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Picture this...
You're running a growing DTC brand, generating millions in revenue, setting record growth month over month, and even turning a profit.
On the surface, everything looks great. Then, out of nowhere, you're suddenly late on Meta payments, your ad account is shut down, and you can't afford to make payroll or cover inventory orders. How does this happen?
The answer lies in cashflow—or more precisely, the lack of it.
Many DTC brands focus solely on either growth or profitability. And while these are both important targets, there's a third metric that often gets overlooked: cashflow.
Cashflow is the real number that most founders, operators, and even finance leaders overlook. Without sufficient cashflow, or an understanding of how it moves through a business, it can be the kiss of death for even the most promising DTC companies. (Check out our previous post on the role of cashflow in an e-commerce business.)
Many founders assume that as long as their brand is profitable, they’re safe.
And while profitability is an essential metric, it alone doesn't tell the full story.
A company may be profitable on paper but not have the necessary cash on hand left over to pay suppliers, employees, ad costs, or its other fixed overhead.
How is this possible?
When you're trying to maximize growth, it's often at the expense of something else in your business. After all, businesses have finite resources, so just because you can grow doesn't necessarily mean you can afford to.
Let's start with inventory.
You might've experienced being understocked, but have you ever been severely overstocked? I hope for everyone reading this the answer is no.
However, many DTC brands fall into the trap of over-ordering inventory on generous demand projections or to secure better margins. But tying up too much cash in inventory can leave a brand unable to pay other expenses, especially if sales slow or paid ads efficiency drops.
This can force brands into a corner to sell through inventory faster than they otherwise would in an effort to free up their working capital. As a result, this can mean potentially moving the units at a breakeven (or even negative) contribution margin. So not only are you not turning a profit, you are actually sacrificing profit margin by sitting on too much stock.
Here's where the cycle gets worse...
If this continues for too long, brands are unable to build back their strategic cash reserves, which are necessary to place future orders. So being overstocked is not quite the same as setting inventory (or hundred dollar bills for that matter) on fire, but it's probably the closest thing to it.
Some brands manage to survive this spiral if they remain solvent, generate positive contribution margin, or are able to reduce OpEx in other areas of their business.
But unfortunately, not all brands make it through to the other side.
It's easy to interpret this post as a case against growth, like somehow "growth" is a bad thing. That's not the case at all...
Growth is essential for any business. Whether you're trying to establish a dominant position in the market or demonstrate future earnings growth to a strategic buyer, growth is a necessary ingredient in any healthy business.
That's why under the right capital structure, operating on clean financial data, and using forecasts based on high probability, risk-adjusted outcomes that take into account new customer and returning customer revenue expectations, brands can afford to grow sustainably and profitably, without letting cashflow run away from their business.
Don't be the brand that doesn't forecast their cashflow. Be the brand that outgrows everyone else because you do.
If you liked this post, check out our Free 13 Week Cashflow Forecast to build your own DTC cashflow forecast.
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