643: (Solo) Why Profitable Businesses Still Fail (And How to Avoid It)

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0:39Just head to OmniSend.com forward slash founder without the E to get started. All right, now let's jump back into the show. hey founder fam welcome back to another founder to founder solo episode i want to talk to you guys about something that every founder eventually goes through and have to learn this the hard way and that's the importance of cash flow so it's so funny i remember thinking back you know i had a really good run for about six seven years with founder and one of my coaches mentioned to me once like, Nathan, you ever had problems with cash? I'm like, nah, nah, nothing to worry about there.

1:17And he's like, oh, okay. He's like, yeah, okay. And I think this is a big misconception in business that if your company is profitable, you're safe. But from what I've seen, businesses don't fail because they're not profitable on paper. They fail because they run out of cash. And if it sounds like a constriction, I get it. But this is why it's so important. We need to talk about it. And not enough founders do talk about it.

1:39Nathan Chan:Hear the stories, learn the proven methods, and accelerate your growth and future through entrepreneurship. Welcome to the Founder Podcast with Nathan Chan.

1:52So I actually saw a video recently from a creator on TikTok talking about how profit is far more important than revenue when you're building a business. And coming from somebody that has been there, right, have had extreme cash flow crunches where like, I don't know, some of you guys might be thinking, oh my God. But like for those that have really been in it, that feeling when you don't know if you're going to make payroll, oh my God, that is so scary. And it really stuck with me because this particular topic, I think it highlights something that almost every founder eventually learns. That while revenue is super exciting and it's impressive, and don't get me wrong, we have the crazy headlines at founder, but profit and cash flow is actually what keeps your business alive.

2:32And if your business is growing, but the cash isn't there when you need it, things can get stressful really, really quickly. And you can have strong revenue. You can have good margins. You can be growing and technically be profitable. But if the timing of when cash comes in and cash goes out, it's not managed correctly, you can find yourself in serious trouble. So I'm going to talk through cash flow, why it matters, some practical things you can do to manage it better. So let's dive in. Now, I never thought that I would be talking about this. I'm going to be the first to say this, like I am not a finance guy by any means, but cash flow is simply the movement of money in, money out in your business.

3:11And money comes through sales and money goes out through expenses. And if more cash is leaving your business than entering it at the wrong time, your business starts to suffocate. And this is what can happen when you're working with retailers. This is what can happen when you scale up and you're spending money, you're getting this awesome return on your ad spend. And then you're just like, oh my God, like I've just sold all this product and then I don't know how I'm going to fulfill it. And then you're like, oh, okay, well then I'm just going to get some product going and then I'm going to air freight it and it's going to cost me way more than I thought.

3:49And then before you know it, you're just like, oh my God, like what the hell's happened to the numbers? And this is why founders often feel stressed even when the business looks healthy from the outside because the bank balance tells a different story. So as the founder and the CEO, it is your number one job to make sure you have enough cash and it's to make sure the business always has enough oxygen. And when it comes to e-com brands, you know, you tend to experience this pressure more than any types of companies because of the cycles around seasonality, planning Black Friday, Cyber Monday, you pay for physical products before the inventory arrives.

4:27That's why I love businesses that do the drop model or selling on consignment in any way, shape or form. Then you invest money in ads to generate demand. So there's often a huge timing gap. And that's why where you can, you have at least 70, 80, even 90 % plus margins with your physical product. And it comes down to your unit economics, like your cost of goods, your contribution margin, your acquisition costs, your fulfillment, shipping costs and if your margins are too thin, every sale can actually make your cash flow worse. I really believe e-commerce founders, they need to obsess over contribution, margin and payback periods because if you can't reinvest profitably and quickly, scaling becomes risky.

5:08Subscription, I love subscription businesses. This is why subscription in e-com is really, really cool and if I look at some of, we just launched founder operators this week and if I look at some of the members that we're enrolling. Some of the subscription businesses are bloody cool, right? So cool what they're doing and their earn back periods and how much scaling opportunity they have. It is so exciting. So another mistake that I see founders make is marketing too aggressively and you get caught up in that top line revenue number. Ads drive that growth. They also require upfront spend. And if you increase your ad spend faster than your cash reserves allow.

5:46You can find yourself in a situation where revenue is growing, but your bank balance is shrinking. That's why experienced founders, they scale in stages. And we see some of our most successful students, you know, doing the testing, doing the validate, and then reinvesting with their profits instead of trying to force growth too quickly. Like I was talking to a founder that was interested in joining a one-on-one coaching program and she was burning serious amounts of money. She was acquiring customers at a loss and, you know, she launched her brand and she was doing like in the first few months, like, you know, seven to 10 grand a month, which on paper, I'm like, wow, that's impressive.

6:21But when I started to dig into the numbers with her, I was just like, oh my God, you're, you're burning like a lot of money here. And I'm like, this doesn't even make sense. And she's like, yeah, you know, like, you know, I'm going to raise money and do all these different things. But at the end of the day, it's all about multiplying your capital. When it comes to business, I heard a really, really smart person say this a very, very long time ago. And it's Something I've thought about for a long time is like whether you're investing in shares, whether you're investing in property, whether you're investing in starting a business, fundamentally, your job is to multiply capital.

6:56So like I started founder with, you know, a couple of thousand dollars US,$3 ,000 US, give or take. And over time, I've been able to multiply that capital into millions and millions and millions and millions of dollars, right? I also lost millions. I've made millions. It doesn't really matter. But when you think of it like that, just that different switch on perspective with your business, sometimes it's easy to forget. Sometimes the money doesn't feel real when it's in the business versus your own personal. I don't know if you go through that, but sometimes I see founders get trapped there. So when it comes to improving cash flow, what can you do?

7:29It's not always about making more sales, right? A dollar saved is a dollar earned. So how can you negotiate better payment terms with suppliers? So you've got more leeway. How can you reduce unnecessary software costs? How can you increase your average order value? How can you increase your repeat purchase rates? How can you reduce inventory that's just sitting there? How can you move it? For us at Founder, like, there was a point in time, guys, it's crazy. I can't even believe I'm going to tell you this. There was a point in time where we were spending over$100 ,000 a month on software costs.

7:59And we had so many different softwares. We had a software for our CRM. We had a software for our phone sales team. We had a software for our delivery of our course platform. We had a software for our email marketing. It was ridiculous. And it is crazy, you know, how much money we save when we consolidated it all. You know, I look at payment term negotiations, right? Like if you can shorten even your cash payment cycles when you're paying your suppliers or even when your retailers or wholesalers, they're paying you on those terms, the better you can move that cashflow cycle, the easier things will be.

8:44I love the concept of just CRO, like CRO, conversion rate optimization, increasing your AOV, increasing your conversion rate. These are things that you can do that are highly leveraged, that does not require more traffic, does not require more product. It doesn't cost you anything. It's just your time is so incredibly powerful. That's why I'm super passionate about what we're doing with founder operators and all the things that we're doing on helping founders with their offers, with their CRO, with their AOV, trying to get a high contribution margin without having to spend more on ads and making more profit from every single purchase.

9:18So, you know, how can you have better ads, right? Better ads, better creative, Cut your cost of acquisition. These are things that are low-hanging fruit, which doesn't require you to spend money. And so one of the first and best habits that founders can also develop is maintaining a cash buffer. So depending on the type of business you have, it's always good to have at least two to three months of operating costs, monthly operating costs in reserves. I've spoken about this on previous episodes. It's important more than ever. You need to have that breathing room to make smart decisions and not be reactive.

9:52Another thing I'd like to talk about as well is planning for the worst. One of my buddies, he always says like you should never, when you're launching a new product, you should never plan or forecast for a best case scenario. You should always plan for a worst case scenario. And I've been guilty of that. Like the optimistic founder in us, we just want, you know, to believe this is going to do so well and, you know, and you should do a best case, middle case and worst case and then operate off a worst case. This is always, always, always how I like to do things now. And another thing to always think about as well from a cash flow perspective is have lines of credit when you don't need it.

10:31So you don't have to tap into it. So if you've got cash reserves and you've got lines of credit that it doesn't cost you anything to have it there, then you just always got enough there for a rainy day because you never know what will happen. I always hear like, you know, you should raise more money than you actually need. If you're not raising money, then you should make sure if you're in a good position with your business, make sure you've got more money than you actually need. So get lines of credit, all these different things, because you just never know. And it doesn't hurt. Like we've had facilities before in the past.

11:01We've found like hundreds of thousands of dollars, like cash flow facilities where we never actually tapped in, right? And there's been times as well where cash been really tough. I'm like, oh my God. And that facility went out. I was like, oh my God, I should have kept it. I should have kept it going, right? Even if you take out 5 % of it just to use it, you know, to keep it going, right? So here's the big takeaway, guys. And I hope you're finding some good action items out of this. The founders who build sustainable companies aren't just great marketers or product builders. They're also disciplined operators who really understand how money moves through their business.

11:34And these are the kinds of things that we talk about inside founder operators. So if you are interested in joining our advanced director consumer e-com founder community, go to founder.com forward slash operators. I hope you found this episode helpful. as always thank you for listening and I'll see you in the next one