DTC 114: Boss of any business, cash flow!

A business needs money to run. Rent, salaries, inventory, software and wi-fi are some costs. The consequences of no cash is a non-existent business. How, as a DTC brand, can you improve cash flow?

👋 Hola! Welcome to Out of Singapore. I am Shan and I am building businesses from Singapore. Sometimes I feel Singapore market is small. Every second day, I think about where should we expand next? Each time I get stuck at the same question - where do we get the cash for expansion? All other markets are going to be far more expensive. Can I make Singapore market a cash cow?🤔 That will allow us to invest in new markets (maybe). 🤔🤔

What’s a cash cow? A business or entity (non-human as well human) that generates high amount of free cash flow, preferably profitable. The “high amount” is defined based on the needs of the business. It could be 1 million for a lifestyle business while 100 million for a large global business. A growing positive cash flow makes a business a cash cow. So what’s cash flow now? Before that, a quick thought from me -

Businesses die because they run of money. Once a business starts delaying or skipping on payments, the services start degrading. Finally it ends up with unsatisfied customers. This translates to less sales. The business slowly dies as it’s cash is not growing each month. That’s cash flow - the amount of cash that comes into you bank each month.

So today, we will cover

1. What is cash flow?

2. Three rules of improving cash flow.

3. Tips to improve cash flow for DTC brands (or any other business)

Let’s begin. Today will be direct and concise.

#1 What is cash flow?

First, let’s get ChatGPT to do it’s magic.

Cash flow is the movement of money into and out of a business.

Positive Cash Flow: When a business's cash inflows exceed its cash outflows during a specific period. The business is generating more cash than it's spending. It is a sign of financial health and sustainability. It allows a company to cover its operating expenses, invest in growth initiatives, repay debts, and distribute dividends to shareholders.

Negative Cash Flow: When a business's cash outflows exceed its cash inflows. The business is spending more cash than it's generating. It can happen for various reasons, such as investment in growth projects, high operating expenses, or declining sales. It's not necessarily a sign of financial distress if it's due to strategic investments that are expected to generate future returns. However, prolonged negative cash flow indicate underlying financial problems.

Cash flow is like a dam. Look at this - water is money, water coming in is revenue (incoming cash) and water going out is expenses. Water flow ~ cash flow. Simple, right?

Higher incoming cash flow allows a business to survive and grow.

#2 Three rules of improving cash flow

Simple straightforward rules. Let’s go through them.

Rule 1. Make profit on each sale.

Some call it “unit economics”. You need to know the cost behind each sale. That will allow you to price your products profitably.

Costs can be categorised into these buckets -

• Cost of goods - ingredient cost, production cost and everything that goes into making a product each time. Assume $10.

• Fulfilment cost - Storage and last mile shipping expenses. Assume $6.

• Cost of acquisition (advertising) - Money spent to get consumers to buy your products. Divide the total revenue by total marketing spend to get this. Assume $40

• Fixed costs - Salaries, agency fees, rent among others. Take the fixed cost and divide it by total orders. You will get fixed cost per order. Assume $20

Total cost per order is $76. You need to sell at least $76 to make a profit in every sale.

Rule 2. Earn first, pay later.

In simple terms, customer payment (cash inflow) should come before your invoices and salaries (cash outflow) are due. The bigger the gap between your earnings vs payments, the better it is.

A simple example is:

1. Day 0 - You pay $10 vendor to make your products.
   Earning = -$10

2. Day 1 - Customer pays $100 for an order.
   Earning = -$10 + zero (no money has hit the bank)

3. Day 1 - Facebook charges you $50 for acquiring the customer.
   Earning = -$10-$50 = -$60

4. Day 3 - Shipping company charges you $10 for fulfillment.
   Earning = -$10-$10-$50 = -$70

5. Day 7 - Stripe deducts its fees of $5 and send you the rest ($95).
   Earning = $95-$10-$10-$50= +$25

6. Day 30 - You pay $20 salaries and rent
   Earning = $95-$10-$10-$50-$20= +$5

7. Day 40 - You pay $10 on an outstanding invoice. (there are always outstanding invoices, 🫠🫠🫠🫠)
   Earning = $95-$10-$10-$50-$20-$10= -$10

There are multiple ways to improve your cash flow in the given example. I will demonstrate in the tips section.

Rule 3. Earn as early as possible, pay as late as possible

Get money in your bank first. Creditors (whom you owe money) should be paid later. Simply, hold on to all the earnings you have for the longest period of time possible.

This is the hard truth I learned in the last one year. This is same across all the countries and regions across the world. Paying late is key to survive.

Those are the rules. Rule 3 emphasises rule 2. 😝

#3 Tips to improve cash flow for DTC brands

These tips are based on the three rules mentioned above. Let’s go through them.

1. Don’t roll in to auto-pay via credit card or debit card - Unless you have lot of cash in your bank, opt out of any auto-pay agreement or arrangement. Pay manually when you have the cash to pay. Auto pay makes life terrible since you do not have control on cash outflow. I can write a whole blogpost on this.

2. Get raw materials on credit of 60 to 90 days - The credit period must be longer than your cash cycle. If it takes you 45 days to sell the inventory, get a 60 day credit period. In essence, pay the vendor from you sale earnings, not with debt.

3. Get advertising spend credit - Similar to above pointer, spend on marketing without actually paying right away. This is “advertising credits” or credit line.
   For Facebook advertising, which forms bulk of DTC ad spend, you can apply for advertising credit after 4-6 months of running ads consistently. This allows you to pay at the end of each month. Similarly, TikTok provides advertising credit as well.

4. Get paid same day by connecting your debit card to your Stripe account. This is an excellent example of realising your revenue faster. Do set up the auto pay-outs.

5. On marketplaces like Shopee and Amazon, you can set up auto pay-out every day or every week. I sometimes take out money twice each week. Example of early cash inflow.

6. Negotiate <7 day settlement period with payment providers. In case you are using a payment service apart from Stripe, negotiate for 3 day or 7 day settlement. Say absolute no to anything beyond 7 day.

7. For consumer payments, don’t do cash on delivery till you are cash flow positive. Ensure consumers pay you before you send them the goods. Cash collected via COD (cash on delivery) stays with the shipping company for more than 30 days and ruins your cash flow cycle.

8. Vendor invoice settlement period should be at least 14 days. Ideally, the bigger the amount, the longer the credit period should be. For larger payments, push for 30 day or 45 day payment period.

Do you have other tips to improve cash flow cycle? Let me know.

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