Mini Episode: A Million Dollar Secret That Only the DTC Scaling Elite Know About
Episode Summary
In this mini episode of the Free to Grow CFO podcast, Jon Blair discusses the concept of risk-adjusted bets in the context of scaling Direct-to-Consumer (DTC) brands. He emphasizes the importance of having a great CFO who can help businesses make calculated risks that limit downside while maximizing potential upside. The conversation covers how CFOs can assist in sizing bets, structuring capital, and managing risk effectively to ensure sustainable growth.
Key Takeaways:
Understanding what a risk-adjusted bet is and why it matters for your business.
How a great CFO can help you size your bets based on risk levels.
The significance of choosing the right capital structure—debt vs. equity—for your investments.
Episode Links
Jon Blair - https://www.linkedin.com/in/jonathon-albert-blair/
Free to Grow CFO - https://freetogrowcfo.com/
Transcript
00:00 Understanding Risk-Adjusted Bets
01:52 Sizing Your Bets Wisely
04:27 Capital Structure and Risk Management
Jon Blair (00:00)
A great CFO who understands scaling doesn't have all the answers, but what they do have is the ability to help you place risk-adjusted bets. And the ability to place great risk-adjusted bets is what separates the DTC scaling elite from the mediocre. Hey everyone, welcome to another mini episode of the Free to Grow CFO podcast, where I break down one key concept that will help your DTC brand increase profit and cash flow as you scale.
Today, we're talking about risk adjusted bets. Why? Because I believe that scaling is simply a series of risk adjusted bets. So what does this even mean? A risk adjusted bet is a bet with a potential upside, but without unlimited downside. The key here is that your downside is limited. In other words, it's a calculated risk that you take as you're scaling that has a probable upside potential, but with limited downside risk.
A great CFO should help you place bets as you're scaling to achieve your goals as you're growing the business, but not bet the whole farm or your entire business on a binary Binary outcomes yield high risk decisions could effectively kill your business, and that's not what we wanna do. We wanna scale on a sophisticated matter, placing bets that have limited downside. So our main job as CFOs of a scaling DTC brand is to help a brand place these risk adjusted bets. And the main way that we can help is to help the brand think about how to limit the risk of every bet that they place. Think of every bet as an investment. That's really what it is. It's an investment in trying to reach your goals and trying to scale. Think things like scaling ad spend, buying inventory, hiring people and spending on capital expenditures. A good CFO who understands scaling should help you to place those bets in a manner that downside risk is not unlimited, so no single bet can put you out of business. So how does a great CFO who help you limit the risk of the bets that you place? So there's a couple key areas that I wanna focus.
The first one, is a great CFO will help you limit risk by helping you size your bet. So the riskier the bet, which basically means the more uncertain the outcome, a good help advise that you place smaller bets you're talking about a riskier, more uncertain outcome. That helps limit risk. On the flip side, if a bet is assessed as being less risky because the outcome is more certain, then a good CFO will encourage you to place a bigger bet. So, method number one that a CFO can use to help you limit the risk of your bets is help you to size the bet depending on the risk. The second really important way is that a good CFO will help you limit risk with the bets you place by advising on the right capital structure to finance that bet. In simple terms, that means deciding whether to finance the bet with debt, equity, or both.
So the key here is that a good CFO is going to help you graduate from thinking about, will we have enough cashflow to pay back debt. And if so, then just take on debt, graduate from that thinking to instead thinking about how risky is this bet and should we finance it with debt or should we finance it with equity or both? And so a good CFO is going to help you decide how risky your capital structure is and help you structure the way that you capitalize or fund these bets in a way that limits the risk of the investments that you're making. So a good CFO tell you, hey, look, if the bet is higher risk, meaning less certainty, then let's place a smaller bet, like I mentioned earlier, and let's use less debt. If the bet is lower risk, which means more certainty, like I said earlier, we can place a bigger bet and more debt is okay.
Another way that a CFO can help you limit risk with structuring, your capital structure the right way is thinking about the maturity of debt. Longer maturity debt, meaning it's paid back further out in the future, is lower risk, and shorter maturity debt, meaning it's due sooner, is higher risk. So a good CFO is gonna help you choose between longer and shorter maturity debt to limit risk of the bets that you're placing.
And then lastly, as it relates to capital structure, a good CFO will help you assess how risky the interest rate structure is on your debt. Fixed rate debt is less risky than variable rate debt because variable rate debt changes, your interest rate changes over time. So to summarize, a good CFO should be advising you on how to limit risk of the bets you place by helping you size the bet appropriately and think about to structure debt and equity funding of the bet appropriately, all in the name of limiting downside
So look, with an amazing CFO by your side, the game of scaling ends up being just a series of risk adjusted bets. Some of them you win, some of them you lose, but without any single bet being so risky that it ends the company's existence. Wash, rinse, and repeat this process day after day, week after week, month after month, and year after year, and the bets you win will propel you towards prosperity.
