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What most e-commerce brands miss in their P&L with Jeremy Horowitz · The Modern Supply Chain

• Izzy Rosenzweig (00:00): Many businesses grow to 500,000, some push it to a million, 2 million, 3 million in order to get there, you have to be obsessed about your product. You have to be a great branding and marketing person. Distribution is fundamental. Great product. And then digital distribution, you got to nail. Vibes get you so far. Vibes, get you to a million, maybe 5 million. But once you hit one to 5 million, you're in the danger zone because if now you don't know P&L, P&L will crush you, cash will crush you. This is The Modern Supply Chain, the show where we break down modern supply chain strategies that help e-commerce brands shift from staying above water to predictably scaling. Today's guest is Jeremy Horowitz, an expert in navigating the complexities of e-commerce P&Ls and strategy. Jeremy has worked with brands to optimize their operations, identify gaps in their business. Jeremy spends his day going deep on P&L of e-commerce businesses and understands the importance of analyzing P&Ls to pinpoint business issues. We'll explore how brands can make supply chain a strategic advantage. We'll also dive into a fictional 10 million brand's, P&L and cash flow to understand how supply chain impacts that business as it scales. Let's dive in. Jeremy, thanks so much for joining today. Jeremy Horowitz (01:12): Thanks for having me on as you're really happy to dive in and really excited to talk about this. I feel like this is something that a lot of people don't talk about, but is the most important part of their business. Izzy Rosenzweig (01:20): Amazing. So I was kind of seeing it before we started recording, but we work with hundreds of brands at Portless and we meet honestly some of the best entrepreneurs that I've ever met, run brands incredible. But one common theme I've noticed with almost all the brands, almost no matter how talented they are, is they almost never think of the exit. And when brands start businesses, I would imagine there's really two intents. One intent is to provide for your family to build a business that is healthy and profitable. And there are some people I've seen build lifestyle brands. Honestly, very rare. Most of the businesses want to build healthy businesses to one day sell. It could be a year from now, five years from now, 10 years from now, but eventually you want to sell. And even some of the biggest brands that we work with, they don't know how that works and I know that you literally buy brands for a living. I think it's a great way to, one of the earliest episodes in this podcast is like, Hey, why are we doing this? What is the end game? The end game is hopefully tax set. I would love to hear, maybe we'll start it off if you had to give one piece of advice, I'm starting a business, look at this one thing in order to be prepare yourself for exit. What's that one thing and then we'll go deep. Jeremy Horowitz (02:35): Something that I would love to see that I don't see enough of, and I've looked through probably close to 500 different CIMs and potential exit people wanted to exit over the past five years is they don't really think about their product catalog, how it's going to scale, especially at that earlier stage, how they're going to scale their supply chain to support that growth. I see kind of the businesses at this stage as three major levers. There's like you get to about 250,000 to 500,000 in total revenue a year and it's like, okay, this isn't just an idea anymore. This thing actually makes money. Hopefully I'm taking some cash out of the business, but I'm probably reinvesting most of it. Then there's that one to five of what I call the oh moment where you realize I have a business, this thing pays my bills, I've probably quit my job. (03:19): But also this thing is so hard to take cash out of. I have to dump all the money back into ads and inventory and despite being bigger and more successful, I'm actually more cash strapped than I probably have ever been. And then I'd say there's the 10 to a hundred mil, which is usually where we play and spend most of our time of the like this is a growing scaling business. It has the potential to be a next great brand and with the right moves moving into the right pieces, this could go to a hundred, 500, hopefully $1 billion in revenue. And what I would say is especially that early stage is there's the throw this spa got to at the wall, which I would consider probably before all of that and cleaning that up, really getting to who are your key suppliers, who's your key supply cha.in When you hit that, I'll call it the "first shadow of death" for a brand of that one to five mil is if we go crank meta ads because realistically that's probably where most of this brands are spreading most of their dollars that they bring in revenue. (04:12): Can we actually scale just a few products because the key there is your cash conversion cycle. I know we're going to talk about that a lot today and I hate to use financial terms At the beginning of a podcast, everyone's eyes are going to glaze over essentially how many dollars can you pull out of the business before you have to put it back into the business? And that I think is the key essential thing that every founder should be obsessed with because at the end of the day, whether you sell or not, the goal should be putting that cash in your pocket. And so really optimizing one or two key products or categories depending on what business you are in. And really just ramping that up because essentially to hit that scale from 500,000 to five to 10 million, it's really one hero product that absolutely crushes. (04:53): And I think too many brands don't cut hard enough and go deep enough into that. And it's so crucial to be successful and especially if you want to sell at that earlier stage, it's very rare that require will want to take a hodgepodge of products that are made from a bunch of different vendors. They're a little bit all over the place. You really want to focus, aerodynamic is the best way to describe it and really scale up and having the right infrastructure to do that. So you can just crank meta ads from a hundred dollars to a thousand to $10,000 a day is the key to hitting warp speed from one to 10, Izzy Rosenzweig (05:27): You're at 500 k, let's call it. That's the first stepping stone. Then the next mission is like this escape velocity to get to 5 million or 10 million. And honestly it's almost the most dangerous part. If you miss a line on let's spray and pray and put bets in too many places, that's your cash gun at the door. Cash is your oxygen. So you're saying nearer in on a product, go deep, get escape velocity, get to that 5 million, get to that 10 million. Now you have a real business and now it's like how do you turn that and you're in a safer space to grow it and it gets at a healthier rate. Jeremy Horowitz (06:03): Yeah, exactly. Because at five to 10 million you'll get some better debt options. You'll start to be able to negotiate with all of your suppliers and vendors. You'll start to just have more leverage where now you are a meaningful enough client to all of your vendors that you start to have some real negotiating leverage where you can squeeze out some profit, you can squeeze out some payment terms and some better cash flow. And that's where then everything really starts to compound where I'm not going to make it easy to go from 10 to 50 or 50 to a hundred, but you start to have a lot more resources versus that one to 10, it feels like you've never made more money and had less cash in the entire history of your business. Izzy Rosenzweig (06:37): I'm curious, I mean I ran a brand for about 10 years before list and I do kind of have lived in founder shoes in that area and I'm curious your thoughts on it. Why is it most brands do not think P&L first? I don't know if it's like brands are marketing people, are they branding people? Are they product people? Why is P&L almost an afterthought when it comes to brands, especially in the early days before they feel the pain of cash flow? Jeremy Horowitz (07:05): Did you know how to build or read a P&L when you started that brand? Izzy Rosenzweig (07:06): Absolutely not. And I hate it. Jeremy Horowitz (07:08): I'm going to torture you for the next 45 minutes. But honestly I think it's just that's the answer when I find most of the greatest founders in this space don't have a finance MBA business background. They're just like an everyday person that had some other profession before this, found some awesome solve in their life that replicated out to other consumers and were just like go. And I can't tell you how many seven, eight figure founders I know who still just manage the business out of their bank accounts, but they're just like, there's more money in my bank account this month than last month. It's working. And I think a lot of founders kind of think that way of they care much more about the customers, the product, the experience. I would think that my philosophy is you can really leverage a P&L to be able to invest in those types of things. (07:52): But I think so many founders just aren't that type of person of it's a touch and feel emotive type of role, especially in the D2C space to be super successful. I can't tell you how many enormous brands I've seen that just kind of went on vibes over everything else. And yeah, usually also if you're really successful, the finances are kind of an afterthought just so you're running from how can I scale paid media to how can I get the inventory into the port out of my warehouse, all those kind of traditional problems, which I know we can solve a lot of those today. So yeah, I think I founders are just so bogged down in the day-to-day that until they kind of step out of the business and start working on it, they don't start thinking about a P&L and those kinds of things. Izzy Rosenzweig (08:30): To your point, many businesses grow to 500,000, some push it to a million, 2 million, 3 million. And I think to your point, in order to get there, you have to be obsessed about your product. You have to be a great branding and marketing person. Distribution is fundamental, great product and then digital distribution you got to nail. But once you hit one to 5 million, you're in the danger zone because if now you don't know P&L, P&L will crush you, cash will crush you. And why I think there are so many brands that die in that space is vibes get you so far, vibes get you to a million, maybe 5 million. Not everyone knows everything. Bring in a partner, bring in consultants, bring in an accountant, someone to study your P&L. That I think is the difference between making a past this escape velocity versus getting stuck. So with that being said, when you look at brands and you want to analyze a P&L and let's call 'em the one to $10 million space, what do you look for or what are the main things you look at? Jeremy Horowitz (09:26): I want to keep things as simple as possible. I also think you don't really have to overcomplicate this and I honestly take this format from Amazon. So if you go and read Amazon's earnings reports, this is exactly how they format their P&L. And if it's good enough for Amazon, it's definitely good enough for me. So you have your top line revenue of just what the cash that comes into your business. Everybody should know their COGS to get to their gross margin. The biggest mistake I always see brands make and I always have to correct it when I go and update their P&L is your fulfillment costs should be in your COGS. So when you start to calculate your gross margins, you really want to optimize to a term called landed costs all your product manufacturing costs plus the cost it takes to get the product into your warehouse. (10:08): And then you should be charging shipping income. So whatever your shipping income is, minus your cost to get to the customer, all of that should be included in your COGS and you should be determining your gross margin based on that because then from there it's very simple. You have your marketing and sales costs below that, then you have basically the rest of your opex, which is usually a small team, some G&A and then maybe some random other costs here and there. And then you get down to, there's many different names for this EBITDA net income, but essentially the cash that you actually make out of the business, which should be the primary goal of the business. And I like to think of it really, really simply because it makes it very, very easy to what I call diagnosing above and below the line issues. Above the line issues are something is not working in our marketing and sales process. (10:55): If our costs are going down, that's a great sign. Either we have better negotiating power, our fulfillment, we're optimizing it, or we can optimize our gross margin by just charging more, essentially by separating that level. Then below the line is just operational. If our marketing and sales are struggling, if our G&A is too high as a percentage of our revenue, we just have to figure out what's going on on the other side of the house. And I like that just balance because really at the end of the day, all these businesses are massive marketing investments and massive inventory operational investments. I'm oversimplifying it a bit, but it really is just those two core functions. Izzy Rosenzweig (11:29): So essentially top line looks great, but that doesn't make you happy yet. You got 10 million, don't care what is driving that top line and what is the operations to get there. Now how do you look at marketing? Because marketing is like a variable cost, it's very tied to revenue, so it's not in fixed opex, right? You almost argue cog is kind of fixed. You know what your cog is, you know what your landed cost is shipping, you kind of know what it is as well, but your marketing is variable. Is it almost three buckets? There's operations, variable marketing, and then revenue. How do you look at marketing above the line below the line? Jeremy Horowitz (12:03): Yeah, I look at it above the line, so I kind of look at that at and above the line. I specifically, every time I build a P&L, like to break out marketing and sales, you'll see a lot of PNLs that have SG&A and for everybody, I'm sorry for the finance and accounting corner here, but a lot of companies standardly will have sales general and administrative. I think that's a terrible, terrible model for consumer brands and especially ones that are DTC heavy slash have retail. I think it's an incredibly misleading. So yeah, I like to break it out into its own section of marketing and sales and that way if you ever hear people say contribution margin, essentially what they're talking about is taking your gross margin minus your marketing and sales, and that way you can just really strip out like, okay, how is my supply chain operating from product manufacturing fulfillment? (12:45): How is my marketing and sales operating? And then how is the cost to run the business operating? And you can usually tell a lot of relationships on the business's success. One of the fastest ways for me to figure out whether a business is healthy or not is doing a year over year comparison of their gross margin and their contribution margin. Because if they're both not going up or they're heading in opposite directions, that means there's a ton of opportunities to optimize something either in the fulfillment side of the business. Usually people like COGS and other costs creep up as they're starting to scale. They don't realize actually the bigger that they get, the lower they should be going and we can have that conversation. And then the marketing sales side, it's like, yeah, are we just getting more efficient? Usually we're going to be dumping a larger percentage of our overall P&L into marketing and sales as we start to scale, but you want to see that those numbers tick up proportionately with revenue and with some other metrics so that eventually you get to the point where, okay, this thing is big enough that we can reduce our other costs and that's where our real profit is going to come from. Izzy Rosenzweig (13:40): Love it. I actually saw a clip of one of your other shows and I thought it was such an important point that I want to push here again, we see incredibly talented entrepreneurs going from 2 million to like 30 million very quickly, especially in our model. And the question they often ask is, again, you want to build it for an exit so you could push towards pure profitability and do not push for top line or push for top line and have bad profitability, but almost like either extreme actually isn't good, making too much profit making, too low profit, well, you're never going to sell. So can you actually walk us through your opinion on that? What is the right balance? What's too much profit, that means you're not reinvesting or… yeah, I would love to hear your take on that because I think it's a really good topic. Jeremy Horowitz (14:25): Yeah, I think this is an entirely false premise by business media over the past 10, 15 years. I think tech and software has just dominated so much of business news that it's just creeped into other parts of the business. If you're a consumer brand, you should be growing and you should be profitable. There will be phases and there will be parts of your business where you are unprofitable because of certain elements and there will be parts of your business where you don't grow because of certain elements, but over the long arc, if you want to build an actual brand that people love, that will make money. The financial engineering you can do around a software business because if it works you, it can rip all of the opex and all of the costs out. And a hypothetical, it's very rare you actually oversee that does not apply to a physical product brand where literally every time you drive revenue, you need to dump revenue back into inventory to then sell it again. (15:11): And so listen, there are definitely some amazing exits where a couple of founders just absolutely hit the gas and over burned, found the right strategic and were able to sell before their entire business collapse. And I can also show you a graveyard of companies that did not make it and that were not lucky. The other piece to this that really bothers me is every brand you idolize was slowly built over an incredibly long time and was profitable for almost the entire period. You want to run down all the most famous American brands, Nike, apple, Jack Daniels, Levi's, all these iconic brands that everybody is a young scrappy entrepreneur wants to build. It just took them forever. An iconic consumer brand just takes 20, 30 years to build if you want to build that massive, massive company. And the other piece that I just caution from especially on the hard growth at all cost mentality is it's really hard to rip out your costs at scale because I cannot imagine an early stage brand spends like 30% of their overall revenue on their G&A and their team. (16:19): When you think about your business, even low gross margin businesses, you're spending 60% on the high end, probably 10, 20% on the low end on your product costs. Fulfillment's usually 15 to 17% and then you can ratchet up and down marketing. I would say 15 to 20% is where I see most brands. 30 to 50 is aggressive, aggressive mode and 5% is basically life support. You're not going to have a great business even at a high gross margin if you have really, really small team, really, really low marketing expenses. Not something I want to buy. I don't want to buy something that's not going to grow that isn't making a ton of profit. It has nobody to run it. But also if you have really low gross margins, you're spending a ton on marketing, you're bound to go out of business. And so it's really figuring out within your category. And there are, I don't like to use averages, but there are kind of some averages across most of the major consumer categories of where you should roughly be in. Obviously you should find ways to break out of the mold and be special, but it's not a spectrum of growth versus profit. Your job, it's hard, but your job is to do both. Izzy Rosenzweig (17:17): I love it. And I know we've been in e-commerce a long time. I was venture backed and there was a period of time like, Hey, why aren't you burning more? And it was very dangerous. Again, you got to go in their shoes. Well, they were looking at the public markets and the public markets were rewarding the businesses that were burning and scaling like crazy. So there was even the pre COVID, kind of like the Casper early DTC, it is the future and you're like, oh no, actually it's just a distribution channel. And then there was the free money during COVID and now it's reality. But what's good is people are still building incredible businesses here. You just need to run a healthy business. You have to run a business that generates profit in software businesses. There's something about LTV to CAC, LTV to CAC three to one ratio over three years, meaning you have to put out a ton of money, you get paid back within 12 months and then it takes you another two years to be profitable. I think that's for SaaS, and I agree with you, DTC is very different, but how do you look at LTV to CAC? Some businesses like subscription businesses or even businesses that are selling products that very often are--bought often. How do you look LTV to CAC when looking at a P&L? Do you give it any credit? Do you want a fast payback period? How do you look at it? Jeremy Horowitz (18:23): For a physical product consumer brand? I could care less about it. I think we were very much in the same era where most of my brand experience where I was on the operation side was in that Casper Bonobos movement watches and was a big Shopify brand back in the day. I think LTV to CAC is a luxury for someone who has a Scrooge McDuck pile of money in their bank account. For everybody else who needs to pay the bills, you've got to focus on your first order of profitability. The important lesson in all of that is every brand should care about their CAC payback, right? How long does it take me to spend a dollar in marketing and earn enough in profits, not revenue, because every brand calculates this on revenue, but you sell a physical product that has a hard cost, so you cannot look at it on revenue, you have to look it on your gross margin and how many months does it take for me to make that dollar back in marketing that I spent? (19:12): That is crucial. I think that's super important. That will tell you how long you can scale and then depending on how much money you do have in the bank and your cash flow situation in your terms of suppliers, you can play some games there to grow faster. But unless you're venture backed and your board is asking you for that metric, I can't tell you how long I obsessed over it and try to move that metric and realize if I just moved a OV the business group twice as fast with half the effort, no consumer product brand should care at all about their LTV dec. I think it's a complete waste. Izzy Rosenzweig (19:39): Love it. And couldn't agree more. I would love to see some examples. Do you happen to have examples of what a private P&L could look like versus a public P&L? Jeremy Horowitz (19:48): Yeah, definitely. I have a spreadsheet and a tracker of about 60 public consumer brands that I track every week for my newsletter. Through my free time, I read a newsletter where I do a tear down of basically a failing public consumer brand. All the usuals on there, I've covered Allbirds, I've covered Warby, we covered Blue Apron before they went bankrupt. I'm happy to share that as well. You're going to have access to all the P&Ls. We track them every year for some brands. I'm happy to share with you kind of a mock P&L of what I would typically see and what it typically looks like. Okay, so basically what I built out is just kind of a sample of exactly what we talked about for, let's call it a $10 million top line brand that's doing DTC plus Amazon. Usually at that scale you're normally multi-channel. (20:30): Some are still just D2C, but heavily, heavily D2C business, so growing pretty well year over year and then Amazon scaling in line, and this is exactly the format that I was talking about before you break out of your sales channels, you can get this all out of your QuickBooks or whatever financial tool you're using and it'll be more formatted. I would like to look through the monthlies, but candidly, I think just looking at this high level view, this is all I really need to understand how the business is performing and then exactly what we talked about before, COGS and fulfillment gets you down to your gross margin. So this is an example of a, what I would call a run of the mill fashion and an apparel brand. I'm not fast fashion, not luxury, hoodies, leggings, that kind of a business. And then I have the sales and marketing here broken out. Usually I see fast growing brand on this stage is probably spending about 30% of their overall revenue. So three out of 10 on their sales and marketing, we came up very much. We were spending a lot of time in eCom in the same era. It's this fascinating thing to me that the modern brand, the post COVID brand does not spend any money on product R&D. Izzy Rosenzweig (21:31): Yep. Jeremy Horowitz (21:32): And that was a really weird thing. So I still keep it, I still look at it, I still want to see it. And this is literally just like we are testing new samples, we are looking for the next product, we're going and buying materials to try new things and usually it's not a massive number five to 6%. And what blows my mind is how people don't do this anymore and don't think about you are not going to get from five to $10 million without figuring out what's next. Even if I'm making this black sweatshirt, I got to figure out other colors, other form factors, other sizes, other ways that I can position this. Maybe it's a complimentary product with it, something else that will continue to drive growth really, really well. Optimized brands on the private side of this scale are usually their G&A is usually around 10%. (22:21): One of the real beauties of an e-commerce business is honestly how big you can scale it on so few people that if you as a founder is not taking some insane $350,000 a year salary at this scale, if everybody's on a reasonable salary, you have good agencies that you're working with that you can push a lot of this out. You can have a pretty not massive number. I would say 10 to 15% is where I see this float a lot. And then we're probably looking at a net income of just shy of a million dollars. I'd love to see this closer to a million dollars. I like to see 10 to 15% net income around here because that means that you have room to grow somewhere. There's something to add to the P&L to continue this business. I would say probably G&A here is a little heavy. I mean also candidly, most brands just don't have the RD line. I put that in there, I want to see it. And yeah, it gets much more complicated than this on a line by line item. Obviously I always work with an accountant and a bookkeeper to have clean books, but this is typically what I would see from a subscale, a sub 10, 20 million brand. Izzy Rosenzweig (23:26): I want to cover two areas that you just said. I sent you another cash flow model if you want to open that. You said it before, DTC businesses are not software businesses. They're asset heavy actually. You have lots of money being tied up and I think the most painful period to what we said before is as you scale, all of a sudden more money's being tied up and more cash is being tied up. And the other thing you said is r and d, you got to 5 million or 10 million, but you're not getting from 10 to 20 without your next winner. So A, you got to balance, how do I become more asset light? Those are the best businesses. That's what people love, buying asset light businesses, but we live in DTC, so what is the most you could do? And then two, how do you drive the next winners? (24:07): How do you optimize your business to discover the next opportunity? Because if you don't, it will stop and you'll get stuck at five to 10 million. We shared another model, traditional versus direct supply chain. And again at poor list we're huge fans of what we call the modern supply chain. These are business like Quince, a $4 billion business. Obviously companies like Shein, $60 billion business and hundreds more that people don't know of that there is a better way to run your business to make it asset lighter. Do not tie up your cash to introduce new ideas to market and scale faster because I'm a huge believer of running healthy businesses. And again, if Jeremy and myself have been in this since over 10 years, the early days was unhealthy. Demand is there, consumers want D2C, we got to service it in a way. Whereas a brand, you're being responsible and healthy. (24:59): So just to walk through some of these ideas, and I'll ask you to go in a second to the next tab to do the analysis, Jeremy is one, we have retail price. Let's assume both in the traditional supply chain, which is again for context, manufacturing bulk at a time, four months at a time, putting on a shipping container and waiting for those goods to get to your facilities. So let's imagine that retail price is the same. Let's imagine we have the same cog, so we're going to do some comparables. Retail price is the same, 70 bucks, cog is the same. 15 bucks units being produced, traditional 5,000 units because you've got to buy four months at a time versus direct supply chain. And our model, you could do a thousand units at a time right near the factory, you can restock once a week if you want. (25:39): We're going to assume the time to manufacturer is 30 days for each, the direct supply chain and traditional, which is actually being extremely conservative because as you're producing a thousand units, you're producing it faster and you could send 300 or 200 at a time for regular pickups. Let's assume getting it to the 3PL in the US is 45 days. In our model, it's essentially immediately sell through time. Let's imagine in traditional is four months versus direct supply chain, you're producing faster in small batches. It's two months. Being out of stock in traditional is typical. Let's assume 10% of your time is out of stock so you lose that revenue versus in direct supply chain, all that doesn't exist. Percentage overstock, let's assume conservatively is 10% in fashion's high as 30 in direct supply chain, it's near zero. You can put one to 2% if we wanted, but it's near zero. (26:26): Freight cost is getting goods to the us, let's call it 50 cents a unit versus in China it's less than a penny just because trucking is so cheap, we're actually going to be conservative and say fulfillment cost in traditional is actually cheaper than direct supply chain, which in many cases it's the same, but let's assume actually cheaper $8 versus 10 storage costs. Let's assume it's slightly higher in the US cost of capital, let's assume 18% in both scenarios, tariff freight is the same. Let's assume 50%, let's assume Q4, U three x during holiday season, but marketing and genie is the same. So with Jeremy, with that context, we'd love for you to look at what we would consider the traditional supply chain model, how that affects your cash flow versus the modern supply chain model and what that actually spits out. Jeremy Horowitz (27:12): Okay, for everyone who's not watching, highly recommend checking out the video. A cash flow model is incredibly hard to explain if you're not looking at one, but yeah, okay, so since I've stepped in to operate multiple businesses recently, I actually watch this daily, weekly, and I actually don't really look at a P&L anymore because candidly, a P&L is really important when you sell your business. But a cash flow statement is the only thing really honestly that matters when you're running a business. And so essentially what we're looking at is when are you producing your units and you have to pay your POs to your manufacturers and then your costs associated to it. So everything in red is essentially all the cash that's leaving your business to pay your bills. And we're right now assuming no payment terms, everything's just pretty simple and straightforward. (27:53): And so the really important thing is looking at everything from four to eight and then nine, right? When are you actually going to make sales? And this is in the traditional model. We'll look through the direct model in a little bit. And this is why e-commerce is such a difficult business is you're outweighing $156,000 in cash before you can make a dollar. And this is such a fascinating thing of we kind of created a monster with D2C of no business really before had, well, there were some, but the majority of business did not have to deal with these long cash flow cycles of slow boating something to China. And it's a really interesting challenge. Your first check 75 grand is out the door in January for your first units and you're not going to make any actual dollars from that until April when you can actually get the units into your warehouse and ship them and sell them. (28:40): And you already have to come 75 grand out for your next batch of inventory to make sure you have enough inventory, assuming you actually know what your sell through is to get you through four months from now. I cannot tell you this is such a common cash flow statement that was just blood red almost the entire year. And then yep, we're in the black in Q4 when it's a big sales period. And what's important here to just really realize is your literal goal as a business to be successful and scale without needing to raise a bunch of money from every part of your supply chain is just moving as much in the red back as possible. I know we're talking about the fulfillment side. You also have the terms with your manufacturers. This model is assuming we pay everything day one, but you also need to be figuring out how you delay those payments as well. (29:28): And essentially what you want to do is how do you sell through your inventory as fast as possible and wait as long as possible to pay for it? And I know that sounds like a dream state, but if you are in five to 10 million, this is the time to start having those conversations with all of your suppliers in your entire fulfillment because yeah, it's just brutal to come 150 grand, you're probably investing all of your profits from last year's Q4 to pay for your first basically half of the year worth of inventory because on this model you're going negative again in July to stock up for holiday this year. So you basically are spending the first nine months of the year in the red. From a cash flow perspective, honestly, it's kind of crazy how much this looks like a traditional retail model of you're just bleeding all year and then you'll finally make all the money and you can take cash out of the business. (30:13): Because what's really important is line 13, cash balance. This is literally how much cash you have and if it is not black, you cannot take anything out of your business. And what's so difficult about scaling an early stage CDC business is you usually see most of the years look like this where it's just red, red, red, red, red, red, red, and then the last two months look really great, but if we built this out for the next year, you're going to be red, red, red, red again, where you're not actually taking any of this $181,000 that you made and have an actual cash at the end of the year. And so yeah, I mean do you want to walk us through the direct model and how that completely changes this kind of what I call blood bath of a cash flow statement? Izzy Rosenzweig (30:53): Absolutely. And I think just to drill in a couple of things you said here, nowadays with Shopify software and all the apps that exist, your G&A could be so tight. You have a tiny team, a small team running an incredible business, and I actually, I'm a huge fan of Ryan from Jolie. These guys build a monster business and they have four full-time employees. I love that. I'm sure they have contractors, I'm sure they have agencies. So I would say the GA side of the business with Shopify, and I'm a huge fan of Shopify, allowed businesses to run software agencies very tight, very operational efficient. So again, businesses always serve demand. There's massive demand for D2C people building amazing stories, amazing products. But the question is to serve that you've got to run a healthy business. So one side of the equation I argue is already healthy, is Shopify software, you're killing it, you have great apps, you're killing it, you have a small team, you're killing it. (31:48): Now it's the below the line. It is what is your supply chain look like? Because to what you said, also end of the day P&L is when you sell, what really matters is sure you got to be profitable, but you got to need the cash. If you don't have the cash, you're not paying your salary, you're not paying your employees salary, you can't run the business, cash is oxygen until you have escape velocity, you got a nice amount of cash, which honestly even the biggest companies in the world worried about cash. That is what keeps you alive. But there is a new way, right? There's a better way, and this is the area that we focus on for our brands, do not produce four months at a time because if you're using a direct supply chain model where you could produce near the factory in small batches, and again, if anyone watching the video here, you could see it. (32:30): Instead of producing 5,000 units for four months, you're producing 1000 and you're producing it every other month. And this is still steaming a 30 day time for production, which you could tighten that because he's so close to the factory and the batches are smaller. But when that happens, you are generating a money immediately. So in traditional, you get away four months to get a penny out. No, you're making that money right away. Also, how much cash do you need to start the business, right? In the cash scenario for the traditional, you need at least 150 k versus in this model you're looking at 20 K because you're putting out less money to start with. The next question is when are you paying your import tax? In the traditional model, you're laying it out in March, right before you've sold anything in the direct supply chain model, you goods are still in China or Vietnam. (33:17): You don't need to lay out anything. So at a high level, by moving to small batch manufacturing, not only are you generating more revenue, you're always in stock, you basically get three extra months of revenue because you have three extra months of producing and selling faster. So in this model, this example, the brand ends of the year at 1.5 million of revenue versus traditionally it's 1.1 million simply because you lost three months of revenue as well. There's additional revenue that by not being out of stock and we assume a very small amount about $8,000 a month, but that's revenue that you would not have in the traditional supply chain. So A not being out of stock B, selling right next to when you're doing production. And that is why most brands do not get the escape velocity of over 5 million because they are not looking at cash flow models, they're not looking at their P&L. So getting to 1 million, huge milestone, 5 million, you can still vibe it, but between the one to 5 million during that time, you've got to start looking at cash flow models. You've got to look at access to cash to your profit margin, and if you nail that, you could scale healthy, run a healthy business and the most important of this entire conversation, eventually exit it, sell it to Jeremy, sell it to private equity, but that is the mission is to run the healthy side of the upstream side of your business to run a much healthier business. Jeremy Horowitz (34:38): And just one thing I want to really harp on also is if you think about the inventory amounts in these two models, you cannot miss in the first model if you don't buy the right products, if you have a tough time getting into the shipment and you miss your deadlines, that's why the one to five is the death trap is because every single batch of inventory you have to sell through it. You don't have anything else to sell in that timeframe and all your cash is tied up. As we showed here, the cash balance is just negative throughout the whole year. So if you're spring or summer collection, don't sell through and are not super popular. That's how you get into a discounting death spiral. When I was at a brand, we did seasonal drops for phone case designs and the toughest part was once we placed the PO and waiting eight weeks to get it in to see if it even was popular and worth investing the marketing dollars in that we were dumping all of our time and effort into just the velocity that you can move finding the right products. (35:35): Because making a one unit bet versus a 5,000 unit bet, you have wiggle room and that also allows you on the operational side to just hit tests harder, go back to the experimentation phase to find what moves the needle next. And this is what I mean by the financial piece is what's so crucial here to understand that operational element of where can you place the big bet where maybe this test that you're running in January at a thousand units is a major contributor to the 10,000 unit PO you placed and loaded for holiday that has some slight variation or a limited edition or you bundle it up. This is why droppings product is so much more frequently throughout the year is crucial, but it's a hundred percent determined by your cash flow. The other piece that I love here is the cost of capital is such an important piece. (36:21): If you don't have the cash, you've got to go borrow from a bank at this scale, it's actually probably more realistic. An MCA, they're going to charge you 40% a PR and it's going to be insanely high and instead of going through all that headache of getting covenants and all these other things where they could take your business, this is exactly what I mean by flipping delaying, where you put your cash out as much as possible and bringing revenue in as much as possible because you can fund your own growth here to then get to that next scale where you can't afford one, you can just afford more growth and you probably have the cash flow to actually fund this stuff yourself, but also at the next scale up you'll get better debt options that will be much more palatable that also when they see you turn so much inventory so quickly, they're going to be like, “Oh my god, I got to give this person money.” Izzy Rosenzweig (37:03): A thousand percent. At Portless we have a saying, it's been around forever, cash is king, inventory is death. If you miss your inventory, you will kill your business. Jeremy, we'd love to hear any predictions of the future. So I think if you zoom out for a minute, the DTC industry went through a lot a rollercoaster growth at all costs. Oh no, no, we got to be smart. I think it's very clear the future for DTC is running healthier businesses. So if you had to look into the future, what will you say from your perspective is something brands will start doing more of or an era they will start focusing in to start making their businesses healthier? Jeremy Horowitz (37:39): I think the five-year prediction of where businesses will really start to invest is they'll think more globally way earlier in their business. During our era, I remember a customer freaking out because they were charged a $200 custom fee in Brazil because we didn't know how to code some specific thing to get through customs and all this insane stuff that just made it super difficult to scale a brand internationally back then and I think 10 years ago you probably had to be a hundred million in top line revenue before you even considered moving out of here if you were an American brand, even considered any other market, I think five-ish years ago that maybe moved to about 50 million in five years, I think a five to $10 million brand will be like, what is the next major market we move into? And to your point earlier we were talking about Shein and Temu and all these massive, massive companies that essentially have just figured out, okay, we can get product into the country easier. (38:36): Meta has made it virtually as easy as possible to scale your ads internationally if you can. They're even starting to do translations. They're making it as easy as possible to get into any country. I think brands are just going to be global way, way earlier and I'm actually already seeing that in Europe now where brands are just going to the Middle East to all across more places in Europe, uk they're thinking about America way, way earlier in their lifecycle than they did five years ago. And I think that will be the major trend we see is we're not see the American version of a brand or the French version of the brand. It's going to be like, okay, people are probably still producing everything out of China, but we're getting it to all these different places that everyone's interested in buying that product much, much faster. And hopefully the legal and the compliance piece is the last major roadblock here. I feel like whenever there's money to be made, the bureaucracy will figure itself out. Izzy Rosenzweig (39:25): I mean we can be bigger supporters of that at Portless. At Portless we ship to 55 countries and we always say that people talk about omnichannel, we say omni customer, your customer is around the world and CPMs in the uk, CPMs in Australia are cheaper than the US So if you have one inventory hub, you're shipping to 55 countries, which we support all local experience. We see brands increase revenue where they started at zero outside the us they're now at 30 to 40% Jeremy Horowitz (39:54): Of their total revenue? Izzy Rosenzweig (39:55): Yes. Within 18 months that's all growth. They started at US only and their 30 40% is now outside of the us, still 60% you're looking at us, but north 30% for brands that scale with us and it's all about, to your point, how do you make it easy? Going global can increase your revenue by 34%. So I'm happy that's part of your prediction and hopefully be part of that story. Alright Jeremy, thank you for the time, really appreciate it. Where could people follow you? Jeremy Horowitz (40:21): Yeah, thanks for having me on is always love doing this. The easiest place to follow me is on LinkedIn. If you just type in Jeremy Horowitz, H-O-R-O-W-I-T-Z. All my stuff is there. If this was helpful and you like some of this content, I post something similar about the general e-comm and public markets once a day. My newsletters there, my YouTube is there, everything is from that one central place. So that's the easiest place to find me. Izzy Rosenzweig (40:43): Amazing, Jeremy, thank you so much. Jeremy Horowitz (40:45): Thanks, have a great one. Izzy Rosenzweig (40:49): Thank you for listening to The Modern Supply Chain. If you have questions about anything we talked about, you can find me on LinkedIn. And if you're interested in learning more about Portless, check out our website, portless.com. As always, hit that follow button so you don't miss an episode. See you next time.