We are in uncharted territory. We can’t deny that early risk capital is scarce. Founders are being forced to get further on less. What if we put profit before growth and cash before everything?
For the last decade-plus, a lot of early capital has been available. As an industry, the norm became chasing growth for growth’s sake. Profit be damned; we can solve that later. But, the pendulum has swung, and this path no longer makes sense for most.
I am passionate about encouraging entrepreneurs to build not only great brands but good businesses underneath those brands. While many see this capital constraint as a concern, I see it as an opportunity. It is an invitation to get off the freeway of growth and choose the meandering country road.
It is a difficult choice because it contradicts what we’ve encouraged and celebrated as an industry. We don’t laud the brands that have spent years, even decades, getting to their first $5MM in sales. Becoming profitable and cash flow positive leads to self-determination and optionality. It takes discipline, patience, and resolve.
Let’s talk about how you do this, how to take the freeway exit ramp and find that bucolic country road. It all starts with your unit economics. An exercise I would like each of you to do is a waterfall of your contribution margin. You can do this by the customer or by the channel. Start with your SRP, and then start backing out all the direct costs of supporting that transaction. This includes promotions, freight, fulfillment, acquisition, COGS, etc. Here is a template that might help you.
What is left is your contribution margin. These dollars or cents contribute to the fixed cost of running your business. I would bet, and I am not a betting man, that many of you will find that the end number is negative. That means that every time you say yes, you are investing in that opportunity.
The next thing to understand is the Lock Box Principle which is all about cash. Every opportunity you say yes to requires you to take cash out of your business and put it in a locked box you can’t access. Inventory, receivables, marketing, and trade expenses go into that box. You can’t use those dollars to fund other elements of your business. Here is an article that explores this in more detail.
When you understand these two core principles, you’ll see that growth is the most voracious cash consumer and that it might not be best for your business.
There is another way to build a great brand and a good business. An approach that puts profit before growth and cash before everything.
