← The Foundr Podcast with Nathan Chan
The Foundr Podcast with Nathan Chan
643: (Solo) Why Profitable Businesses Still Fail (And How to Avoid It)
00:12:04
Most founders think if their company is profitable on paper, they're safe. But here's the truth I learned the hard way: businesses don't fail because they're unprofitable. They fail because they run out of cash.
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Hey, founder fam. I want to talk to you about something super exciting. We're officially partnered with Omnisend, the email marketing and SMS platform built specifically for e commerce founders. We've been recommending Omnisend to founder students for a while now because it just works. Whether you're launching your first store or you're scaling to seven figures, it really helps you automate your marketing and get real results. Did you know, on average, OMNISEND customers make $68 for every one. $1 they spend, which is an insanely
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good return on investment.
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And because you're part of the founder community, you get 50% off your first three months with the code FOUNDER50. Just head to omnisend.com founder without the
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e to get started.
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All right, now let's jump back into the show.
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Hey, founder fam. Welcome back to another founder to founder solo episode. I want to talk to you guys about something that every founder is 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 6, 7 years with founder, and one of my coaches mentioned to me once, like, nathan, you ever had problems with cash flow? I'm like, nah, nah, nothing to worry about there. And 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.
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Here are the stories. Learn the proven methods and accelerate your growth and future through entrepreneurship. Welcome to the founder podcast with Nathan Chan.
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So 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 gonna 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. And if you're 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. And 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 know, 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. And 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 ecom 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. That's why I love businesses that do the drop model or selling on consignment in any way, shape or form. Then you invest, you know, 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. Subscription I love subscription businesses. This is why subscription and E comm is really, really cool. And you know, 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. Like 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, but they also require upfront spend. And if you increase your ad spend faster than your cash reserves allow, you can find yourself in a situation where revenue is growing but your bank balance is shrieking. 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 ten grand a month, which on paper I'm like wow, that's impressive. But 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. So 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 and millions of dollars. Right? I've also lost millions. I've made millions. It doesn't, 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? It'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. And 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 cash flow cycle, the easier things will be. I love the concept of just Croatia, 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. So, 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. Another thing that 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, so you don't have to tap into it. So if you've got, 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 with founder, 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 the cash been really tight. 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, Gu, 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. And these are the kinds of things that we talk about inside Founder Operators. So if you are interested in joining our advanced direct to Consumer E. Com Founder community, go to founder.com forward/operators. I hope you found this episode helpful as always. Thank you for listening and I'll see you in the next one.