Merchantry: Financial Prudence: The Unfashionable Wardrobe Essential for Brand Owners
January 17, 2023
May 10, 2023
min read

Merchantry: Financial Prudence: The Unfashionable Wardrobe Essential for Brand Owners

Merchantry: Financial Prudence- The Unfashionable Wardrobe Essential for Brand Owners

Ashwin Ramasamy, co-founder of PipeCandy invites Ben Tregoe as a guest on the Merchantry podcast.

Find Part 1 & 2 here:

🎵 Part 1 on Spotify
🎵 Part 2 on Spotify


Ashwin: Welcome to the 1531st episode of Merchantry. I'm kidding. I wish we get to that long, but, probably we are on the 10th or 11th episode,but, I'm in a good mood, as you can see. The reason is we are going to talk about a topic which is very close to my heart. And, I have today Ben Tregoe from Bainbridge Growth. He's the co-founder. Ben, good, to have you.

Ben: It's great to be here, Ashwin. Thank you so much for having me.

Ashwin: Awesome. Yeah, Ben, we've talked to founders of brands, we've talked to SAS operators, but this conversation is very different. Right. So, this is the first time you're talking to someone who has has ripped upon businesses, looked at the interplay between cash flow and debt and the right kind of borrowing, cash versus equity when, it comes to growing businesses and so on, all those topics which were unfashionable maybe even two months back, we're going to talk about that. I'm pretty sure this is going to be such a hit of an episode because of the times we are in, before we jump into all of this juicy stuff, I want to understand your background and if you could go ahead and do an introduction to the audience, that would be nice.

Ben: Yeah. Thank you. Well, I got my start, out of college in finance in New York  Wall Street. I was a financial analyst at a couple of different firms, the most recent at Lazard Freres in Private Equity. So that's kind of where I got my start in financial modeling and my interest in finance. I then, realized that wasn't the career for me, moved to LA. I tried to break into the entertainment business. I was a TV writer for a hot minute, for one year at Disney, and then got into..

Ashwin: Did you meet Larry David?

Ben: (Laughs)..No..I wasn't a very good TV writer because I didn't get a second-year contract, but I think that was a good thing. I, then got into startups, and, I've been doing that ever since 2000, mostly in like, marketing, tech, ad tech, and then in e-commerce. I've always had kind of an interest, ah, in those things. So Bainbridge is really the culmination of those things. A combination of finance and startups and tech and e-commerce. And we started Bainbridge, a bunch of us came out of a company called Nanigans. It was Facebook's largest marketing partner for several years. We had great customers there, like eBay and Wayfair, and Zappos, but also a lot of the DTC kind of 1.0 brands like Glossier, Harry's, Bonobos, Whereby Park, or Peloton were all customers, right? And we were, ingesting their data and making revenue predictions as part of our software. So my co-founder and I thought that was really fascinating, that with all that data, you can make these pretty accurate, cohort predictions. And we thought, what else could you be doing with this? Isn't there more that these companies need than better Facebook ads? And that kind of led us down the path of trying to help them make the right financial decisions. So that's when we got into financial modeling, we connected the financial modeling to a data system so we could, make the models more accurate and easier to use, and more automated. And that's where we are today. So we work with 16 DTC brands. They range from usually about 10 million to up to about 80 million. There's nothing magic about those numbers, but they really are brands that are facing complexity in their business. Omnichannel, typically, so they're in Shopify, Amazon, starting into wholesale, very difficult, cash conversion cycles, or understanding that and this kind of complexity of the business is getting beyond them. They start reaching out for help and making better decisions.

Ashwin: Awesome. So you're a veteran when it comes to, down market cycles, 2007 and 2008.

Ben: I'm old, but another way of saying I'm old.. (Laughs).

Ashwin: I just had a taste of 2000 when I was just graduating out, so I'm not that young either, so this is familiar, so coming to brands, Ben, they are a tough cash flow business. There's no other way of putting it, right. So in the early days of DTC, they were positioned as, tech businesses, and they were,  and, they are really in the business of turning cash flows. Right. And the sooner they realize that, the better it is. Right, maybe we can start with that, you've talked about businesses with $10 million revenue to $80 million and so on, what have these businesses done differently than others?

Ben: That's an interesting question. Well, the reason that I think DTC brands are really interesting and DTC is probably a bad term, but the idea of selling direct to consumers through multiple channels, the founders are typically really good at figuring out some need in the market, a better product that has resonance with some group of customers. So there's no getting around that. We don't really work with Amazon sellers that are just trying to game the Amazon system. So, you've got to have that. But usually, that takes you to, I don't know, a few million. You can sort of make it work, but you start petering out because of the difficulties of scaling the business. So the people, the founders that are able to move past that sort of, hair on fire stage, where you're getting a container, selling a container, running ads, usually, are able to scale out because they get a grasp on the core mechanics, the finances of the business. Sometimes they get past that on sheer luck or in the aberrations in the market as we discovered, right? So there was kind of an aberration in the market where VCs like you were saying were pumping lots of money into this space and, pre-iOS, ads were pretty easy to run, and everybody thought they were a genius. And you could build these companies to a really big size and keep attracting capital and like, oh, I can go public. And then everybody could look at your numbers and be like, this is actually a pretty crappy company, right? And it's unclear whether they're ever going to make money. And then the second abberation in the market was like COVID. We all decided to stay at home, and then people were like, well I still want to buy things. And so we had all these great ecomm sales. So people were like, oh this is working really well. And now people are discovering that like, hey, that share of wallet is disappearing. So I think we're in this now. This is kind of, like you said earlier, we're going back to normal. You know how these businesses really run and there's a lot of bad habits that have been built up among founders in the space, and then they're finding it difficult to transition back into the kind of nitty gritty, maybe unsexy, but critical concepts of cash flow management.

Ashwin: So, since you say cash flow management, there is a saying, profit is an opinion, cash flow is the fact. Right? So let's say cash flow, if I were a first-time entrepreneur, I would say I want to run a profitable business. That means nothing if there's no free cash flow. Right?

Ben: Yeah.

Ashwin: How about that?

Ben: Well, cash is king. I mean that is an absolutely critical concept, to get and to build on and never lose sight up.

So you can get cash in two ways.

You can raise it, which in effect you're buying it, right? So if you're raising capital, you're effectively buying it. So if you are raising equity, you are selling your share of the company in exchange for cash. If you're debt, you're paying interest on it in some form or another. The key to that is that you got to remember that, if you're raising equity, you, the founder, are paying the cost of that capital. If you're raising debt, the company is paying the cost of it.
So obviously we should all be hoping, we should all be trying to raise debt as opposed to equity if we can, because who wants to get diluted?

But more importantly, it's like the second way that you really got to understand because you can't raise capital forever is you got to be able to generate it. So eventually investors have to say, how do you generate cash? Now you're into this really unsexy things. But there's this concept of free cash flow, which you're mentioning, which is basically the idea of, like, all the cash that's left over after you've funded operations you've paid for capex like, if you're building a warehouse, which maybe you're doing, maybe you're not, and debt payments.
That money that's left over is your free cash flow. It's technically called your levered free cash flow. And that's what drives your growth. Your ability to generate that money is what enables you to control your destiny. It's what enables you to grow more. It enables you to be profitable. If you can't get to that stage, you might be able to convince people to give you money for a little bit of time, but you're eventually going to go out of business, or maybe you get sold for some crappy multiple, and you walk away relatively unscathed, but not rich. So, that's the critical concept, is free cash flow, and you've got to figure out how to get there. Sorry, am I rambling too much?

Ashwin: No, I'm all ears. Because okay, this is, in my part of the world, the sexy topic.

Ben: Well, you and I share the same kind of unsexy, interest.

Ashwin: Yeah. So there are two businesses. I mean, in the 70s, there was TCI, the cable company, which eventually sold to AOL for $48 billion.

Ben: Okay.

Ashwin: So, John Malone, who was the guy who did that sale, is the father of this term, EBITDA. Right?

Ben: Yeah.

Ashwin: So he was like, a hacker. Buy cable companies, put a lot of money upfront on capital costs because they cost capital, and then service that debt, through bank loans, and avoid taxes because you're booking losses. But it's a free cash flow machine. And 20 years later, Jeff Bezos did the same thing. Yes. So there are really smart cash flow mavens in business, and they build substantially big value. Right. So, if I'm a brand owner, and if you're telling me that cash flow is important than profitability, can you assure me why I would be valued as a better business if I manage cash flow over unit economics?

Ben: Yeah. Well, there's a cascade of, buyers of businesses. Right. So if you are early stage, typically you're getting in with small investors or VCs, and at every subsequent stage, somebody else has to come in and say, I believe that this business can go to another level. Right. And so, at larger scales, like, at the scales that we're talking about, like a 10 to 100 million dollar business, your next phase is, like, well, going public or, being acquired. So, just to take the acquired ones off the table first, you can have a very good exit, like Hero Cosmetics to a strategic who says, hey, you've proven out, the ability to win in a new category profitably. And if I buy you with my distribution, I could ramp your sale like, 3x, no problem, tomorrow, because I can get you into all my accounts. And so this is a win. So that's a great exit. The key to that type of exit, though, is like some sort of dominance in a category, or to get a good exit out of that is dominance in the category, or, a nice strong customer base that you prove through profitability. Right? So it's so important, and your ability to stay in business. Nobody wants to come in and be like, well, let me just fund $200 million of losses for the next indefinite period, seven years, because we hope this works out. So cash flow is still important there. For the public markets though, eventually, the public markets are going to say, you know, some form of a discounted cash flow, like, hey, these guys make money. I discount those back at some risk-return rate, and I say, this has a lot of value, so I'm willing to pay $7 a share for it, or $70 a share for it. So you still have to be able to generate and, that cash has to show up at some point. Now, Bezos was able to convince people, like, don't worry, it'll show up in like, three decades, or whatever it was, but it's showing up. Right?

Ashwin: Right.

Ben: So he ultimately was able to deliver on that, so that's why this is so important. Above just profitability, you got to be able to get there and to get there, you still need the cash, right? So you've got to be able to prove to people that you can deliver on that profitability without, consuming infinite amounts of cash. And that was one of the main reasons that the VCs got out of the business, is because they said, or to a large degree, because they're like, I can't fund the cash needed to get to this potential profitability. And these guys are consuming way too much cash.

Ashwin: Right, so what's exciting, or what's interesting for me is if you have unit-level profitability and you have the ability to generate cash, the cash funds grow, right? So you don't have to be in a situation where you decide between growth and profitability. It's what most of the VC businesses, are asked to choose between. Cash gives you the luxury of both growth as well as profitability. You can choose not profitability. You can put that money all back into funding new brands or starting new warehouses and so on. But you're under control, in that sense.

Ben: Well, I think that's what a lot of CEOs and founders and companies are struggling with right now, is that the market has shifted so dramatically, and they all sense in some form or another, their loss of control. If you aren't generating your own cash, then you are relying on somebody else giving it to you. And, this is a scary time to be relying on somebody else, convincing somebody else to give you money. So it's absolutely critical that people figure this out quickly. Now, the good news is that you can figure it out. If you know how to do it, you can figure it out. And, that's what I think we'll be talking about here, too. How do you sort of diagnose the problem and get to answers quickly? So, you are able to self-rescue and survive, right?

Ashwin: Let's talk about that. Right. So let's say I'm a brand that comes to you, and I, have some knowledge revenue, 20% EBITDA, which is great, what kind of questions would you ask me about, to understand my cash flow situation and what cash flow is good? So today, if I'm a brand, what should I plan for from a cash flow perspective?

Ben: Well, let me sort of go back up to first principles. Your job as a founder is to build a machine where you can put a dollar in and you get more than a dollar out on the other side, consistently. And if you can do that, you will have an incredible amount of value. Any idiot can build a machine where you put a dollar in and you get $0.50 out on the other side. That's easy, right? Like, you don't want to be that person, right? So let's be the smart person. Right? So now you got to think about, like, okay, how does that dollar get converted? Well, what makes brands difficult is that they're very complex businesses, and you have kind of multiple flywheels moving at the same time. So the complexity comes from multiple disciplines that you have to master, I have international supply chains. I have logistics, I have marketing, I have product development, I have paid advertising. I have finance, I have operations. I mean, it's way more difficult than a SaaS business.

Ashwin: Right. No recurring revenue.

Ben: Yeah, exactly. And it's like SaaS businesses, like international supply chain logistics, customer support, like, yeah, send me an email. Right, that complexity is hard. Then the other thing is you have these multiple flywheel rights. You have this, like, the first part of your cash conversion cycle is your ability, like, hey, I paid my supplier well in advance of my ability to monetize the inventory. Right. So that is, typically the biggest part of your cash conversion cycle. And then the other part is, like, now that I have the inventory, how long does it take me to sell through that inventory? Just because I got 100,000 units sitting in my 3 PL today doesn't mean that I can sell it all tomorrow. Right. So that now is a function of, well, what does your repeat business look like, and what does your acquisition business look like?

And so you're now, I think, getting a sense of the questions that we start asking people when we sit down with them the first time. Like, what do your supplier terms look like? Are you paying 100% upfront or are you able to spread that out more? What does your repeat business look like? How often are your customers coming back? And how fast are they buying through your inventory? And what does your ability to acquire customers look like? What is your ability to pay for that ad spend? And then you start getting into some of the concepts around. Everybody wants to talk about ad spend, right? And CACs and stuff. But the key is, like, what's your payback period on those customers that you're acquiring? Because if you're acquiring customers, just as an example, people are like, oh, I want to let CACs go up. We're having trouble, so they want to raise CACs. And let's say that their goal is like a million dollars in sales in a month. So they let CACs go up so that they hit their sales targets. So, like, okay, you reduced cash, right, because you had to pay for more ads, you hopefully got that cash back in terms of your revenue. But now what you also have to think back is that because your CACs went up for that set of customers that you acquired, your payback period on them just got extended. So it's not what happened in this period, it's what's going to happen in six or eight, nine months from now, before they start generating free cash for you. And that like, right there is like, a concept that people often are like, oh, yeah, so now I'm extending on my payback period. So, like, okay, things looked good this period, but I'm going to have a cash issue out into the future because it's taking me longer to recoup that cash from those customers that were more expensive to acquire.

Ashwin: Right, yeah. That's, an AHA moment, or like, Oops moment, for most businesses, it is the Oops moment. And, there's also SKU level profitability, people don't get into that until, it pinches them..

Ben: Sorry, if I could jump in, you just reminded me that's a great point. You often see companies, and I had this just last night, actually, a really interesting company that had sort of cracked the code on a product, but then everybody's like, oh, I need to grow, I need to expand my customer base. And there's a whole different topic around, like, can you really expand your customer base or your tribe, so to speak? But they tried it, and then they found, like, okay, now we're attracting these different types of customers. They're not generating as much cash. Lower price points, worse payback periods, and worse churn rates on the subscription. So now it's like, not only did you develop that product, but you're churning through a lot of money acquiring those customers that aren't generating money for you. So that's like sort of the second level of questions that we start looking at is like, how do we segment your customers to find the most, profitable ones that can generate the most cash for you? How do we segment your products so that we can look at the ones that are most profitable? Another common problem is like, people acquire customers for a certain product. Those customers never come back. They don't buy into the rest of the brand.

A great example there is like, we had a CEO of a very successful company, up in the 200 million dollar range, and after about four years, we finally figured out that backpacks were kind of useless for us. We've been putting all this money building and acquiring customers for backpacks. We finally looked at all the data and the backpack buyers never come back. They'd buy a backpack and we'd never see them again. So just imagine how much money they spent. He was like, thankfully caught it. But how much money he spent on developing backpacks, acquiring them, selling them, advertising them all for a customer that was like basically a one hit deal.

Ashwin: Yeah, that's what made me wonder about businesses like mattresses, for example. You don't buy a mattress every year, so, you are in a very difficult business right up front, and the product line expansion does not allow for a lot of repeat purchases either. Right? So, I think that's, a good education, if you're an, entrepreneur, thinking of launching a product like repeat purchases is something you need to think of way ahead. The other question that kind of confounds me is, these innovative brands and products that are trying to create a category. How do you calculate LTV in these cases or when they launch a new product? And modeling that carries a lot of assumptions. And in this market, getting the model wrong means, you're out of cash by a few quarters before you thought you would so that's risky. So what's your advice?

Ben: Well, first let's define LTV. So oftentimes, the majority of time when people tell me an LTV number, what they really mean is lifetime revenue. Right. So an example there is like, a company is like, oh, we've got this, like, you know, and they never, they rarely define lifetime. So let's say what we like to do is first, you time bracket it like, okay, what's your six months, twelve months, depending kind of on your product, but the LTV really should be contribution profit after marketing. And people use different terms. At Bambridge, we're big proponents of standardizing, so that we can benchmark everybody against each other and provide better advice. So our definition of contribution after marketing is, your contribution profit is what's left over after you've delivered to the customer. Right. And then the after marketing is your full marketing expenses. It's not just your paid, it's your cost of your marketing team, any agencies you're using, PR, all the budgets. So contribution after marketing is now what's left over for you to fund opex. So you're still not profitable. You have your overhead, but you have a good sense of the kind of unit economics at that point. And what's critical here, and this is why we think that ROAS is a pretty lousy metric, is like, people say, oh, ROAS. So they mean like, oh, my revenue rate or return on ad spend, but usually they're using revenue numbers. So let's say you had like a $300 lifetime revenue, but you had a $30 contribution profit after marketing. And if you're like, oh, I'm running at a 3x ROAS, so you're like, okay, so you have a $100 CAC. But what you're also telling me is that it's going to be over three years before you're even getting the money back to fund your opex. Like, how confident are you in your repeat business that you're going to do that? You are creating a massive cash trough in your business until you can get to profitability. So the more customers you're acquiring, you're just deepening that trough.

Ashwin: Right.

Ben: Where is that money coming from? You better be really good at raising it because that's going to be painful.

Ashwin: Right. So that brings me to the source of money, right? So, let's assume companies, are borrowing. Borrowing, six months back is different from borrowing now. High interest rate environment, people say high interest rates, and it's all over the newspapers. But explain what high interest means for an LP, who is investing money in a lending company.

Ben: Yeah, well, the first thing to kind of understand is, capital has a price, right? So, everybody has a different price for their capital. And, loans are priced presumably off of it's a function of the risk and the cost of capital to the buyer. So as interest rates rise, the reason that your mortgage rates go up or your credit card interest goes up or whatever, is because it costs more for the lender to get access to that capital.

Ashwin: I’ll stop you there for a moment to clarify this. What does cost of capital here mean for a lender?

Ben: Okay, so if the classic example would be like a bank, right? So banks cost of capital is often deposits. We all have money in banks. Good luck if you get paid on, any interest on what's sitting in your checking account. Right. So if I'm that bank, I'm like, man, that's an insane cost of capital. That's incredible. More deposits, please. Free money over here. And then I get to lend it out and I make that spread. If I'm one of the alternative lenders, a Clear Co or a Wayflyer or somebody like that, I'm getting funded primarily through, I don't know what their funding sources are, but they used to be credit funds. So the credit funds are like, I'll give you money at 15% or 12% or 10% or whatever the number is. The bigger you are and the more successful you are, the lower your cost of capital from these credit funds. But if you're starting from, let's say it's 12%, I'm borrowing money from a credit fund at 12%. Well, I can't lend it out at 13%. I've got to lend it out at like, I don't know, 18, 20. I've got to make a spread, right? That's how I'm going to make money. So as interest rates rise, cost of capital goes up for everybody and it gets passed down to the borrower, right.

Ashwin: If I'm an investor, I would rather put the money in T-bills or some of these conservative deposits instead of giving the money to a VC or a modern lender. So they are going to go for risky investors who are willing to put money on them. And the expectations of interest is high. So the expectations on the brand is high.

Ben: Yeah, I think that's fair. I mean, the beautiful things about the capital markets is they're massive, right? So for every person that wants to invest in T-bills or somebody else is like, risk on let me, you know, I want to make a huge return, right, or I need to. So money will tend to find a home, but that's the first thing to understand about the alternative lenders, in borrowing. The other thing to understand is like your ability to get, the lenders has to make a profit assuming some form level of losses, right? So if you go to a bank, the reason banks are so hard to get money from, if you're a brand is because the cost of capital is cheap to you. Like, five or six or 7%. But they're like, I can't afford any losses. I can afford one loss for every 1000 loans or something like that. They're going to make damn sure that you are a good credit. The way they do that is that they're going to be like, well, are you profitable? How long have you been profitable? How much cash are you generating? Are you able to service this debt? They're going to really put you through the wringer. Whereas people that are, doing more alternative financing are going to say, well, I can afford some higher loss rates because I'm going to make so much more money from these loans that I can afford a slightly higher loss rates. The way they primarily control their risk, I'm talking really about the MCA, Merchant cash advance is that they're like, unlike a bank, my money isn't out for very long. Right. Another way to control risk is like, how long do you have the risk on. Well, if you're a bank, like, okay, here's your loan, Ashwin, and pay me back in three years. That's a long time you're looking way out into the future. If you're a Clear co or Wayfire, it's like, here's your money, pay me back starting tomorrow and I'm out of this thing in 60, 90 days or whatever it is. 150. I mean, whatever terms you can get now from these guys. But they're getting paid back really quickly. They're reducing their risk accordingly.

Ashwin: Right. So if I'm a brand, if I'm having to raise capital now through borrowings, how do I evaluate my options?

Ben: Well, that's a great question. The first thing that you should do is really be take a hard nosed look at yourself from an outside perspective as much as you can. Because what you want to do is you want to eliminate the, options that are not going to pan out for you so you don't waste time on them. Capital raising is an incredibly time consuming process, outside of hitting the button on shopify capital, which the reason that works is because it's fast and easier. But if you're trying to get a lot of money at really good terms, it's a time consuming process. So you don't want to waste time like trying to get a bank loan if you're not lendable to banks, if you're unprofitable and all those things. At BainBridge Growth, we have a whole rundown of this, field guide at DTC Capital. You can find it on the site. It sort of explains your options. That's a great place to start because get rid of the things that you're not going to be suitable for, then focus on the things that you are. Right. Another great example is like, don't go chasing venture debt guys. If you haven't raised venture money, they're not going to listen to you. You're just going to spend a lot of time getting those right, so once you hone in on your decisions, the next big thing you got to do is you got to make sure you're ready for it. Your financials are in good shape, that you can present a really good case. You can get through the diligence process quickly. The last thing, or not really the last thing, but another key consideration is like, why are you raising this money and what are you using it for? And this is probably actually the most important consideration. So what we see is a lot of times people will raise like this alternative financing, oh, I need cash, I want to spend money on ads. I need this inventory payment. And what they're doing is they're kind of using the quick money, when they should have done the hard work of like, how do I, am I generating cash in this business? Can I get my business to generating cash flow? I don't need to borrow as much or raise as much. And the problem with the quick fix is that it goes back to that formula for free cash flow. Right. So, in your example, I think you said a 20% EBITDA margin, right? Okay. So I have this, like 20%. I saw something for a dollar and I have $0.20 left over. It doesn't make them that simple. But now if I go out and I get one of these MCA loans and, let's say it's 18% off the top or whatever, which would not be uncommon now, I sell something for a dollar, they take their eighteen cents, and then I'm left with two cent left over. Well, like, you dramatically reduced your ability to produce free cash.

Ashwin: Right.

Ben: So that's why people get in trouble with these things so quickly, is because now, instead of making $0.20 every month you’re making two, well, jeez, next month comes along, I need more money. I guess I'll do another MCA. And you're in the cycle of always having to borrow more just to get by. So you're much better off figuring out how you can generate your own cash first and then using that money kind of as your last resort, or if you're super confident in, your ability to repay it. Sorry, am I going on too long?

Ashwin: No. Go on.

Ben: But a key consideration in that use is like, there's this concept in borrowing or lending called matching, right? So what you ideally want to do is match your use of the borrowed money to, match the repayment of the borrowed money to your use of it. Two examples. So, if I take a loan from a bank, like, let's say a three year loan, and they give me a million dollars, like, I have a million dollars now in my cash, my bank account. But if I can't use it for 18 months, I'm just sitting there paying interest on, having lots of money in my bank account. That's a poor matching. Another example of poor matching is like, let's say my cash conversion cycle in my business is 270 days, right? So it takes between the time I have to pay my suppliers so when I get fully paid back on the inventory, it's like nine months or something like that. So now, if I borrow money from an MCA and they're trying to get their money back in, like, you know, 90, 120 days or something like that, it's like I've taken the money and I've paid it back before I've really gotten to fully use it. So that's another poor example of matching.

Ashwin: I can think of one more example. Don't take the money and do experiments that you don't know how, the end results are going to be. Don't put on new ones. Don't do product development for a new segment, that's a costly risk.

Ben: Yeah, I think that's absolutely right. Because now if you do that, you could get zero back from it. Now you've really strained yourself and your ability to generate cash because you've paid it all back. But you haven't generated your own cash either, so I think, it's tempting because it's so easy. I'm like a bank loan. They'll give you money really quickly, but there's a reason for that. I'm not saying that you should never take it if you're in a total jam and it's better to take the money than go out of business, that's for sure, but it's really a bad idea, like you said, to use it for things unless you really need it.

Ashwin: Yeah. Keep finding ways for newer revenue or easier cash flow models. Like subscription. Not all businesses can be subscription businesses, even within DTC. But what about a club where someone pays to be a part of the club and then they get to some discounts. So collect $100 upfront per year for them to be part of the club and then give them discounts later. Right. So find a way to get cash up front.

Ben: Yeah, that's smart. That's what's so fun about I think what's really fun about retail and ecommerce is like, there's all these great ideas out there and then people sort of repurpose them for their business, experiment with them and come up with something really interesting. But as you were talking about, I was like oh yeah, like Costco. That's a great model, works super well. You build an enormous amount of loyalty into that thing. Prime, think of how much loyalty Amazon just built by the fact like, I don't know, shipping seems to be free. I'll just buy from those guys.

Ashwin: Yeah. When we think of these ideas, these ideas typically come from the marketing teams, but, wear the cash flow hat and ask for the finance team for ideas on what you want to do with marketing and pricing and you might probably get cash flow ideas.

Ben: Yeah. Well that's interesting because I think what's happened over the past few years is like marketing has been emphasized and finance has been deemphasized from the founders and these brands businesses. And I don't think that the emphasis on marketing is a bad thing. I think it makes sense. But the deemphasis on finance has certainly been a bad thing. So now you have a lot of founders that aren't aware of these concepts or don't understand the machines well enough, which now leads to a lot of bad decisions. It's a thing that you really just can't outsource. You can outsource it for a while, but you need to internalize at some level, these concepts so that you start making better decisions. I think that going back to your question, how do people scale out of it? It's like these businesses that have internalized the concepts and really know the plays and the playbook that can lead to generating cash consistently.

Ashwin: I'm going to ask you to do a little bit of crystal ball gazing.

Ben: Never works out, by the way.

Ashwin: We all still indulge because we want to feel secure about the future. We want to feel that we know it and so on. I thought the Black Friday Cyber Monday is going to be, a ho-hom, affair. But shopify came up with some spectacular numbers, and we are looking some other numbers from Amazon,and it looks good. Where do people have the money to buy and how long will they just go?

Ben: I think you and I are probably in the same camp. The size of the revenue was surprising to me. The size of the sales was really surprising to me. There's no doubt that there's these counter forces in the economy. Like, consumer sentiment is down, consumer debt levels are really high. People are running out of spending power. I don't know how that's not true. And we've even seen that in some of our customers that are doing subscription businesses, that their credit card declines have gone up because people are just tapped out. So my best guess what I think happened, and this is where I'm going to go way out on the limb for you here, so it'll look like a jackass in two or three months. But, my guess is that people are so trained now on the sales in Black Friday that they basically accelerated all their holiday shopping into the period. And my concern is how long is December or January sort of on out? Is it going to look worse now? But I don't know where's the money coming from because it doesn't feel to me, like, from a personal standpoint, I was like, 30% off, okay, but trying to save some money. I'm not dropping a lot of money out there. I guess maybe that's the problem. You over index on yourself and then you're like, everybody else is like me, and why are they acting differently? I don't know. I think founders should be battening down the hatches more. Really getting, you know, I don't think this market is going to turn around any time soon. I don't think the capital markets are going to turn around from anytime soon. I think it's time to focus on generating cash as quickly as you can.

Ashwin: Right. I'm going to look at, BNPL numbers and FDIC numbers on credit card spend for, November. That will tell the story as to where the source of the fund is for consumers. But, I'm nervous. If this had been a flat Thanksgiving, it would have been much more comfortable. That the reality has sent in. But it hasn't. So we're just kicking the can down the, not a few months.

Ben: So you think that the consumer were sort of like, screw it, we'll be okay.

Ashwin: So the BNPL numbers will say it. That and the credit card numbers for next month. I think, that's what is happening. Customers are actually spending, or like, they are spending from the future and we'll know from December holiday spending if that's true.
We are coming close to the top of the hour, so I'm going to switch gears and talk about a couple of other things.

Ben: Okay? Yeah.

Ashwin: So if a founder has to become financially well educated and prudent, what are the resources you would recommend to them? Anything that you can suggest. One, two, three things that they should start reading up.

Ben: Well, I'm going to plug myself, so we put a lot of content out of I mentioned the Field Guide to DTC capital. That's a great source of getting the basics. We also put a lot of blog posts out about setting up your chart of accounts, how to think about, these concepts. I think that's a good place. There's a lot of good e-commerce groups out there, you guys put out a ton of great content talking about this. Andrew Youderian at E-commerce Fuel puts out a lot of great content around this. There are some great podcasts, like the DTC Pod, is a good one. So I would start just listening and reading up on it. I think the other big thing is, like, you got to dive into the numbers. I know that there's a lot of founders that are like, I just want to focus on how awesome my product is and what the ads are doing and the marketing and stuff. But you've got to get into your own models and really start understanding the interplay of the levers in your business. And if you don't have a good enough model and you got to get one, that's another thing, because models are just representations, of the future. That's all they're doing, is that they are trying to show you potential futures. And so if you have a model that is too rudimentary, you will discount it automatically in your mind. Yeah, that's not really what's going to happen. But it was easy to build and understand. So, okay, why not? If you have a model that's too complex, then it becomes like, well, jeez, I don't know, how do I make 500 correct predictions? Right. So you want to find a balance of a model that, you feel is a good, solid representation of the future, and you want to start playing with it so that you really understand the interplays. And I find that to be the most helpful. What would happen if we did this? If we could shorten our cash conversion cycle, if we send our payment terms on our suppliers, if we could maintain CAC, if we could increase our repeat purchase rate then you're like, oh, okay, that's a really good lever. I should focus on that. Or you're like, oh, all this effort that we're putting in and trying to get our repeat purchase rate up to another 5% actually doesn't pay off that wealth. Like, we should focus on whatever the other thing is. It helps you start questioning all the sacred cows in your business right. Where you are like, oh, we have to discount subscriptions. Do you? I don't know. That might be your problem right there. You're over-discounting your subscriptions. Or people are terrified of price increases. It's like, Christ, look at the supply chain. Like, inflation is going is compounding through your supply chain. So if you're like, oh, 8% inflation. No, it's not 8%. It's 8% every step along the way.

Ashwin: Yeah, that's what people miss. Yeah.

Ben: If you're holding your pricing study, you're just like, ravaging, hey, do you have a good product or not? If you feel like you have to discount your product so heavily to get people to buy it, then maybe you don't have a good enough product. Maybe you should be focusing there. But I think that people get terrified of raising prices and that's like, look, you got to survive. You've got to generate cash.

Ashwin: Right? In fact, this is not a brand, but a SaaS business. I was talking to a couple of days back, they are doing the 2023 planning, and it's one plan. It doesn't work. So you have to have scenarios. If the cookie crumbles, the plan B and plan C has to be involved. You cannot work on a plan B and plan C when it happens.

Ben: Right, yeah, that's a great point, my final plug for myself is, like, that's exactly what we do for our customers, is build and deliver really good financial models connected to their data so they make the best possible decisions.

Ashwin: Right. So, Ben, this is a conversation I enjoy so much and I don't get to do many of these conversations. And I think we are at the time of the world where this conversation is possible. I'm thankful for that. And you're building a great business, doing a great service for entrepreneurs, and helping them stay in business. More power to you, and I totally enjoyed having you here.

Ben: Thanks, Ashwin, this is a lot of fun. Thank you for having me.

Ashwin: Awesome. All right. And that brings us to the wrap of, yet another fun filled episode of Merchantry. I'll see you maybe one more time before the holidays.

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