The 10 commandments of DTC finance

Hi again, 

Thanks for stopping by for a quick bite to chew on. 

We’re going to switch things up today. 

Usually for this newsletter, we deep dive into topics and get into the weeds a bit with you. 

But today we’re going to go a little more high-level on a topic we always get asked about - finances. 

There is a ton to write about when it comes to finance in DTC, but the deeper you drill down, the more specific things get for each, individual brand. 

So today we’re going to share the most vital things that we’ve learned over the years. 

Stuff that could apply to just about anyone running an e-commerce biz.

Without further ado, we present Obvi’s 10 finance commandments for DTC…

#1 I WILL NOT optimize for vanity metrics like topline revenue

Because everyone still loves those hockey stick revenue graphs you see all the time, remember that it’s not how much you MAKE it’s how much you KEEP. 

A lot of attention was paid to the high-growth consumer brands that popped up like weeds during the ZIRP era (zero interest rate policy) or the pandemic. Many of them disappeared when advertising got difficult and money got expensive. 

It’s relatively easy to sell $20 for $10 each if you catch our drift. The trick in DTC is to create enough value - and optimize your business - so that there’s something left over once all the bills are paid. 

#2 I WILL understand my total cost to ship

There is a lot that goes into getting your product to your customer’s front door. Your cost of goods sold (COGS) is only one variable in your cost to ship. 

Packaging, freight, warehousing, pick and pack, shipping, discounts, returns, chargebacks, seller fees, and marketing - you must price in all of these considerations when it comes to tracking your profit and understanding your business.  

If you’re ordering materials like cartons, pallets, packing paper, labels, or neckbands for your supplier or co-packer, don’t forget to back and those in as well. 

#3 I WILL NOT use a boilerplate P&L

The profit & loss statement is the keystone financial report for understanding the health of your company. 

But out-of-the-box P&L’s provided by standard accounting software or bookkeepers are poorly suited to deliver insights at a glance, especially for DTC brands - and ESPECIALLY if you have more than one major sales channel.

Take the time to set up your chart of accounts so you aren’t defaulted to the basic line items like “Advertising”. Get granular and specific with categories that have a high impact on your business, meaning you’ll require transparency and clarity to judge them. 

Make sure you include key ratios in your P&L reports rather than just totals. You need to understand what percentage of net sales that, say, your ad spend is consuming. 

For brands with several different sales channels, consider making a dedicated P&L for each of those business units, and then laddering everything up to an aggregated P&L. Profit per sales channel, as well as associated growth or waste, is easier to spot this way. 

#4 I WILL set up a process to report on daily contribution margin and profit

As you scale your business will get more complicated. Dozens, hundreds, maybe thousands of orders per day spread across different channels and platforms. 

Then you will have multiple departments with different budgets and cost structures. 

Which is why some founders and leaders look at their gross revenue as they leave the office and call it a day - because digging through everything else seems impossible.

But that’s also why it’s so important to create a process that summarizes all of these inputs and reports on net dollars, each and every day. Because things can go off the rails fast at scale. 

(see: Commandment #1) 

#5 I WILL find ways to reduce my cash conversion cycle

Your cash conversion cycle is the time you need to sell your inventory, collect receivables, and pay your bills.

It’s one of the few things in the world that you WANT to be negative. Because that means you’re selling your product before you even have to pay for it. 

The smaller you can make cash conversion, the less you have to stretch your cash or finance your inventory with things like loans or a line of credit. 

This can be one of the biggest unlocks for growing brands, so negotiate with your suppliers and look for instruments like credit cards with 60-day payback periods to help you shrink the space between paying for and selling your inventory. 

#6 I WILL NOT confuse profit and cash flow

They are related, but not synonymous. 

To put it another way, profit is necessary but not sufficient for running your business. 

Fixed expenses have to be paid out every month. Accounts receivable from retail accounts can take months to collect. Inventory can trap your cash at the back of a warehouse somewhere. 

Even with great margin, your company can run out of cash and be forced to liquidate or fundraise if you aren’t careful. 

#7 I will always have a realistic and up-to-date cash window

“Cash is king”. It’s a cliche because it’s true.

 The last thing you want is an empty bank account when a major expense comes knocking. 

Avoid this by creating (at a minimum!) a 13-week cash flow analysis. 

To do this —>   

1. Create a 13-column spreadsheet, one for each week.

2. Input all known cash inflows and outflows for each week.

3. Estimate variable amounts using historical data

4. For each week, calculate: Ending Balance = Beginning Balance + Inflows - Outflows

5. Review and adjust: Analyze the results and make adjustments to ensure positive cash flow.

6. Update regularly: Refresh the analysis weekly with actual figures and new projections.

#8 I WILL NOT “set and forget” operational expenses like SaaS Subscriptions

Because of the sharp focus on things like sales, marketing, salaries, taxes, and inventory, it’s easy to let cumulative costs like tools, subscriptions, and other miscellaneous expenses build up without much oversight. 

To avoid this, develop a new spend approval process so that random costs aren’t just added to the mix. Onboard an expense/payment tracking system so have better insight and control into what everyone in the company is doing. 

Oh, and don’t be afraid to hit a hard reset and just cancel all of your company’s credit cards. We did this and it made us go back and re-evaluate everything we were spending money on. 

It'll be a pain, and force a ton of payment declines and speed bumps, but that's the point - you have to consciously approve every expense.

#9 I WILL NOT forget that sometimes the cheapest option can actually be the most expensive

It’s tempting to always look for the cheapest option when it comes to adding just about anything to your company. 

New hires, new platforms, new vendors, whatever. The “lowest bid” is often the most seductive. 

But sometimes you get what you pay for. 

Reducing costs and expanding your margin is great, but poor vendors, shoddy platforms, and low-quality hires can actually end up costing you more in the long run. 

In some instances, it’s important to understand the return on investment and whether it makes sense to pay a bit more upfront to get better returns down the road. 

Fighting this temptation at the executive level is a constant battle. 

But you can also expand this principle a bit further. For instance - negotiating better (longer) payment terms with your suppliers or vendors in exchange for a bit more money for them.

(See commandment #6) 

#10 I WILL take the time to review, update, and forecast my business monthly, quarterly, and annually. 

If you don’t plan, you won’t be prepared. 

If you’re Pre-product-market fit, it’s fine to fly by the seat of your pants. You have to because this new thing you’ve created doesn’t have any history or data to look back on. 

But growing and scaling brands can’t do this. Your fixed costs get bigger and so does the risk of messing up and going broke. 

Marketing calendars, team capacity, inventory position, product launches - all of this must be assessed against your 1-year, 3-year, and 5-year plans.  

So take the time to create a comprehensive annual plan as your year ends. Then evaluate and adjust as you go on a quarterly basis. 

Layer in P&L reviews and expense audits after each month-end close so that you have your finger on the pulse of where you are and where you’re going relative to your forecasts. 

Sum it up 

There you have it - our 10 DTC finance commandments. 

Some of this stuff we knew when we started, but most of it we learned along the way. 

We’re confident that if you follow these commandments, you’ll always have your financial house in order.

Before you go…

If you’re in DTC, you’re probably always worried about your Meta ads performance.

Join me (Ash) and Alex Song of Proxima on November 5th to share our secrets to Meta media buying. 

Not only are we going over strategies to maximize Meta’s potential for your business, but we’ll be conducting live ad account audits, so you learn in real time how we’d optimize other brands’ paid efforts 🙂

Grab your free seat here. 

And BTW we are also hosting a black tie affair in New York next week. 

There’s still an opportunity to grab a ticket and make it an October To Remember with us and a bunch of the best founders in the industry. 

Fancy dress, craft cocktails, and killer food - all in support of breast cancer survivors. 

For a limited time, we’re offering complimentary tickets to this unforgettable event. 

RSVP here and use the code “RONSCOMP” to come as our guest. 

All the best,

Ron & Ash