Why a brand with good margins and rising sales can run out of money, and how fast your cash can let you grow.
An income statement matches each sale with the cost of its goods in the month of the sale. Your bank paid for those goods months earlier. When sales are flat, the two agree. When sales grow, they split apart.
Say a brand sells $500,000 a month at a 60% gross margin, so the goods it sells cost $200,000 a month. Its cash is out for about 134 days from supplier deposit to payout, the cycle in the chart on page one. That means about $880,000 is always tied up in stock, deposits and payouts in flight: 134 days of $200,000 a month.
Now it plans to grow to $750,000 a month. At the same cycle, the amount tied up rises to about $1.32 million. The extra $440,000 has to be paid to suppliers before the extra sales happen. If the brand keeps 5% of revenue as operating profit, the bigger business earns $37,500 a month. It would take about a year of profit to pay for the stock the growth needs, and the stock is needed first.
Nothing is wrong with this brand. It will still run short of cash in its best year, and if it hasn’t planned for that, it will cut marketing, miss a reorder, or take whatever financing is offered that week.
Growth is bought with stock, and stock is paid for before it sells.
Neil Churchill and John Mullins made this argument in 2001 in “How Fast Can Your Company Afford to Grow?”, which opens with the observation that a company can run out of cash “even if its products are great successes” Published. Every business has a rate of growth it can fund from its own cash. Grow faster and someone else funds the difference: a lender, an investor, a supplier or a customer.
Dell is the textbook example of a business its customers fund. In fiscal 1994 it wasn’t: sales reached $2.8 billion, but it lost $36 million after pushing into notebooks and retail stores Reported. Its finance chief, Tom Meredith, told strategy+business that when Dell stumbled it was “singularly focused on growth to the detriment of profitability and liquidity.” The fix was getting everyone, top to bottom, “to understand the cash conversion cycle, and how they affect it” Reported. Chapter 4 shows where that led.
Two cautions. These are correlations in large public companies, not experiments on DTC brands: faster turns might make firms profitable, or profitable firms might just have products that sell faster. And look at the payables result. Deloof read it the sensible way round: “less profitable firms wait longer to pay their bills” Published. Stretching suppliers is a sign of trouble, not a route to profit. The gains in this research come from inventory and receivables, which for a DTC brand means stock and payouts.
The tool below runs the example on your numbers. Use the cycle from the tool in chapter 3; if you don’t know it yet, start with 120 days for an importer.
With the defaults, a $6 million brand planning 60% growth at a 4% operating margin and a 134-day cycle needs about $529,000 more in the cycle by year end, earns about $384,000, and ends about $145,000 short. Its own cash funds about 37% growth; cut the cycle by 30 days and that rises to about 54%, with no change to margin.
This is one chapter of Cash Before Growth, which is free and readable in full on a single page with no form in front of it.