Financial Prudence: Thumb Rule to a Successful D2C Brand

Most start-ups are built with an aspiration to scale into unicorns (if not decacorns) - however, more than 97 percent of them eventually get consumed as popcorns! And the biggest reason for this is their cash running out or 'almost' running out and lack of follow-on investments. Does it mean it's a wild goose chase - maybe and maybe not? Some might call it luck as well. 

As Paul Graham famously said, "You do everything right and then you roll the dice of luck!" but then Hasan Kubba at Unfair Advantage quipped aptly "you keep rolling the dice until you get a six." 

In the world of start-ups, we think financial prudence is more definitive than that. Certain principles - Let's call them the 3Cs for the sake of jargonizing things - help you avoid looking at finance as rolling the dice and trusting your luck completely!

Cash Flow - Sail Before Scale

Of the 3 reports you get in financials, cash flow is the most undermined report - this holds more precedence over P&L or balance sheet. As long as you know you are making cash, you will be able to sail through. While cash is king is usually undermined, I learned it the hard way, when suddenly we had 10 days of cash with us, while we were gloating in happiness for being ‘profitable’. Your P&L might be in green, but cash flow helps you understand how much float you have to literally 'play the game' in the next few months.

You are Building to ‘Build’ and Not to Fundraise

In the era where a fundraise is an embellishment to your profile, getting funded has virtually become the raison d'etre for start-ups. Have met a lot of entrepreneurs (or ‘wannapreneurs’ in true parlance) whose major goal is to build something that will get ‘funded’ quickly or who take actions that are more ‘fundable’.

Once again, from personal experience, we realized that if you keep ‘fundability’ as the objective, you will most likely be distracted from the core of what you are building, and might compromise on that most of the time. The risk you run is that if you don't manage any funding, steering it back to the main road becomes a tough task. This is one shortcut path from where there might be no u-turn for you.

CAC for CLV and Not CLV for CAC

CAC is the most abused word in the name of marketing. Customer Acquisition Costs - whoever talks about it, ends up defending any weird number through performance marketing, by picking a brilliant superlative 'lifetime value' of the customer, or as they, the CLV. With the era of highly distracted multi-loyal customers, where most customers have a repertoire of brands and not a single brand that they love, basing CLV on high loyalty levels is highly preposterous. It always helps to be highly pessimistic and assume a very high churn rate (we assume customers would move on in less than a year) and then check your CACs - not the other way around.

Contribution Margin

Finally, while CAC/ CLV jodi would help you decide how much to spend on advertising, it might not completely help you in building a sustainable model. You should make sure the unit economics works for you - which means you should be making money on every single transaction, all spend inclusive. Most of us do not realize the significance of contribution margin, as that's something that is usually skipped during our finance classes. If there is one variable you should chase after cash flows, it is contribution margin.

If you know you are making money on every transaction, you know how much business you need to do (or how many units you need to sell) to pay for your fixed costs - the unpaid part of ‘fixed costs’ is what you need to minimize at the earliest. Ideally, you should increase your fixed costs gradually to ensure you don't run out of cash earlier than you anticipate.

Sometimes, the contribution margin itself helps you understand if the gross profits with which you are working, are good enough for you to sustain - and that's circling back to the unit economics challenge that you might be asked a lot of times. If the Contribution margin itself is negative, you need to increase your margins or reduce your variable costs (like commissions, logistics, etc) to build a more logical model. If you ignore this, the 'burn' that you flaunt might soon burn your business.

Conclusion

In summary, while you continue to drive your regular business, you should chase the 3Cs – cash flows, CACs for CLVs, and contribution margins to drive sustainability for your business. Finally, if you stay true to the very reason you started with, across various stages of your scaling up, it does pay out - in ways more than just profit. At the end of the day, you can look into the mirror and into your own eyes, and at least smile back at yourself for adding that tiny little value to the planet as a team and making a true story for more than a few inhabitants.