceptions of starting and scaling an e-commerce brand. They explore the importance of enjoying the entrepreneurial journey, learning from failures, and the significance of simplicity in product development and marketing strategies. Clay shares insights from his entrepreneurial journey, including the rapid success of his brand GloriLight, and emphasizes the need for creativity and authenticity in marketing. The conversation also touches on the role of faith in entrepreneurship and the best practices for raising capital.

Key Takeaways

• Simplicity in product design leads to faster market entry.

• Invest in creativity to drive growth and attract investors.

• Understand your North Star metric to guide your business.

Episode Links

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

Clay Banks- https://www.linkedin.com/in/claybanks/

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

InPaceLine - https://www.inpaceline.com/

GloriLight - https://glorilight.com/

Meet Clay Banks

Clay Banks is a seasoned entrepreneur and growth strategist with a proven track record of bringing ideas to market and scaling them to success. Over 23 years, he has co-founded or led eight companies, raising more than $7 million in seed and venture capital. Specializing in go-to-market strategy, Clay has successfully launched over 23 hardware and software products, driving their adoption across direct-to-consumer and B2B channels.

In 2022, Clay achieved a successful exit, selling his equity position in HavenLock—best known for its appearance on ABC’s Shark Tank and features in Forbes, TechCrunch, and Entrepreneur—to a venture capital firm. Today, Clay focuses on advising and investing in early-stage startups and short-term rental properties, leveraging his expertise to help founders navigate growth and achieve market fit.

Passionate about enabling visionary entrepreneurs, Clay offers mentorship and consulting in growth strategies, eCommerce scaling, and operational excellence. Outside of business, he’s a five-time Ironman, published author, and dedicated advocate for turning big visions into impactful results.

Transcript

~~~

00:00 Introduction

02:14 Clay Banks' Entrepreneurial Journey

08:25 The Pursuit of Freedom in Entrepreneurship

19:17 Scaling GloriLight: Lessons Learned

27:07 Simplicity in Product Development and Marketing

27:33 Validating Product Assumptions Quickly

29:24 Lessons from Past Failures in Marketing

32:53 The Importance of Authentic Content Creation

37:34 The Journey of Content Creation and Its Purpose

38:45 Best Practices for Raising Capital

44:09 The Role of Purpose in Brand Success

51:35 Faith and Control in Entrepreneurship

55:07 Closing Thoughts

Jon Blair (00:01)

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 outsource finance and accounting firm for eight and nine figure DTC brands. And today I'm here with my buddy, Clay Banks. He's had his hands in so many things. I wasn't exactly sure.

how to introduce him, but as of today, he is the founder of GloriLight a growing e-commerce brand, and he also runs a coaching business called InPaceLine, kind of a strategic growth firm that helps accelerate visionary brands. He's got a much more extensive background than just that, which I'll let him tell in a second, but Clay, thanks for joining, man. How are things going in your world today?

Clay Banks (00:53)

Glad to be here, Jon. Today's Cyber Monday, so things are going good for us today. Our plan is working as designed. I'm able to take time away from those busy hours of e-commerce hype season and come be with you. So I'm glad to be spending our time today together.

Jon Blair (01:10)

Ha ha ha!

Yeah man, call this, at Free to Grow, we call this the eCommerce Super Bowl, Black Friday, Cyber Monday weekend, and there's like so much build up to it, so much prep. Most brands have been prepping for not just weeks, but months, and depending on lead times, maybe back in the early summer, starting to plan out purchases, and so it's definitely an exciting weekend for the eComm world, but look, thanks for joining. This, this, we're gonna chat about today is honestly near and dear to my heart. I've kind of coined it realities and misconceptions and lessons learned of starting and scaling an e-comm brand. Now I will say the concepts we talk about today, there's gonna be plenty that are more universal to just business in general, right? Starting and growing a business, but as we always do, we'll be chatting about specific examples and strategies around scaling an e-comm brand.

But the bottom line is, you know, I'll just come out right at the beginning of the episode letting everybody know, what we're here to talk about is that at the end of the day when you decide to start and scale a brand, it's all about loving the journey that you're on, honing the craft, not necessarily getting to an end point. And we have a lot of stuff to unpack around this subject today and I'm excited for the conversation. So before we dive into chatting about that though, Clay, walk us through your entrepreneurial journey. It's extensive.

And walk me through it and how you got to where you are today

Clay Banks (02:49)

Yeah, I first kind of got my first bug, so to speak, when I was a sophomore in college. I went to the University of Tennessee back in 2001. I got it right here. I keep it right here on my desk. I published this book called A Voswalk. It's a compilation of fan stories about how they became a fan of the University of Tennessee. And that was back when Amazon was just a bookstore. Put yourself back into 2001.

Jon Blair (03:16)

Hahaha

Clay Banks (03:19)

People still bought books at Borders Books and those types of brick and mortar stores. Back then, crowdsourcing wasn't a thing, wasn't even a term, but we went out to tailgates across campus and we crowdsourced stories from people. And we published those in the book and got the rights to put the power T on it and got the color orange, which was patented, and sold them across the state. And every Books-A-Million Borders book, Sam's Club,

Walmart, Walgreens, all across the state and had three business partners. Still very dear friends with those guys today.

And after selling an entire couple of football seasons worth of books, we looked at our bank account and there was no money there. There was no profit margin. And it was a tough lesson learned. When we sold the book for 20, it cost us about $9 to print it, but we sold it to distributors, the bookstores, for around 11. So gross profit was really around about a couple bucks, but by the time we paid gas and marketing expenses

Jon Blair (04:09)

Hahaha

Clay Banks (04:30)

and we had enough for a couple burritos after that. But really fell in love with the idea of entrepreneurship and the idea of controlling my own destiny and not having a limit on my potential. I carried different jobs. I worked different economic development roles, recruiting companies to the state. Through that, I was always reading books or listening to podcasts about entrepreneurship, about raising venture capital, about scaling up brands, about building teams. I'd started a handful of companies that that never really got out of the gate. I started a mobile web development company that built mobile websites for Blackberry phones. So if you can remember back when you had the Korty keyboard, we built websites or small micro sites for Blackberrys. We built, I did a tech transfer company out of the University of Memphis. Never got the first dollar of revenue with that one.

Jon Blair (05:22)

Hahaha.

Clay Banks (05:40)

It took a handful of kind of getting up to the plate and striking out to kind of really understand what entrepreneurship was about. And then in 2014, I partnered with a guy and we invented and patented a home security product that could detect and prevent home break-ins. And this was a very complex product to make. was metal stamping, powder coating, injection molding, firmware software, electronics that communicated over to an Android and iOS that communicated to Google and Alexa and then ultimately we spun that product into a product that we sold into schools to prevent active shooters from getting into classrooms and that one we raised at the time when I left the company about seven million dollars in capital from about 90 different investors and you know, a team of about 13 people growing that business. So yeah, that's a little bit about my journey. Shark Tank, season 10, yeah, go back, one of the most watched episodes, I think in the most shared episode of all time. We can get into that if you want to.

Jon Blair (06:42)

And Shark Tank, don't forget, don't forget, don't forget Shark Tank.

That's actually how we met. Well, the funny thing is that's actually how we met when I first started. So Clay has a very tight connection to the beginnings of Free to Grow CFO actually. I first left Guardian Bikes, another Shark Tank company, and I served, in addition to the CFO role, I served the business as the COO. And I was out just networking, calling on my network literally a few weeks into having started Free to Grow.

and was talking to another fellow Christian who was like, hey man, you've got to meet this other guy. He's out in Tennessee who, and that was Derek or, depending on who you're, who, how you know him, Derek or William, I believe. And he lives, I believe on Clay Street. And I told him my story. I told, I told Derek slash William my story. And he was like, and it included Shark Tank being a COO. And he's like, you have got to meet my friend Clay.

Clay Banks (07:33)

Derek, yeah.

Jon Blair (07:54)

who was a founder of a Shark Tank business and he was the COO and he's looking for his next thing. And so I met Clay just a couple weeks into having started Free to Grow. And so that's one of the reasons I'm so excited about this conversation because we just hit it off immediately with just, I mean, effectively just sharing stories and ideas and thoughts about the right and the wrong way to think about scaling a brand. And even got to work on a project together, a brand called Curb Cover.

that was really exciting and a lot of fun. okay, there's a couple things that you mentioned in your background that I want to kind of like dive in on. One is this concept of like freedom and controlling your own destiny, right? I always say, talk about this a lot in my content, that like, why did you get into business in the first place, founder? Usually the word freedom, or the idea of freedom, is somewhere in there, right? That's like, that is the entrepreneurial ideal.

is that I'm gonna pave my own path and I'm gonna be free to work on the things I want to work on and hopefully become financially free through my business, right? And so we at Free to Grow, we work specifically with profit-focused e-commerce brands. there's this tight connection between being profitable and being able to control your own destiny, right? What are some of the things that come to mind when you start thinking about freedom, entrepreneurial freedom, and either where you see that go right or you see it go wrong.

Clay Banks (09:27)

Yeah, I've taken 23 plus years to kind of really realize this, that I'm more passionate about the process of...

doing the work it takes to build something bigger than yourself. The result, well at first I started out thinking about the result, about the finish line of what that would look like when we exited, we IPO'd or whatever the dream was. I can tell you it's always gonna be something different than what you expected. And I kind of just began enjoying the process it takes to get a brand to, know, to...profitability and then to, you know, first revenue and then profitability and the first one it took a good seven years for us to really hit a good stride in revenue and then when I sold that company the next one I started, company called GloriLight, was much faster because the lessons that I had learned in the previous one were

there weren't many headaches, weren't as many, you know, where to go. know, most of the path was at least figured out for that business and it got to profitability much faster, it got to scale much faster, albeit it be a simpler product, but...

To me, I just love building something bigger than myself and enjoying the process. I'm a five-time Ironman. you know, ran down the red carpet five times in different countries here in end in the US and I wouldn't do that if I didn't like training every day, every week, you know? And I enjoy the process of getting, the finish line is what everybody sees. It's the stuff that people don't see that I enjoy.

Jon Blair (11:12)

for sure. Well, yeah, you know, it's funny.

Totally.

Well, you know what though, if you study any part, like quote successful person, this could be an athlete, it can be, you know, someone like Warren Buffett or Mark Cuban, you know, presidents, like you, if you study someone who you admire in terms of their accomplishments, you know what's the common theme that you find behind all of them? They were all like super obsessed with the process, with the journey, right?

and the outcomes of accomplishment and success, that just ended up being the results of being obsessed with the journey, right? And I'm a musician, I'm a heavy metal musician and like heavy metal guitar players are like the best guitar players in the world in my opinion. And when I watch some of them play, I can get this feeling of like, man, where did they find, where did they learn these shortcuts from?

And when I go and I watch YouTube videos or I read articles about these guys, you find out they practice 12 hours a day for years, right? And even to this day, they maybe don't have to practice 12 hours a day anymore, but they still have to maintain, right? They have to maintain, they have to always push themselves. And so if you are just living, in my experience, if you're living for the end, that's when you experience burnout. Because what you do is you push yourself to these,

unsustainable limits, right, going, this will pay off when I reach the end. And you realize you don't know if you will reach the end, when you'll reach the end, or what the end will even look like. And so if you want to be sustainable, you've got to just enjoy the process. Do you agree with that? And do you have anything else to add to that?

Clay Banks (13:04)

know, a thousand percent. When I first started Haven Lock back in 2014, my business partner and I kind of both agreed, okay, this is like a 10-year plan and we were gonna put everything we had into it for 10 years, but our vision was this big elaborate like IPO slash

Purchase buyout by another company where we would we would all go and we would rent out a big room and you know all of our investors and friends and family would be there and we would have a nice dinner and that was kind of the the dream right, but when when when I sold my portion of that business I sold it to a venture capital firm when the money hit my bank account and I was done and I'd signed off on all the papers and everything was I was completely divested of that company

I looked at my wife on the couch, we had a glass of wine and we're like, it's done, cheers. It was not that big. That thing I'd built up in my mind was this big event. And ultimately, it was still a successful event, but I got to share that with my wife, but it wasn't what I was planning. That's okay, right? And now looking back, it was those...

Jon Blair (14:00)

Yeah

Clay Banks (14:18)

You know, I was working two jobs. I was working for the state of Tennessee recruiting companies. It was my full-time day job. So I was getting up at like four or five in the morning to work on this company and then work until about seven or eight in the morning, then go to that job and then come back and then work until sometimes midnight working on the company. And fortunately, I don't have to have that kind of cadence and rhythm now, but

There's something to be said about what's done at dark is brought to the light, right?

It's those things that you do when no one's looking and the consistent reps that you have to put in You mentioned like playing the guitar You've got to learn those skills and those skills never really go away so that They just compound on each other you get better you get faster You get better at making decisions you get better who you pick to work with like that's another big one for me It's like I can now

Jon Blair (15:08)

Totally.

Totally.

Clay Banks (15:18)

decipher like character traits a little bit better than I could early on. So yeah, these all take, you know, reps and practice to learn those skills.

Jon Blair (15:31)

I'm actually not, I'm not exaggerating at all. I'm getting the goosebumps right now because I'm a lifetime entrepreneur just like you as well. And these lessons that we're talking about, this is the life of an entrepreneur. And like to me, this is what lights me up, right? Is like, hey, even though I haven't had that end all be all, whatever, liquidity or monetization or exit like event yet, right?

I'm growing as an entrepreneur and I'm becoming wiser, right? And the thing that's hard, here's the thing that's hard. I want everyone listening to this to just like for a moment, like free themself of the burden of like, of the idea they have in their mind about what their life and their business is supposed to be like. Cause the reality is, and I'm speaking from a place of like pure vulnerability right now, we get down because we don't.

We can't reconcile where we're at today with this lavish idea we have in our mind as entrepreneurs. And it's so hard because you go out there and you're like, I mean, you get on LinkedIn or you get on Twitter, you see the content, you read the books and you're like, damn, all these guys got to figure it out. They're freaking crushing it. Like look at Mark Cuban, look at freaking Warren Buffett, look at Kobe Bryant, like any, look.

Clay Banks (16:49)

any of the middle micro-influencers out there that are, it's a perceived thing that they got it overnight and those people earned it and it took them a long time to get there and most people can't justify that.

Jon Blair (16:53)

Totally.

Totally.

And to this day, but I'll even say, and I know I'm just gonna go out on a limb and just say, I know you feel the same way. We still question ourselves every single day. Like every day I'm like, man, I'm not good enough. Every day I'm like, what's Free to Grow? And like in reality, we serve 31 brands. I met Clay less than three years ago, I had one client. We have a...

Clay Banks (17:26)

was gonna say, there's like one or two.

Jon Blair (17:28)

We have a team of 10 people that are all amazing and the founders we work with are awesome and like, I bet you next year we'll be at 40 clients, maybe even more than that. And I'm not saying that to brag, I'm saying that like, we are succeeding and every day I wake up and I'm like, man, what, is it enough? And like, where am I failing, right? And so I'm saying this because I want, if you're listening to this episode, you're listening to this episode because you're looking for tools and tips and tricks.

Clay Banks (17:44)

Is it enough?

Jon Blair (17:58)

to do a better job of scaling your brand. And right now I just wanna free you and say, just keep going, just stay in the game. Be willing to say, it's only a failure if you don't learn from it, right? And failure is an event, it's not a person, it's not you, it is an event. And here's the beautiful thing when you're ready to finally embrace failure, is you can say, hey, that event failed.

that thing failed, that decision failed, that product failed, that ad campaign failed, but I'm alive and I'm gonna live a fight another day and I can sit down and I can say, okay, what went right, what went wrong, and what am I gonna change? And if you do that, I've got on my screen here in my notes, Clay started eight businesses, six failed. Six out of eight failed, right?

two became million dollar plus brands and the most recent one, GloriLight, which Clay basically just started, that one happened the most quickly, right? Like years and years into the game after failing, right? And so where I'm leading with this is like, Clay, let's talk about GloriLight, an eComm brand that reached seven figures faster than any of your other businesses. Walk me through just the first things that come to mind, the learnings from your previous business failures that allowed you to start this business so much more wisely and achieve that scale and profitability so much more quickly.

Clay Banks (19:27)

So let's dive deep here. When I looked at GloriLight and the idea behind it, first of all, it's a kids night light that projects.

Bible verses onto the ceiling. Okay, and it's got this little tray that you put in these these discs and it it shines a light through the film onto the ceiling. So it's in high definition. When I first got this idea from a business partner Matt, I looked and said, how fast can we get to an income producing product? Right? And before, my whole entrepreneurial journey before, it was like, let's build a product that people would love, but we overcomplicated it. We made it too complicated. It took forever to get to market we had to have it connected to apps and all this other stuff, all this extra bells and whistles that really the core value of it was preventing a home from being broken into. So my now learning is how fast can I get something to market that adds

Value to someone without being too complicated. could have we could have made this way complicated We could have tried to create an app that works with it We could have tried to create a community of people sharing Bible verses and and teaching their kids We could have tried that right? But no, let's just try to first get out the light as fast as possible to start, you know gauging The opportunity and I think a lot of times entrepreneurs have this big vision and they try to have it all ready before they go to market and you have to kind of really start with what you think is the magical power that you have in that product or that idea that really provides that desired outcome that you want people to have and get to market much sooner. So with GloriLight, we were revenue positive within the first probably maybe 60 days, 58, 60 days. And the reason it took that long was because we had to order the product and have it manufactured and shipped here, right? I think we could have gotten it done sooner, but the first one, took me about four and a half years.

It's a big difference. Yes, it's a different product, but now I'm looking at when I'm coaching other entrepreneurs, it's like how do we strip out all the bells and whistles and focus on the one thing that just makes you unique? Let's start with that.

Jon Blair (22:09)

Really quick, I want to draw something out here and then we'll keep going on the lessons that you learned that help you to get Glorylight started and scale a lot faster. There's a financial concept here that you're drawing out or that you're dancing around that I want to just explicitly say because I see it a lot with the dozens of brands that we work with and the other dozens of brands that I talk to and we don't end up working with, which is that when you're sitting down and you're designing a product,

Right? One, it has to truly start with meeting a need. Right? And you're talking about like that one thing that like drives value to the consumer so that they'll even want to vote yes for that product with their dollars. Right? But then there's a second thing that I think, I think it's more intuitive for founders to go like, I get that. Like, let's get some revenue traction. Right? But the second thing is, and this ties back to the simplicity piece of what you're, what you're walking through here is like,

Is there enough margin in this product for it to even make sense to scale it? Right? Like you may get revenue traction and at the price point and you're looking at your variable costs, there's just like no money to cover marketing. Right? And even if there is, there's knowing what your cack.

like the range that your CAC is going to probably sit in because you can't really affect that too much. There are just CAC bans at certain spend levels, right, for the most part. Can those even be covered by the unit economics of your product? And as you get more more complicated, right, there's more and more risk that that's going to drive more and more variable cost, which is going to leave you less and less on a unit economic basis for dollars to cover marketing. And then hopefully, cover more than marketing. Cover overhead and drop profitability to the bottom line. what have you seen using GloriLight as an example, like being more simple, what has that done for your cost and your margin structure for the product?

Clay Banks (24:12)

First and foremost it allowed us to bring on affiliates or content creators to tell our story. we were starting this brand, we sell to moms and grandmoms. Okay, that is our core demographic. 100 % moms and grandmoms. Guess what? I am not. I am not a mom or a grandmom and neither is my business partner Matt or my business partner Brett in this company. So we had to say, okay, who's going to be the face of the brand, the marketing, the outward position of the brand, right? So we had to make it so simple that any mom or grandmom could get the light and understand what it does, and so they could talk about it. We have over almost 400 affiliates now that are creating content on our behalf and sharing it on their social media accounts. So that is reducing our customer acquisition costs and our marketing spend, but we do supplement that. But if we were to try to create all of that on our own, that message wouldn't be as simple to come across. if we like with going back to the Haven Lock days.

We thought it was important for us to be a tech focused product, meaning it integrated with Alexa, it integrated with Google, it integrated with Android and iOS. It had digital keys and you could share encrypted keys and get a schedule when someone comes and goes, right? And all of our branding and all of our marketing was around the tech features and it was falling flat. Well guess what? People didn't care about that. People wanted to sleep safe at night.

especially women whose husbands traveled, right? And they were gone. The women wanted to be safe at home with their kids. So we repositioned the brand about being safe, about protecting your kids, having peace of mind and safety. And that's where our marketing took off.

when I say go to that one thing that has the value, find that one thing, right? And for Haven, it took us a long time to find that. And once we did, that's where it unlocked. But if we would have started there, we would have gotten to profitability, we would have gotten to better marketing earlier on than we did. And sometimes entrepreneurs, especially first or second time entrepreneurs, They want to build this big grand vision that's too complicated for people to understand right now. They can't really see it because they don't know that one thing that it's about or the value that it brings. we try to now coach brands to identifying what is that magical power that separates you from the others, right?

Jon Blair (26:57)

Yeah.

Well, and another thing too, excuse me, is that the more complicated it is, even if you can get the consumer to understand it, the more complicated it is to manage operationally. And the more complicated it is to manage operationally, oftentimes you see that that affects profitability negatively, right? Because it's so complicated. You have manufacturing challenges and issues.

There's probably just higher costs overall in your bill of materials. And so I think what Clay is getting at here is like, if you're trying to launch a brand or even just launch a new product, right, within your existing brand, figure out how to get something simple that really tests your assumption around what is that one thing. Get it to market as quickly as you can because the only way to really validate it is to get actual consumer feedback and the best way to do it is to try to sell it. But I see a lot of brands make big mistakes where they'll launch a big product and they'll do a big product launch and they're excited about the product. They're personally excited about the product, but they haven't validated what kind of traction it's going to get. And they order this big lot of it, right? It arrives. They do this launch campaign.

And if it flops, they're stuck with all this inventory and all this cash tied up in inventory. And now all of a sudden they're slashing prices, right? And so like they've, they're completely diminishing the value of the product. so, you know, just what, what Clay is talking about here is very practical advice for how to think about like validating what really moves the needle with consumers. What I want to ask you another question here, Clay, about GloriLight and like, you know, drawing from those learnings of your six failed businesses and your previous brand that did have a heavy eComm presence at Haven Lock. When it comes to the advertising and the marketing for GloriLight, in addition to the affiliate strategy, what else have you guys done that's been successful but that came from your wisdom of like previous failures and lessons learned?

Clay Banks (29:23)

Keep in mind, I've been involved in buying meta ads, Google ads for probably at least eight years, going on eight to nine years. Went through the iOS 14 changes, And where we used to create...

nicer, more polished, more produced content. A big lesson learned in today's world, we're in November of 24, this might change next year, but polished, produced content doesn't work.

Jon Blair (29:47)

Mm-hmm.

Clay Banks (30:01)

as well as it used to. So now we have to get into a rhythm or a cadence of creating more real, authentic, less polished, less produced content and being able to, as the owner of the brand, being able to let go of that. Because I see this a lot of times with businesses that I coach or work with is we'll go get a handful of affiliates to create some content for them and they'll go, well, the way they plated this or the way they set this up or the way they presented it, the lighting didn't look good or the audio wasn't good or the it didn't show this best feature of this product or it didn't show this best benefit of this product, you've got to kind of let go and your brand is what people say about you. It's not about what you say your brand is. And most of the time founders want to control that brand message.

Jon Blair (30:53)

Sure.

Clay Banks (31:00)

You have to in today's world you have to completely let your audience control that brand message and with GloriLight We have completely let go of what's been said And what we require from our affiliates and made it super simple. All they have to do is basically say yes I want to create a video and That's and we send them a light and then they post a video about it We don't we don't monitor if they posted we don't monitor what they said. We don't like it's basically

We're letting you get the value and you transcribe that to your audience, right? But we've made it simple for them.

Jon Blair (31:37)

will say, in my mind, what you're talking about here actually is very much related to the concept of simplicity and getting a product to market to test that one thing with consumers ASAP. When you're talking about creating content or creative, right, to use for advertising, how do you test it? You get it out the door and you test it, right? And so if you sit there and pour over perfection, what are you doing? You're just waiting longer to get it out in the marketplace and test it, right? mean, like even when we started this podcast, you know, I sat down with our, with my EA, Sherilee who you know, who does our marketing. And I said, Sherilee, I don't want, I want to start, I want to launch this podcast next week. And I don't care how perfect it is. Like we're, we're going to launch it and we're gonna just start and we're gonna learn along the way. And funny enough, like this mic that I'm using right now, it just came last night, I bought it on a Black Friday sale. I've had this crappy little $19 mic that I've used for the last 10 months running this podcast. It was good enough to just get started. And I actually have two new fancy lights that I bought on Black Friday sale as well that are sitting here that weren't here before. like, you know, but I...

Clay Banks (32:38)

Gotta do it.

How many podcasts have you done before that?

Jon Blair (32:56)

Yeah, we've done like 20 something and I've had clients and prospects reach out to me way more than I thought and say, hey man, I've been listening to the podcast, it's been helpful and the content is real deal. Like it's really actually helpful. And we're getting better at producing podcasts now, right? But we just started and you know what I mean? So go ahead, what do

Clay Banks (33:18)

Let's go back to this. We talked about putting in the reps earlier on. right? And entrepreneurs, especially first time entrepreneurs, this will drive this home. To be in the top 60 % of all podcasts on the internet, you have to produce two episodes.

Most people only do one and it doesn't go the way they think. They overthink it. They don't do the reps. They don't go on and book the next show and they fail. So if you want to be in the top 60%, two episodes. This goes if you're trying to raise capital, right? If you're trying to raise venture capital or raise capital, you can't just send out your deck to one investor, right? And it's over, right? And people say, well, I tried that, it didn't work.

Jon Blair (34:03)

and get a no and it's over.

Clay Banks (34:08)

That's a good example. To be in the top 90 % of all podcasts, you have to produce 20 episodes.

Jon Blair (34:16)

Woo, there we go baby, we passed 20. You wanna know something funny? I think what we're just talking about here is a universal truth, right, by the way, which is why we both have so many examples. I've been really into reading sales books recently, and do you know how many times you have to ask for the order on average to get the sale? Nine. And do know what the average is of what most salespeople ask? It's one, it's one time.

Clay Banks (34:19)

Alright.

Nine.

I was gonna say most people fail to ask at all. One time.

Jon Blair (34:45)

Most salespeople ask one time and it takes nine times. And there's this book I read by a guy named Daniel Priestley. I highly recommend anyone listening to this pick this book up. It's a short read and it's so, every page is helpful. And he talks about 7-11 foreign people. And what does that mean? It's that you need to have seven quality touches, right, in...

That's the seven and then four is in four different locations. So four different channels, right? And the 11 is, I can't remember what the 11 is, but what it has to do with is just that you need to be, his words are, don't be perfect, be prolific. And what does being prolific mean? Get started, crank it out, crank out the content, start writing a newsletter, start writing on LinkedIn. Like for us, we started on LinkedIn two years ago and you know what we did? I sat down with Sherilee and I said, hey Sherilee,

I wanna post once a week. And as soon as that got easy, I said, I wanna post twice a week. And as soon as that got easy, I said, I wanna post three times a week. Today, two years later, we have like quadrupled our following. get leads from LinkedIn all the time. And we post 12 times a week. And it seems completely easy now, right? But like we just got started and I've posted so many things that just like no one replied to, like no one commented on, no one liked. The impressions looked really crappy, but.

And still today, I'll be on a streak that I'm like, man, I'm crushing it. Like people are, engagements are killing it, impressions are killing it. And then I'll write something that I think is gonna be amazing and it just flops. And you know what, you just keep going. here, going back to the point of all this stuff we've been talking about, you know why I do it? Because I love the journey of creating content because I wanna be helpful. Because when I was on the founding team of Guardian Bikes, and I was learning how to scale a business for the first time, I was just, I had this insatiable desire to read books and listen to podcasts, because I didn't know anything about scaling a business, building a team, running an e-commerce brand, managing inventory, managing a supply chain, running financial models. I didn't know the last thing about any of that stuff in real life. And you know what got me through it was like having the right people around me and consuming content. And so, I want us, I want Free To Grow to produce content, because I want to be helpful. You know why? Because scaling an e-comm brand is hard and it's lonely and it's challenging and you wake up every day second guessing yourself as a founder. And I want to remind people that there are great resources out there that can help. And we just want to be one of those resources. And so like I create content because I love the journey. I check the metrics because I want to see what does well and what doesn't do well. And I want to learn from that, but I don't do it for the metrics. I do it to be helpful.

Clay Banks (37:34)

And I've found giving every time is more rewarding than the metrics. Just the process of me thinking through some content that I want to give someone, whether it lands or it doesn't, I felt rewarded by giving that away. I didn't hold it in. And maybe one day it might hit the right person and they'll learn from it. And that to me, kind of makes it all worthwhile when you're not seeing the metrics, you're not seeing the engagement. It's like, well, that's okay, somebody will get it one day and it'll hit home. But yeah, it doesn't all have to be perfect.

Jon Blair (38:17)

So I wanna ask you, you have a lot of experience with raising capital, both for your businesses and advising with some of the people that you coach on raising capital. Walk me through just the first things that come to mind about best practices, some of which may be surprising to founders or misconceptions by founders. What are some of the do's and don'ts for raising capital that you've learned over your years of doing it well and also failing?

Clay Banks (38:45)

First and foremost you got to understand rep count is important you to get good at raising capital You've got to pitch a lot of times a lot of people that I coach, they want to perfect their deck. That's that's the the pitch deck is usually nine times out of ten If not 99 % of the time the entry point And it's the linchpin needed to get you a meeting or get you a pitch Okay, it's typically the first thing that investors are gonna want to see before they even consider taking a meeting with you, right? a lot of times entrepreneurs raising capital think they have a good deck and they send it out and they're not getting any even the opportunity to pitch. So having a really good deck that's streamlined into the problem, the value problem in the market opportunity, right?

It's having that expectation that if I send this out to 10 people, they think they're gonna get 10 meetings. And actually, they'll probably get one or maybe zero. So you've gotta get into the reps of creating places for you to pitch. So what we did is we had this deck and it was always evolving. It was always this document that was continuing to evolve. But we didn't wait around for people to say yes to our pitches.

we started renting rooms and I would go find other entrepreneurs who were raising capital and say, hey, you invite your network of investors, I'll invite my network of investors and we'll have like a mini Shark Tank pitch. We'll rent out of room, we'll have some beer and wine and we'll invite as many people as we can. So that got me the practice or the rehearsal it needed to be able to pitch and sometimes nobody would show up other than the other two companies, right?

very, let's put this way, very few investors would show up, right? So we would have a couple other entrepreneurs and we would just critique each other and pitch and help each other, like just having those reps and you could see other people pitch their business and you start to learn from them, right? And that's one thing that I think is a misconception founders think is like, I'm just going to create this deck and I'm going to send it out and I'm going to get the meeting and I'm going to get the investment and it doesn't work that way.

You've got to go out there and practice and rehearse it. There were times where we were pitching a good 40 to 50 pitches a week, if not more. And some of those were groups of angels or syndicates where there might be 10 or so people on a call or in a meeting. But we were getting in the reps. And over time, you start to go back to yourself and go, I wish I would have said that differently. I wish I would have shown this instead of that.

Another thing is people get too comfortable pitching off of their deck. The deck is used to get the meeting, but it's more important that you build your own deck so you tell yourself the narrative of what you're going to say while you're building it. You're mentally building your pitch deck, usually 10 to 12 slides. You're mentally rehearsing over and over and over while you build your deck.

And that is how you ultimately tell your pitch, but you don't use the deck to tell it. It's more of a natural conversation that you have with an investor where you're actually taking product and you're showing them. You're putting it in their hand so they can touch it and feel it. It's a natural conversation instead of, look at my pitch deck and pitching slide by slide by slide. That's pretty, that's not authentic conversation, right? think those are big misconceptions that founders have. Very rarely would we use a deck to pitch when we were raising capital unless we were on stage pitching to an audience or we were in like a like an angel syndicate where we were pitching a bunch of investors at one time taking them through like a visual where we were remote like we were raising money during COVID so you know that was used to pitch it pitch the deck but now if you're gonna meet in person or a one-on-one call it's more conversational and you've got to be able to to tell the right things to get that investor of like why should I join in you and solve this problem or why should I join in you to go on this crusade together to this promised land that you're forecasting here.

Jon Blair (43:40)

So what this all makes me think of is I'm seeing this pattern, again, Free to Grow works with 30 plus profit focused and growing e-commerce brands and I talk to dozens every month as I am going through our sales funnel, because I manage all of our sales, and I'm noticing this connection between what we're talking about here and brands that withstand the test of time and ultimately achieve success.

And it's that the product, the brand is built around a really true mission driven purpose that the founder and usually the leadership team are just, they're truly bought into. They're not fake bought into it. They are bought into it, right? The most impressive growth and profitability rates that we see within the brands that we work with, there is this almost cult like following inside the business that like this product is making the world a better place, right? And in fact, that is the primary reason why I started Free to Grow in the first place because I believe that scaling an e-commerce brand is just about one of the hardest things you could choose to do in the business world. And it's lonely and it's challenging and you get into this, you start this business for, you get this allure of freedom and controlling your own destiny which you mentioned when we first started the episode. And then you almost get trapped by how complicated it is to scale it and turn a profit and manage the finances and also manage marketing and manage operations and customer experience and all of this stuff, right? And I just seen in my years of being in the e-commerce world, I've seen just this overwhelm and this stress and this oppression, this thing that was supposed to create freedom now becoming oppressive, right? And the one way that I know how to come alongside and help those founders is to give them the financial intelligence that they need to make decisions with confidence. As you grow, you have more and more people asking you for more and more money. Your ad agency wants more ad dollars. Your supply chain person wants more inventory. Your COO wants to hire more people. And guess what? As you grow, all of those decisions cost more and more money, more and more zeros at the end.

And if you don't have a CFO who can build out a budget and a forecast and a financial model and understands scaling an eComm brand from both a financial model perspective and a strategy perspective, if you don't have that, you're just going yes or no, we can or can't do that. And it's really a guess. And when you say yes, it's like, man, are we gonna run out of money? And if you say no, it's like, man, is this gonna, are we gonna stop growing? Because I just said no to that. And so,

The point I'm making is scaling Free to Grow as a firm is actually really hard. I have plenty of days where I second guess myself. But then I get the comments and the feedback from our clients about life before Free to Grow and life after, and how much more confident they are and how they can sleep easy at night and how we've helped them through really challenging situations that they couldn't have made it through on their own. And that mission that we're on,

That's what keeps us going. And I think it's no different for an eComm brand. I look at GloriLight or even look at Haven Lock. I know for a fact, you guys were like, we have to solve this problem, right? We're not gonna give up. We have to solve this problem. Guardian Bikes, making safer kids' bikes. It was like, we have to get these to market. We cannot let our competition beat us. We need to make the world a better place. That is what your why. That's one of the ways that you...

find the energy to stay on the journey, right?

Clay Banks (47:36)

And that why, when you go back to like, what are some misconceptions or pitfalls that founders make when trying to raise capital, is they can't quantify that why. We call it the North Star metric, right? What is the North Star your business is going after, and how are you measuring and tracking it? And it comes down to that why, right? It's the number of children we serve, right? The number of children that have a GloriLight in their home, that is our North Star. For other companies, it's something different, but...

But being able to articulate that to an investor and how you're getting traction against that North Star and how you're on your path to that North Star, that's what's building investor confidence. And that's the why behind what you're doing. And if you cannot articulate that, then the investor can't see the vision. So that's a big point that I think a lot of startup people that are raising capital make. Also,

Jon Blair (48:25)

Totally.

Clay Banks (48:32)

Another one is they're not really an investable type of company. Their growth isn't an outsized return big enough to get their return on capital. They're not playing in a big enough market or the potential for the exit isn't big enough to take that risk. And a lot of times people go, I just want to raise capital to grow my business. And I'll say, well, what's...

Jon Blair (48:50)

That's a big one.

Clay Banks (49:00)

What makes you think money is gonna help you scale this? And if they can't answer that question, then they're not an investable company, right? Then you usually say, I wanna invest in marketing or I wanna invest in inventory, right? No, you need to invest in creativity. Creativity will get you everything that you want.

Jon Blair (49:08)

Totally.

Clay Banks (49:21)

It'll bring in the capital, it'll bring in the customers, it'll bring in more sales, whatever you're looking for, you've got to invest in creativity. And when you're not creating, investors can't get behind that, right? If you're just asking for inventory money or you're asking for marketing money, that is hard to scale profitably, right? And it's a tough cost of capital too.

Jon Blair (49:33)

Yeah.

Totally.

Well, it's funny because I actually see the same dilemma that you're talking about. The economics, the game isn't big enough for that three to five. It depends on who you're investing, who's investing, right? Call it three to 10x return that you need, depending on what stage you're in and what kind of investors you're raising from. If that opportunity is not there, then the investors aren't going to invest. I see the same thing with unit economics and investing in scaling advertising. Is that you can't bring a product to market and then figure out the unit economics later that allow you to be able to afford a CAC that scales on digital ad channels, you have to engineer the unit economics from day one to be able to afford the CAC to scale in whatever sales channels you're trying to scale in. doesn't happen by accident. It has to happen intentionally, and it's the same way. Okay, unfortunately, I gotta land the plane here. I actually think we're gonna probably have to have you back, because we got through like half the agenda.

that we were gonna talk about, but it's because there's so many things that we can chat about between your experience, the wisdom that you have gleaned over the years, and just kind of the overlap that you and I have on how we see the business world. But before we land the plane, I would like to ask a personal question to everybody who comes on the show. And as I mentioned, I believe I mentioned earlier, Clay is a fellow Christian as well as myself. And I think it's really important to highlight that like faith shapes our journey and our mission as entrepreneurs and as business leaders. And so how does your faith shape your entrepreneurial perspective and your life as a business leader?

Clay Banks (51:34)

I used to think everything was in my control.

Jon Blair (51:40)

Hahaha.

Clay Banks (51:43)

And with successes or failures, I didn't go to God in every circumstance or every partnership or every, you know, and I just said, I can control this, right? I can figure it out if it goes bad. And now it's more like, hey, God's in control and I'm just a steward and I can't. To me it's a lot more comforting knowing that I'm not in control. He's gonna put the right people in front of me and he's given me the skill sets and the experiences to know and decipher who the right and wrong people are that I need to be working with. Over time it's just taking time for me to comprehend and learn that and now go there's some freedom in knowing that I don't have to make every decision. I don't have to, I can just lean on Him and He'll guide me in the way that where He wants to take this company. Specifically with GloriLight being a kids night light that projects Bible verses and the Word of God.

very on, the two guys that I'm in partnership with on this, we were like, is his company and we're just using our skill sets that he's given us to take it to wherever he wants us to take it. So there's no pressure. We don't have that pressure of getting some sort of outsized return and we don't have investors so we're not having to get, and there's some freedom in that. There's not as much pressure.

Jon Blair (53:19)

Absolutely.

Clay Banks (53:21)

And I know not every business can be like that But the more you think hey, man, I'm just gonna like turn this over to God and let him you know direct me like I got into our quickly. I know you want to end this here, but With when I was selling haven lock it got to be a very stressful situation

We had a board of directors, we had 90 plus investors, a lot to divide up, right? It got very stressful. So I went to the sport of Ironman to have that time with God. The longer I spent with God on a bike or on a run or on a swim or whatever I was training for, the clearer my mind got.

about how to respond or how to react or how to position or how to strategize the close of this sale of this company. And before I did not allow God in that amount of time, I was just making decisions on my own. So I definitely allow God to do his work and give him the time he needs and it'll turn out.

Jon Blair (54:32)

Man, I'm actually, getting goosebumps again because I was praying about this exact thing this morning in my morning quiet time that I feel this sense that my wife and I with our three little kids and the couple of businesses that we run, we have been just moving too fast and it's been so, we've been, we've just been trying to control, keep everything in order, right? Keep everything under control.

We've been trying to control everything as we all do, right? And it's been overbearing, completely overbearing. And I've been getting this sense of like feeling like I'm burning out. And luckily God has taught me that feeling burned out doesn't mean I need to give up. It doesn't mean I need to give up the efforts, right? Or what I'm trying to do, but it does mean that I need to give up control and let it happen in His way and at His pace, right?

And so there's a book on my bookshelf called At God's Pace. And I was this morning feeling like I needed to pick it up and reread it. And I think I just got the confirmation right now that I need to reread it. I was praying about it this morning just a few hours ago. Clay, I can't tell you how much I appreciate you coming on the show. This is kind of a full circle thing for me coming from like the first couple weeks of starting Free to Grow.

Clay Banks (55:43)

Yeah.

Jon Blair (55:57)

to having you on the show to talk about all these awesome things. Look, as a reminder for everyone, release yourself of the burden of trying to live up to this lavish vision you have in your head. Don't give up the visions that you have, but realize it's a journey. It's not an end, right? Work hard at loving the journey, work hard at making an impact, work hard at honing the craft, but give yourself a bit of a break.

You know, and if you're, and if you are a person of faith, maybe trust God a little bit, right, to take some of the burden off of your plate. So this is a awesome conversation. I know that everyone's gonna find it super valuable. Just as a reminder before we land the plane here, if you want any 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 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, Clay.

Clay Banks (56:59)

Yeah, scale on. See you, Jon.

The Five F’s: A Holistic Approach to Entrepreneurship

Episode Summary

In this episode of the Free to Grow CFO podcast, Jon Blair and Chris Lang discuss the importance of holistic health for entrepreneurs. They explore the five F's: Faith, Family, Focus, Fitness, and Finances, emphasizing how each aspect contributes to a balanced and successful life. Chris shares his journey in entrepreneurship, the significance of maintaining focus, the role of fitness and nutrition, and the necessity of financial education. The conversation also touches on the importance of setting boundaries between work and personal life to achieve long-term success.

Episode Links

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

Chris Lang- https://www.linkedin.com/in/chrislangsocial/

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

Move FWD - https://www.movefwd.co/

Key Takeaways

• Faith is Foundational: Why understanding your "why" and living with intention impacts everything from decision-making to resilience.

• Focus Wins the Day: Learn how eliminating distractions and playing to your strengths drives long-term success.

• Finances for the Long Game: Insights on cash flow management and staying financially viable in a world of distractions.

Meet Chris Lang

Chris Lang is a creative entrepreneur from Las Cruces, New Mexico. His focus on brand development and business strategy has helped launch multiple Shopify brands across the apparel, food, and wine industries, generating over 8 figures. Fresh Chile is now in the top 10% of all Shopify stores. He is working on donating over 1,000,000 meals to his community (currently 500,000).

Transcript

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00:00 Introduction

02:32 The Birth of Move FWD

04:50 The Five F's of Life

09:30 The Role of Faith

11:54 Family Dynamics in Business

14:46 The Importance of Focus

22:02 Fitness and Mental Clarity

26:21 The Impact of Processed Foods on Health

28:38 The Importance of Nutrition and Sleep

30:29 Long-Term Success in Business

30:45 Understanding Finances in Business

35:35 Learning from Financial Mistakes

42:54 Setting Boundaries Between Work and Personal Life

48:27 Closing Thoughts

Jon Blair (00:00)

Hey, 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 outsource finance and accounting firm for eight and nine figure DTC brands. And today I'm here again with my good friend, Chris Lang. Chris, I think you're the first ever second time guest on the show. Thanks for joining, man. How are things going?

Chris (00:10)

That's a big honor. Yeah, things are going pretty well. Been a been a really great year overall as far as learning so much and yeah grateful to be here again.

Jon Blair (00:46)

Yeah, so today, last time you were here, we were chatting about one of the businesses. I would consider Chris to be kind of a serial entrepreneur. He's got his hands in several different things. We chatted about Fresh Chile the last time he was on, former client of Free to Grow CFO, and really we're chatting about kind of scaling marketing, but ended up having a really great conversation about story, which is something that's so front and center in your content, which I love. But today we're actually talking with Chris about his focus on a separate venture that he has. He's also co-founder of Move FWD. And today what we're gonna be talking about is something a little bit outside of kind of the getting into numbers and scaling, but something that is, I would say, probably even more important, which is how entrepreneurs build and live a life of holistic health, right? Because at the end of the day,

Chris (01:33)

Mm-hmm.

Jon Blair (01:42)

We're all humans. It doesn't matter if we are also DTC brand founders or operators. We are humans, right? And as Chris is a fellow Christian, as we believe, created by God, right? And so we're gonna talk about how entrepreneurs can live a balanced life that includes things like faith, family, focus, fitness, and finances. And so, before we get into chatting about that, Chris, know, the people who listen to show know a bit about your background as it relates to kind of leaning into starting and being a part of the Fresh Chile journey, but walk me through your journey to co-founding Move FWD and walk us through a little bit about what Move FWD does.

Chris (02:20)

Definitely Move FWD is a result of understanding life is more than just about business. And so it's about finding that balance and purpose and business and life. And so what I have noticed over and over again in business, whether it's been successful or whether it's been a, you know, so-called failure on paper, is that there's so many determining factors to what goes into each one of those opportunities. And it has to do with your faith, your family, your focus and your finances. And so I think that's where it's like, I wanted an opportunity to partner with someone, his name is Greg Bowles, he's out of Dallas and he owns the largest home inspection company in DFW area. But he's a friend that I've known, he's a former pastor and he does a lot of coaching consulting with other businesses and entrepreneurs. He was someone who was really strong and his focus and finances and he's also, you know, a of faith and his family are we go on vacations together. And so that's something that we kind of talked about. Hey, let's let's really team up because, know, I was really coming from a place where I was really broken, you know, about, I would say for a few years now and each day is kind of forward in that clarity.

Overall, it's just to help entrepreneurs balance beyond business their lives.

Jon Blair (04:23)

Yeah, man, this is something that's near and dear to my heart. This is manifested, this kind of holistic philosophy about business and life is something that is very pervasive in my personal and business life. I was, and I still am a little bit on the side, an EOS coach, an EOS, for those of you don't know, the entrepreneurial operating system. It's an operating system. It's an actual structure and framework for thinking about planning and running your business. And it doesn't matter if you like StratOps or EOS or you follow a guy like Michael Hyatt who has the full focus planner, whatever. You follow Dave Ramsey. Dave Ramsey has his own, I forget what his system is called, but all these systems are all, what do they all have in common? Intentionality and purpose, right?

Chris (05:04)

Mm hmm.

Jon Blair (05:19)

And when you get down to the root of it, why does that stuff matter? Because humans were created to live life with a sense of purpose. When you find people that are depressed, in my experience, when you find people that are depressed, they've lost their sense of purpose or they're wrestling with their sense of purpose, right? And when you find people that are happy, they're doing the things they're doing in life, whatever they are, business or otherwise, they're doing them on purpose, right? And the funny thing is, the phrase on purpose is a common phrase. I did this on purpose, right? But if you really think about those words on purpose, it's in alignment with a purpose that gives meaning to the thing that you're doing, whatever that is, right? And so these things, it's funny, in the system scaling up, they tell the people who are implementing that operating system into their business to first do a personal a one page personal plan. I believe it's OPP. And this grid that they create is a grid that across the top has time horizons. So like one year, three years, five years, next 90 days, but down the side it has faith, family, focus, fitness, and finances. The same, they call it the five F's, right? And the reason why we are gonna have a conversation today in relation to those five F's is because when you think about your faith, whatever it is,

Chris (06:36)

Okay.

Jon Blair (06:47)

You think about your family and you think about what you're focusing on, you think about your fitness and your physical health and you think about your finances. Those five F's are a great holistic way to think about your life and that when those things are in balance, we tend to be living life on purpose, right? So the five F's, faith, family focus, fitness and finances, why are those so important to you personally, Chris?

Chris (07:06)

Mm-hmm. Well, I believe it starts with my faith, number one. I mean, that's always the area that I want to make sure that...

you know, I have the most balance and harmony and I feel like that's where I haven't had in the past when I am sort of losing focus or what I feel is kind of not walking in God's path, you know, in my life and for my family's. And so, you know, if I'm not, if I'm not focused on my faith first and my family, you know, fitness, finance, focus, it all, it all suffers because of that. so faith is important too, because it's ultimately what I believe that I'm called to be on this earth for, is to be a servant and to serve others. And if I'm serving myself or serving my needs or serving myself in a loathing type of way, then everything else will kind of falter. so even though faith has always been important to me, as we learn in life, there's all these kind of peaks and valleys that we go through that where faith becomes a different priority for us. for me making it the priority every day that I wake up has been the overall change in my life.

Jon Blair (08:39)

Well, and so it's interesting that you say he starts with faith because you and I are both Christians, so we believe in the God of the Bible, right? Even if you don't believe in the same faith that Chris and I do, everyone, I believe, has some form of faith in their life. It, in more general terms, maybe, is what you believe about the purpose of mankind, right? And everyone believes in some purpose, even if that purpose is...for me to just live a selfish life and enrich myself. That is still your version of faith, right? And so, it actually, as a human, it has to start with faith, which is maybe we'll call it your worldview, right? Because that's the lens through which you're going to view your family, your focus, your fitness, and your finances. So actually, whether you think you have faith or not, I guarantee you do.

Chris (09:16)

Mm-hmm.

Right. Right.

Jon Blair (09:30)

We all do as humans. It may not be the same as mine and Chris's, but you have some view about the world and that's where it all starts, right? The second one, family. What is the importance to you, not just of family in general, but how that helps you excel in business and in life? Making sure that that's number two on the list.

Chris (09:30)

All

Mm-hmm.

Right.

Yeah, you know, I think a lot of people think, you know, in business, I'm doing this for my family. I think that's kind of like the most common answer that we would probably, you know, hear I'm doing this for my family, doing this for my family. you know, if we really were to strip away if we weren't entrepreneurs, you know, or business people, and then what is our role in our family? And you know, for me, it is kind of to ingrain sense of security in them. And that security is not always financial. But it's a it's a loving security that they have. And so you know, for me, you know, making sure that they feel emotionally and physically loved is, is what kind of family means to me, it doesn't mean about just taking care of them. That's all a byproduct of kind of making sure that your family's emotional needs are taken care of because

Jon Blair (10:24)

Mm-hmm.

Chris (10:47)

We've seen it so many times where you have a lot of families where their physical needs are met through the roof, but emotionally, like the family's a wreck. Divorce is on the horizon. The kids are going to rebel. And that's something where my wife and I are just very intentional with our two children. And we are a family and these other things, they don't define us.

it may be what we do. But they don't define us. And we're there for each other, kind of first and foremost. And to that note, too, you know, my wife and I will be celebrating 20 years next, next summer. And thank you so much. And it's because we've learned that we're there to serve, you know, one another. And it's not always about our needs first. And it's not, you know, from a selfish view. But we're ultimately there.

Jon Blair (11:30)

Congrats, man.

Mm-hmm.

Chris (11:46)

for the same purpose of really to glorify God. And what does that look like through our marriage, through our family, and through our relationships?

Jon Blair (11:54)

It's funny, so our pastor always says, people always tell me that marriage is 50-50. He's like, marriage is not 50-50. It's 100%, 100%. Meaning that each person is in it 100% every single day, pulling their own weight in the marriage, right? In the relationship. I don't just come to the table 50%. If you think about any relationship, it's 100%, 100%. Like, you gotta be there, you're...in it 100% regardless of what happens on the other side, right? But I think another interesting thing I was thinking about as you were talking and like weaving in the entrepreneurial spirit with family is actually something you posted on LinkedIn I think over the weekend about your boys, having your boys with you at the farmers market, know, slinging goods from your, from one of your other companies, right? And the point being, the point being like there's a way that we can take what we do as entrepreneurs.

Chris (12:42)

Mm-hmm. Mm-hmm.

Jon Blair (12:53)

Right? And share that with our family and not just use the business, not just use being an entrepreneur to make money for the family, but to actually teach them entrepreneurial qualities so that they can carry on. This is the future generation, right? Our kids are the future generation and what gets kids excited? How do kids know what to do or what they could possibly do later in life? They have to be exposed to it. And that's a big job as parents. I don't expect every one of my kids to necessarily start a business or business is the way that I have. But I believe every person has to have some amount of entrepreneurialism. Because really, strip the word business aside, what is an entrepreneur? An entrepreneur is someone who sees a gap in the world and fills it. Sees a need that's unmet and fills it.

Chris (13:34)

Mm-hmm.

Right.

Jon Blair (13:47)

And so actually I think everyone has a duty to be entrepreneurial in some way, shape or form. I think stay at home moms have just as much of a duty to be entrepreneurial, right? By seeing an unmet need and pulling together resources. like actually here's another way to think about it. An entrepreneur sees the landscape of resources, things that could be pulled together to be used for something. They see a gap somewhere in the world with an unmet need and they go grab resources and they pull them together and they meet that need. You do not have to start a business to be entrepreneurial. And as it relates to being an entrepreneur and family, that's a big duty that I believe that we all have as entrepreneurs is to raise up the next generation of entrepreneurs, whether they're going to start businesses or not. So the next thing on the list of the five F's is focus. This is near and dear to my heart because I am a productivity nerd. I've read so many of the books. I'm a huge fan of Michael Hyatt. He has a book that was like, can see it on my bookshelf over here. It's like super formative in my life. It's called Free to Focus, right? And the older I get, the more that I find that my stress and lack of achievement is actually self-induced. I allow it to happen to myself. And you know what it always is? I lose focus. I allow the unimportant to creep in and block me from the important. And one of my other pastors, he used to always say, hey, are you minoring in the majors and majoring in the minors? Meaning like, if you're majoring in the minors, you're filling your life with these minor details, these minor like tasks and things that are not of major importance.

Chris (15:20)

Great.

Mm-hmm. Mm.

Jon Blair (15:41)

You wanna be majoring in the majors, not majoring in the minors, right? So talk to me a little bit about the importance of focus when it comes to being a holistically healthy entrepreneur.

Chris (15:41)

Right.

Yes, I think, you know, this is something that I am, I am in the midst of in my life of trying to understand what that means and also to achieve it meaning. On paper, I have eight different businesses that is not focus. Right on any level, you know,

Jon Blair (16:13)

Yeah.

Chris (16:16)

And so I'm actually in the midst of having all these difficult conversations with partners where I don't believe I can add value to this business anymore. I need to step away and I need to also have other conversations where, I need to double down on this business. What does that look like? And so, you know, for me, I think one of the

Jon Blair (16:33)

Mm-hmm.

Chris (16:38)

I don't want to say biggest lies. But we just think we can, you know, as entrepreneurs, we think we can just achieve anything once we've achieved one thing. And it's not the case, you know, I've, you know, have failed miserably at a restaurant and a coffee shop. Why? That's not my skill set. It's not e commerce. It's not digital marketing. And, you know, I felt spectacularly at both, right. So again, it was because I wasn't focused.

that have led to some of my biggest mistakes that have also cost me financially as well, right? So again, I need to make sure that I'm focused and in a way that I can be serving my partners from a business standpoint and in the greatest capacity that I can. And as you know, with Free to Grow, financial cash flow is the most important thing that we can achieve in business and and in profits. And so we need that. And when you diversify yourself to where nothing is really making money at the end of the day, then you're basically in a zero sum game because you've lost your lack of focus.

Jon Blair (17:52)

Man, there's a lot there that I want to dig into. No, no, mean, it's that such so a couple of things. One, I've actually I don't know. I know that you know, Nick Shackleford, but he he'd post a lot of content on LinkedIn about his various businesses and and what one thing he I think this was last week he was talking about. This made me feel better because I'm I'm kind of like you. I'm like starting.

Chris (17:54)

I'm... No, it is.

Yeah.

Right.

Jon Blair (18:19)

I'm looking at starting all these different things. I currently have three businesses. And sometimes I wonder like, is this a trap? Is this a mistake? And Nick was talking about in his content recently, think again, I think last week, he was like, I think there's a lot of people who would kind of condemn what I'm doing, owning so many businesses. But what I have done is I've brought in partners that compliment my weakness. They have a strength in that business, right? And the role that I play in that business is where I am strong, right? And so he's not, the point being he's not just going in, there's still intentionality. There's actually, what he doesn't realize is he's saying there is a focus that he has within each of those businesses. So I actually do believe there's a way, I do believe there's a way to start multiple businesses, but be very intentional about what your role is in each of those businesses. And what I think I'm starting to realize is, Free to Grow, me and my business partner, Jeff, we are the main operators in Free to Grow. For this season in life, Free to Grow is the right place for me to be one of the key operators. All other businesses that I start, I do not have the time to be the key operator. I can be...I can play some role in strategy, can play some role probably in marketing, possibly in sales, possibly coaching, maybe providing some capital, but I could not be the main operator in multiple businesses. And so there's this, we'll call it another dimension to focus, where you may be able to do something that appears unfocused, having your hand in a bunch of different businesses, but you can do it in a focused manner by deciding, what is the focused role that you will have in that business and then placing other partners and or key employees in the other areas that need focus that you don't want to or can't do well. And so I like to use a framework that comes from Michael Hyatt. He calls it the Freedom Compass. The Freedom Compass, basically takes everything you could possibly be doing for your business and he puts it into one of four quadrants. And the quadrant that he says makes you feel free and where you're the most valuable to the business is the quadrant in which there's an intersection of your greatest passion and your greatest proficiency. So you're really, really good at it. You're proficient, right? Proficient means really, really good. And it's one of your greatest passions. And if it's outside of one of those, you should either eliminate it, automate it, or delegate it. And so, that's a framework I use all the time. And the reality is when you're really focused on stuff that you're really good at and that you really love, you just find the energy to get it done. You don't have to search for the energy. You don't have to muster it up, right? And again, let's go back to family and faith really quick, because we're going through the five. Like if you feel alignment with what you're doing every day in any given business or businesses or even outside of business other areas in life that you're focusing on if you feel alignment with your faith your worldview of how things work in the world and what your purpose is you feel alignment with your family and the role that you have in your family and you feel like you're focused on areas that you are proficient at and really love man you're building the building blocks right of just like a great life and something that brings you energy every single day. So on the topic of energy, let's go next to fitness. Where does fitness fit into all of this and why is it so important for being a holistically healthy entrepreneur?

Chris (22:06)

Mm-hmm. Mm-hmm.

Yeah, I mean this one is weakened on a pack greatly as well too but the mental clarity that you know you receive every day from working out is unmatched. know it there's a there's a personality on Twitter I love he says he's gonna go see his therapist and it's like 225 deadlift you know what I mean he's just like I'm gonna go see my therapist right

And, you know, for me, I was, you know, I played, you know, played sports in college and I worked at multiple gyms in my 20s. And then life kind of happened and I got away from being in the gym. And so last December I committed to being in the gym again. And I just, found myself just amazed that, you know, I love this so much. Like, why, why did I stop? What, what, you know, what was it, you know, and

Jon Blair (22:44)

Hahaha

Chris (23:13)

And so just being back in the gym. And then also I went carnivore for a couple months. And that was life changing. It truly was in a sense of the mental clarity and energy and the ability to make decisions. And it is something that I don't know what the long-term effects of it are, but I plan to do it again. And I don't know for how long this time, but fitness.

it also is our nutrition and what we put in our body. again, we're not hunters and gatherers anymore. So, but you know, there's, you know, all these nutrients that our body needs that we used to receive, you know, and so, but it comes down to that. If we, if we want to have that balance where mentally we can be there in our faith and our family, you know, and our focus.

It kind of starts with our fitness. It's kind of, I don't know how we would map out this system, but it's something that's equally as important to everything else and the way that we approach each of the other areas of our lives.

Jon Blair (24:26)

Yeah man, it's crazy because I think my gut, this is just what my gut tells me if I'm wrong you can tell me but what when you said life happens it's like you have kids, you get married, you have kids and you're like my gosh my routine is all messed up because I have, you know for me I have three kids, you have two kids, you have a wife and multiple kids and you have to integrate your routines with their routines and usually their routines can be like in one way, or form, much less predictable than your own routines, right? And so like the first things to go are sleep, right? Especially like when you have an infant, like you throw sleep out the window, it just, you got to feed them every three hours, you got to attend their needs, keep them alive, right? And then like, if you're not even getting sleep, to me, I think about like fitness, like kind of like building blocks, if you're just not even getting enough sleep, yeah, you can go work out to offset the lack of sleep for a little bit, right? And it will work for a little bit.

Chris (24:56)

Yeah, yeah, definitely.

Mm-hmm.

Right.

Right.

Mm-hmm. Mm-hmm.

Jon Blair (25:22)

But eventually it loses its power and you've just got to get some sleep. That's foundation number one. And then there's the nutrition. Like you were just saying. And then there's some form of moving your body. We'll call it moving your body. Unfortunately, I played football and baseball and I injured my knee. I can't run anymore, which sucks. I love running. I love the pump from it. But I've also done a lot of reading and found that any sort of even just like medium intensity including brisk walking. If you do it regularly like at least five times a week the benefits to your heart and your body are actually massive. So it's actually not about how intense you go it's about doing something that you can just be consistent at right and and then on the nutrition side this is kind of a new journey that my family's been on my wife and I like it and it really kind of started with having kids is like starting to be more aware or become more aware of what is in all of this processed food that we're giving to our kids, right? And like you and I, I feel like we came from this generation, our parents were kind of like the first processed food generation and they like loved like my parents are big snackers and like, you know, like mass produced processed food kind of happened in their generation. And so it was very pervasive in our life growing up.

We didn't think anything of it But the man the thing that's kind of blows me away is just like the massive amounts of well the fact that everything is stripped of its fiber and Nutrients, right? So it's just like there's no nutrition and all of that stripped flour and and rice and all that kind of stuff But then the amount of salt and sugar that's in stuff is just like outrageous and I see it with my kids when they Have these snacks that are marketed to kids

Jon Blair (27:19)

they go crazy because of the sugar content in them and the fits that they throw when they can't get them. it's sort of, I read this book like, I don't know, several months back, actually written by a nurse and nutritionist who's also a Christian and her, she took it from the Christian perspective, which is like, our bodies weren't made to, you know, process this highly processed food that is like, devoid of all of its actual like natural nutrition. And as soon as we started eating more, you know, we're, we're, we're not 100% right? Like perfect at it, I'd say 70 to 80%. But just that 70 to 80 % has made all the difference in the world of like, how, how good we feel our brain's ability to process information and mental clarity and energy. And we need all those things to make it through the sport of business and life because

Chris (27:59)

Mm-hmm.

Right.

Jon Blair (28:16)

The sport of business and life and staying on course is exhausting. And so you cannot, I'm realizing more and more as I get older, especially as you get older, you've got to nail sleep, you've got to nail nutrition, and you've got to nail some form of moving your body. And when you do those things, everything is easier. It's crazy, you know?

Chris (28:31)

Exactly.

Right. It is. It is. It's wild. so sleep again. I used to be someone who would work till, you know, one, two in the morning, get four hours of sleep and just go. I can't do that anymore. I need eight hours. And I protect that. Like I love going to bed at 10 o'clock now. It's the weirdest thing. It's like, but it's like, yeah, you perform better with it.

Jon Blair (28:55)

Yeah, get in that sleep.

So, know, one thing that I'm realizing as we're talking through this game, we've gone through faith, family, focus, fitness. You know, back, whenever there's a big tech boom, there's always like a bunch of like, you know, productivity hackers that put out these crazy things about like, like how to, how to hack, you know, scaling your startup by sleeping one hour a night, like how to sleep hack, how to nutrition hack, and all of those fads they eventually, like eventually you burn out, right? What we're going through here today with the five F's, it's not just living a life, a business and personal life that's holistically healthy and that's on purpose. It's about living a life in business and in personal life that withstands the test of time. That keeps, so that you can go, you can execute for the long haul, right? Because I'm realizing success in life and business comes through the long game. Making it through the long game. It's not about timing your business perfectly or timing your investment perfectly. It's about staying in business or staying in the stock market for the most time, for more time than everybody else. And how do you do that? You stay on purpose with your faith, with your family, with your focus and your fitness. The fifth F we're talking about now, finances.

Where does finances fit into all this, Chris?

Chris (30:29)

Yeah, you know finances is different for everyone's kind of life goals Kind of like what we talked about, you know, what what do you value and we all have different reasons for you know, being in business or wanting to make money. And you know, it's interesting because right now, there's a huge influx of like, money Twitter, as we like to call it or money Instagrams, you know, and, and, you know, these guys have learned to make a lot of money and then where are they putting it? And we see the lambos and the jewelry and everything else. so just knowing that life is beyond, you know.

beyond material things, right? And so how do you want to set your, you know, your family up long-term and, and, you know, what cash do you need to focus on certain investments or certain businesses that you want to grow? Because businesses, especially businesses that are in growth require almost all your capital, right? And

So what do you have that's kind of cash flowing? Because I've been back up here, you know, I think if I were to go back, you know, a handful of years, you know, having a cash flowing business is really the most important thing that we can kind of do in the beginning of our career. And then if we want to go and start another business to solve another problem in the world, you know, understanding, that that cash flow is going to be needed for, you know, for you to live and for you to have savings or investments. And at this other businesses, we're going to require, you know, another set of capital that you could get through loans or financing or just self funding. so it's. I think it's it's one of the issues going back to what I was just saying with like money Twitter, it's like there needs to be more education in this space.

Jon Blair (32:43)

sure. Yeah, and one and I will say I'll take it one step further. Education that is down to earth and real and not that is clickbait headlines. I'm so sick and tired of the clickbait headlines. I think you you may have liked one of my LinkedIn posts from a couple weeks ago. I got I got an email from one of these like solopreneur gurus and the and the headline was like how I run an eight figure business four hours a week. And I'm like, I'm done with these headlines, okay? Because it's BS. And I guarantee you there's way more to the story, but that gets you to click, that gets you to buy his content, right? And that's why I've taken this position of like, no, really great entrepreneurs are entrepreneurs for their whole life. And so we're not racing to try to hit it big.

Chris (33:14)

Mm hmm. Yeah.

You

Right.

break.

Jon Blair (33:40)

and to time everything perfect, time the market, time the exit. We're trying to just build great businesses, right? That matter and like you're saying, have a financial model that's actually viable, right? And to stay in it for the long run because that's actually where wealth is built. Whatever form of wealth you're looking for. Whether you're talking about putting money in the stock market, you're talking about investing in real estate, you're talking about growing your own businesses. You will build if you make good decisions that have sound financial models to them, right? And you just withstand the test of time. You stay in it for the long run. You're gonna make, you're gonna build some amount of wealth. Are you gonna like leave opportunities on the table? Miss like selling at the top of a bubble? Of course. That's gonna happen. You can't time those things perfectly. And some people do get lucky. That happens. But...

Chris (34:08)

Right. Right. Right.

Jon Blair (34:37)

So much of this advice is based on these stories that are either clickbait and BS and they're sound bites that are pulled out of the truth and make it seem like something else or they are stories of people who are the exception and not the rule. The rule is build, make sound financially fundamental decisions and stay in the game longer than everyone else. That's the rule. The exception is I sold my tech company right before the dot com bubble burst. That's the exception. That is not the rule. Don't follow that business plan, right? And so I totally agree with you. It sucks because I'm actually, you can tell I'm fired up about this because it actually upsets me. It upsets me because people make money off of all these, off this quote financial education that is really kind of a get rich quick scheme disguised as not a get rich quick scheme, you know? and I think the other thing too that I want to say on the concept of finances is that you're gonna make mistakes we're all gonna make mistakes and it's okay like I guarantee you like the Rockefellers have tons of stories they could tell about all the mistakes they made Dave Ramsey's business was born out of a massive mistake where he had he basically was on the verge of bankruptcy right and so but

Chris (35:45)

Right.

Right.

Right. Right. Right.

Jon Blair (36:05)

But what we try to do as CFOs is help you make mistakes that don't kill your business. So you can still live to fight another day. Right, and go, made a mistake, but it didn't put me out of business. Here's what I learned, and I'm not gonna do that again. Right? And so, I mean, what are some of the most important lessons, besides, you've talked about this like cash flowing, like figure out how to get your business to cash flow, which is super important. Are there any other?

like stories from your eight businesses, right? That I mean, which, that's a lot of whether you feel like you made mistakes or they were quote failures or not, you just, learned a ton. What else did you, have you learned about finances that you're going to take into the next business that you started that you're gonna take into the, the fewer number of businesses that you're gonna double down on?

Chris (36:54)

Yeah.

Yeah, you know, to not trust your accountant blindly. This might be the number one mistake I think a lot of entrepreneurs make is, you know, we think our accountants are taking, dotting the I's and crossing the T's and it's not always the case. And so you need to be on top of your numbers every week, you know, every month. And that's a mistake that, you know, since I was busy focusing on everything else.

that has been expensive mistake in my life. think another, you know, is to not is to this is a hard one, because it's like, we want to solve a problem, the definition of business is solve a problem. And we are emotionally passionate to do so. And so a lot of our decisions are emotionally and so like, but there's a lot of times in your business when you're like, hey, payroll cannot be at this number, but we're emotionally attached to certain employees, individuals. And so we make a lot of emotional decisions and we need to make those decisions faster. And what I've learned that it's better for the employee long term and it's better for your business short term. we don't have, I didn't have the experience to know that, but I can say that will never happen again. so...

Jon Blair (38:00)

Totally.

totally.

Chris (38:25)

And then I think as a kind of, it's just a third takeaway is.

when you have something that cash flows.

to always make sure that you're always keeping that pipeline going. So again, there's multiple different types of businesses, but let's say for our audience, say it's an agency or consulting or coaching or services, keep that top of funnel going. Make sure that you're keeping the leads going and that you're not distracted by another endeavor and all of a sudden,

you haven't talked to anyone about your services in the last six months. And all of sudden, you're like, hey, what happened here, right? So that's kind of where that focus comes in is like, hey, making sure that things that are cast flowing that we are focused on them. And that whatever, even if it gets even if it means that, hey, I gotta get up a five o'clock every morning to do this, make time, make time to, to put your eyes, you know, on your accounting, on your numbers.

and on your cells. I guess I have to sum it up.

Jon Blair (39:34)

Totally. No, no, mean, you know this, and I actually talk about this a lot in my content. The number one issue we come across when we talk to potential brands that want to potentially work with us, the number one issue is that they had some CPA that knows nothing about e-commerce looking at their books or doing their books. so actually what that...

Chris (39:47)

Mm.

I know it's so hard.

Jon Blair (39:59)

meant was books that were being done in a way that were just optimized for tax returns, right? But not optimized for the owners and managers actually understanding how the business is performing and what decisions they might have to make based on that. And we just see it again and again and again and again and again. And you know, I say this a lot, you don't have to become, you don't have to go get an accounting degree, but you do need to know enough.

Chris (40:03)

Right.

Right.

Jon Blair (40:25)

that you know what good looks like and you know what bad looks like. And I'll even go as far as to say that if you're a founder, you have to know enough about marketing and sales and operations and accounting and finance, even if only one or two of those things are your focus, right? Like your personal focus. You have to know enough to know what good looks like and what bad looks like because you're still ultimately responsible for whoever you're delegating that stuff to or outsourcing that stuff to. And so, that is a great challenge, but that is why entrepreneurs who can crush that make the big bucks, because it's hard. But it's totally possible, right? It's totally possible. And then the other thing that you mentioned was, you know, you can't ever stop prospecting. Whatever business you're in. Doesn't matter if you're in an e-com brand. I a lot of e-com brands who like, we just want to cut ad spend. I'm like, well, what other prospecting are you going to do then?

Chris (41:12)

Right.

Jon Blair (41:20)

Like, because at some point that's gonna come back to bite you, like, you can never stop prospecting and there's a, there's a, I think a lot of people don't realize, no matter what business you're in, there's actually a longer tail than you think in terms of like first someone, first becoming aware of you and then finally buying. There are some people who become aware, they're in the market and they're like bam, perfect, this checks all the boxes and they buy. But so many people become aware and then, they're a part of the long tail, many months later, and they finally buy. And so if you think about, I mean, if you really think about the analogy of like a funnel, if you stop dropping people into the top of it, eventually there's no one coming out the bottom, right? And so it just doesn't matter what business you're in, that system has to always be tended to. Now, can you delegate that to someone else, to other people?

Chris (41:50)

Right.

Right. Right.

Jon Blair (42:14)

Yeah, you can. It doesn't always have to be used as the founder, but if no one is working on it, it will eventually dry up. It may take a long time. I actually think that's where the trap is, is that it can take months. Sometimes it could take years for the funnel to dry up, but it does eventually if you are not actively putting new prospects into it. So I think that's fantastic advice. So I think the last thing that I want to chat about here is boundaries between work and personal life. Do you have any sort of, I don't wanna say hacks, but like do you have any guiding principles that you use when it comes to setting boundaries between your businesses and then your personal life?

Chris (42:54)

Yeah, for sure.

Yeah, you know, I think one of things that I take a lot of pride in is, even though I am a senior entrepreneur, it is my nine to five. So every morning I wake up my children, my wife and I make them breakfast and we make them lunch. We go outside and wave to them as they drive off to school. And you know, I have family, I have a little bit of one on one time, you know, with my wife and you know, and then I get ready and I come to work.

And when I'm here, and you know, might be five or six, you know, depending on the day. But while I'm here, you know, I'm solving problems. And then I go pick up my son from football practice. We go home, we make dinner as a family. We have dinner as a family around the table. And we spend time. So last night, my daughter and wife, they were painting each other's nails watching a TV show.

And actually what I did with my son last night is I really introduced the five F's concept to him. And we I actually bought him a full focus planner and we actually started filling that out. Awesome. That's awesome. And so we started doing that. And then, you know, we say, you know, good night to them. And so again, you know, those boundaries are in a sense of like

Jon Blair (44:08)

I love it. My full book is over here. I live and die by it. My wife has one as well.

Chris (44:25)

that faith and family and fitness, they're all the main focus before kind of business starts and ends. And so I would say that's the main thing that we try to focus on as a family.

Jon Blair (44:42)

Yeah, I love that. have a similar kind of similar kind of boundaries. mean, and actually Michael Hyatt, know I keep he's the one who invented the full focus planner, but he's a he's a big like the content, the books he's written his podcasts are big reasons or the driving force behind a lot of my guiding principles when it comes to the balance between work and family. But he always says like, you have to set a start time and you have to set an end time to your day. Because as an entrepreneur, no one's gonna set it for you. You have to set it for yourself, right? And so I actually have, no, no, yeah, exactly. I still think about business. Let me say something that might be freeing to people that are listening. I can't turn off being an entrepreneur, and I don't. But I can be present with my family at 5.30 p.m. every day, even if I'm still thinking about work.

Chris (45:17)

No, and our brain doesn't turn off.

Yeah.

Mm-hmm.

Jon Blair (45:40)

part of being an entrepreneur that doesn't ever turn off and that's okay. It's something I wrote about on LinkedIn recently. I've been in the season of writing on LinkedIn about stuff about giving grace to entrepreneurs. I think we're all so hard on ourselves. I know we are. We're all so freaking hard on ourselves and there's no one who's gonna, people rarely tell us we're doing a good job because we don't have a boss. We're our own boss and we're actually the hardest boss that we could ever have. And no one's gonna tell us to stop, right? No one's gonna tell us to stop. so I actually have my start time and end time in my calendar, and I bookend my days with meals with my family as well. I have a three-year-old and a two-year-old boy while my wife is taking my daughter, who's five, to elementary school. I make them breakfast every day.

Chris (46:09)

All right.

Yeah.

Jon Blair (46:32)

I put away the dishes for my wife. I do some things around the house. I clean up the house so that it's not absolute chaos when she gets back, because she does enough of that all day long, taking care of our family. And then I start my work day, and at 5:30 we have dinner every day, and that's when my work day is done. Every once in a while, and what I mean every once in a while, mean like a few times a month, do I have to log in at night? Yeah, I do, because I didn't get something done. But once the kids are down for bed, they've been bathed and they've been put down,

Chris (46:41)

Right. Right. Yeah. Right.

Jon Blair (47:00)

Every once a while do have to get a thing or two done on the weekend? Yeah So every once a while do I say hey? I'm gonna be late for dinner today because there's this thing that got scheduled and I couldn't move it Yes, but those are very clearly the exceptions not the rules and because I've placed those boundaries. There's friction There's friction to scheduling them and because they're in my calendar Whenever I like look at possibly scheduling something over them. I go. I'm scheduling over my morning time with my boys having breakfast or over dinner with my family. And so it's just there's, so if there's anything from all this, it's like set boundaries and be okay with it not being perfect. know, Michael Hyatt always says, if he's calls it mapping out your ideal week, and if your ideal week is 70% on point, that's the goal, 70 to 80%. It's not 100% perfection, right? But if you are 70 to 80%, in alignment with what you've intentionally laid out as your ideal week, which includes boundaries at the beginning and end of your day for your personal life, you will be living a life of far greater success, achievement, and intentionality than most people out there. So in closing here, I would like to close with a little fun little personal question. What's a little known fact about Chris Lang that you think people might find shocking or surprising?

Chris (48:27)

I know I mentioned this to you before, but that I learned to read, write, speak Cherokee as a child. So I was raised Cherokee in Oklahoma, and it's really what inspired me about the story. What was this nation trying to preserve its history, its stories, its language? And so I think that base is, yeah, I think that base is...

Jon Blair (48:50)

That's so cool.

Chris (48:53)

has given me a lot of perspective and I'm super grateful for that opportunity.

Jon Blair (48:58)

Can you still read and write, Cherokee?

Chris (49:01)

So I can't write or read. It's something like, mean, you know, if I were to go back, would say, Osiyo dtohitsu? which means hi, how are you? And then if they asked me how I was, I'd probably say, agiyosi which means I'm hungry. So I know how to get around and get fed. That's about it. know, so no, but it is something, it's a very complicated. I think it's a, you know how there's different levels and languages?

Jon Blair (49:10)

Yeah.

Yeah, I love it. love it. Yeah. No, that's all good, man. That's cool, though.

Mm-hmm.

Chris (49:31)

to learn, I think level five, I think it's like a level five as far as the how hard it is. And so it's not native, know, like, I definitely know more Spanish now than I know Cherokee.

Jon Blair (49:43)

For sure. That's cool, man. I love that. So before we land the plane here, where can people find out more about you and about Move FWD?

Chris (49:49)

Mm.

Yeah, movefwd.co is our website and @ChrisLang social across platforms is where you can find me.

Jon Blair (50:02)

Definitely check out Chris's content. I read it every single day. It's really, really awesome stuff. And definitely check out Move FWD. mean, look, I don't think there's an entrepreneur out there that isn't looking for holistic health and as Michael Hyatt calls it, the double win, which is winning at work and succeeding at life. And so if you're looking for someone to come alongside you and help you in that journey, check out Move FWD and see what they can do for you.

Chris (50:06)

Amen.

Mm-hmm.

Jon Blair (50:30)

And you know, don't forget, if you're looking for more helpful tips on scaling a profit-focused DTC brand, which is my area of expertise, consider giving me a follow, Jon Blair, on LinkedIn. And if you're interested in learning more about how Free2Grow's DTC accountants and fractional CFOs can help you increase profit and cash flow as you scale, check us out at Free2GrowCFO.com. And until next time, scale on. Thanks for joining, Chris.

Chris (50:56)

Thank you.

E-Commerce Accounting 101: Tips, Tricks, and Mistakes to Avoid

Episode Summary

In this episode of The Free to Grow CFO Podcast, Jon Blair sits down with AJ Stockwell, founder of Climb CFO and e-commerce accounting expert, to tackle one of the biggest challenges DTC brand founders face: keeping clean, accurate financials. Together, they dive into the essentials of bookkeeping for e-commerce brands, from spotting red flags to optimizing margins and ensuring financial clarity. Jon and AJ highlight a critical yet often overlooked mistake—misclassifying sales tax as revenue or expenses on the P&L statement. As AJ explains, sales tax is actually a liability, and including it on the P&L can seriously distort your brand’s financial health, impacting decisions around pricing, ad spend, and growth strategy. This episode is packed with insights to help founders maintain accurate records that drive smarter decisions.

Topics Covered in Episode:

• Biggest Red Flags in DTC Financials: Common errors in e-commerce bookkeeping that signal trouble.

• Holiday Cash Flow Management: Why December’s slower sales and post-holiday tax liabilities require extra planning.

• Landed Cost Accounting: Why it’s challenging for DTC brands and how to stay ahead with smart tracking of freight, duties, and fees.

Episode Links

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

AJ Stockwell- https://www.linkedin.com/in/ajstockwell/

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

Climb CFO - https://climbcfo.com/

Meet AJ Stockwell

AJ Stockwell spent a decade as the CFO and Controller of numerous e-commerce brands, both in-house and on a fractional basis through his firm Climb CFO. More recently, he has shifted his firm's focus to accounting education and helping businesses clean up their books rather than providing ongoing CFO support.

Transcript

~~~

00:00 Introduction

03:50 AJ Stockwell’s background

05:51 The Importance of Accurate Bookkeeping

12:01 Red Flags in Financial Statements

30:22 Navigating Financial Complexity in E-Commerce

36:43 The Importance of Accurate Costing Methods

39:45 The Challenges of Landed Cost Accounting

45:27 The Significance of Contribution Margin in Profitability

50:21 Closing Thoughts

Jon Blair (00:00)

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 outsource finance and accounting firm for eight and nine-figure DTC brands. All right, today, I gotta be honest, my guests, this is a long time coming, because this is one of my good buddies, and actually, to be quite frank,

He's someone who took a lot of phone calls from me the year leading up to starting Free to Grow CFO. He was kind of a sounding board of like AJ, should I do it? Should I not do it? And so AJ is actually like a super important person in the history of Free to Grow, whether you know it or not. So AJ, thanks for joining, man. I appreciate having you here. How you doing today?

AJ Stockwell (00:53)

I'm doing great, yeah, and it's awesome to be on here finally. I know we've been trying to make this happen, so I'm excited to record this and hopefully it's not the last time.

Jon Blair (01:03)

Yeah, 100%. So here's actually a little bit of history about how I know AJ. And he's gonna give his own background in a second, but AJ was formerly the controller of one of the early e-comm brands, Tuft & Needle. If you're an e-comm nerd, you've definitely heard of Tuft & Needle, probably heard a little bit about their story. AJ ran all kinds of stuff on accounting and finance for them as they were scaling super fast. At Guardian, we had hired a few people from Tuft & Needle, kind of post the merger that they had with SSB, and we were introduced to AJ through a former Tuft & Needle employee who was working at Guardian. AJ actually worked for us as a fractional CFO and controller for a period of time. That's where we met, but we stayed in touch after we kind of took those functions fully in-house.

And as I was wrestling with the idea of starting Free to Grow CFO, knew AJ was a perfect person to call, one, because we could have nerdy accounting conversations and both enjoy it. But two, he had started Climb CFO, which at the time was a firm that was focused on serving growing e-commerce brands as well. And so today we're gonna be talking about e-commerce accounting, tips, tricks. do's and don'ts. Super important topic and I couldn't think of anyone better to have on than AJ. The reason we're talking about this is because we just keep seeing time and time again when we come across brands who are interested in potentially working with Free to Grow that they don't even realize how messed up their accounting is. Oftentimes they'll have a sense that something's wrong because they'll look at the numbers and something doesn't seem right. Most founders have a picture in their head of where they think profitability is gonna land for a given month and then they get the P&L from their bookkeeper and they're like dude this is way off from what I was expecting. What is going on? Well, we're gonna actually dive into some of the most common issues and red flags that we come across That are probably driving your inaccurate bookkeeping. So what this is gonna do is it's gonna equip you as a founder to be able to Identify that you do indeed have a bookkeeping problem Where it's probably coming from?

And then which is gonna better inform you to know how to kind of decide on the next steps to go find the right person or people to help you get it fixed so that you can ultimately make timely and quality decisions based on your bookkeeping. So before we get into the details of all this fun stuff, AJ, if you could give the audience kind of a quick rundown of your background and your journey to where you're at today at Climb CFO.

AJ Stockwell (03:54)

Great. Yeah. So as you mentioned, I was previously with Tuft & Needle. I was their first accounting and finance hire a little over a decade now ago, which is pretty crazy to think about. There were about nine or 10 of us at the company then. And that year we did about nine million in revenue. Over the next four years, I helped grow the brand, helped build out the accounting and finance function as the company grew.

And then about four years after I joined, we completed a merger with Serta Simmons Bedding. And that was the time that I kind of ended up leaving the company. So those were really nice bookends, you know, being the first accounting and finance hire and then seeing it through that merger. And at that point, you know, the brand had well over a hundred employees and, you know, north of 150 million in revenue that year. So really.

astonishing growth, not something that I've personally honestly been involved in much or seen since Tuft & Needle. So it was a really incredible learning and growth experience for me. And then by the time I was getting ready to leave Tuft & Needle, I'd already been thinking about leaving the company for a little while just because I recognized that I liked working with earlier stage brands and working with smaller teams.

You know, my time at Tuft & Needle was kind of consumed with meetings and managerial roles and I liked to, you know, be kind of more boots on the ground helping grow a brand. And then the second thing that I recognized was that there was a real need out there for e-commerce brands, especially, you know, we're talking about 2018 or so now when e-commerce was really exploding.

And there was a great need for a higher level of accounting and finance guidance by brands who maybe weren't big enough where it would make sense for them to have a full-time CFO, but they still really needed a lot of the discipline and structure and kind of higher level guidance that comes from a CFO. So that's when I recognized the opportunity to start Climb CFO and start working with brands on a more dedicated but fractional CFO basis. And then more recently in the past year, I've actually sort of wound down the CFO practice and focused on sort of smaller scale projects and advising, especially around helping companies clean up their books and clean up their financial statements, which I know is kind of the big topic for us today. So it's perfect.

Jon Blair (06:43)

For sure. Well yeah, okay, so a couple things I want to kind of draw here. One, if you kind of read between the lines, AJ saw growth from nine million to very healthy nine figure revenue in four years, right? So like a lot of lessons learned there that a lot of people don't have not learned firsthand before themselves, right? And then two, I always say this, you as an e-comm brand need a CFO before you can afford one full time. That's something that we've realized that free to grow is a reality. And the good news is you don't need one full time before you can afford one full time. And today with firms like free to grow and others out there in the space that are able to provide CFO services on a fractional basis, it allows you to get the CFO expertise that you need to scale your brand profitably and with healthy cash flow, but at a price you can afford today, right? And so, you can, now that you've heard AJ's background, you've...

probably recognize why it made so much sense for me to pick his brain before we started Free to Grow because he was a few years ahead of me in you know starting a practice in kind of the same areas. But yeah, what we're going to talk about is we're going to talk about messy books, why clean books are so important and what it means for you as the founder if you're dealing with messy books and the potential like, you know, real big issues that it could cause for you. the first question I have, I touched on this a little bit in the intro, but from your perspective, AJ, why should brand founders care about accurate bookkeeping?

AJ Stockwell (08:39)

Yeah, so I think the list there is sort of endless. A couple of just like surface level sort of obvious things are, you know, from a compliance and reporting perspective, you know, making sure that you're getting your taxes filed correctly and accurately is crucial. And then from a financial reporting perspective, you know, if you're reporting to a board or investors or any external parties, you know, it becomes crucial to have

Jon Blair (08:44)

Hahaha

AJ Stockwell (09:09)

accurate numbers that make sense. And then, you know, nevermind if you're going to look for an acquisition or starting to raise money, they become even more crucial in those cases. But probably the most important and kind of the core of it is just being able to operate your business on a day-to-day basis, knowing what's actually going on, you know, having a clear windshield and seeing

what's going on in your business, understanding the health and the performance of your business on a day-to-day, month-to-month, year-to-year basis, and having confidence in those numbers. it sort of eliminates a huge unknown that shouldn't be an unknown when you're starting to have certain strategic conversations around whether it's a large investment in a new product line, into a retail store things like that or an infinite number of potential strategic directions that you might go.

Jon Blair (10:15)

Yeah, I love the analogy of the clear windshield. Like if you got a windshield that's got mud all over it, like how can you drive the car safely, right? And the other thing that I want to mention is that by virtue of running a DTC brand, you have chosen one of the more challenging verticals to scale within. Why? One, there's a ton of competition. Right? And there's more competition today than there's ever been because the barrier is super low to entry. Anyone can buy products, source products off Alibaba, fire up a Shopify store, start spending money on ads. So there is very low barrier to entry, which is one of the reasons there's so much competition. But just looking at the business model, you have a business that is largely driven by ad spend, which is a huge investment, and you hold inventory which represents another like complexity of the business and use of cash. And so, we always say like the reason, every vertical has a need for clean books. But I would say that some of the simpler business models can get by without clean books right, for a while, eventually they're still gonna need them once they get to a certain size. But in e-comm, you need them a lot sooner than other verticals because you're dealing with heavy amounts of ad spend and you're dealing with inventory, which makes things that much more complicated, which means there's actually more metrics and KPIs that help you understand financial health that you need to track than some other simpler business model. next we're gonna get into talking about some of the biggest red flags that we see over and over again. These are red flags that indicate like, hey, almost guaranteed there's a big issue with the books here. And because there's a big issue with the books, they're presenting information that is probably misleading when it comes to making operating decisions in your business. So let's chat first about sales tax. Because I actually see...

I run all the sales in Free to Grow and so I actually review the financials of every brand that we create a proposal for. And I actually see this more frequently than anything else in terms of red flags. There's some issue with sales tax that ultimately means there's an issue with revenue.

From your standpoint, what are some of the common things that you see on your end when you come across books and you notice there's a sales tax issue and what does that mean for the accuracy of those books?

AJ Stockwell (12:59)

Yep, yeah, so I agree with you that it's one of the top red flags and one of the first things to look for just because it can be so obvious. once I see it, it's a sign that, you know, this this review is going down a little bit different of a path and it's becoming, you know, more complex and I'm going to spend more time understanding what's going on with the company's books. The bottom line, and this is why it's so easy to kind of see.

Jon Blair (13:15)

Yeah.

AJ Stockwell (13:28)

The bottom line is that sales tax should not be anywhere on the P&L statement because sales tax is not an income when you're collecting it from customers. It's not an expense that you're paying out. It's not your tax. What it is is a liability and it's something that, you know, a company is just holding kind of on behalf of a tax agency. So that's why it's a liability.

because customers truly are the ones paying the tax. It's part of their cost and businesses have a responsibility basically to collect and then remit that tax to the taxing agencies. So anytime I see sales tax income as an income row, I know that there's a red flag. And if I see it also separately or in addition,

Jon Blair (14:17)

Ugh.

AJ Stockwell (14:26)

as an expense going out. That's kind of the second red flag. And those are probably the two most common places where I see it and it jumps out right away like a sore thumb. One of the, I guess, like quick, you know, deeper reasons why this can be an issue and not to get too far ahead of ourselves. But if you're reporting the sales tax that you collect as income,

Jon Blair (14:40)

Yeah.

AJ Stockwell (14:54)

and then the payments as an expense, then not only are you showing them incorrectly and maybe there's an argument that it's netting out in the bottom line of the P&L, but the much bigger issue is you're overstating your revenue. So you're looking at your financial statements thinking you're taking in more revenue than you actually are. And then if that expense is

Jon Blair (15:06)

hear that a lot.

AJ Stockwell (15:22)

lower on the P&L within the operating expenses or something like that, then that means that you're also gonna be overstating your gross profit margins. And you're gonna be thinking that your products themselves are more profitable than they actually are because you have this revenue overstated.

Jon Blair (15:32)

Mm, yep.

Yeah, so another way to think about this is...

you know, your margin ratios, right? So if we take gross profit margin ratio or gross profit margin like AJ was just talking about is you've got gross profit dollars divided by revenue dollars, right? Well, you're overstating revenue. So you're actually you're throwing your understanding of your margin ratios gets completely thrown off. If there's anything in your financials. And this is common. Most founders have some number of metrics that they divide into revenue, right? To get the margin

ratio and if the denominator is revenue and revenue is overstated because sales tax is in there, then that ratio is wrong, which means what? It means misleading data that may lead you to make bad decisions, right? And let's take it even one step further. What's the margin? What's the number one reason why I hear

DTC brand founders wanting to understand their margin ratios because they want to know how much they can afford to spend on advertising, right? Because what percentage of every revenue dollar is available to spend on advertising and then hopefully still have some left over to cover fixed overhead? Well, guess what? If you're calculating the wrong percentage because the denominator in those ratios is wrong because you've your overstating revenue by including sales tax,

AJ Stockwell (16:49)

Right.

Jon Blair (17:09)

you're making bad ad spend decisions that you may think are profitable and aren't or vice versa. And you don't want to be doing that because as you're scaling, you know, to seven figures and then to eight figures and then to nine figures, you're spending more and more ad dollars. And you want to know for sure with certainty, with confidence, what the impact is of those advertising dollars on the business's profitability. There's one other thing I wanted to note.

that you mentioned AJ is like, I hear a lot too. well, they just net each other out. Well, here's the reality. That's not maybe they net each other out in aggregate, right? And when I say like over a long period of time.

But the reality is we don't work with a brand who doesn't have different filing frequencies for different states, right? Like, and it depends on thresholds. Like, can start annually and then once you start collecting more, goes to quarterly and then it goes to monthly. Yeah, well, if you collect every single day and that hits your revenue, but you don't pay it out until three months later because you're a quarterly filer, it doesn't net each other. They don't net each other out on those three months leading up to when you finally pay it out. So like,

That's a slippery slope argument to try to hang your hat on. But here's another thing that I wanna dive into with you. And this one is actually the one AJ started with, which is sales tax collected as revenue, sales tax paid as an expense. That at least has.

AJ Stockwell (18:29)

Yeah.

Jon Blair (18:41)

You can identify that, you can see those things, right, in the chart of accounts and on the P&L. But there's this other one that's maybe like a little bit more, even a little more dangerous, which is you don't see sales tax anywhere. It's not on the P&L and it's not on the balance sheet. And what are some reasons that you, when you see that AJ, what does that start leading you to think may be going on?

AJ Stockwell (18:55)

rate.

Yeah, so there are usually two possibilities there. One is that the company is just outright reporting on a cash basis, whether it's just for the revenue of that portion alone or for all of their business. And I know we're going to talk about inventory as well. But one thing that that can show is the company is just reporting revenue on a cash basis, which most commonly what that will look like is

Jon Blair (19:18)

Mmm.

AJ Stockwell (19:35)

you know, in their bank feed, a deposit from Shopify comes through and they just post that to sales. But the problem there, of course, is that, you know, there's sales tax in there. There's there are, you know, fees probably taken out of it that they want to get broken out and things like that. So that's one. And that's probably the most.

Jon Blair (19:45)

Yeah.

AJ Stockwell (19:59)

dangerous in a sense. It's again kind of easy to recognize if you just look at the entries that are, you know, posting to the overall sales account on the P&L because you'll see that it's just those those deposits from the merchant processor. And then the second one is that maybe people are breaking out the way that they're entering their revenue and their transfers that are coming from their merchant processor.

but they're still just posting those sales straight into that main revenue account on the P&L. So anytime I'm looking at the P&L and looking at, I'm clicking into revenue and looking at the detail of that ledger to see how this is actually being posted.

Jon Blair (20:35)

Yeah. Yeah.

For sure, yeah, this is the second most common thing we see. And usually what we find is it's a CPA firm, a horizontal CPA firm, meaning that they serve like any and all industries. They're tax, they're really tax preparers. They're doing the books. And so they oftentimes are doing the books on a cash basis because it aligns with what, it aligns with the tax return strategy basically. But you know, the problem is again, going back to margins, the most common version I see,

is the first one that AJ walked through, which is that when you get a net payout that comes from Shopify every day or every couple days, that net amount that hits your bank account, they just post that straight to a single revenue general ledger account. The issue is it includes, it's actually inclusive of gross revenue, discounts, refunds, sales tax payable, and merchant processing or credit card fees. But even worse,

there's a delay between the sales, the actual orders and sales associated with those amounts. And so they may not even be posting it in the right month. A perfect example is like on, know, actually upcoming, where we're gonna see this a lot in our CFO audits is after this holiday season because Black Friday, Cyber Monday this year crosses over from November to December. So what that means is all these brands are gonna have a huge concentration of sales and incoming cash being generated

AJ Stockwell (21:47)

Yeah.

Jon Blair (22:13)

this last week of November, but a bunch of those Shopify deposits are gonna hit their bank in December. And so if your CPA or your bookkeeper's doing the books in this manner where it's cash basis and it doesn't include that breakout of those different actual P&L line items,

you're gonna see a bunch of revenue from November actually hit in December. There's a whole nother can of worms we could open up on like revenue recognition timing, but the bottom line is it may put your revenue in the wrong period, which can lead to bad decisions. It doesn't actually allow you to understand how much of that quote net revenue. I'm saying quote because it's.

partially wrong, is actually sales tax, is credit card fees, is refunds, is discounts, all of those things. It doesn't matter until it matters. And guess what? Guess when it's gonna matter? Black Friday, Cyber Monday weekend, when you're giving big time discounts, you're collecting a bunch of sales tax, you have a whole bunch of merchant processing fees, you want that stuff recorded right so you actually know how it's impacting your profit and cash flow.

Is there anything else related to this AJ that you see like when the accounting is done this way, like what kind of trouble it can get a founder into in terms of decision making?

AJ Stockwell (23:35)

No, I think just the one step further is, and I know we have inventory on our list, but sort of same thing when you're considering how you're posting your cost of goods and costing out the inventory that you're selling, this cash basis of recording revenue only makes that more difficult and probably further incorrect depending on the way that you are.

Jon Blair (23:58)

Totally.

AJ Stockwell (24:04)

recording your cost of goods and your product costs especially.

Jon Blair (24:06)

Yeah, and because revenue minus cost of goods is gross profit.

You've got revenue from gross profit possibly in one period and cost of goods sold in another one. And so if you look, depending on the time period, you're looking at gross profit. It's wildly over or understated in one period and then corrected, quote, self-corrected and over and understated in the other direction in the next period. One other thing I want to point out, this is something that's probably less common for founders to realize, but you want to make sure the payables.

AJ Stockwell (24:16)

Exactly.

Jon Blair (24:42)

on your balance sheet are accurate every month and sales tax payable being one of those because cash in the bank is not all your cash, right? It can be very misleading. Again, especially after a big sale like right after Black Friday, Cyber Monday, you have all this cash and you're like, bam, there we go, baby. All this cash. But how much of that is due to taxing authorities, right?

AJ Stockwell (25:04)

Yep.

Right.

Jon Blair (25:09)

How much of that is due to your vendors in the form of accounts payable? How much of that is due on your line of credit which you extended to buy all the inventory for that sale weekend? And so I kind of made this metric up. It comes from the metric quick ratio. I call it what's your quick cash balance, meaning like take cash and you subtract your current liability. So your cash on hand and subtract AP, sales tax payable, and then maybe your line of credit.

whatever's due soon, that's the cash you actually own. You back out credit cards too. So you may have a million in the bank and you back out those other items, you only have 200K left over. So don't go on a crazy spending spree. You actually owe some other people money eminently. So that's another reason why you gotta make sure this stuff is accurately split out on the P&L versus the balance sheet.

AJ Stockwell (25:52)

Right.

Right. Yeah. And I actually just want to emphasize that even a little bit further because another common dynamic with Black Friday, Cyber Monday is that a lot of brands will have much slower sales in December, especially when that full weekend is in is actually in November. So what will happen is, you know, someone might be sort of planning their cash and they're just looking at what's in the bank account.

Jon Blair (26:18)

for sure.

AJ Stockwell (26:31)

and they know that they're gonna have lower sales receipts in December, but they might not be thinking about really the impact that those sales tax payments can have on their cash, especially as brands get to be.

Jon Blair (26:45)

Totally.

AJ Stockwell (26:48)

a pretty big size with economic nexus and everything. know, brands are filing sales tax in 20 plus states, know, 20, 30 more states for big brands. And that's a, that ends up being a lot of cash, especially when you go from.

a huge level of sales over the course of a weekend and then end up with a much lower than normal sort of level of sales. It's, when you have when you don't have those monthly fluctuations, it can be a little bit easier to sort of plan or you sort of like expect kind of the level of cash that's going out for those sales tax payments on a month to month basis. But I've seen people kind of underestimate those December payments.

Jon Blair (27:12)

Totally.

AJ Stockwell (27:35)

which can be really considerable.

Jon Blair (27:37)

That's a great point and actually going back to something I said at the beginning which is like hey Newsflash you picked a hard vertical right by getting into ecom You've got to spend a lot of money on ads and understand whether they're profitable or not You got to hold inventory and the third one is you're in consumer goods So there is seasonality like there are yes, there are some consumer goods brands that

that have less seasonality than others, but most of them have some form of seasonality. And so this, what AJ was just talking about, nailing your planning from a cash perspective becomes even more important when you have any sort of seasonal peaks and troughs, which so many consumer brands do. And that's again where getting the help from a CFO who understands these dynamics, is gonna just help you make decisions at just such a higher level of sophistication as you're growing your brand.

AJ Stockwell (28:34)

Yeah, and I think this is also like a really important sort of warning. And I'm just going to even further emphasize it for brands is this cash planning, like December cash planning should start maybe in the summer. I mean, obviously we're always planning, you know, ideally kind of 12 months in advance. But when it comes to the really tactical cash planning for the end of the year, it does need to start a little bit earlier and be a little bit more thoughtful. Because you also brought up things like lines of credit and vendor payables. And so a brand can get really bad whiplash when they come off of the end of Black Friday, Cyber Monday, and they have maybe the highest cash balance that they've had all year. And then it turns out, my line of credit is based on the amount of inventory that I have. And suddenly I sold through a ton of inventory. So now my line of credit availability has gone way down. So I'm actually not necessarily even going to be able to draw back all of that line of credit balance. And then I have some vendor payments for some of those big inventory purchases and those need to go out. And then I have those sales tax payments. And then potentially one more thing is, you know, maybe I'm seeing higher returns in sort of a real time cash basis in December because overall sales are lower, but I'm seeing the returns from that big Black Friday, Cyber Monday weekend. And these are, you know, four or five huge swings in cash that can really reduce a company's cash balance. And if they haven't planned for at least those items, you you can really run into trouble come the end of the year.

Jon Blair (30:40)

Yeah, great points. And again, reason there's such a need for...higher level sophistication in your accounting and finance functions in a growing e-comm brand, it's because of all these moving parts. AJ just did a great job of kind of going through a list of them, but not all businesses have these, but you're gonna have them if you're growing an e-comm brand, and so you need to have the right accounting and finance team to help you navigate them, because they're not going away, unfortunately. And as you grow, there's more and more zeros at the end of each of those items that AJ just went through, so there's more and more at stake.

So what I want to talk about next is inventory. Some of the biggest red flags that we see on a regular basis as it relates to inventory. So the first one I want to ask you about AJ is prepaid slash in transit inventory. It not being on the balance sheet. Why is this a red flag and what kind of issues does it cause?

AJ Stockwell (31:37)

Yeah, so like with the other topics, there are a few things that can be going on and numerous issues that this causes. But it comes back to kind of the core of understanding what is my current inventory position, inclusive of orders that are already out there and especially inventory that's already on its way to me know, if you don't have the prepaid inventory on your books kind of broken out separately and it's all lumped into inventory, or you know that it's coming, so I'm sort of treating prepaid or in transit similarly, just because once it's in transit, usually you'll have the invoice and that's kind of going into inventory.

You can get into issues if you're managing or looking at your cost of goods sold based on kind of your physical inventory on hand because if I just have one inventory row on my balance sheet and I'm asking my 3PL at the end of the month, what do you have on hand and I'm maybe adjusting my inventory to that or I'm using that to figure out what my cost of goods is then I'm gonna kind of overcorrect or go way too far in terms of what I'm costing out. And then maybe the next month, once they've actually received that inventory that I wrote off or costed out the prior month, all of a sudden it's looking like my cost of goods is higher. I didn't sell as many units, even though we have our sales numbers. So I think it again comes back to sort of the month to month fluctuations and items being posted in the wrong month but also just not having an accurate overall picture of where I stand with all the inventory that I own.

Jon Blair (33:29)

Dude, we see this so often and usually, I would say honestly 99 % of the time, it could even be 100 potentially. Matt Fowler, one of our accounting managers would probably be like, Jon, it's 100 % of the time, I don't know what you're saying, 99% there is no distinction between prepaid and in transit and on hand on the balance sheet. There's usually just like an inventory account. And if there's multiple, it's usually by product category, shirts, socks, hats, whatever, right? But to say what AJ just said in different words, if you don't have them broken out, you can't reconcile the general ledger balance to a physical count. Why? Because the general ledger balance, if it's all lumped into one inventory account, it includes prepaid in transit inventory and on hand. What's the problem with that? Prepaid and in transit will not be in the physical count that comes from your warehouse. So you're gonna compare apples to oranges, right? And when you go to true them up, on the financials, true up your balance sheet to the physical count, everything that was in prepaid and in transit and reality but lumped into that balance sheet balance, that all goes straight to cost of goods sold. But guess what? When it arrives the next month, it'll get subtracted from cost of goods sold. So cost of goods sold is too high one month and too low in another. And it's just, it causes a whole bunch of issues. But furthermore, the other issue is, what we see, this is more of an operational side effect, but it's super important, is that when we see that when brands don't have to track this for accounting purposes, they just don't track it period. So they don't even have an accurate accounting somewhere of what has been prepaid for and what is in transit, which is like a massive miss on just overall operational control to make sure that like you're getting from your vendor what you have prepaid for and to make sure that what is in transit fully arrives, right? And so we almost always, I think close to if not 100 % of the time are setting up a prepaid and in transit inventory bucket for the first time in most of our clients like history and

AJ Stockwell (35:36)

Right.

Jon Blair (35:50)

Usually to be honest with you if you guys end up if you're listening this you end up working with us and you're like my gosh, we don't have prepaid in transit inventory and my margins are all over the place I think this could be part of the problem. Keep in mind. We will not nail correcting it for you in month one unless you have a very detailed accurate historical tracking of prepaid inventory and in transit, which you probably don't and I don't blame you because no one's ever asked you to do it before and you haven't known why it's so important and what's at stake. So usually takes us two to three months. We try to help, we try to go back in the general ledger and look at all purchases that have hit the general ledger, whether it on a cash basis or an accrual basis, we'll try to go back many months, as far back as you think you have something prepaid or in transit, and we'll try to build out, we'll give you a list of things to choose from that's still outstanding.

But even then it takes usually several months to get this nailed down and it basically starts working when you figure out how to track this internally. So just know that like your accountant can't do everything for you historically in terms of cleaning stuff up. And this is one thing that usually takes a couple months to figure out and it's in partnership between who's doing your accounting and who's actually managing your inventory. So another thing that we see on the inventory side of things, well actually hold on, one other thing that I would love to get your take on. So let's just say we kind of take the corollary approach to this and we say, okay, we don't want to break out prepaid and in transit inventory, but we're also never gonna true up the balance sheet to the warehouse and we're just gonna expense to cost of goods sold our estimated product cost by SKU. Because we see that a lot.

What issues does that cause in your mind?

AJ Stockwell (37:43)

So in that case, I think the issue is that you're using estimates there. So you're sort of focused on a P&L approach, which again is common for when you have like a CPA firm, you know, like a tax firm kind of doing the books on kind of a cash basis, they might try to sort of estimate your actual sales, but they would be using an estimate often and that's a focus on the P&L and you sort of run into like a confirmation bias, I guess, because you've sort of decided in your mind and it's of course informed based on historical costs and that kind of thing. You kind of decided in your mind what the P&L amount should be for that cost of goods sold, but you're not looking on a regular basis at the true amount.

Jon Blair (38:13)

Mm-hmm.

Yeah.

AJ Stockwell (38:42)

And the only way to do that is to have a handle on your comprehensive current inventory position, meaning including what's been prepaid and what's in transit. And ideally also kind of breaking things out, not necessarily in QuickBooks, but somewhere by location. one thing like you mentioned, operational danger from sort of an internal controls perspective, making sure that you get what you paid for. But there's also operational danger in the supply chain team not knowing what is coming. And if you're not tracking your in transits well or prepaid as well, then you can end up double ordering for certain items and overbuying inventory so not to go too far on a tangent, but I guess coming back to kind of the P&L focus part, you know, if you're using incorrect estimates, then your balance sheet inventory is just going to perpetually either get higher and higher and higher if your cost of goods estimate is low or your inventory is going to perpetually get lower and lower and lower. And what I mean by higher or lower is

Jon Blair (39:35)

No, no, no.

AJ Stockwell (40:01)

not just from the dollar perspective, but the error is going to be magnified on a monthly basis, either higher or lower. And it becomes a serious headache, especially like I've started to work with brands whose accounting firm was focused on this product costs $10. So we're just going to cost out $10 per unit sold according to Shopify and never look at the balance sheet.

And that goes on for a couple of years. And then all of a sudden, you know, you could have hundreds of thousands or even in the millions of an adjustment that has to be made to the inventory. And meanwhile, it comes back to this idea of, you know, knowing where you truly stand, understanding your true profitability from a product and an overall business perspective and, know, making decisions about how much you can spend on marketing and things like that and knowing those correct margins is crucial. And that's why I always say there are sort of two, the process of recording cost of goods is sort of two steps. And it's, if you're using kind of a landed cost, you know, detail or matrix to calculate your cost of goods at first, that's fine. But there's step two, which is crucial, which is confirming the actual inventory balance on the balance sheet.

Jon Blair (41:13)

Mm-hmm.

Totally.

AJ Stockwell (41:30)

because that's what informs if you are using those correct costs.

Jon Blair (41:36)

Yeah, and furthermore too, there's another thing that we see it's an issue all the time, which is that like, we call it internally, we call it the direct method of applying cost because we're directly applying sales volume times product cost, right? As opposed to indirect meaning backing into it, right? From like, just beginning plus purchases minus cogs equals ending. Yeah, exactly. like,

AJ Stockwell (42:02)

like a purely balance sheet. Yes, there's the pure P&L perspective and then pure balance sheet perspective where you say, you know, what did I buy? What did I sell? Or where did I start? What did I buy? What's the ending? And assuming that that's cost of goods sold, right?

Jon Blair (42:11)

Yep.

Yeah, everything else is cogs. Yeah, but the problem with that one is it doesn't tell you anything about why it was higher or lower than you expected. You're just backing into it, right? And so we take a blended... Yeah, it's even worse. Exactly.

AJ Stockwell (42:25)

Right, exactly. And if you're not tracking prepaids and in transits correctly, then you're running into the huge issues we were talking about a few minutes ago.

Jon Blair (42:34)

Totally, totally, yeah. And so like we take a blended approach, which is we start with the P&L method. If you don't have an IMS, right? If you don't have an inventory management system, which a lot of brands in the lower to middle market don't. But like we do the direct method of applying cost based on your estimated landing costs straight to cost of goods sold. And then we look at the general ledger balance and we compare it to the snapshot physical count, right? And we actually, if we do make an adjustment,

We put that on a different cost of goods sold account so you can see the difference between the true up adjustment, the balance sheet true up adjustment and your directly applied COGS. So you can get a sense for how much each of those entries like really impacted your margin buy.

And furthermore, there are just things that you have to pick up every single month via that balance sheet true up which is like damaged goods, returns that come back in and either get scrapped or get put back into finished goods, marketing samples, things that just go out the door that don't make their way into a Shopify order, right, or into an Amazon order. And so like you have to make sure you account for those, because we've come across brands who have not done that for like four years, and yeah, the adjustment was like 650K, and we're like, hey, unfortunately we can't tell you all the reasons this is so far off. We can tell you theoretically that it's one of or it's probably multiple of reasons within this list of things of and like going forward we're gonna directly apply COGS based on your estimated landed cost by SKU and then we're gonna true up the balance sheet every single month to the physical count so this doesn't happen to you anymore but you know just know that you know I go back to the analogy of like if you're flying a plane right that's supposed to go from LA to New York and you're off on your compass heading by one degree at the beginning you're not veering that far off course, but four to five hours later you may be Heading in a completely different direction and so it's this little one degree off For a long long time all of a sudden puts you super far away from the destination that you were trying to get to and and so just that in mind that like it may not seem like a big deal today but if it goes on unreconciled for one two three four five years you're gonna find yourself way off down the line and the problem is if that results in hundreds of thousands of additional cost of goods sold that's hundreds of thousand dollars of cost that you've had over the last several years that you didn't think you had that you actually have and so the question is what decisions would you have made differently

AJ Stockwell (45:22)

Right?

Jon Blair (45:27)

if you knew about those costs. So there is a lot at stake here. There's one other thing. go ahead.

AJ Stockwell (45:32)

And I would say, I was gonna say these are also issues that get further magnified as you scale and as a brand grows. So again, coming back to the reason that you and I started our firms is just the importance of having accurate financials and understanding where a brand stands, even starting from the earlier stage.

Jon Blair (45:40)

Totally.

So I wanna ask this, we've touched on some things here, but like, what makes landed cost accounting easy in theory? I've got, for those of you watching the video this episode, I'm air quoting, easy in theory, but challenging in practice. There are actually a ton of reasons, but from your perspective, what makes landed cost accounting, accurate landed cost accounting, challenging?

AJ Stockwell (46:27)

So I think it's just the sheer number of sort of different components and the different moving parts to consider. So like one quick thing is, know, freight. Freight is not going to be the same per unit or very rarely gonna be the same on a unit basis for each order or for, and therefore, you know, for each unit that you have. But without.

you know, using a proper inventory management system, which I really believe that companies can get away with using or without using, you know, a really robust inventory management system early on if they have other good kind of processes and checks and balances. But freight is one of those examples of something that's going to fluctuate on pretty much a unit basis. Another tricky thing is, like I was saying, just the number of moving parts. Like you brought up returns. and that's another piece that is technically in transit inventory that people might not be considering when they're closing the books. And, you know, they see these returns in Shopify for, you know, October 31st, but those are not yet put back into inventory. So if we're just doing kind of a simplistic, you know, costing approach,

Jon Blair (47:41)

Mm-hmm.

AJ Stockwell (47:49)

But then also trying to reconcile to a physical inventory count and what we truly have on hand from a balance sheet perspective. There's so many different kind of moving parts that have to be considered that can be really difficult to track without the proper processes.

Jon Blair (48:09)

Totally. Another one is accruing landed costs because so accrual for those of who don't know is an estimate which would like economically from an accounting standpoint economically that either revenue or expense event has actually happens such that it should be recorded, but you don't have an actual transaction maybe or a source document that should drive you to record that transaction. And on landed costs side of the house, what happens all the time, you order something from China, right? It could even be domestically, but like China's a good example because it happens over, you order something, a freight forwarder moves it to the 3PL, it gets received, and on the day it gets received, it gets sold, right?

So it gets sold immediately because you're a low stock on that item. But guess what you haven't gotten yet? You haven't got the duties invoice from US Customs and you haven't gotten the freight forwarder to give you the invoice yet. And even worse, you call the freight forwarder and you're like, I need this invoice because I need to cost this inventory. And they go, hey, all the subcontractors that moved these goods for us, they haven't even billed us yet. So we can't get you the invoice. So what do you do? You actually have to accrue the freight costs as of the day that that stuff got received, right?

you're doing accounting on a monthly basis, there's a period crossover, right, from one month to the next, you at least need to accrue the costs, the estimated costs of the inventory received through the end of that month. And how do you do that? I mean, there are ways to do it. At Guardian, we would use the quote to try to estimate a cost, right? We had a table of duty rates by HTS code where we could get an estimated duties. It's never perfect, but we could accrue costs that are pretty close, right, as of the close of the balance sheet each month, but those are not trivial things to do and there actually is no document. There is no trigger unless you have the process. There's no trigger that says, hey, record this, like a deposit into your bank account or a bill coming in from a vendor. You have to have a process as a part of your month-end closed checklist to check for the need to accrue revenues and expenses and that further complicates landed costs.

All right, so unfortunately we got to land the plane here We're definitely gonna have to have you back to chat some more, but we always like to ask a fun personal question and so before we conclude, what's a little known fact about AJ Stockwell that you think people might find shocking or surprising?

AJ Stockwell (50:40)

I don't know about shocking or surprising. Maybe part of this is, but I really enjoy barbecue. like the craft of, you know, making barbecue and cooking barbecue. it's something that I've been, you know, not to use like a dramatic word, but kind of studying and practicing for the last six or seven years. and then this is a little more maybe surprising or interesting at the beginning of COVID. I actually recorded a series of cooking videos, like instructional cooking videos at my house. And I only did it for a little bit during COVID and you can't find them anywhere. But it's actually something that I've thought about picking back up in terms of recording cooking videos.

Jon Blair (51:26)

Heck yeah, I love that. I mean, I'm in Austin, Texas, so I love barbecue and I've gone on a kind of a little journey myself of learning how to make really, really good barbecue, so I love that. Before we end here, where can people find more information about you and what you were doing today at Climb CFO?

AJ Stockwell (51:29)

Yeah.

Yeah, so you can go to my website, climbcfo.com. It's a pretty simple landing page at this point. But like I was saying, my main focus now is sort of on bookkeeping cleanups and kind of smaller projects. So people can certainly reach out to me at aj@climbcfo.com if they have any interest in talking about something like that.

Jon Blair (52:12)

Perfect, yeah, and depending on who's listening right now and if you end up working with Free to Grow, there's a chance, depending on what your needs are, that you may end up getting connected with AJ through Free to Grow. So it's great to have you on, man. This is such an awesome conversation. Obviously I love that we get to nerd out, but just remember, your bookkeeping matters because it is the foundational, accurate data that you need to make great decisions as you're scaling your brand and scaling an e-commerce brand is one of the hardest things you could possibly choose to do so you gotta make sure your bookkeeping is right because if it is it's gonna make everything else easier on you. Don't forget if you want more helpful tips on scaling 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 flows you scale, check us out at FreetoGrowCFO.com. And until next time, scale on.

Mini Episode: Why Your CPA Should Not Keep Your $10M Brand's Books

Episode Summary

In this mini-episode of The Free to Grow CFO Podcast, Jon Blair discusses the critical importance of specialized bookkeeping for e-commerce brands, particularly those generating close to $10 million in revenue. He emphasizes the inadequacies of using a general CPA for bookkeeping, highlighting the need for expertise in e-commerce consumer goods. The short discussion covers the differences between cash and accrual accounting, the necessity for timely financial data, and the challenges posed by tax deadlines that can hinder bookkeeping efficiency.

Key Takeaways:

• E-commerce bookkeeping is complex and requires specialized knowledge.

• Accrual accounting provides better visibility into cash flow management.

• You need timely and accurate financial data for decision making.

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 (00:01)

Alright, if you're a brand that's doing almost $10 million a year in revenue, and your tax accountant is the one doing your bookkeeping, you've got a big problem, and you need to make some changes. Why? Here's the thing. Most likely, your CPA, your tax accountant, is a very horizontally structured firm. Horizontal meaning that they serve all different kinds of verticals, maybe some service businesses, some manufacturing businesses, some solopreneurs, maybe some consumer goods brands. And by virtue of being horizontal, they just are not gonna understand the nuances of consumer goods and even more specifically, eComm consumer goods.

Here's the thing, eComm bookkeeping is hard in and of itself, consumer goods bookkeeping is hard in and of itself. When you smash the two together and you have an eComm consumer goods brand, you've got extra complicated bookkeeping, so having a horizontal CPA firm do your books is a bad idea. Once you get to 10 million or close to it, you need very solid financial data. And the way that you get that in the eComm consumer goods world is you work with a bookkeeping firm or an accounting and finance firm who specializes in eComm consumer goods. They’re going to be able to get you the financials that you need in a timely and accurate manner to support really sound decision-making.

So the first reason why having your CPA do your bookkeeping for your $10 million brand, the first reason why that's a bad idea is because they're probably horizontal and they're not vertically focused on eComm consumer goods. The second reason why it's a bad idea is actually because by virtue of being a tax accountant first, they're likely telling you to do your books on a cash basis just because that's easier for them to keep and it allows them to file cash basis tax returns really easily. Is that necessarily the best thing for you? Maybe it is from a tax standpoint, maybe it's not. Oftentimes I find it's actually not the best tax treatment is to do cash basis books and CPAs actually just tell you to do that because it's really easy to do selfishly.

But here's what I can tell you. If you've reached $10 million a year in sales as an e eComm consumer goods brand or close to $10 million in sales, you need accrual books. And so keeping cash basis books just because your CPA is telling you to do so because it makes it easy for them to prepare a cash basis tax return, that's a bad reason. That is not a good reason. You need accrual-based books so that you can truly understand month-over-month margin changes, and so that you can truly understand what's called your cash conversion cycle. Your cash conversion cycle basically tells you how well you're managing your cash flow, and most specifically for an eComm consumer goods brand, it's how are you managing your inventory and how are you managing your payables. With cash basis books, you have no visibility on that, and by the time you reach 10 million in revenue, you absolutely need to have a read on your cash conversion cycle.

Here’s the third reason why you shouldn't use your personal CPA to do the bookkeeping for your $10 million eComm brand. Because every time they get close to a tax deadline, your bookkeeping's gonna slow down. Most CPAs get your books closed in like three, four, five, six weeks. You don't have that kind of time running a growing eComm brand that's doing at least 10 million a year in revenue, right? You just do not have that kind of time every single month. You need your books closed in two weeks or less. Now, when they get close, when your CPA gets close to a tax deadline, either a personal tax deadline or a corporate deadline or even an extension deadline, so that means it's happening not only in March and April every year, but it's also happening again likely in September and October. They get super busy and guess what gets put to the back burner? Doing your books. And so, however long it normally takes them to close the books, it's gonna take even longer around tax deadlines and you don't have the luxury of waiting weeks and weeks to get your books done every month. They need to get done in two weeks or less so that you can use the data to make financial decisions and move on. If it takes four, five, six, seven plus weeks to get your books done, every year around tax deadlines, by the time they're done, that information will already be useless and you'll have moved on and made decisions blindly without any books to back them up. So to recap, three reasons why you should not have your tax accountant doing your bookkeeping if you're doing at least $10 million a year in sales.

One, because they're probably horizontally focused and instead you need an eComm consumer goods vertically focused firm doing your bookkeeping.

Two, because they're probably telling you to do it on a cash basis, which although that might be easy for their tax return preparation, you need accrual basis books to make sound decisions.

And three, because every year around personal and corporate tax deadlines, including extension deadlines, they're gonna get so busy that your books are gonna get thrown to the back burner and it's gonna take weeks and weeks and weeks for those books to get done.

3 Warning Signs Your Bookkeeping is Holding Back Your DTC Brand’s Growth

Episode Summary

In this episode of the Free to Grow CFO podcast, Jon Blair and Jeff Lowenstein discuss the critical role of bookkeeping in scaling direct-to-consumer (DTC) brands. They highlight three warning signs that indicate poor bookkeeping practices, including the misclassification of sales tax, the absence of sales tax in financial statements, and the erratic swings in profit margins. Throughout the episode, Jon and Jeff stress the importance of having a clear understanding of your financial metrics and how they inform your decision-making process. They share real-world examples from their experiences with clients, illustrating the potential pitfalls of poor bookkeeping and the value of having a dedicated team that understands the nuances of e-commerce accounting.

Episode Links

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

Jeff Lowenstein- https://www.linkedin.com/in/freetogrow-jeff/

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

Key Takeaways:

• Contribution margin is your real top-line revenue. Understanding it is key to profitability.

• When you run your books on cash basis, you miss out on the true financial picture of your business.

• Erroneous bookkeeping can lead to poor
  financial decisions.

Meet Jeff Lowenstein

Jeff was previously leading M&A efforts at ecommerce aggregator Boosted Commerce where he was the 5th employee. He built processes across M&A, finance and operations to support rapid growth from 0 to 30 brands under management in 2.5 years.

He previously co-founded and exited an app for Shopify merchants and spent time in the Strategic Finance departments of Etsy and Caesars Entertainment. Jeff holds a BA from the University of Pennsylvania and an MBA from Harvard Business School.

He’s worked with hundreds of brands over his career and founded Free To Grow because of his passion for supporting entrepreneurs and helping them succeed. The analytical and financial tools he has developed over the years are specifically crafted for the modern consumer brand.

Transcript

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00:00 Introduction

01:09 The Importance of Solid Bookkeeping Beyond $10 Million

02:15 Warning Sign #1: Sales Tax on Your P&L

08:34 The Impact of Poor Bookkeeping on Decision Making

14:12 Warning Sign #2: Missing Sales Tax in Financials

18:12 The Importance of Accrual Accounting in E-commerce

22:40 Warning Sign #3: Wild Margin Swings Month Over Month

33:04 The Role of Intentional Bookkeeping in E-commerce

39:12 Closing Thoughts

Jon Blair (00:01)

All right, what's happening everyone? Welcome back. Another episode of the Free to Grow CFO podcast where we're diving 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 are the go-to outsourced finance and accounting firm for eight and nine figure DTC brands. And today I'm here with my partner in crime, co-founder of Free to Grow CFO. Jeff Lowenstein, Jeff, what's happening, brother?

Jeff Lowenstein (00:32)

What's up? Good morning. Happy to be back here on the podcast, Jon.

Jon Blair (00:38)

Heck yeah man, happy to be back talking about the seemingly not important aspect of scaling a brand with solid bookkeeping. The reason why I'm saying that is because bookkeeping we see time and time again is often overlooked by the founders of the founding team in the early days and the way that I like to say it is that like getting your brand from say zero to 10 million, maybe a little bit less than that, five to seven, but we'll call it roughly, getting your brand to eight figures, you did it with decent or terrible bookkeeping in your gut. But when you're scaling beyond 10 million, you need rock solid bookkeeping as a foundation for financial analysis and ultimately planning and strategy. And so we're gonna get nerdy today and we're going to talk about three warning signs that your bookkeeping is jacked up. And remember, as we're talking through these, the context for you to think about these as a founder and operator is not that you have to understand all these nuances, but if you have one or more of these issues, your bookkeeping is jacked up, which is impeding your ability to make sound decisions, and it certainly is holding back your brand's growth. So we're here to help you identify these warning signs so that you can get in and you can fix them and you can move on to...better and brighter days scaling your profit focused brands. So let's start with number one. First warning sign that your bookkeeping is jacked up. We see this over and over again. Sales tax shows up on your P&L. To lay the groundwork for this discussion, sales tax doesn't belong on your P&L. It's a current liability, which we'll talk about in more detail in a second but sales tax collected, sales tax paid, no business showing up on your P&L as a revenue or an expense. Jeff, you see this a lot.

Jeff Lowenstein (02:45)

This is an easy one for us to point out and I quickly identify when the books are jacked up when we meet brands. This is an obvious red flag. it might sound weird, Like sales tax is something that the customer pays to me. And yeah, you pay it out later, but like it gets lumped into my Shopify payouts, right? And that's income that I receive. Well it's easy to make that mistake, right? And it's weird to think about, but that's why you need to work with a bookkeeper or a CFO that really knows e-comm, because we do see it a lot, and it really can screw things up in your books.

You can have dramatic swings, right? So really the right treatment is that it doesn't actually hit your P&L at all. It stays over on the balance sheet. You collect the cash and then it comes out as a liability that you record the liability and then you pay down the liability to the tax authorities, right? So that's how it should work. The problem is when people put it on your P&L, your margins get all screwed up because you have, it looks like revenue and you have extra revenue in one period with no cost then all of sudden you pay it out a couple months later and you have a massive expense with no associated offsetting revenue. And it's so obvious when we look at the brand's books, when we see this massive swing in margin, in margins, right? It's a very obvious mistake for us to point out. So it screws up your margins. You don't have a good understanding there. It screws up your understanding of your liabilities because you don't understand what's going on there. And then you're also not keeping clean revenue metrics either. This is something people don't talk about. It can screw up your efficiency metrics on the marketing side. So that's another point where we see people having issues. So I have a lot of thoughts.

Jon Blair (04:43)

Totally.

You know what though, I will say on that last one, what I was gonna mention is I actually don't blame brand founders and operators for getting this wrong. You know why? Because Triple Whale and Shopify include sales tax in their sales numbers. And so I actually think that Shopify and Triple Whale, and there's probably other tools out there that have the same issue, we just, see those day in and day out because we work with primarily DTC brands, but when you look at the sales dashboard in Shopify, that sales number includes sales tax collected. And when you look at Triple Whale and you look at sales and you look at ROAS, it includes sales tax. So unfortunately, you're being misled. You're being misled by two analytics platforms that are staples in the DTC world. So I don't blame you for getting this wrong. And quite frankly, it's aggravating that they have not fixed that yet because this has been going on for many, many years. But additionally, like Jeff was mentioning, there's a huge risk as a scaling DTC brand to looking at a ROAS number that in the numerator has sales tax included when in fact that sales tax collected is not a revenue item. I'll get nerdy on the accounting side should be classified as a current liability. The definition of a current liability is it's an amount due, an obligation that you must pay in the next year or less to somebody else. And that's what your sales tax collected is. You're collecting it on behalf of a taxing authority that you owe it to at a later time. Revenue, on the other hand, from an accounting standpoint, is income earned, earned through the fulfillment of services and goods, right, to customers or clients. Those are, by definition, two separate things. You did not earn that sales tax, right, that you get to keep based on fulfilling your order to your customers. You're just a pass-through, and pass-throughs, which means that it is owned by, definition by someone else who you're ultimately passing it through, it should be classified as a liability on the balance sheet. So it should never even touch your P&L in the first place. And the other important distinction that Jeff made, this is really important, margins. What's the denominator number in a margin ratio calculation? Revenue, sales, right? So if you have sales tax collected included in the denominator of your margin calculations, your gross margin ratio, your contribution margin ratio, any other expense to revenue ratios that you track as a brand, they're wrong. Cause the denominator is wrong because it includes sales tax collected. So I'm drawing these out. Cause what Jeff mentioned is those two points are really important. It's now all of a sudden bookkeeping, which didn't seem like a big deal. It's like, bookkeeping out of like, I don't want to deal with that. I'm the founder. I'm a product guy. I'm a sales guy. I'm a marketing guy. Well, guess what? That jacked up bookkeeping is actually making you think on the marketing side you're doing better than you actually are or on the margin side you're actually doing worse than you actually are because the numerator is higher, right? And so like this is, I just want to draw that connection for everybody between crappy bookkeeping bad decisions, right? Good bookkeeping good decisions. Jeff, you got something to say about that, I know.

Jeff Lowenstein (08:29)

Yeah, we're two finance nerds, so we're passionate about it, right? it's funny because our mission at Free to Grow is we want to support brand founders and help them scale profitably. And part of that is helping them sleep better at night and making quicker and more informed decisions. And so a big part of you what we're doing is we're trying to get these things right so that the founder doesn't have to worry about them. And it's an interesting, like, I think there's like a life cycle as to when this type of stuff becomes important. If you're starting out and things are humming and your MER is, you you're crushing it, maybe you're at a 5, it doesn't matter maybe if you're off by 10% in your MER metric because things are going, you're figuring out your channel mix, you're figuring out your products, what's working, and you're on fire. But you're going to hit a ceiling, Efficiency is going to go down 2.5, 2.4, 2.0, or maybe 3x MER. All of sudden, that 10% difference, so let's say it's a 3.0 MER you're measuring. Well, if the reality is actually that it's off by 10% because of sales tax, you're actually at a 2.7 or something like that, right? That's a huge deal, especially as you're scaling spend. So your budget is larger, your MER is smaller, but like that 10 to 10 has a much larger impact as you scale and things become less efficient. I think I understand why people don't care about this stuff in the beginning when they're trying to figure out, do I have a business here? What is my unique proposition in the market?

That makes sense. Bookkeeping is not your number one priority, but these types of details and financial metrics and, you know, they really do inform the decisions you make as you become more and more strategic and the thought process becomes more detailed and thorough as the numbers get larger, right? So like there is a natural life cycle to the decision-making process. It should change as you scale and you should be more exact about your numbers as you scale. that's a big part of how I think about it as well.

Jon Blair (10:53)

Totally.

Yeah, so a story actually that comes to mind right now with one of our clients, and this is very common. see this almost every single time when we onboard a new client. The other thing that you're not exact about in the earlier days is sales tax collection, right? Sales tax compliance. It's really hard to be compliant, and there's a cost benefit analysis, right, to that and like going and setting up tax accounts in all the different states through one of the various services out there like, it can be a waste if you're not actually getting enough traction, right, in multiple states to make it worth your while. And so at the beginning there's usually like very few sales tax accounts set up. A lot of times it's like in your home state wherever you're incorporated, maybe one or two other states. But once you get to like your 10 million or so in revenue, that's when you start bringing on like a ZAMP or a numeral, right, sales tax service to get you set up in basically every state in the country. And so I actually had a brand that scaled, that I was a fractional CFO for, scaled from 1.8 million to 35 million in one year, crazy ride. And along that, like in the middle of that $35 million a year, they were like, hey, it's time to get serious about sales tax. So they went and got Avalara set up and here's what happened. Before that, they were only collecting sales tax in their home state. So it was a very small amount. So the deviation between the variance between real revenue and revenue with sales tax was small and so it wasn't skewing their triple whale metrics by enough for it to matter. Then all of a sudden, it was this one April I remember, is April, Avalara turned on and they started collecting hundreds of thousands of dollars of sales tax a year. This is a brand doing five, six million a month at that time, their monthly run rate was that high. So all of a sudden, hundreds of thousands of dollars of sales tax. Now their revenue in triple whales overstated by hundreds of thousands of dollars.

Jeff Lowenstein (12:24)

Yeah.

Jon Blair (12:53)

So I'm running my own MER calculations and spreadsheets and their marketing team is making decisions going, dude, we're killing it 2.6, 2.7. And I'm like, guys, it's 2.1. And they were like, no, it's not. Triple Whale says 2.7. And I'm like, hold on, let me reconcile this. And so I went through and reconciled it I found the exact delta was sales tax. And so there's another, there's a huge, I mean, that was a huge example. 2.1 was below where they needed to be. So they thought they were profitable and they were scaling spend and they actually weren't, right? So they were actually losing margin dollars. And luckily we caught it quickly. That was another benefit of working with me as their fractional CFO is we caught it and we caught it quickly. But they would have gone for months like that and gotten their financials done at the end of every month and not understood why they were so far off from where they thought they were throughout the month. These things are important and like Jeff said, bigger and bigger dollar amounts as you scale, they become increasingly important as you continue to grow. And actually what I wanna do is I wanna segue, I had this as number three in terms of the third warning sign that your bookkeeping is jacked up, but I wanna segue to this because it's about sales tax. it's that here's the other warning sign. So one, we just talked about sales tax shows up on your P&L, shouldn't be there, right? And can lead to bad decisions.

Two, you don't see sales tax anywhere on your financials. You don't see it on the P&L or on the balance sheet. warning sign number one is very important, but warning sign two might be even more important because what this likely means, or at least what I always see, is that when you don't see sales tax anywhere, there's a really good chance that your bookkeeper is recording revenue equal to the amount of deposits that come over from Shopify. And so they're just taking the deposits, which are net of, those are really net amounts, right? Net of gross sales, refunds, returns discounts, Shopify payment fees, and sales tax collected. And that's net amount, that single amount is just getting deposited straight to revenue.

I'm gonna pull my hair out because like this is actually a almost, I would say quite likely a bigger problem. There's cash basis, there's a whole bunch of stuff. Like Jeff, when someone's doing their accounting like that, like what does that do from your perspective as a CFO like to your like ability to analyze the financials? Where do problems show up there?

Jeff Lowenstein (15:18)

It's a massive red flag because you know if that's going on there's gonna be all sorts of distortions in the financials, but I mean if you're booking net payouts for revenue that's like sirens are going off. I'm like my goodness, there's massive issues here. It probably means all through financial statements there's cash basis going on and this is the thing about e-commerce, you really can't do a cash basis because...cash basis P&L is going to look crazy different than an accrual P&L. In particular, the most obvious example is that we buy inventory in large chunks often from China. We pay for that some deposit and then maybe 30 % down plus 70 % on shipment or on delivery or something. But then we sell it over the next three, six, nine months. And so the actual cost of selling the physical product is disconnected from the revenue if you're on a cash basis and we want to connect those things with an accrual P&L so we have a clean understanding of margins and a consistent understanding of margins right that's just one example we see the same thing with 3PL invoices and other you know marketing every line item I could go through but if it's cash basis, it's going to be really negative one month when you pay for inventory or whatever else, and then really positive in another month. And so you're not going to know, am I profitable? Am I not? What is it going to be on a go-forward basis? What's my margins over the last couple months or last year? You can't analyze these crazy swings. It's really challenging as a CFO to use historical data that's totally...incorrect and messy to forecast the future. Of course we do what we can with limited information, but we actually spend a lot of time trying to clean up the historicals when we work with a client that has a messy situation like that before we go on to do most of our forward-looking CFO analysis. And that's pretty important. So what would you add to that?

Jon Blair (17:59)

Well, actually, I mean, to just be super blunt with the audience, this may be a little too blunt, but I'm just getting, I'm getting really, I'm the one who runs sales at Free to Grow CFO, and I do all of our audits for all of the, you know, prospective brands we may end up working with, and I'm getting fed up with this kind of accounting, and what I'm realizing, actually, is that if your accountant is booking revenue, based on net payouts from Shopify, they just flat out don't understand e-commerce. Like fundamentally, like think about it. They don't understand what's embedded in that deposit. If they did, they probably wouldn't do it that way. But they actually don't even know that that is net of gross revenue, refunds, discounts, Shopify fees, and sales tax collected. They're just, and it's usually, honestly, it's usually a CPA that runs a very horizontal firm that just they're basically a tax accountant and they've been given the bookkeeping work by their client who just so happens to own an ecom brand. And so they're taking the information that they have and understand about ecom, which is almost nothing or very limited. And they're just reconciling bank accounts and credit card accounts the best that they can. And so I don't really necessarily blame the CPA, but they just flat out don't understand ecom. If they did, if they knew what was embedded in those in those deposits, they wouldn't be, even if they were doing it cash basis, they would at least split out gross, refunds, discounts, Shopify fees, but they literally don't even understand that. And so they're just booking it. And that's why Jeff was saying, if you see this, there's a good chance that there's a bunch of other stuff that's wrong. And it's actually because there's just a fundamental misunderstanding of how an e-com's accounting transactions even work. So it's likely that your books are riddled with issues even beyond the revenue. And even worse, like Jeff was mentioning, it's probably being done on a cash basis. And so you've got expenses in one month when they're paid and revenues in another month when you collect them. then I just, I work with very few brands that are not seasonal.

And so if you're seasonal, your costs when you're gearing up for that season are all gonna be before the season hits and all your revenues are gonna be when the season actually happens. And so how do you know if your margins are going up or are going down? If you're getting better on your, how do you know if that negotiation you did with your 3PL is actually making your margin better? You don't.

Jeff Lowenstein (20:50)

You want to know something that's interesting this year, Jon? I'm looking at the calendar right now. Black Friday is November 29th.

Jon Blair (21:01)

I know, I was looking at that, I was literally looking at that with, I can't remember, one of my clients and I was like, hey, we're gonna have to, we're gonna have to do a little bit of work to make sure that we get revenues and costs in the right period because you're gonna have this, all this revenue is gonna get slammed into the system on the last few days of the month and probably some of those orders are gonna ship out in December and you're gonna get invoices from the 3PL in December and

to for us to get those monthly margins right on an accrual basis, we're going to have to do a little bit of work this year. And so what Jeff's pointing out is, it the last, what were those dates again?

Jeff Lowenstein (21:43)

So Thanksgiving is Thursday the 28th and Black Friday will be the 29th. Cyber Monday though will be on December 2nd. So it'll be interesting, right? Because you'll have probably the sales that happen on Black Friday and Saturday the 30th will be, the payout won't come until December. And so if you want to, it depends, you your setup, right? But like that's something to be, to talk to your bookkeeper about right now and make sure they understand that the revenue generated and those expenses incurred from those sales happened in the right period. Obviously that's like a huge spike in sales.

Jon Blair (22:26)

Yeah. Dude, that's interesting. Dun dun dun. It's not just Black Friday for like your sales promotions. It's actually Black Friday for your accountant as well, because we have a we have a month end period crossover this year from November to December for Black Friday Cyber Monday weekend, which means accountants who are doing things cash basis are going to get found out this year much more than in previous years. So you're going to get exposed. That's for sure. That's for sure. The the. OK, so sorry. You said something about discounts when you were talking before that I just want to respond to as well, because this this really bothers me as there's a it's very easy to have a disconnect if your bookkeeper doesn't understand how to book discounts and refunds. You know, gross minus discount minus.

Jon Blair (23:02)

Mm-hmm.

Jeff Lowenstein (23:20)

Refunds equals net. Let's say you go crazy and give a ton of discounts in one month. Well, you're going to have...you're have massive discount as a percentage of gross, but you still might have higher net sales because when you offer a great discount, people convert at a higher rate and you sell more product, right? And so I actually had a case where I was working with a client and they couldn't understand the way that their old bookkeeper was doing things. They're like, I sold so much product. How is it possible that I had way lower margins and I almost lost money for that month when I had such great sales?

What they didn't understand was that, yes, they were selling more units, but because those units were discounted so much, they actually lost money on a lot of those. so understanding that breakout and having those metrics clearly laid out in your financial reporting is like super important. You can't lose sight of that, especially during the holidays where you're going to have an increase in demand. It's very easy to let those discounts get away from you.

Jon Blair (24:08)

Mm-hmm.

Totally.

Jeff Lowenstein (24:24)

You have an overactive marketing team, right? You need to make sure that they understand the impact of those offers.

Jon Blair (24:32)

Well, let's take it a step further in like from an accounting standpoint why it's so important to get this right is because discounts and refunds and Shopify fees are legitimate per unit variable costs. That's what they really are, right? They're variable costs. And if you don't have your variable costs, broken out properly, you can't measure contribution margin. And contribution margin is the truth about profitability. And for those of you don't know, contribution margin, in my opinion, is your real top line revenue number. Because you don't keep 100 % of your gross revenue, right? You keep, after a sale, gross revenue minus discounts, minus refunds, minus...shipping and fulfillment costs minus landed product costs minus credit card fees. That's what you keep. And then you take out marketing spend, your variable marketing spend, and those are the dollars left over. So that's your actual top line. That's the real top line dollars, right, that are available to cover your fixed cost, your costs that don't go up and down when sales volume goes up and down. That is like a table stakes metric that we analyze and model and help our clients understand because it's the only way to really measure the efficiency of the business as you're scaling and to accurately assess if you're getting closer or further away from profitability. And you cannot do that if gross refunds, discounts, credit card fees, and even worse, sales tax collected are all lumped into this one net revenue number that is not even net revenue. So, and don't even try to calculate your other margin percentages if this is how the accounting's being done, because the numerator is not revenue. It's revenue net of all those other things that we just talked about. So interestingly though, the third warning sign that your bookkeeping is jacked up is connected to this, because we've already talked about how the sales tax issues can be one of the, the culprits, but it's that your margins swing wildly month over month. So third warning sign that your bookkeeping is jacked up, margins swing wildly month over month. So before we dive into this, just as a side note for everyone, we do this free CFO audit, right? It allows us at the firm to assess that there's a good fit on both sides for us to pull together the most well-informed proposal for our prospects and we also deliver some free value in the audit so that you can actually get a little test drive of what it's like to work with us. But the reason I mention that is because when I do these audits, I actually check for one, the first thing I check is, are margins swinging wildly month over month. And when I say that, mean, is the margin 50% one month and then 30 the next, and then 25 the next, and then 85 the next, and then negative 10 the next. When you see these wild up and downs like stock market like swings in margins, it's very rare that that doesn't indicate that there's an issue with the bookkeeping. We've already mentioned how sales tax can distort and screw up that calculation, but there's also cash basis accounting and there are other things. Jeff, when you see margins swinging wildly month over month, besides the sales tax that we've talked about, what are some of the other just like common culprits?

Jeff Lowenstein (28:12)

Yes, so I guess I went out of order because I mentioned the margins earlier. But what are the other culprits that caused margins to swing from month to month?

Jon Blair (28:16)

That's okay. It's all connected, man.

Jeff Lowenstein (28:28)

So a very obvious one is COGS like I was talking about before, you buy, of course you buy inventory before you sell it. It should be living on the balance sheet until it's sold. That's an obvious one. I also see a lot of issues with 3PL invoicing. That's a very common one where...It's a couple, it shows up in a couple of ways, right? Maybe the invoicing they give you, like the way that they pull the data, it doesn't map to when the sales are made. Another issue is like they could just invoice you late. And so sometimes we see people not accruing properly for that. They may lump, they may lump things together as well. like another common thing is your pick and pack fulfillment fee is often lumped in with like a shipping in freight out.

Jon Blair (29:21)

And maybe different periods too, like oftentimes, Pickpac will be for the whole month, like it'll be for a calendar month, but it'll be on the same invoice as shipping charges that cross over a month. And so that whole invoice actually needs to be broken up in order to get into the right period. I see that a lot too.

Jeff Lowenstein (29:26)

Yes.

Yeah, exactly. So yes, bingo. yeah, we try to pay attention, close attention to that. Obviously, 3PLs are pain in the ass to deal with, especially on the way that they invoice and bill e-commerce clients. so that's the...

Jon Blair (29:54)

And they're all different, no 3PL bills the same. I mean it-

Jeff Lowenstein (29:59)

They're all different. They all use different software. It's a pain. like you're not alone if you're struggling with that. But you know, we do look at it with a close eye to make sure we're getting it booked correctly. So that's an important one. And then, okay, so I'm just thinking moving down the P&L. So a lot of people have been forced off of credit card payments for Google Ads and onto monthly invoicing. And so make sure that you're getting those invoices for

a month to your bookkeeper in time for them to close the books rather than just, you know, if you're getting it, let's see, so it's September 30th today, if you can, your September invoice for Google Ads might be available on October 1st but not due until October 31st and then you might pay it in November. So if you're not careful, that could easily get booked in the wrong month.

you need to be paying attention to that. And that again is going to impact your marketing efficiency metrics and that's super important. that's another one that I would say is it's important for your overall financial margins but you're holding your marketing team and your agency accountable to those metrics as well. So that's super important.

Jon Blair (31:12)

Well, actually let's talk about that example. You brought a very interesting example up because you like, let's say the spend was for 9/1 - 9/30 but the invoice was dated 10/1 but then it's due or maybe you pay it November 1. So let's, let's go through each of those dates. If you do everything on a cash basis, the expense will be on November 1st, the month in which the cash is paid. If you just blindly post the bill on 10/1 the expense will be in October, which is the wrong month. So you actually have to have a keen enough eye to go, hey, I know this is dated 10-1, but the expense is for 9-30. And so we will either just date it 9-30 in the system so that it hits the right month or we'll manually accrue it via journal entry to pull the expense into September. But what Jeff just laid out is depending on how your bookkeeper is thinking about like either or incorrectly, or just like misses this like very important detail and isn't looking for it, you could end up with that bill in one of three dates and only one of them is correct, which is actually, you know, sometime in the month of September. And so that's like very, very important distinction. I think the theme I want to draw out is like solid e-comm accounting doesn't happen by accident. It doesn't happen by accident, right?

We understand, the reason why we are good at e-comm accounting is because we understand economically how these businesses work, right? And so we are looking for, and we understand, actually, and I know you can riff on this one, Jeff, because you say this all the time. When you go to analyze the financials, what are the metrics that matter? And doing the bookkeeping in service of those metrics existing accurately, right? Like Jeff calls FP &A ready or CFO ready financials.

Jeff Lowenstein (33:08)

Yeah. Yeah, I mean, I guess I talk about it a lot. So this is something I do care about a lot. We're a CFO shop that offers bookkeeping. And so think that informs, like our DNA is as a CFO business, We're all...

experience in the e-comm sector in finance roles and that informs how we do the bookkeeping because we want the books to be clean and ready for analysis and so even without one of our Free to Grow CFOs, a brand founder can read the financial statements that our bookkeeping team prepares and very easily understand exactly what financial position they're in and they can make very quick and informed decisions based on those numbers and I care a lot about that. I have lot of pride in us getting our output delivered in that way and helps that standard. So I think that's super important, something that we do. I mean, we only do e-comm all day long, right? So that helps a lot. Everyone on our team understands what we're talking about when we say freight in versus freight out or understanding contribution margin. MER is something people know through every last person who works here, right? So that is super important for us.

Jon Blair (34:40)

Well, yeah, and so like again, it's intentional. It's bookkeeping with intention, right? Like Matt, one of our accounting managers who was my controller at Guardian Bikes. He has been scolded enough times in the last 10 years for not getting marketing spend in the right month that he is looking for all the signs that...marketing spend get put in the right month, even if, I mean, the number of times he's hit me up and gone like, marketing agency invoices are also notorious for this too. Where like, if there's a variable component to a marketing agency invoice, meaning they charge you a percentage of ad spend, the number of times I've had Matt come to me and go, hey, I just got this invoice for this agency a week late, it's dated in the following month, he's like, but like this needs to be accrued, right? He's asking, this needs to be accrued in the prior month, right? Because I can see this is for services rendered and ad spend last month. And so he's not just taking the invoice date at face value. He's actually thinking about what the transaction is and saying, I know the CFOs need to see ad spend in the same month of the revenue that is generated. And so the point that I'm making is that it's not just about turning over clean books and going like, look how nice and clean these books are. Like no one cares about that unless they're in service of something else. And what they're in service of is solid analytics, right? That actually help you understand month over month margins. And I'll even say cash flow because I know we're talking mostly about the P&L, but cash flow is all about connecting the balance sheet and the P&L together.

Right? That like the balance sheet tells a story that the P&L can't tell in isolation. And so if you've got stuff like sales tax on the wrong, like not on the balance sheet and on the P&L instead, like having accrual financials really in its simplest form without being an accountant means you have a solid balance sheet. Right? That's what accrual accounting means. And when you have a solid balance sheet, you can actually understand why profit and cash flow are not the same, which they never are in a growing DTC like consumer brand. And so, like there's intention and purpose and massive amounts of usefulness behind getting your books right. So, look, just to recap really fast, what we've talked about here is three warning signs that your bookkeeping is jacked up. One, sales tax shows up on your P&L. Two, you don't see sales tax anywhere on your financials and three, your margins are swinging wildly month over month. Jeff, before we kind of land the plane on this, is there anything else that you want to say about what it means to you to have solid books and why it's so important when you're trying to scale a brand?

Jeff Lowenstein (37:39)

I just think that there's, there comes a time in every brand founder's journey where they, I see how stressful it is and I get it, the whole thing is stressful. There comes a time when you're growing fast enough, you're making larger decisions, you have more people running around, you have more SKUs more channels.

If your financials are not solid and you don't trust them, you don't feel like you can make decisions on them To me that is like a very scary situation You feel like there's a you're building the plane while you're flying it, but you're not sure if the engine actually works, right and so that's what I see as our mission is like helping people understand. yes, this engine works, pour some fuel in it or no, your engine's actually broken. Chill out before chill out, fix it up and then go and maybe go and you need to turn left here or whatever, you know, whatever it is. like to me, like that is very real. And like, I, I see the mission of what we're doing is helping people, make better decisions in a very pivotal time in growing their business, right? So it's not just about sales tax, it's not just about the balance sheet, like you're saying, it's in service of something larger and we definitely live that and feel that every day with all the brands we work with. It's about helping the people behind them sleep better at night.

Jon Blair (39:13)

100 % said beautifully, I couldn't have said it better myself. If you want a team of e-comm and accounting nerds to pour over your books, definitely consider hitting us up because no joke, when we have some sort of an issue with one of our clients' books, you've got probably four, five, or six just of the nerdiest accounting and finance people sitting on calls pouring over what the solution is. You're probably honestly getting like six to seven hundred dollars an hour worth of labor on solving your problem for and not and we probably don't extract enough value out of that but the point that I am making is that it's all about accountants who really get ecom and DTC and that know that nailing the books is in service of a greater purpose, which is helping you grow your brand profitably and achieve your goals. So I appreciate you all sitting through this super nerdy conversation. We love talking about this stuff more than you know. But don't forget, if you want more helpful tips on scaling a profit-focused DTC brand, consider following me, Jon Blair, or Jeff, Jeff Lowenstein on LinkedIn.

We're both putting out content week in and week out that is honestly in service of just trying to help you scale your brand profitably. And if you are 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.

DTC Hypergrowth and Overcoming Supply Chain Constraints

Episode Summary

This week on The Free to Grow CFO Podcast, Jon Blair is joined by Doug Schneider, COO of Heart & Soil, to discuss the challenges and strategies involved in scaling a direct-to-consumer (DTC) brand, particularly focusing on operational constraints, supply chain management, and the importance of leadership. Doug shares his journey from a biochemistry background to becoming the COO of Heart & Soil, emphasizing the significance of purpose-driven business and the need for strong relationships in supply chain operations. The conversation also touches on demand planning, inventory management, and the role of leadership in navigating hypergrowth.

Episode Links

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

Doug Schneider- https://x.com/DTCDoug

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

Heart & Soil - https://heartandsoil.co/

Key Takeaways:

• Effective demand planning is essential for managing inventory.

• Data-driven decision making helps reduce decision fatigue.

• Strong relationships with suppliers can provide a competitive advantage.

Meet Doug Schneider

Doug Schneider is the COO of Heart & Soil Supplements. As a founding manager, he played a pivotal role in scaling the brand from $0 to $50M in just three years.

Transcript

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00:00 Introduction

02:36 Doug's Background and Journey to Heart & Soil

10:12 The Importance of Purpose in Building a Brand

14:41 The Role of Communication in Supply Chain Management

23:11 Leadership and Its Impact on Business Growth

35:14 Demand Planning Challenges During Rapid Growth

50:12 Closing Thoughts

Jon Blair (00:00)

All right, yo yo, what's happening everyone? Welcome back to another episode of the Free to Grow CFO podcast where we're diving 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 good buddy, Doug Schneider, COO of Heart and Soil. Doug, what's happening man?

Doug (00:29)

Yo, Jon, thanks for having me, man. I appreciate it.

Jon Blair (00:33)

Yeah, it's funny actually to have Doug is out here in Austin as well. We are not in the same location. Currently, I'm maybe about like 20 20 miles away from him, but it's not often. Actually, I think the last person I talked to is in Austin was Dean, your CEO. So local local Austinite in the eComm scene out here, one of our beloved clients. And I'm super stoked to be chatting today because

Doug (00:50)

Mm-hmm.

Jon Blair (01:01)

What we're talking about today everyone is removing operational constraints during fast hyper growth. Because here's the thing, when you're scaling a brand, you have your major functions, operations, marketing, and finance. And what the scaling game becomes is which of those functions is the constraint today? Who's holding us back today? For example, at the beginning,

oftentimes it's marketing is the constraint. How do we acquire enough customers to even start growing fast? But as soon as you do that, typically operations becomes the constraint because they have to keep up with inventory and maybe they're stocking out. Then the operations team figures out how to get ahead of inventory and guess what becomes the constraint? Either marketing again, because it's gotta keep growing, or finance because we're running out of cash that's getting consumed by inventory. So it becomes this whack-a-mole game.

And I know from scaling at Guardian Bikes, the supply chain side, supply chain and operations side of removing constraints is a huge, huge challenge. Many of our clients are dealing with it. And so I couldn't think of anyone better to chat through this than Doug, given that, you know, he and Dean and the rest of the people on the founding team of Heart & Soil have scaled to a very healthy eight figure business very, very quickly. And so,

Before we get into chatting about operational constraints, Doug, it would be great if you could give us a little bit of a background, your background and kind of your journey to ending up at Heart & Soil.

Doug (02:35)

Sure. It was a little circuitous, I guess, but I actually, so my background, I got my undergraduate degree in biochemistry and I wanted to be a dentist when I got out of college. My stepfather is a dentist. So that was like my plan and you know, best laid plans doesn't always work.

Jon Blair (02:51)

Dude, my dad's a dentist. I love it.

Doug (03:04)

When I got out of college, was working in biotech while I was trying to get into dentistry. And I figured out that I really hated working in biotech and I wanted to do something else. actually I read, I probably read like two books that were really influential in what landed me at Heart & Soil. And the first one, I was probably like 25 years old and I read Zero to One by Peter Thiel. And that's some

Jon Blair (03:15)

You

Mmm. Yep.

Doug (03:34)

an idea in my head that I hadn't fully conceptualized before which was you know if you're like I'm like a pretty idealistic person especially when I was like 25 years old I was and this book kind of laid out this idea to me that if you want to influence things and see some change that really a business is the way that you do that in the United States and I think I was kind of of the idea that

Jon Blair (03:58)

Mmm. Love that.

Doug (04:03)

like you write your senator or something like that if you think things should change and then I just like snapped into focus to me like the business can be this really powerful vehicle for bringing about this you know whatever change or influence that you want to have and so that idea was cemented in my head then I read another book called Deep Nutrition

Jon Blair (04:06)

Yeah.

Doug (04:26)

by Catherine Shanahan And I was interested in nutrition because I was just a gym guy and I wanted to improve my performance in the gym.

looking at nutrition and when you look at nutrition there's a lot of contradictory information you can contradict every single thing that you find somewhere else and this book that I found really was like okay this is like a voice that I can trust and I'm gonna follow this and and one thing that she mentioned in the book was eating organs

Jon Blair (04:46)

Totally.

Doug (05:04)

and that this was like this missing piece in people's diet that we used to eat organs from like cattle, pigs, et cetera, and that we stopped doing it and that these really, really nutrient dense foods, and I was really captivated by that idea, and I kind of got going on this journey with nutrition and...

I was getting an MBA, I decided I wasn't going do dentistry, I'm going to get an MBA instead, I'm looking at this business world thing a lot differently now, and it would be great if I could do something in nutrition. That seemed like pie in the sky to me actually at the time, I didn't know what it was going to be, but this opportunity kind of fell in my lap because I was in some online communities that were discussing things like organs, it a very small community, a lot of weird people like me talking about this stuff.

Jon Blair (05:42)

Mm-hmm.

Doug (05:55)

I got hooked up with Paul Saladino who He was in his early people who don't know he's a huge influencer now in nutrition But in in his early days he was like this up-and-coming guy that only a few people knew about I got hooked up with him he he comes to me one day and says he's starting this company he wants me to help him come run it and Boom just like happened. I don't even know how it happened, but here I am

Jon Blair (05:59)

Got it.

I love it, man. So a couple things that I want to comment on. The first one is like the beauty of a business, right? I'm personally, I'm a man of faith, I'm a Christian, and I actually believe that businesses are like one of the most beautiful things created by God in terms of like it's this thing where you as an entrepreneur can follow a passion, right?

Doug (06:31)

Yes.

Jon Blair (06:49)

Go to seek to make a difference in the world, like a true difference. Fight back against a problem that you think is worth fighting for, right? And at the same time, if it succeeds, you make your customers' lives better, your business grows and you hire people and you make their lives better, and you engage with suppliers in which you make their lives better. And I just actually can't think of a thing, an organism, that can do that in such a way, anything close to what a business can do. there's a book I read a number of years ago by a guy named Donald Miller, who Donald Miller is a guy who talks a lot about guiding principles, frameworks for guiding principles. And I'm also a big EOS guy, which you might chat about in a little bit, because I know you guys are doing EOS. I was an EOS coach for a while.

It all starts with purpose, right? And I think even Jeff Bezos says, first you have to have core values because you can't find the people that you want to find without filtering them through core values. So then when you define core values and you find people who fit those values and then you give them a purpose or a mission and then you've got a company, right? And so you start with guiding principles first because if you don't have those things, things break down. Scaling a business is hard work and it never ceases to be hard work.

And you have to have that purpose and that drive to get through the tough parts. You gotta have the why and you gotta have a team that's bought into the why. So I really, really love that man. And I also think too that like what people, what a of people don't realize about Heart & Soil, you know, I would say from my vantage point, just cause a lot of people, I've actually come across this talking to a lot of people in the e-comm world. They're like, man.

You guys work with Heart & Soil, like you guys are definitely like a DTC. Like there's a lot of people who look up to you guys aspirationally, right? In terms of like your growth story. But what a lot of those people don't realize is it started with the purpose and the passion, right? And a great business was built around that. And it didn't start with a lot of econ brands. There's a low barrier to entry to starting an econ brand. Anyone can start a Shopify store, right? And source products off Alibaba from China and like

Doug (09:12)

Mm-hmm.

Jon Blair (09:15)

Bam, you've got a DTC brand. But a lot of those brands fail because there isn't actually any soul behind them. And in reality, we call it a DTC brand, not just a DTC retailer. A brand has true meaning and heart behind it. And so that's something that I want to make sure that everybody hears on this episode, because I talk about this a lot in our podcast, is like, look, we're not just building a company.

No matter what product category you're in, if you want long-standing success, you're not just building a company that sells products online. You're building a brand that represents some sort of a movement that has serious purpose behind it, and that's how you build a great business, matter what vertical you're in.

Let's chat about constraints, because you and I have, I mean, this has come up in conversations.

that we've had, whether we're grabbing a beer or another forum, I've heard you talk about challenges. what I wanna start around is like, first off, I already said the stage, like yes, operations and supply chain can become a constraint as you're growing. But you guys have some unique potential constraints because the product you're selling, you guys are very rigorous and serious and this is a part of your purpose about the quality and where your...

you know, your product comes from, right? Can you talk me through a little bit, like, about the rigor behind, like, sourcing the right ingredients and how that made supply chain even more challenging as you guys were scaling really fast?

Doug (10:41)

Yes.

Sure, so you kind talked about this purpose driven idea and the way that some e-comm brands pop up and they have to overcome obscurity. When we were launching, so Paul, one thing that people I don't think realize about Heart and Soil is that we kind of popped up out of nowhere but...

Paul Saladino, our founder, he spent four years before we launched building his personal brand. And when we launched this company, he had a decent sized audience that was ready to buy whatever he was selling. And that was the context when we started selling was there were people there that were ready to buy. Now, reason people loved Paul,

He was very particular about the science and the way that our products were developed was that it had to be of the highest quality. And that meant that the cattle that we were sourcing the organs from had to be grass-fed and grass-finished. Now, constraint number one is in the United States, there's not a lot of grass-fed, grass-finished cattle. It's like...

over 95 % of the cattle in the US are finished on something outside of grass. So that made us have to go look elsewhere, which was, and New Zealand was really the best place where we could get good volumes of, we believed, of grass-fed, grass-finished cattle organs. So we wind up going to New Zealand, and immediately when we launch, as you alluded to earlier, we had this big success.

So we're selling right away and the constraint became very obvious right away that it was going to be supply and this industry or this Segment of the market the supplement market, you know selling cattle organs is very niche. It's very new and the the constraint when I was given hey You're going to be in charge of operations and we launched and we we ran out of product

I'm trying to solve these problems, became obvious to me, the constraint is actually not the organs and the cattle. There was plenty of cattle in New Zealand that were grass fed and grass finished. The constraint was the capacity for freeze drying the organs. So that was like problem number one that identified right away. Okay, we've got this constraint. is the bottleneck that we're dealing with on our supply chain is freeze drying. So immediately I'm begging my manufacturers to give me access to the freeze-dried suppliers in New Zealand. I want to talk to them directly. They're guarding that relationship. And I'm eventually able to convince them that it will help all of us if I can talk to the guys in New Zealand and we can sort of make some plans to try and get this thing fed and scale because it was very obvious they were going to need to do some scaling too. That was like the big problem to solve in the beginning was we needed more freeze-drying capacity. I needed to talk directly to them because this thing was taking off faster than we thought it would.

Jon Blair (14:17)

Interesting.

Doug (14:27)

So there was a lot a lot of you know weekly Hour two hour meetings with people in New Zealand where you know the timing is all weird. talking to them It's their tomorrow or their day ahead. I can't remember is weird, but we were able to, by establishing those relationships directly with the supplier, even though the manufacturer was a little ambivalent about that, we were able to get them to buy into the fact that we could be their horse if they would feed us. So if they started moving more capacity toward us that they had existing and they made plans to scale, that they could ride us very far, that we felt like we had a lot of room for growth and we just needed the supply.

Jon Blair (15:16)

Yeah, so there's something that you're kind of like a conceptual thing that I've come to learn over the years with supply chain management that I want to draw out for the audience, which is that like, I mean, first off, from a product development standpoint, it is very important to be intentional and sophisticated about thinking about what is your bill of materials. Bill of materials definitely drives cost, right? But what I think, so I think people think about the technical side of managing costs and supply chain. But what I've learned, because I ran our supply chain at Guardian Bikes and so I had some firsthand experience of trying to keep up and deal with similar constraints. Actually, so much of it, actually so much of cost control and removing constraints on supply chain is literally just communication and being like relentless about communication. And it's all relationships because

Doug (16:10)

Yes.

Jon Blair (16:15)

The number of things, whether you're talking about getting payment terms negotiated or you're talking about a volume commitment and resulting in a per unit price decrease, the BOM the technical side of product development, yeah, that's great, there's importance to it, but that's not what you're leveraging. You're not coming up with some super savvy way to get cost out of the product because of the way that you are reformulating it.

you're leveraging a relationship and you're really, it's like all about communication. And so I think the point that I'm making is so much of supply chain cost control is actually like all soft skills, right? It's all EQ, it's communication, it's relationship building. Do you agree and do you have any more like to say about that?

Doug (16:51)

Yep.

my god, yeah, that was the, I mean, that became very obvious to me right away. Like when I first joined Heart & Soil, I'd never run a supply chain before. I didn't really know the first thing about it. But it was very clear to me that like, wow, we are really dependent on these other people and we need to build very good relationships with them. And the other thing that I found when dealing with vendors, especially on the supply chain, they might, you might have like rough spots where you're like, man, these guys stink, you know? These guys aren't doing what we need them to do. And I think a lot of people's first instinct is to say, okay, we need to find another vendor. Right, cut them.

Jon Blair (17:38)

Cut them, yeah, cut them.

Doug (17:41)

And my first instinct was like, okay, you go to another vendor, you're gonna have a new set of problems that you have to work through and you're gonna think that they stink. So what you need to do, or what I decided to do was like, okay, I think I have some role that I can play in making this vendor relationship better.

So it was about like identifying ways where we could have cleaner lines of communication. And what really needed to happen is like things need to be easy. Like they need to be really, really easy and boring. Like the guys on my supply chain team, talk to them about that all the time. I'm like, we need things to be easy and boring. That's when we're doing good. So when things get complicated, we got to go back and figure out, okay, what do we got to do to make this easy and boring? And like we instituted, or we made like systems, like shared spreadsheets and things like that with different vendors where we get together, we say, hey, this is how we think this can work. And they say, that's easy, that's good. And then all of sudden you go from, hey, these guys are not doing what we asked them to do, to being like, okay, now we're kind of clicking and things are flowing. But it takes that extra layer of accepting that you have some

responsibility in this vendor relationship and that there's some things that you should be doing to try and make the relationship better.

Jon Blair (19:03)

Totally.

You know what? This just got my mind thinking. There's a very, I think the guiding principle or the concept that you're drawing out here is completely the same as managing your internal team, right? Where like, when there's an employee who's dropping the ball all of a sudden, it's really easy to go like, cut him, I can find someone better, right? But I've learned over the years, and yeah, look. There are some times that you do actually have to get rid of an employee and those are hard conversations to have. But I think I've learned more and more and this comes back to my EOS kind of coaching perspective which is like, it's usually a core values thing. It's usually like they stick out like a sore thumb on a cultural thing where like it's toxic to the rest of the company, right? But if there's a technical thing that they're dropping the ball on, that's the leader's opportunity to step in and go, what's the gap that I can help you fill, right? Are we missing resources? Has the roles and responsibilities all of a sudden gotten away from you and they're like outside of your realm of expertise and you're feeling uncomfortable? Is there something going on in your personal life, right? And like, again, sometimes those conversations do lead to cutting that person, but I think I've realized more often that just like with vendors, Let's leverage the relationship. This person's worked for me for a number of years and done a great job up until this point. What's going on, right? And so like, it's a lot more of asking the right questions to really diagnose what all of a sudden is the root cause of this issue that kind of seemingly has come out of nowhere. And then working together to like, to solve that issue. Like, do you see the same thing with like, managing your internal team?

Doug (20:41)

Right.

Yeah, absolutely. It's exactly the same because I think you have to have like a... For me, I'm like my instinct, like you're saying someone on your internal team is maybe not doing as well. The instinct for me has to be like, well, where have I failed this person? Because normally I'm of the mind that like people aren't dumb. They just haven't been taught yet and that you need to go and do and play your own part in making sure that this person has what they need to succeed. And it's the same with the vendor relationships. And what I found is that...

With our supply chain the vendor relationships have had became like this crucial competitive advantage that we hold and what we did was we were very patient during that period where we struggled to keep things in stock now we and we worked very tightly with them. We did not you know Call them on the phone and like really give them hell it was mostly working collaboratively and what we found was when we built like this positive relationship that when we really needed something done, like we have that equity with those vendors where we can call them up and say, hey, we need this. And they say, we're going to get it done. I mean, it's worked for us where we can pick our spots to kind of play hardball and really press and that they will respond when we do that. That's just been my approach to it. And I approach it the same way with people on my team.

Jon Blair (22:27)

Totally, totally.

Yeah, dude, totally, I...

No, I agree. I read, I don't know, I'm a big reader. I read like two or three of Jocko Willink's books. He's most famous for Extreme Ownership, but he has this one, he has a newer book called Leadership Strategy and Tactics. And he talks about how like, you know, and he's talking about it from the perspective of a Navy SEAL. So you're talking about life or death situations, right? And so like it actually really puts in perspective this concept of you have to have a real relationship, not a fake one, to leverage when the going gets tough. You don't leverage fake relationships. There are a lot of leaders that try to leverage fake relationships and the person on the other side sees right through it and they're like, and they feel manipulated, right? And so actually it's not a coincidence that Free to Grow is first of our five core values as relationships. And it's because if we don't have real relationships internally and with our clients, we can't leverage them. When they really need to be leveraged. And even with working with our clients, like we have to have good relationships with them because sometimes we have to deliver really bad news or tell them to make a hard decision. Things like, hey, you gotta stop paying yourself so much. Things like, hey, I think you do have to cut payroll costs. I don't know who, but I think we have to do that, right? Like hard, hard decisions that need to be made. And you can't just say that. It doesn't land the same. If you don't have a real relationship to leverage. And managing a supply chain is no different at all. They're people on the other end and they're just an extension of your business, right? And like the thing I wanna make sure everyone hears is that managing supply chain and operations, there's technical aptitude that goes into it, but cost control, building a profitable business, it's so much the soft skills of learning how to.

Doug (24:26)

That's exactly right.

Jon Blair (24:43)

unlock value from people and that's people who work in your supply chain external of the business and people who work in your business because at the end of the day as you're scaling like Heart & Soil I think I was talking to Dean when I was hanging out with him yesterday your CEO he's like I think we're around 30 35 you know employees now when you eventually you guys will be at like 50 plus when you get to that point, you guys as the leaders cannot be going and checking on all the different metrics that all those people are responsible for. All you can do is build an environment where the value that exists within those people is being unlocked and they're looking after those metrics for you because you have unlocked the value and they're bought into the relationship and the purpose, right? That's actually, I'm...

Doug (25:16)

Right.

Jon Blair (25:36)

That's why when you go meet someone who works for a big corporation that has like thousands of people, everyone is so unmotivated. And they're literally just looking for the way to go work for a smaller business where they actually are known or start their own business or just climb the corporate ladder and make enough money that they can retire and not have to do that anymore. There are very few people I've met in a big corporation that are super happy because they are not truly being like poured into and nurtured and like really have the ability to own something and create value there. And so this is super important because it's counterintuitive. And again, I'm not saying to not get into the technical side of managing your costs, which we can talk about a little bit more, but like I would say what withstands the test of time as you scale and the team gets bigger and bigger and bigger and you as the leader and founder can keep your finger on the pulse of less and less and less. It's about unlocking value in people. That's just how it goes. That's why so many of the best founders are known as just like incredible leaders. Because that's the thing that unlocked the value in the business, Is leadership. And so actually, I want to talk a little bit about leadership here as you guys have scaled. Dean, had, Dean was actually, your CEO was the guest on our very first ever Free To Go CFO podcast episode. And we talked about leadership because Dean is a very... Dean is very intentional and passionate about trying to be the best leader that he can. He's like, in fact, we hung out on the lake yesterday and that's basically what we talked about the whole time because he's really always trying to figure out the next way to be a better leader. Like, how has Dean's like true heartfelt focus on the...

guiding principles and leadership impacted you as a leader and how do you see that like benefit the business?

Doug (27:42)

mean, Dean's motor is insane.

Jon Blair (27:45)

Yeah

Doug (27:47)

like and he has this like massive massive passion for exactly that like this the leadership stuff and the like time management stuff he consumes this stuff in his spare time like he's watching YouTube videos about he's reading books about it he's geeking out about it like that's what he cares about and he has this big motor and energy that when I first started working with him we clicked really really well and you know we started day one with the company and the company is super small and we were given the reins to this business we both felt really fortunate about that we both took it very very seriously and as the business started to scale we were constantly talking to each other about

upping our own game. That was very, very important. He was very obviously invested in doing that and becoming better and better and better. There was something that I recognized in him and I was like, I've got to do the same thing. We started to pour ourselves into what was going on on Twitter with the e-commerce community, starting listening to podcasts, reading books, whatever. We could do going to conferences soaking in as much as we could to learn as much as we could about ecommerce and trying to constantly up our game and it's still this ongoing thing where both yes and we're both built the same way where it's like you almost kind of like the

Jon Blair (29:16)

Mm-hmm. I love it. Forever.

Doug (29:28)

You'd like I don't ever think there's some you know at there's a what would have reached the end of the rainbow here And I'm gonna be good. I'm like I don't even like to you know I like the fact that I'm gonna have to keep going going going going and he's the same way So and that pervades the whole company is like we have to keep upping our game We have to keep improving like and I feel that when I went from you know I'm leading this small company that's made zero dollars to, know, I'm the COO of a company that's doing 50 million plus a year. But like, if I'm to be the COO of a company that's doing 50 million plus a year, like, I need to be a COO that's doing 50 million plus a year. Like, I need to have my game upped. And so...That's something that I think our team recognizes too, is that we're constantly trying to improve and we're constantly thinking about the future and we want the systems that we, so it went from, it's weird when you're in a startup, like you go from, like you yourself, if you're running a startup, you're doing tactical stuff every day and then all of a sudden,

as things start to scale, know, those hard skills of executing there tactically become less important and then the soft skills and the leadership and the strategic thinking rapidly start to become, and being like a cheerleader basically for your team and getting people motivated rapidly becomes like way more important. And making that shift, that transition was actually, Dean did it

Jon Blair (31:03)

100 % Totally.

Doug (31:17)

beautifully and We we really took a core group of people and we were able to kind of manage this massive hyper growth with this core group of people because Dean He was ready to make that transition into that leader and you know, know I'm his right-hand guy So I was right there with him too. But yeah, he's been a huge inspiration for me. It's just his work ethic is insane

Jon Blair (31:33)

Mm-hmm.

I love that.

I dude it's funny every time I hang out with Dean we find like another Dean and I have this really weird like overlap of interests like I'm calling it weird because it's like a very nerdy I'm like avid reader and like all the same kind of stuff and so we're just like talking about like EOS and weird leadership like okay

Doug (31:53)

Yes you do.

Jon Blair (32:06)

He texted me yesterday after hanging out at the lake on Sunday and he was like, hey, what was that thing you were talking about? I was like, I need to articulate this to the rest of the team. like, it was like an unlock for me. And I was like, it's the difference between objective planning and execution planning. They're not the same thing and they oftentimes get confused for one another. Objective planning is where are we going? What are we going to achieve? Execution planning is how? What are we gonna do to get there? They're not the same thing. And you gotta get into two different mindsets, right? And he's like, thank you, that's exactly, so like that's what he's texting me about after we hung out on the lake, right? Like, and so, but then he also likes obscure heavy metal, just like I do. And so like, so anyways, it's been, it's been fun getting to work with you guys and us all living in Austin so that we can have nerdy conversations over beers. But I love it, dude, I mean, and again, coming back to growth.

Doug (32:44)

Yep.

Yes, he-

Hahaha

Jon Blair (33:05)

I think there's this common misconception that growth happens because you just find the perfect product that no one is going to compete with you on.

Doug (33:05)

Yep.

Yep.

Jon Blair (33:14)

You source it cheaply, you sell it expensively, and bam, we have a business. it's no, like whether we're going back to the purpose at the beginning of this story, or we're talking about like what's driving the CEO and the COO from like just like a guiding principle standpoint, that's what keeps things moving. And like I have a kind of a mentor.

Doug (33:24)

Yep.

Jon Blair (33:36)

Ryan Rouse who's been in the ecom and like CPG space. I don't know if you know him. He's out here in a he's out here in Lake Way But he he's about eight years ahead of me in life three kids like me And so I look up to his perspective a lot and he always says like look dude. It's not about Timing the game. It's about the time in the game, right? And that's that goes with working out that goes with like any discipline. It's about spending time in the game

Doug (33:48)

Mm.

Mm.

Jon Blair (34:04)

but you find a game that you love playing so much that there's no way you're gonna quit and you're gonna spend the time in the game and you love the journey and that's why you're not worried about the end, right? Because the journey is...

Doug (34:16)

Right?

Jon Blair (34:18)

That's everything, right? And that's where these beautiful things get created. And so you gotta find a journey you want to be on, right? And that like you can't stop thinking about. And so anyways, I just wanna point that out because it's counterintuitive to what a lot of econ brand founders think when they start a brand and they wanna achieve success. So really quick, I wanna chat a little bit about the technical side of what you manage. I wanna talk about demand planning because

Doug (34:27)

Thanks

Sure. Yep. Yep.

Jon Blair (34:47)

Demand planning is this thing that everyone struggles with. This push-pull between marketing and operations, but also cash flow that you have to consider. What, from your perspective, what has been the hardest part about the demand planning process as you guys have been scaling so fast?

Doug (35:07)

So it was interesting because when, so our, what phase of business we're in right now, we went from like,

you know, from 2020 through 2020, halfway through 2022, it was like hyper growth, insane growth. And so demand planning, I was like, throw it all out the window. I don't, I don't want to hear it. Nothing that you say is happening. So I built, you know, a system and this might not be the way to do it, but I wanted to have some hard data to look at. And in our supply chain is still run this way where we look backwards at sales and we're saying, this is the sales volume for the previous 30 days and we have decision making around we want to carry this many days of supply. We want to have this many days of supply of raw material based on the current sales volume. And we're going to order based on current sales volume because

Our business is also a little bit different from other people's where we don't have big spiky moments in our sales. It's very steady and predictable. Our business is built around subscription, really. It's a product that has 30-day supply. We really focused on subscription because we thought we could get monthly recurring compounding revenue, and that was how we wanted

wanted to grow.

using the system of looking backward at sales data for but it's still current the previous 30 days and kind of Building our constraints around okay. Here's how much we order at a time, but it's all based on the current volume It gives us enough that we can we can adjust when we're making our finished goods To be able to make sure that we're staying in stock and we're always making sure that we fill subscriptions So that's another

Jon Blair (37:03)

Mm-hmm.

Doug (37:15)

thing for a business like ours is like we can we can demand plan for subscriptions that's easy for us because you can look at the current subscriptions and you know what you're gonna need to fill so we will cut off sales for a product for one time and keep filling subscriptions in the background like for the past two and a half years we've I don't think we've missed more than a day or two worth of subscriptions I would fill thousands and thousands so I would say like less than point

Jon Blair (37:33)

Mm.

Doug (37:45)

percent of subscriptions have been missed. Yeah, so we focus on, so that, you know, the subscription thing is easy when it comes to demand planning.

Jon Blair (37:49)

I love that.

Doug (37:56)

What we're dealing with now that we've gotten to a little bit more of a steady state with the growth where it's not hyper growth anymore and it's more steady, this recurring growth, we have things like we never did Black Friday before last year. And when we did a big promotion for Black Friday, we had this massive spike in sales that I wasn't anticipating on the supply chain.

Jon Blair (38:08)

Mm.

Doug (38:24)

we were able to weather it and kind of learn like, we can kind of expect.

Jon Blair (38:25)

Mm.

Doug (38:29)

this much, right? But we knew that where we had our inventory level for Black Friday, we were able to get through Black Friday, through Q5, and into January 1, where you get all the production slowdowns, and we still kept everything in stock. coming into Q4 this year, we were like, well, we know kind of what inventory level we need to keep to be able to weather that storm, because you're dealing with production slowdowns,

Jon Blair (38:53)

Mm-hmm.

Doug (38:59)

with massive spikes in sales and the planning that's going on with our manufacturer right now, we need to get to this inventory level by November, whichever November date and...

Jon Blair (39:14)

Yep.

Doug (39:15)

We've got to make this many bottles a month. We're projecting this many are going to be sold. So we're getting a little bit more sophisticated with how we're doing the demand planning. to begin with, I just needed hard data, especially when we were in hyper growth. It's like, me something that I can look at that can tell me. I don't want to sit here and make every single decision and agonize about it. I need a system that tells me what to do. So I need data. I didn't want the decision fatigue. I needed data that

Jon Blair (39:27)

Yeah.

Doug (39:45)

told me you need to order this much on this day.

Jon Blair (39:49)

For sure, yeah, and I think still one thing to draw on what you just mentioned, what you just talked through is that you're still thinking strategically. You have to have data to drive initial numbers of quantities and when is the drop dead date to issue that PO, but you're like, okay.

Doug (39:58)

Yes.

Jon Blair (40:09)

there's segmentation happening. Like one, I'm sure you have certain products that, you're thinking about subscriptions, like we're not gonna go out of stock on subscriptions. We're gonna fill subscriptions, right? And so that's like a strategic decision. And I think the point that I wanna make is a lot of people agonize over trying to cut the perfect quantity on your PO. You're just not gonna cut the perfect quantity on your PO. It's never gonna happen. I've never seen any company do it. Yeah, exactly.

Doug (40:15)

Yes. Yes.

Yes.

And you're not gonna make a perfect forecast either. So yeah, think agonizing about that stuff is like not good. And that we wanted, when I built that system, I was like, need to remove the decision fatigue and I need this thing to tell me what to do. And it's not going to be perfect. That was the thing too, was the reason why we were using

Data that was looking backwards instead of taking in like here's the forecast was the forecast were all wrong and Forecast forecasting is not easy. I'm not saying that as like our marketing team couldn't forecast well It's really difficult especially when you're the growth is like in that hyper growth phase to it was really hard to predict But you need systems this alludes to what I was talking about earlier You need a system that makes things easy and boring when you're doing operations

Jon Blair (41:04)

Yeah.

Doug (41:27)

like you can't be sitting there and agonizing about everything you need you need data that's reliable and you need to be able to make decisions very quickly but

Jon Blair (41:27)

Totally.

Doug (41:40)

you need to be grounded in something that you're gonna trust. like, we talk about, my guys on my supply chain team, sometimes, you know, our system is telling us to do something, and I'm like, wait, maybe we should do something else. And one of the guys on my team is like, you gotta trust the Sheets, man. We have to trust the system. I'm like, you're right.

Jon Blair (41:59)

love you. do. That is, I love what he's like. Here's the thing. You can agonize over trying to get it perfect from a, from like a forecast perspective, which you're not gonna do. I've seen enough brands. I haven't seen, dude, Amazon, their demand planning is very inaccurate. Like incredibly inaccurate. We sold vendor central at Guardian for a period of time where we were their vendor and like, but.

Doug (42:11)

Yes. Right.

Yes.

Jon Blair (42:25)

it was a system that they trusted the system, right? And the system would correct itself a little bit over time too, right? As more historical data, like you beat your forecast, that rolls into the next iteration of the decisions. And so what I always tell people is stop getting so afraid about leaving money on the table because you under order. You're gonna live the fight another day. And guess what? If you're building a brand with purpose,

Doug (42:30)

Yep.

Exactly. Yep.

Yep.

Jon Blair (42:52)

If people stock out, they're actually gonna want your product more. They're not gonna go, forget hard and soil, I'm gonna go buy something else. They're gonna be maybe a little bummed, right? But like, the desire, if you build a good product that stands for something and meets a real need, you can be wrong on inventory planning and you don't have to bet the farm on whether you, whether you,

Doug (42:57)

Exactly.

Jon Blair (43:14)

know, stock out or not, you know? And so look, I wanna ask you one other question. This is like the token question I gotta ask. My business partner Jeff is your CFO, right? How has Jeff been valuable in helping you manage the brand's P&L and or cash flow or just make better decisions?

Doug (43:18)

Yeah. Okay.

Yes.

One thing that when it comes to operations too, and I don't know how many people are gonna listen to this podcast and be like deep inside of supply chain and operations, but.

One thing that Jeff and I have worked on a ton is inventory reconciliation and reconciling the inventory asset value that we have on our balance sheet with what we are seeing in our own systems and making sure that we're adequately accounting for our cost of goods. so solving that puzzle has been really, really interesting and fruitful.

And I've worked with Jeff a bunch on this because it has been a little bit of a puzzle, but it's uncovered things for me and my team about, we didn't really understand our costs as well as we should have. And we've been getting deeper and deeper and deeper and understanding exactly where our inventory assets, because we have to buy our raw materials. A lot of companies don't have to buy their raw materials. You just work it with a man you

Jon Blair (44:39)

Got it.

for sure.

Doug (44:43)

You got your PQ. You know your quote and it's pretty easy, but we have raw materials that we have to buy You know we have we have the production costs with with the manufacturer and understanding how those costs are flowing through the supply chain to the end consumer like that challenge of just making sure that our that we're adequately accounting for for cost for our balance sheet has been like fruitful for me and my team to be

able to really, really go deep on understanding exactly how money flows through this business. And the other thing about Heart and Soil too,

Jon Blair (45:17)

I love that.

Doug (45:23)

is that our main cost center is cost goods. It's not paid acquisition like paid advertising. A lot of e-commerce companies are going to be spending the majority of their costs are going to land in paid acquisition. But we've had a lot of organic growth and there's reasons why we don't have to spend as much. But the main cost center in our business is cost of goods sold and

our profitability is dependent on what we do on the supply chain. And so lot of the conversations with Jeff are kind of about protecting...

Jon Blair (45:54)

Totally.

Doug (46:02)

Because our profitability is based on that, protecting that profit level, putting the guardrails on what we're doing with the supply chain, like having some simple heuristics and guideposts for ensuring that we can maintain that really healthy profitability that we have. with your guys' Reach Reporting portal, he's given me the cash conversion cycle and the inventory days.

as like two really important guardrails to be working with my team on to make sure that we're not over ordering things and kind of affecting the cash flow negatively and then decreasing profitability as well.

Jon Blair (46:38)

for sure.

I love that man. Yeah, I mean it's so hard to, you guys are just trying to keep product in stock, but understanding the financial impact is super important, because sometimes there's a counterintuitive impact on cash flow and profitability.

Doug (46:54)

Yes. Yes.

Yeah, the cash flows, that's the main thing is like if we're not Because if I just told the guys on my team never go out of stock You know we could we could order things like crazy like those those suppliers that we we had the problems with they've scaled things pretty effectively we can go get a lot more but But it would totally wreck the cash flow because that's where all of our cash gets tied up is in the supply chain

Jon Blair (47:13)

Yeah, exactly.

Totally, totally, totally, I love that. Well know Jeff loves working with you guys, he's gonna be out here next week for our Free to Grow quarterly planning and so I think we're both gonna see you guys in person which we're looking forward to but I know we gotta land the plane, we're going a little bit over here so before we do, I always like to ask a personal question. So what's a little known fact about Doug that people might find shocking or surprising?

Doug (47:37)

Yep.

Yep.

my gosh.

my god i didn't know you were ask me this let's see there's one that i'm like i don't know if i should share this but yeah okay yeah you know what it's kind of a fun little story i went i went to jail for a weekend it was something that happened to me when i was 23 but when i was in jail

Jon Blair (48:00)

Ha ha ha.

That's probably the one we want to hear.

Doug (48:23)

has been three days in jail. I won an arm wrestling competition between the inmates. Yeah. and this was not prison by the way. This is county jail. Very, very, very different. but there was a tournament that broke out while I was there and, I won it. And, yeah.

Jon Blair (48:31)

That's epic man. That is so, hey, we've all done things when we were 23 that we wouldn't do today. So no judgment here. I've got some crazy stories as well. When I was 23, I was finished my business degree and then like quit working and was touring in a heavy metal band thinking that that's how I was gonna make a living and I did very...

Doug (48:54)

Right. It's true. Thank you. Yeah.

Yep.

Jon Blair (49:10)

very shameful things while I was in that van. So like no judgment here brother at all. And I appreciate you sharing that. Before we land the plane, where can people find more info about you and Heart and Soil?

Doug (49:12)

Thank you. Yep.

So our website is heartandsoil.co but if you want to talk to me I'm on Twitter @DTCDoug.

Jon Blair (49:33)

Love that, love that. Well, Doug, this was an awesome conversation. We didn't even get to chatting about EOS, so I might have to have you back and we can chat, we can check in on how your EOS implementation's going over there at Heart and Soil. But, yeah, look everyone, bottom line is, the takeaway here is there's a lot of...

Doug (49:39)

Yeah.

Dude, I'm down. Yeah.

Jon Blair (49:53)

best practices and technical, there's a technical side to managing operations, but there's a soft side, right? Strategy, managing relationships, unlocking value out of your people and out of your suppliers. Don't miss the nuggets in this episode about those.

Doug (49:59)

Yes.

Jon Blair (50:11)

those concepts and so this was super valuable. I hope it's helpful to everyone and in closing, remember like 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 like we've helped Heart and Soil, check us out at FreetoGrowCFO.com and until next time, scale on.

The Top 3 Mistakes DTC Brands Make While Scaling From $1M to $10M

Episode Summary

In this episode of the Free to Grow CFO podcast, Jon Blair and Jeff Lowenstein discuss the common mistakes DTC brands make while scaling from one to ten million in revenue. They emphasize the importance of inventory management, the impact of marketing agency fees, and the necessity of regular financial reviews. This conversation provides valuable insights for founders looking to navigate the complexities of scaling their businesses effectively.

Episode Links

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

Jeff Lowenstein- https://www.linkedin.com/in/freetogrow-jeff/

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

Key Takeaways:

• It's better to risk stocking out than to overstock.

• Monthly financial reviews are essential for tracking progress.

• Understanding contribution margin is key to evaluating agency performance.
  

Meet Jeff Lowenstein

Jeff was previously leading M&A efforts at ecommerce aggregator Boosted Commerce where he was the 5th employee. He built processes across M&A, finance and operations to support rapid growth from 0 to 30 brands under management in 2.5 years.

He previously co-founded and exited an app for Shopify merchants and spent time in the Strategic Finance departments of Etsy and Caesars Entertainment. Jeff holds a BA from the University of Pennsylvania and an MBA from Harvard Business School.

He’s worked with hundreds of brands over his career and founded Free To Grow because of his passion for supporting entrepreneurs and helping them succeed. The analytical and financial tools he has developed over the years are specifically crafted for the modern consumer brand.

Transcript

~~~

00:00 Introduction to Scaling DTC Brands

01:21 The Badlands of Scaling: Key Mistakes

02:50 Inventory Management: The Fear of Stockouts

22:07 Marketing Agency Fees: Finding the Right Fit

32:14 The Importance of Monthly Financial Reviews

Jon Blair (00:00)

Hey, 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, the go -to outsourced finance and accounting firm for eight and nine -figure DTC brands. And today I'm here with my favorite guest, I don't know.

No disrespect to any of the other amazing guests that we've had on the show. They're all great. But I got my co -founder, Jeff Lowenstein, on. So yeah, I gotta say that I do have a little bit of favoritism there. Jeff, thanks for joining me, man. What's happening?

Jeff Lowenstein (00:39)

Yeah, happy to be back on the pod, Jon, and no disrespect to anyone else. I mean, you could say we're all tied for first for your favorite, favorite guests.

Jon Blair (00:50)

100%. We've got a little bit to live up to on this one. You were on Taylor Holiday's Bridges webinar last week, we've got to really crush this one. But I'm excited about what we're gonna be talking about. Last time I had you on, we chatted about LinkedIn post that I had posted maybe a couple months ago, and that got a lot of people talking. And today we're gonna chat about another one.

which is centered around the top three mistakes that I see DTC brands make as they scale from one to 10 million in annual revenue. Keep in mind, everyone, before we dive into this, these are not the only mistakes we see, right? and there's nuance to all of this, but there are three things that I see over and over and over again that plague brands that are scaling from one to 10 million, and I gotta be 100 % honest, the reason we're talking about this,

Scaling from one to five million is what I call the badlands. Where you have got product market fit, right, and you need to scale and punch through five million dollars and you've got to take enough resources to get to the other side of the badlands. You can't get stuck in the middle, because if you get stuck in the middle you've got to either retreat or push through and it's a really tough place to be. And I'd say depending on your product category and your business,

the badlands could extend all the way up to seven, eight, nine, 10 million. It's a tough, tough phase of the business. And so we just wanna share our thoughts on three of the biggest mistakes that we see brands make in this period of scaling in hopes that it will help you as you are pushing from one to 10 million and that you might be to glean a little bit of wisdom from what we're chatting about here today. So dude, let's dive right in to the first one.

Jeff Lowenstein (02:21)

you

Jon Blair (02:45)

Purchasing way too much inventory for fear of lost sales. Now, over the years, I've learned it's better to risk stocking out and live to fight another day unless you have excess capital, which most brands don't have at any point in time, but definitely not in 2024. Jeff, what are your thoughts about purchasing way too much inventory for fear of lost sales? You see this, what are your thoughts on it?

Jeff Lowenstein (03:12)

I mean, the only thing worse than not having enough inventory to sell is having too much inventory that you can't sell, right? So just think about like, which way would you rather be wrong is what I recommended. No one is ever getting this perfect. It's literally impossible.

you're placing a risk -adjusted bet on where you think things are gonna sell, how much of each SKU and variation is gonna sell. Let's just be honest, it's impossible to get it perfect. You're gonna miss, and you're gonna miss in places you...

didn't expect to, right? You might be super confident on one channel or one product category and then, you know, that's actually what you end up getting wrong rather than where you thought you might have issues. So it's just really freaking hard, right? You have the combination of marketing efficiency that varies day to day, month to month.

season to season, right? Especially we're about to enter the holidays and it's, you know, it's crazy times for everyone, especially the Black Friday Cyber Monday coming up. So...

I like to think about it like where would you rather be wrong? I like to show a little bit of restraint. Like I'd rather have some of my clients stock out a bit rather than being super over -inventoryed and having their cash tied up. Cause that cash crunch can kill you in a lot of ways. So that's typically where I try to push people if you have to choose one or the other. you know, it's a skill that you do have to hone over time, the inventory planning piece.

Jon Blair (04:39)

Totally.

Jeff Lowenstein (04:51)

you

Jon Blair (04:51)

Well, so there's a couple things that I want to point out there that Jeff just mentioned. One, inventory planning is really freaking hard and you will never get it perfect. No one gets it perfect. I've worked with companies doing $500,000 who are not getting perfect and I've worked with companies doing, you know, nine figures in revenue not getting it perfect. And so, take that burden off your shoulders, right, of like trying to engage in inventory planning perfection because it doesn't exist.

The other thing is, you know where this came from, this like topic in this post, is that on the founding team of Guardian Bikes, we made this mistake several years in a row. We lived to fight another day, right? But where did this show up the most? It showed up the most right before Q4, like Jeff was mentioning, right? That prime time is right around the corner.

Jeff Lowenstein (05:21)

Yep.

Jon Blair (05:49)

And then it showed up for us at the time, Guardian has since brought its supply chain back to the US, but at the time we were purchasing bikes in China. And so with Chinese New Year falling right after the holidays and shutting down the country for basically a month, we had to commit to springtime inventory, which for bikes was the other seasonal spike. And so the trick was, we're growing, you're growing, so last year's numbers for Q4.

and mind you for Q2 for the spring, your sales numbers should be bigger this year theoretically, right, than they were last year, but you don't know how big they're gonna be. And if you have really long lead times, you're committing to orders really early and even harder, you're committing to orders that need to be produced before Chinese New Year before you've even seen how you did during Black Friday, right? And so we had to play some massive bets.

Jeff Lowenstein (06:42)

Yeah.

Jon Blair (06:47)

And the trick is where the emotional or like kind of psychological bias comes into play is the fear of lost sales. Right? With the fear of lost sales, you're like, shoot, I may be leaving money on the table. Right? And so what Jeff mentioned about a risk -adjusted bet is like one way that we think about this from the CFO standpoint, and I'd love to get your

elaboration on this Jeff, but it's like what's the most that we can afford to buy with our capital structure, right? That can allow us to sell or to hit the highest revenue goal possible. But that if we totally whiff and we hit some minimum sales forecast that we feel really confident in, that we're gonna at least hit that, that we would still survive, right? We'd live to fight another day. Instead of betting the house and you either survive and thrive,

Jeff Lowenstein (07:29)

Thanks

Jon Blair (07:44)

or you die. You got any other thoughts on that, Jeff?

Jeff Lowenstein (07:49)

I always have lots of thoughts, And I know you live this with Guardian Bikes as well. okay, I have a couple things that I wanted to mention in response. So actually, I also have some experience from when I was at Boosted Commerce an aggregator. We actually were trying to buy a brand and what they were doing at that time.

They were growing very, very nicely year over year, consistent every month, consistent from January through, it must have been around this time of year, September, that we were looking to buy them. And the year over year growth rate was really high, like they were crushing it. And we were looking at, know, hey, we're about to enter Q4. But by the way, we have so much we want to order for the holiday season.

that we don't even think they can produce all this and also what we need for Q1 because they're gonna be out on Chinese New Year break during Q1, right? Which happens right after the holidays, which people often overlook that they have this...

Jon Blair (08:46)

Mm.

Jeff Lowenstein (08:59)

they were thinking, okay, we're gonna make this massive, massive order because that's what's needed to fund, you know, to fulfill all this demand that we're creating. Well, all right, let's look at the numbers a little more closely and they were crushing it all throughout the year up to that point. But if you actually look back at last Q4, they also had a massive, massive growth rate.

over the prior year. And so if you just look at it in terms of dollars, was, it was actually a crazy bet to say that we're going to actually grow, you know, another plus 75 % over last year's massive Q4. And so, you know, in making an acquisition, right? Like, you know, we were able to have some influence on that inventory purchase because, you know, we weren't going to buy it if we were uncomfortable with that. And so we worked with them to understand, let's, let's be a little more.

I don't want to say conservative, but it is conservative, right? Is the way we wanted to go with that. And basically what we're able to do is with the supplier, and again, this is a whole different conversation, you can have, basically giving more information to your vendors is always a good thing. And the conversation was, hey, here's roughly what we think we're going to purchase over the next 12 months, right? Here's the forecast. And that opened up, that transparency,

Jon Blair (10:09)

Totally.

Jeff Lowenstein (10:19)

opened up a whole new set of options. And so what that brand was able to do was give them that forecast. They would actually start making stuff in advance. And only when it was shipped out of the warehouse in China was the brand then paying for it. And so that was a much, much...

Jon Blair (10:39)

Mm.

Jeff Lowenstein (10:41)

cleaner, more agile supply chain because you can make much smaller shipments rather than saying like, hey, here's what we're ordering for Q4 and Q1, you know, ahead of those like really long lead times, which was a massive cash outlay that they would have been overstocked if they had done that. And so saying like, here's the next 12 months of...

sales we want to do, okay, so let's make that in batches and then only pay for that once we release those batches from your warehouse. And by the way, the amount you release, you can react to that in real time based on sales data. It doesn't need to be predetermined. It's a huge advantage and makes you much more agile. yeah, anyway. Yeah.

Jon Blair (11:23)

You know, I actually want to drill down on that a little bit because you brought up several, let's talk about strategic financial management concepts in what you're talking about here, right? So how do you reduce the risk? Going back to what Jeff said earlier, risk adjusted bets, right? So what are the dynamics or the levers that you as a brand can potentially strategically pull or maneuver to reduce risk? One that Jeff just brought up is

batch size, right, or purchase lot size. The smaller, more frequent releases of inventory you can commit to, the less risk there is in ordering more. And it's because you're committing to small lots at a time financially. The extreme case on the other side is like, you commit to a year's worth of inventory all at one time, massive financial risk, right, huge cash outlay at the beginning, and like, you're very reliant on releasing that cash.

Jeff Lowenstein (12:10)

Yeah.

Jon Blair (12:21)

over time based on sell through, right? like lot size and batch size is a huge one. The other thing is lead times. And there's actually a very tight connection between lead times and batch sizes. Like if you think about, we used to look at this at Guardian Bikes all the time, like how do we do like frequent releases, right, of product that there's kind of like always this continuous flow. And so when you think about like lead times,

If I always have this continuous flow of like SKU mix on the water at that time, like I may only... And if like what Jeff's talking about, there's a continuous production happening on the other side, right? At the manufacturer. They might have work in process or raw materials or components already ready to go that would decrease your lead time. We saw that at Guardian. Where like when we would order twice a year, they didn't have a stockpile of what they needed to get production going. But when we're ordering all throughout the year,

Jeff Lowenstein (13:12)

Yeah.

Jon Blair (13:18)

and they were kind of like getting these little drip campaigns, so to speak, right, of like shipping out product. They, if we had to change the SKU mix, they're like, cool, we already have those components, let's just put them on the line, let's change the line, and we can get those out the door in the next few days. So, like lead times, decreasing lead times. The other thing to consider is when you're, when you have a, this depends, this doesn't work for bikes, because air shipping bikes, you just, you lose money because of the size and the weight. But if you have a smaller product you can air ship,

If you're talking about a, for example, like a big sales period, like Q4, commit to what you feel comfortable committing to, put it on the water or the slowest, cheapest transit method to maximize your margin, but be okay with air shipping some if you have, if that does produce incremental contribution margin dollars and you place that shipment late, right, in the season once you see you're gonna stock out and yes,

Jeff Lowenstein (14:01)

Thank

Jon Blair (14:15)

Is your margin lower? Yes, but as long as there's incremental contribution margin dollars, it is still incremental to the bottom line. So that's another thing that I've done with brands before in the past.

Jeff Lowenstein (14:26)

How many Guardian Bikes did you airship? Zero.

Jon Blair (14:30)

We did not airship many, zero because we couldn't, but I always wished we could. We were always trying to figure out how we could and make money and we couldn't. But we have apparel brands we work with that can still turn an incremental margin profit, right, at airship. But unfortunately we could never pull that lever at Guardian. always wanted to.

Jeff Lowenstein (14:34)

Yeah.

Certainly. Certainly.

And there's another thing that I wanted to respond to that you said earlier, which is it's about maximizing revenue in a holiday period. there's also something about being understocked as a forcing mechanism

to preserve contribution dollars and contribution margin because in the, let's say you're overstocked you're holy crap, it's December.

Jon Blair (15:08)

for

Jeff Lowenstein (15:17)

First, we got through Black Friday and I have way, way, way too much inventory that I need to sell before Christmas here. What are you going to do? Well, the obvious thing is you're going to either increase budgets or increase discounts or both, right? If you really need to move inventory and that's going to absolutely decimate your contribution margin, right? And so the advantage of having that extra stock, you know, is not even there, right? And it hurts your overall P&L. It's not just like, it's only, you you can't just do that.

Jon Blair (15:30)

Mm -hmm.

for sure.

Jeff Lowenstein (15:47)

a certain amount of units, right, that affects your full business. And so if you think about it the other way, if you're understocked a bit, you're actually going to be able to preserve price much better and you're going to be able to be more efficient on your spend as well. So that's something to think about.

Jon Blair (16:03)

Totally.

Jeff Lowenstein (16:07)

those, you know, obviously you're not going to be at either extreme where you're like, hopefully, like, hopefully you're not discounting, you know, 30, 40, 50%. And hopefully you're not like cutting ad spend off altogether if you're under, if you're understocked. it does seem to me like based on my experience and the brands I've worked with, that it's a less stressful place to be in, be in, to have to say like, we're selling too well, let's preserve margin. that, that is usually a less stressful conversation for, for,

Jon Blair (16:26)

Mm -hmm.

Jeff Lowenstein (16:37)

the founder to have than slashing price and increasing budgets. What do you think about that?

Jon Blair (16:42)

That's a really good point. That's a really great point. And actually, you know what that made me think of too is... This is kind of the elephant in the room, I think. The thing you're not thinking about that's lurking right there, why is it that you're so scared to have to capitalize on this moment? In this case, we'll call it Q4. Why are you so scared of fear of lost sales?

And what I'm gonna bring up here is like the difference between building a brand that people are loyal to and they're gonna purchase from you at some point after the holidays versus a one -hit wonder and you acquire a new customer, they buy one thing from you and they never come back. At the end of the day, like you still have to build a brand and if you are truly building a brand and you stock out, yeah, you're leaving sales on the table for that period, but if you're building a brand that people really connect with and really believe in, they are gonna come back and buy when you're back in stock, right? If you're a one -hit wonder, yes, you're leaving money on the table, but like you've got bigger problems, which is you don't have a brand, which is what you need in the end, right? And so like, that's the other thing is, I think, I

You need to be very focused on strategic marketing. We're building a brand. We're selling things that people are gonna come back and buy again from us later, right? And like, the more and more that I work with DTC brands, I mean, because we don't just say that we are fractional CFOs and accountants for DTC companies. It's DTC brands. Because, at end of the day, the unique...

Jeff Lowenstein (18:22)

Great.

Jon Blair (18:25)

And I think even Taylor brought up something akin to this on the webinar last week. It's like, you can have a really great product, but unless you truly have IP locked up around the world, which basically no one does, and even eventually your IP, your patent is gonna expire, Eventually someone's gonna copy it and your profits are gonna get competed down to zero, right? But what doesn't get competed down to zero is building an amazing brand, right? And so at the end of the day,

It's about, when I say like, over the years I've learned it's better to risk stocking out and live to fight another day, it's not just that. It's over the years I've learned that if you're really building a brand, it's okay to stock out. And I'd rather stock out and build a brand that people are gonna come back and buy from later when I'm back in stock, than freak out and put my brand at risk, its existence at risk, by trying to go too big.

Jeff Lowenstein (19:22)

For those who didn't catch that, I did a webinar with Taylor Holliday on the Bridges series. It's on YouTube. It's posted on my LinkedIn. please feel free to check that out as well. What was the question, Jon? What was the problem?

Jon Blair (19:37)

No, mean look, at the end of the day, mean we're just kind of, no, I mean we're just, we're just riffing, it's, mean, look, there's one other thing I actually wanted to mention, and then we're gonna move on to the marketing agency one. There's, the statement is that, you know, I originally made that we started talking about is like, unless, says, unless you have excess capital, right? And so the one other thing I want to point out is, like, we have some brands that we work with, I have one that's my client, they took a

Jeff Lowenstein (19:50)

Yeah.

Jon Blair (20:07)

big swing last Q4 and they would have been put out of business had we not put the right debt facility in place that allowed them to be overstocked and they're selling a product that's not going obsolete, right? Obsolescence is a whole other thing, right? And yeah, so like what I, the, the, be careful.

Jeff Lowenstein (20:10)

Yes.

That's a whole different conversation. Yeah.

Jon Blair (20:32)

Debt is risky if you structure it the wrong way, but we as CFOs really were able to help this brand not only put the initial debt facility in place that got them the inventory, but once they realized they were definitely gonna be overstocked for a year plus, we helped them refinance into the right debt facility to help them sell down that inventory that again is not gonna go obsolete, right? And so they took a big swing and many brands, they quite likely would have gone out of business if they didn't have a CFO.

Jeff Lowenstein (20:46)

Yep.

Jon Blair (21:01)

to be quite honest with so that's another thing to just keep in mind. If you have excess capital, on the equity side, you're paying the cost of equity, which is really expensive, to take that swing, but maybe there's a reason you wanna take that swing. But CFO can also help you get the right debt facility in place to take that swing.

Jeff Lowenstein (21:20)

for sure. I think I know who you're talking about and I agree.

Jon Blair (21:24)

So let's chat marketing agency fees because the next thing that we see very commonly, this is super common, we work with about 25 growing e -comm brands and we see very frequently brands paying too much in marketing agency fees. Now, as I said in my LinkedIn post, I'm not saying agencies are bad because they definitely are not. But...

You can't pay 20 to 30K a month in agency fees if your annual revenue is only a few million dollars a year. And so what my initial advice was, choose an agency that specializes in working with brands of your size and has fees that align with your cost structure needs. What are your thoughts on this topic, Jeff?

Jeff Lowenstein (22:09)

Yeah, mean, of course, I agree. I think that a CFO can help you do the math. That's very simple. The agency fee, which is typically a fixed amount plus a variable, maybe a percent of app spend, right? The math that we help our clients do is what is the incremental revenue?

that that agency needs to generate to offset their fee. Because that's not a very obvious calculation that people are doing, right? They're just thinking, well, if I can get extra 10%, 25 % on my ROAS, then it probably pays for itself, maybe.

but we can actually help you figure out what that exact dollar amount is. So that's definitely like step one that I would do. I would also say...

Getting an agency to do an audit for you is super important, and getting their thoughts on how they would make changes to your account. What would they do differently? What would they do better than your current setup? Sometimes they have good answers and sometimes they don't. So really assessing them during that audit phase is quite important as well. And then lastly, like, I mean...

I don't know how many people have pulled this off, but I have heard of it in a couple cases. Why not negotiate for a percentage of contribution margin instead of percentage of spend so that the incentives are actually in the right place, right? Because that is their job at the end of the day, is to generate extra contribution margin dollars. They're gonna argue, they're gonna say, there's all these other things that are out of our control, but.

Jon Blair (23:50)

Totally.

Jeff Lowenstein (24:00)

If they're a true partner, I would hope that they're willing to at least consider that. So that's another tactic I would urge people to try.

Jon Blair (24:10)

So, Jeff just brought up a couple of really important things. Let's start first with profitability, right? The first thing that Jeff mentioned is the incremental cost of investing in that agency, is it actually profitable, right? Because it's not just, hey, an agency's getting me revenue. It's, is that agency generating more contribution margin dollars than their cost is, right? So just as a simple example, if you hire an agency for 10 grand a month,

does hiring them produce more than $10 ,000 of contribution margin incrementally compared to before you use them? Because if not, you're losing money on that agency, right? They have to produce more contribution margin dollars than they cost, right? But like Jeff mentioned, second to that, the agency has to understand their impact on contribution margin dollars or else how can they...

Jeff Lowenstein (24:49)

Right.

Jon Blair (25:04)

How can they ensure that they're generating more than what they cost? Right? And so that's another big topic in the marketplace that we see all the time is like, there are agencies who really understand contribution margin dollars and how to influence them. And there's others that don't. There's a lot that don't. And so like really doing your homework on like testing them on do they understand contribution margin dollars. And I would say that's a big place where we help our clients, right? Is that like,

Jeff Lowenstein (25:30)

Yeah.

Jon Blair (25:34)

we can help vet agencies. We can tell pretty quickly if they understand contribution margin or not. And we can help you and the agency understand what's the ROADS or the MER and the revenue that they have to hit for them to truly be a profitable investment, right? Because that's the reality. That's what they need to be or else that investment is losing money. Do you have any other thoughts on that, man?

Jeff Lowenstein (26:01)

Just the last thing I would say is your original question is, you know, can you spend 20 to 30 K a month if you only have a couple million dollars in revenue? And the answer is no, but I guess the thing that's hard about this, right, is like I'm victim to this as well. I'm on Twitter scrolling, I'm on LinkedIn scrolling. I see people on podcasts, on webinars talking about how they're killing it, right? And everyone's posting like how great they're doing. And...

First of all, like not all of that is true, right? Even revenue screenshots don't tell the full story. But the other thing is just like, think about what's right for me at the stage that I'm at, which is something you said earlier, Jon. There's some really, really great agencies out there that are doing really, really great work. And you'll see them posted about on LinkedIn, Twitter, whatever. And they probably are killing it, right? But.

Jon Blair (26:43)

Totally.

Jeff Lowenstein (26:57)

Think about what's going on internally, right? They might be working mostly with those large, like premium accounts that can afford to pay 20, 30, 40K because they are, you know, healthy eight figures or nine figures. And so if you're a much smaller client to them.

The question is like how much actual personal attention will you get on your account? And so there might be a smaller shop that is much happier to have you, that gets to devote more time into managing your ads or creative or whatever it is, right? And so just think about not just the brand name, but also the actual people that are gonna be working with you and the individuals behind it, I think is something that will really move the needle.

Jon Blair (27:21)

Mm

Yeah, you know what? You brought up a really great point there. This actually got talked about in the thread of comments when I posted this originally on LinkedIn, which was like, when you, it's really easy to like fall into wanting to work with like a LinkedIn influencer or a Twitter influencer who like has an agency, right? But like, or to follow a brand that you follow aspirationally and see what agency they use.

Jeff Lowenstein (28:11)

Right. Right. They... It worked for X. It must work for me. Right?

Jon Blair (28:13)

We actually, this happened to us at Guardian Bike, so we looked really... Totally, yeah. So we really looked up to a lot of the early DTC darlings and, you know, there was Harmon Brothers. I don't know if you've heard of Harmon Brothers out of Salt Lake City, Utah. They made all these direct response videos for like mattress companies and direct to consumer like grill companies.

And we were really enamored with Harmon Brothers and we went like we got to go work with them and we went and talked to them and like their fee was like We were like a two million dollar brand at that time was like, okay We definitely cannot afford that and they they referred us to another group out in Salt Lake that was like more aligned with our needs but they were kind of like the Harmon Brothers guys were like their mentors kind of situation, right and and so we and ultimately like we

Jeff Lowenstein (28:47)

Yeah.

cool

Jon Blair (29:07)

that actually ended up even not going over very well. Like it just, it didn't perform, that campaign didn't perform. But the point I'm making is we got sucked into the allure of like doing exactly what an aspirational brand that we follow did, thinking that that would work for our brand. like sometimes it does, but you had to think from a first principle standpoint about why that would or would not work.

with your brand, right? And so when going to work with an agency, like, you gotta think about things from a first principle standpoint. Like Jeff is saying, like, is this right for the stage that we're in? Why is it right or why is it wrong? What are the constraints that I have to deal with? What are the constraints on the margin side? Like, maybe they're crushing it for a brand that has 80 % gross margins and your brand has 60 % gross margins and an AOV that's half the size of that other brand. Like, you have to break it down and go, what do I have available in CAC?

Jeff Lowenstein (29:56)

Yeah. Yeah.

Jon Blair (30:03)

Right? You have to help inform that the agency can't do it for you and like if they're used to working with brands that have higher AOV, maybe it's not a revenue thing. Maybe it's an AOV and a margin thing. Right? And then like, like how much room is in the margin for your CAC. And so these are all questions you have to ask yourself from a first principles standpoint. These are all questions that a CFO that can help you think through. Right? In like crafting and vetting this relationship with an agency. And then there was one other thing that you mentioned.

that I think is really important and it's that like you have to well you actually didn't mention this directly but it made me think of it an agency may work for a season and not work for the next season and again this comes back to right like I've seen agencies crush it get a brand of 10 million and they're just not the agency to take that brand to 20 million

Jeff Lowenstein (30:50)

Mm. That's a great point. That's right.

Jon Blair (31:03)

Right, and so just know that like, that's something that you have to always be assessing. can't just assume a brand or an agency is gonna take you from one to a hundred million, right? You might have several along the way and maybe even insource some stuff along the way. So I don't know if you have any follow on thoughts to any of that, Jeff.

Jeff Lowenstein (31:21)

I mean, it's a great point and I think even the individuals within an agency might be right for you in different seasons as well.

Jon Blair (31:28)

Mm.

I've seen that play out for sure.

Jeff Lowenstein (31:32)

Yeah, we've seen people stay with an agency, but having a different person on the team brought in on the account can make a big difference. just because it's not working, you don't need to move agencies. You might need to just shake things up a bit internally as another option. Cool. Should we go to the next one?

Jon Blair (31:52)

So yeah, yeah, for sure. I mean, I probably should have done this one first given that we're a fractional CFO firm, but we'll save the best for last, right? So the third point in this post about top mistakes that we see DTC brands make when they scale from one to 10 million, not reviewing financials and a forecast every month. Now, at minimum, you need to review your historical financials and a forecast model monthly. Why?

Jeff Lowenstein (31:58)

Yeah.

Jon Blair (32:22)

to assess if your actual execution is on track with your plan. If not, then you make adjustments. And waiting longer than a month to adjust can be way too costly. We can probably do a whole episode about this, but Jeff, what are your thoughts on reviewing financials and forecasts in every month and why from one to 10 million, that's so critical to be doing?

Jeff Lowenstein (32:32)

My gosh, well, you're talking to a finance nerd. So obviously I love this stuff. I've been in FP&A my whole career basically. And this is like what I love doing, right? It's understanding what are the financial trends? What are the financial margin profiles of your overall business? But then different channels, different SKUs, different decisions you make.

Inventory purchasing and on ad spend, you know, 3PLs, etc. Right? All these all these different little things, all these different decisions add up to a financial picture. And that review period, I think, is when you get to actually understand how you performed against your goals and against your plan. And to me, if you're not doing this review, you might be just, you know, it's like sailing without a compass, right? You're definitely going somewhere, but you may not end up where you want to go. You may end

up very, very, very, very far away. So this regular review process keeps you honest and keeps you on track. And something that, you know, we do that's table stakes with every client we work with is a simple variance analysis every month of what was my forecast? What were my actuals? Line item by line item.

where was I wrong? And you'll be, you you don't need to work with us, but you can to do this, but you can definitely do this on your own and just have the discipline of doing that every single month. And you'll see you're pretty far off in month one, but don't get discouraged. You're a little bit closer in month two and by month three, four, five, like that improvement will just get so much better very quickly. And you'll be like, okay, I have a much tighter understanding of my financials, right?

And then therefore as I go about making decisions in my business, you have now a gut feeling about how all those decisions are going to impact your financials that you maybe didn't have before. So that compass gets internalized as you do this monthly review process. So I'm passionate about it. It's the boring nerdy stuff in Excel that a lot of people don't like doing, but I do love it.

Jon Blair (34:47)

Totally.

Well, and so like, let's riff off that a little bit more. So, let's say, why monthly, right? Why monthly? Well, scaling a DTC brand is like insanely hard and everything is changing always, right? And so like, your supply chain costs are changing, your freight out costs are changing, your marketing returns and know, CPMs and CACs are changing all the time. And so,

Jeff Lowenstein (35:19)

Absolutely.

Jon Blair (35:31)

The reality is I've seen brands go like, I only need this like once a year or twice a year or every three months. like, no, you don't, like, if you're scaling from one to 10, remember, that's the context of this discussion. You're scaling, you're intervening on your system all day long. You're trying new creatives, you're maybe trying new ad channels, you're launching new products, maybe you're trying fully new sales channels, new suppliers, new 3PLs. So you're introducing all these variables that impact

Jeff Lowenstein (35:38)

Yeah.

Jon Blair (36:01)

your profit margin, your contribution margin and your fixed overhead, but furthermore, your cash flow, right? And so every time you're messing with your system, which DTC founders are doing all the time, rightfully so because they're scaling super fast, right? You need to then model and assess the forward looking impact of those interventions on your profitability and your cash flow. And so every single month, you're making decisions as a founder

under the assumption that the business has a margin profile, fixed overhead cost structure, and cash flow expectations. And guess what? Every forecast is wrong. So at the end of the month, you missed those in different directions. And so you need to regroup, have your CFO take you through where you missed and where you hit it, and then re -forecast forward, right? With all of those tweaks and changes that have happened to your business, re -forecast forward the future.

And then you make a new round of decisions. And it's it's rinse and repeat. You gotta do this every month for the rest of your life as long as you wanna scale a DTC brand. What are your thoughts on that stuff, Jeff?

Jeff Lowenstein (37:11)

I mean, yeah, 100%, but like something you said that I want to comment on actually is, hey, for all you e -comm founders that are listening to this, like...

Congratulations, you chose one of the hardest industries to be a founder in. Your financial profile is changing every month, like Jon was saying, for all these reasons. It's extremely dynamic. It's extremely complicated when you have multiple channels, multiple products with different margin profiles, doing different ad channels as well. So attribution is complicated, and you're looking at cohorts as well.

Jon Blair (37:30)

for sure.

Jeff Lowenstein (37:53)

Like all these things, all these different types of analyses have to come together for you to make decisions. You know, there's a lot of more simple businesses you probably could have started. So I have a lot of respect for the e -comm founders, especially, know, bootstrapping is particularly challenging. So I think it's important to acknowledge that as well and say like this stuff is really freaking hard a lot of the time.

Jon Blair (38:15)

Totally.

Jeff Lowenstein (38:20)

There's no perfect answers, but there is, you know, just trying to sort through the data in an organized and structured way to try to make the best decision you can in real time, right? So that's the type of stuff we try to help with.

I have a lot of respect to be a brand founder. You have to have a certain stomach for some of this stuff as well. you know, one of our missions, it says it in our company values as well, right, is we try to help brand founders sleep better at night, which is not always easy. And implicit in that is that they're already getting pretty bad night's sleep because it is so stressful. So I just want to comment on that.

Jon Blair (38:50)

Totally.

It's overwhelming, Totally, totally. Yeah, I mean, look, at the end of the day, what we are here to do is make sense of all of this complicated financial data and help you make sense of it quickly so you don't have to unwind it and figure it out on your own. Because chances are, just like most brand founders, you're product -focused and or you're marketing -focused, right? That's what got you in the business in the first place. And so...that the last thing you wanna do is try to learn how to do the bookkeeping and how to make sense of your numbers, right? And so, again, the whole point of this is to get you the insights and the strategic recommendations that you need grounded in your numbers to understand what happened.

How aligned is it with my plan? What new decisions do I need to consider? And then you go out and you execute for another month and then we regroup and we do it again. There are very few businesses that are as complicated and challenging to scale as an e -com brand. And so this is just like, this has to happen. There is...

I've even worked with very financially sophisticated founders and they still need this on the journey from one to 10 plus million because it just gets harder and harder and harder and harder to track in your head. So, well look, we do have to land the plane on this one and I feel like we could actually probably talk about all this stuff again to be quite honest with you and just have a whole new discussion on

different aspects of this topic. But like the bottom line is to summarize for everyone, scaling a brand, a DTC brand from one to 10 million is hard work, right? And we see very often three really big mistakes, purchasing way too much inventory for fear of lost sales, paying too much in marketing agency fees, and not reviewing your financials and a forecast every month. The good news is...

Free to Grow CFO or firms like us can help with all three of these things and more when it comes to scaling a DTC brand from one to 10 plus million. So that being said, before we do land the plane, Jeff, if you want to share really quick where people can find more information about you.

Jeff Lowenstein (41:18)

Well, you can find us on FreetoGrowCFO.com. You can find me on LinkedIn, Jeff Lowenstein. Twitter is @JeffLOW791. You know, we're the go -to option for outsource CFO and bookkeeping for growing profit-focused direct -to -consumer brands. So, you know, give us a shout, fill out the form, send us a request if you want to chat.

Jon Blair (41:47)

Absolutely. Well, everyone, thanks for listening to another episode of the Free to Grow CFO podcast. Don't forget, if you want more helpful tips on scaling a profit-focused DTC brand, consider following me, Jon Blair on LinkedIn, or like Jeff said, Jeff Lowenstein. We got great content we're cranking out every single day. And don't forget, check us out at FreeToGrowCFO.com if you think we can ever be of service. until next time, scale on.

Jeff Lowenstein (42:13)

All right, thanks everyone. Take care, Jon.