307. Cash Flow, Profit & Focus for CPG Founders With Nate Littlewood, Future Ready CFO

24:19unknown host:So from a strategy standpoint, love that. So you're helping to quantify and qualify the value of the decisions and rank them so that strategically I know where to focus my efforts. Love that because I think that's so critically important that founders know exactly where to focus. And that in and of itself pays for exponentially pays for what you're doing. I mean, the reward, the ROI, just that piece of the business is so valuable. Can you talk about, so now that I know where I want to go, I know which balls I want to kick into the goal, how do you help me? Let's say I chose these three out of the 20.

25:04How do you help me then decide how do I maximize my efforts in that?

25:10unknown host:Or can you go down, can you get that granular?

25:14Nate Littlewood:Yeah, absolutely do. So it varies a little bit based on the type of engagement I have, but at the most engaged end, one of my clients, I am currently helping them basically roll out objectives and OKRs or OKR, the OKR model. Some people prefer EOS and that's fine as well, the entrepreneurial operating system. I, you know, doesn't really matter which of these frameworks you use. I like OKRs, so that's what I do. but basically we went through this whole process we figured out what the company as a whole should be focusing on and each individual on the team has now got their own set of objectives and key results as well so essentially what we're doing now in in three month intervals is we've determined these priorities we've set tangible goals on each of these kpis like you know the metric or improvement that we want to achieve.

26:09Nate Littlewood:And everyone on the team is now tracking their progress towards these goals. And we have a weekly all hands meeting where everyone shares their updates. And we talk through, you know, what did we do last week? What are we doing this week? And what are the things I need help with? Like, where am I stuck? And it's just an incredibly rich, power packed one hour meeting. It's like, swat, swat, swat, swat, swat. Like, this is what's going on. this is the progress I'm making this is what I need to help me get to the next step you know we went from a meeting that was unscripted no agenda and frankly just waffling on for 60 minutes to now something that's focused intentional and you know we have a plan and I can see that the impact it's having in terms of team engagement people feel like they have direction that people feel like they know where they're going people can see the impact they're having on the bigger picture.

27:06Nate Littlewood:And yeah, it's translating in terms of results. So that's, you know, one way that I work with my clients. Other people prefer to do it on their own time, you know, like other people don't, you know, want or need me as involved. And some of them will just manage this stuff for themselves. So how granular I get with this stuff just depends a little bit on the client and how involved they want me to be.

27:29unknown host:Appreciate you saying that. And I think it's really also critical to point out that you being involved at that level helps me remain focused on my goals and my priorities. You spotting the blind spots that I can't see before I can't even see them is critically important. Where I'm going with this, Nate, is that I've heard of a lot of CFOs that basically say, okay, here's the spreadsheet, here's the report, whatever, do this and then having the founder kind of figure this out so where i'm going with in terms of that is that it's a collaborative process it's a give and take and the best way that you can support me as a founder for example is that one if i trust you two if we're communicating we're engaging we're working together along with the rest of the team to help solve that problem so thank you for that.

28:20unknown host:So any more thoughts along those lines before we dig more into cash?

28:25Nate Littlewood:Yeah. So a couple of things. Going back to my 30 to 20 priorities down to two to three, implicit in that is that often when I first start these relationship with founders, 80 or 90 % of their time is being spent on stuff that really shouldn't be a priority, right? They're kind of wasting time on shiny objects and squeaky wheels that really don't deserve their attention. Let's say hypothetically that you are a founder paying yourself, I don't know, maybe$100 ,000 a year, but only 10 % of your time is focused on these priority projects that you really need to be focused on to move the need to afford.

29:11Nate Littlewood:If I can get you from a state where 10 % of your time is focused on important projects to 100%, this is an extreme, it would never actually get to 100, but if it could theoretically get you to 100, then your value that you're giving to your company has just gone from $100 ,000 employee or contribution to a million dollars a year. We've basically grossed up the value that you're giving to the company because now, rather than only 10 % of your time, being, you know, value-add, we're now getting you to be 100 % value-add. So you've got kind of get 10x more powerful or valuable as a contributor to your own business.

29:50Nate Littlewood:And I think that and that alone is one of the most compelling, you know, value arguments for working with a CFO is that we can help you get, you know, focused on the things that you need to be prioritized and help you figure out what is the 80 or 90 % of noise that we can reasonably ignore.

30:09unknown host:Love it. And I assume that also means that you can look downstream and see what roles within my company are contributing and what level and how to maximize those as well?

30:23Nate Littlewood:Yes. So I get into, I spend a little bit of time with my founders talking about team and team structure. So one of the exercises I do with a lot of my early clients is a time tracking analysis. I have them install this free app called Toggle, T-O-G-G-L, and basically get them to track their time for an entire month and put everything into categories like sales, marketing, product, email, team meetings, whatever. Anyway, at the end of that month, we do a review of essentially their timesheet and their time allocation. And inevitably what we find is that they're spending way too much time on the business.

31:05Nate Littlewood:I mean, one of my clients just handed me her results yesterday, actually, but basically shows that she is kind of, you know, the central information conduit. So every problem is going through her. She has to make a decision and then she, you know, delegates or gives someone else the team instructions, which means, you know, the team can only grow as fast as her ability to process problems and direct things to wherever they need to be. So it's a real, you know, kind of constraint on her growth. One of my, another client, I did it a month or two back and we saw that they were spending like 30 or 40 % of their time on warehouse logistics and fulfillment type tasks.

31:42Nate Littlewood:I'm like, why is the founder freaking packing boxes in the warehouse and putting product on shelves? Like we need to hire you an operations person and get you focused on things that are actually going to grow the business. You should not be focused on, you know, backhand logistics. It's like, you know, a$15 to$20 an hour job. You're a founder wanting to pay yourself hundreds of thousands a year. Like, how can you pay yourself, you know,$100,$200 ,000 a year when you're doing$15 an hour work? So we do that sort of stuff. Yeah.

32:17unknown host:No, that's very helpful. I appreciate it. Thank you. And it keeps getting back to this staying laser focused on what you need to be paying attention to. So let's switch to a little bit about what you do. So one of the things that we talked about is why should a founder care about cash? And what is the difference between cash and profit? How do I know what matters? And then how do I stay focused on what matters?

32:43Nate Littlewood:Sure. So profit, the way I like to think about it is profit is a theoretical concept, right? Profit is what happens when you start with revenue and deduct all of your expenses or costs associated with generating that revenue. The main reason for tracking profit is it's kind of a theoretical assessment covering a certain time period, commonly a year or a month. But you could also calculate profit for a day or a week or an hour if you wanted to. but it's a theoretical assessment of how effective your business is at delivering its core product or service and it's tracking profit particularly over time is a really good way of seeing whether our business is actually improving if the business improves then generally what we're doing is creating value for equity holders right that's how businesses grow and become more valuable is that they established a track record of growing profit over time.

33:45Nate Littlewood:The problem is, particularly with our industry, you know, CPG, e-commerce, physical goods, is that there can be very, very prolonged periods where the cash flow can deviate from this theoretical construct called profit. And the reason for that is because our industry is very inventory heavy. Okay? Let's think about a simplified business model where maybe we're placing three purchase orders a year to restock our shelves. So every four months, we've got a cash outlay that we're sending to our manufacturer, co-packer or supplier. They're sending us a whole lot of inventory. And then we spend the subsequent three or four months basically depleting that inventory before we have to reorder.

34:27Nate Littlewood:So what's happening here is kind of a cashflow, you know, seesaw, jigsaw. And this cashflow situation gets incrementally more complicated when you start thinking about, you know, accounts receivable. In other words, when does your customer actually pay you for the product and also accounts payable, i.e. what is the timing around when you actually had to pay for the inventory or product that you received? So cash flow is, I mean, cash is really the lifeblood of a company. It's the things that, you know, goes through your veins is what you breathe and keeps you alive. you can have a business survive for a certain amount of time without profit you cannot have a business survive for very long at all without cash or cash flow right because no cash means no payments to suppliers you can't pay payroll and pretty soon people are going to stop showing up to work and shipping your product so things too will grind to a halt pretty quickly so that's you know, the important differentiation between the two and analyzing them, understanding them and forecasting each of these things into the future is a related but separate exercise, right?

35:46Nate Littlewood:So with my clients, I am forecasting the profit or the profit and loss statement. In the same model, I have a separate forecast for cash and cashflow, okay? And they are linked, you know, they do kind of generally move in tandem, but there are periods where they deviate and, you know, one could be going up and one could be going down and vice versa, right? They can, you know, they can move around. So, yeah, both important, but for different reasons.

36:13unknown host:No, it makes sense. Actually, it reminds me back when it was in accounting, when I was studying accounting, all the different things I needed to pay attention to. So long story short, just because I've got a lot of cash in the bank doesn't mean that I'm successful or that I'm profitable. So thank you for sharing that. When you're talking about that, do you throw that into what we talked about before in terms of what are the balls that I need to be focused on kicking into the goal?

36:43Nate Littlewood:In terms of the lengths of profitability, you mean?

36:46unknown host:Yeah. I mean, so when you're thinking about where should I align my objectives, are they based on the profit or the cash or a little bit of everything?

36:55Nate Littlewood:Yeah, often both. Depends a little bit on the founder and the business situation. So monitoring cash and cash flow is, when it's important, it's really, really important. When it becomes important, it is the most important thing for us to focus on. One of my clients sells into retail and also direct-to-consumer, and they're in a bit of a distressed cash situation at the moment. And we've actually put together a cash flow model for them that lists out over 100 different vendors and suppliers. and every single week we are mapping out the cash flows that we can afford or the cash outlays that we can afford to to pay all these people the reason we're doing that because this business is short on cash and we're trying to avoid a bankruptcy situation and things are very very tight and we need an extremely high level of precision to basically you know keep cash in the bank.

38:02Nate Littlewood:That's kind of an extreme scenario. And I'm not going to do that with all of my founders. In an ideal world, the founder is not stressed out and needing to obsess about bank balances and look at cash with that level of detail. In an ideal world, the founder is a bit more focused on the profit and loss, but we can only get to that point when we have a certain amount of cash buffer and cash comfort. And we have enough cash in the bank to know that we don't need to be stressing about it every day. So really what I'm trying to get my founders to is the point where, okay, we can relax. We're not about to go bankrupt.

38:41Nate Littlewood:That means that we can stop stressing and instead put our time, attention, and focus on the future and figuring out how we can grow profitability over time, because that's really the thing that's going to create economic value for them. In other words, make their company more valuable over time. Does that make sense?

39:00unknown host:Yeah, no, it makes perfect good sense. So do you have a way to help people understand from a granularity standpoint, the concept of how and why this is important?

39:14unknown host:And I'm sorry, where I'm going with that, Nate, is the reason this matters is because if I'm not aware of this is something I need to pay attention to, not necessarily get into the

39:24Nate Littlewood:weeds, but something I need to know about, then how do I at least know that this is something I

39:30unknown host:need to be thinking about so that I can avoid that position long-term? Does that make sense?

39:37Nate Littlewood:Yeah, I think so. Let me have a crack at it and you can put me back on track if I'm drifting off the wrong way. So I guess what you're touching on here is founders and their relationships with finances. And it's worth maybe before we go any further, just laying out some of the different types of relationships with finances that I see amongst founders. Good point.

40:04unknown host:No, that's a good idea.

40:06Nate Littlewood:Four phases that I see people move through. The first is what I call the denial phase. And And this is where people will go, hey, I don't want to talk about finance. I don't want to look at finances. Like, just make this problem go away. I want to live my life pretending like the finances don't exist. The problem with that, Dan, is that whether or not you're paying attention to them, the finances will continue to exist, but they're just existing without your supervision. And we've touched already at some of the problems with that. in my experience one of the most common reasons that founders get themselves into that situation is a concept called cognitive dissonance which is basically when us humans struggle to internalize and hold two opposing views at the same time what i mean by that is that when we're founders and we've got a great product and we have a mission and we're you know out there changing the world Like we want to think that we're doing amazing things.

41:07Nate Littlewood:And that's certainly the narrative and the story that we want to tell our family and friends. Unfortunately, the finances can sometimes tell a slightly different story and the finances might be going, eh, yeah, you kind of average to sucky right now. Things aren't going that great. These numbers are pretty nasty. And the problem that we as humans have is it's very hard for us to hold these two different narratives or two different versions of the story at the same time. And so what we do is we comfort ourselves by ignoring one of them. And that often happens to be the finance story because it's just uncomfortable to internalize it.

41:45Nate Littlewood:So that's step one. Step two is usually what I would call overwhelm. And this is where people have started to poke around at the finances and numbers and started to try to understand, but it's complicated. They don't understand it. A lot of jargon, mumbo jumbo and it's like oh dang like i gave up let me go back to step one so we haven't really made a lot of progress so far if you if you've ended back at step one anyway step three is what i call the uh i guess the the curiosity phase and this is more the intrigue phase this is where we kind of start peering over the fence and going huh looks like there might be something interesting over there.

42:26Nate Littlewood:I don't really know what it is yet or what all these numbers are saying to me, but it seems like there's something there that I should learn about. Okay. And that is the precursor to the enlightenment phase. Once we get to enlightenment, the penny drops and we start to say, ah, now I get it. Now, uh, now I can read all of these signals and messages that the finances are giving me. Now I can see how to partner with these financial statements to make better decisions. Now I understand how being able to read these documents and, you know, pick up on what they're trying to tell me, it can actually make my life easier, can make decisions clearer, can tell me how to focus, can tell me what are the things I shouldn't be focused on, right?

43:14Nate Littlewood:So a big part of what I do as a CFO is try to help people through that arc from step one to step four but listen the truth is not everyone wants to go on that journey it's true some people some people are happy in phase one and if people are stuck in phase one and not wanting to go any further like i can offer extend a hand and say hey i'm here to help but if they're not willing to grab my hand and come on the journey with me then i don't know not not really a whole lot I can do about it. Well, I think it's what I like about this, Nate,

43:52unknown host:and thank you for sharing that, is that you're simplifying why this matters. And without trying to force me to go get my own MBA, quote unquote, in finance and accounting and stuff like that myself, you're helping me drill down to what matters and what I need to focus on now. And the the better I get at this, then the more I can do to help support whatever initiative we have as a company. And I think that's what's critically important. So thank you for sharing that. When you're going through this process, what are some of the common sources of cash leaks? And at what point do I need to start thinking about financing versus using my own cash or whatever?

44:36Nate Littlewood:so i actually have a product or a an offer which is like a hidden profit audit and basically takes a week um people will plug in their financial statements give me access to a few other pieces of data and i'll basically spend a week going through these businesses and looking for these profit leaks um the the product or service ends with like about a one hour presentation where i deliver the results. But it's a long way of me saying that I've looked at a lot of these different sets of numbers. And there's certainly some common themes that come up quite a lot. I would say amongst the top three would be number one, top line revenue related leakage.

45:21Nate Littlewood:So in the finance world, we talk about revenue in a few different ways, but some of the most important ways of gross revenue and net revenue. So the gross revenue is kind of linked to your product price. Like if you had a$100 product and you sold one of them, you'd have$100 worth of gross revenue. The net revenue is what actually lands in your bank account. Now, if we're talking about e-commerce, some of the big differences between gross and net would be things like coupons, discounts. I've come across brands that have had coupon leakage unbeknownst to them. Their coupons got on some, you know, honey.com or some platform site.

46:00Nate Littlewood:And suddenly like everyone's using this freaking coupon that was meant to be a limited time thing. And so we lose a lot of money there. A lot of founders are giving away, you know, their obligatory 10 or 15 % off welcome offer thing when they really don't need to need to be. And they could actually generate more profit if they didn't have an offer like that. So there's often some, some leakage there. Then we've got refunds and returns. So these are, you know, could be a, it's very common in apparel, by the way, like people need to try on a garment, for example, and then they're going to return it.

46:34Nate Littlewood:But you can also have product related issues, right? If your product was damaged by the co-man or the co-packer, it wasn't packed correctly, or maybe the manufacturer didn't actually make it correctly in the first place, and the customer receives a defective product, they're probably going to either send it back or ask for a refund. There can also be issues in expectation settings. So if your website listing shows one thing and what the customer receives is slightly different, then they're going to be like, you know, WTF, like this isn't what I ordered. It doesn't match the pictures. So I want a refund, right?

47:08Nate Littlewood:So we look at that as well. In a wholesale context, you've obviously got your trade spend, right? So this is your free fills, your chargebacks, your promotional, your couponing, like all of these things are deductions off revenue as well. And I would say, you know, nine times out of 10, I'm finding some type of issue at the revenue line. I actually did one of these hidden profit audits for a brand last week, and they were losing 25 % of revenue between gross and net revenue. So 25 cents on the dollar is disappearing. out of that business before we even start talking about cost of goods sold and overheads, right?

47:53Nate Littlewood:And, you know, 25%, to put that into context for you, a healthy e-commerce business is making maybe 8 % to 10 % EBITDA margin, right? So to be losing 25 % off the top is a huge, huge leakage of profit. Some of the other, there's, I guess, two other places I would look, usually overheads as a percent of sales. Very, very common to find that a brand has bloated overheads relative to their sales. When I see bloated overheads, there's one of two possible inferences I could make. The positive interpretation would be this brand is positioned for growth, right? We've got too many people, too many resources today, but maybe we're well capitalized.

48:43Nate Littlewood:Maybe we have some investor money and maybe what we have right now is a team in place, not for today, but where we want to get to in a year from now. So, okay, you know, bigger than what it needs to be today in terms of overheads, but we're positioning ourself for growth and we're well capitalized enough to be able to afford to do that. Then I'll say, okay, fine. Makes sense that your overheads are what they are. The other interpretation, and this is sadly a bit more common, would be that there's been mismanagement of those overheads. When you think about financially what overheads represent, and what we're talking about here is like software, people, subscriptions, rent, that sort of stuff.

49:27Nate Littlewood:Founders are investing in that to solve some type of problem in their business. You hire a marketing person because you want help with marketing. You hire a salesperson because you to sell more. And if the overheads are bloated relative to sales, it kind of tells me that some aspect of that overhead has not been properly managed. We are not generating the results that we thought we were going to get from bringing on that salesperson last quarter. Because if we were, we'd have a higher sales number and the ratio would look a lot better. So particularly in founders who are doing a poor job of managing their team or allocating resources, that's very commonly the reason.

50:07Nate Littlewood:The third place I would, will always look is at the interest debt financing type level, right? So the big issue that I see there all the time is founders hate stockouts. Founders hate the idea of a customer rocking up to buy their product and them not having enough inventory. Anyone who's experienced a stockout will know how frustrating it is. You've got customers submitting support tickets. They're complaining. They're like, where's your thing? I wanted to buy it. Like, anyone who's been through that probably doesn't want to repeat of it. Unfortunately, the way that a lot of us compensate for that is by overordering.

50:51Nate Littlewood:And we're like, okay, I'm going to order so much that I never have to worry about a stock out again. The problem with that is that we end up with way more inventory sitting around than what we need. that inventory translates to additional storage costs, warehousing fees. It translates to product obsolescence risk, particularly if you've got a product with an expiry date, i.e. food and beverage. So if you're sitting on nine months of inventory, for example, you get some feedback from a customer that would otherwise make you want to change your product. If you've still got nine months of inventory there, it's going to be 10 months before you can ship that change.

51:29Nate Littlewood:unless you're willing to write off nine months worth of inventory and throw it in the bin, then you could ship the new version sooner. But like, you know, you become less nimble and you're slower to react because you have this inventory to sell through. The final problem is to do with debt, right? If we've got more inventory, the most common way to finance that is with debt. And a lot of these, particularly like the unsecured MCA or merchant cash advance and revenue-based lenders, that industry is notoriously deceptive in terms of how they talk about the cost of those facilities. I've had interactions with founders who've said, oh yeah, we got this great deal from Shopify Capital.

52:09Nate Littlewood:They're only charging a 16 % interest. I'm like, no, Shopify is not charging 16%. The actual APR on these things can get as high as 60, 70, 80 % when you do the financial math on it. These facilities can be three or four times as expensive as a credit card. And a lot of founders are using them to finance these inventory purchases. So you've got too much inventory at ridiculously high interest rates. Therefore, we have a lot of profit leakage at the interest line of the P &L.

52:42unknown host:You know what I'm realizing, I appreciate you sharing it, thank you, is that even if I had a CFO on my business and I'm doing well, having someone like you come in periodically and just give us a checkup, because you have so much depth and breadth and you see so many different things, there's a lot of value in that. So thank you for sharing that. What is the cash conversion cycle and why does it matter?

53:07Nate Littlewood:So great question. I like to think about businesses like a pipe or a tunnel, right? Essentially what you're doing when you're in the physical products game is you're putting money into one end of that pipe and that money goes in in the form of inventory. Then it sits in the pipe for a period of time before it pops out the other end. And when it comes out the other end is when it can become revenue. That's when you sell it to a customer. A cash conversion cycle is essentially the length of that pipe. So how long does your cash stay tied up between paying for stuff with the supplies and receiving money from customers?

53:49Nate Littlewood:Now, it's an important concept for a few reasons. First of all, because when capital or cash is tied up in this cash conversion cycle, you can't do anything else with it. You can't invest it in people. You can't use it to buy ads. You can't use it for your next growth initiative or launching a new sales channel, it is locked up and it is inaccessible to you. So really what we want to do is figure out how to move cash through that funnel as fast as we can, because if we can move the cash faster, then it creates more options in terms of how we spend it and what we do with it. Does that make sense?

54:27unknown host:No, it makes perfectly good sense. And that's critically important for me to understand as a founder, because I need to understand how do I get, excuse me, how do I get profitable? How do I move the money to the point where I can pay myself, pay everyone else, and then satisfy my customers? So thank you for sharing. I appreciate that concept. I know we're getting closer in time. So how does Future Ready CFO help with cash flow management?

54:53Nate Littlewood:Yes. So we help clients forecast their cash flow. I do it both on a monthly basis and when needed. We'll also do weekly forecasts as well. The example I gave you earlier of the brand. It's in a bit of a distress situation. So we're doing this kind of 13 weeks out at a time. Really my goal and what I'm trying to achieve here is remove cash concerns as something that keeps the founder up at night. I want to liberate my founders from that stress. I want to stop it being a thing that takes up their mental energy because frankly, they have more important things to worry about. They should be focusing on growth and how to acquire more customers or launch new products.

55:40Nate Littlewood:And they're the captain of growth, right? So really what I'm trying to do here is liberate them from the burden of worrying about cash and cashflow so that they can focus on the things where they add more value.

55:52unknown host:Love it. Kind of full circle our conversation back to where we started again. So thank you so much, Nate. Nate, thank you so much for your time. Certainly, I want to make sure that everyone knows how to get a hold of you at the end of the podcast in the show notes, et cetera. So if you could please send me that. Any closing thoughts, anything that you want to share to surmise or to wrap up what we talked about?

56:15Nate Littlewood:Yeah, I guess the number one takeaway I'd like to leave people with is to consider the possibility that finance and accounting is more than just a cost center for your business. consider the possibility that there are insights and feedback and pieces of information that you can get from this that can actually make your life easier as a founder it can help you get more focused on the things that you really need to be focused on to create economic value and it can help you make better decisions and um yeah it's a cost to having someone like me around sure but I'm pretty sure that most of the folks who look into this will pretty quickly convince themselves that there's a positive ROI on this stuff.

57:02unknown host:Well, absolutely. I mean, if I have to pay attention to the cost of my product, getting it on the shelf, just that granular thing, you know, as far as the stuff I make and sell, well, if I'm not measuring that properly, then I don't know how successful I am. What you're talking about is more the overall business health. So absolutely. I appreciate that. Thank you for sharing that. Anything else you want to share?

57:27Nate Littlewood:No, I don't think so. I think we covered a lot of ground today, Dan. I've enjoyed chatting with you. Appreciate it.

57:33unknown host:Thanks. I want to thank Nate for coming on today. This is such an important topic, especially for every entrepreneurial brand. You can learn more about Nate at Future Ready CFO, and you can get access to his free hidden profit audit template. You'll find the links in the podcast description and on the podcast webpage. Want a competitive edge? The recipe for success. Here's this week's free downloadable guide. New product innovation is a lifeblood of every brand. New products fuel sustainable growth, attract new shoppers, and increase brand awareness. Learn the crucial steps to get your product on more retailer shelves and in the hands of more shoppers.

58:10unknown host:Maximizing your trade marketing can pour rocket fuel on your lunch. Thanks for joining us today. Please reach out and share your most pressing questions and I'll do my best to get you the answers that you need on future episodes, including expert advice from CEOs and industry thought leaders. Comment, leave your questions and get this week's free downloadable guide and the show notes at retailsolved.com session 307.