Over the course of my career as a CFO, I’ve had the privilege of working with many different CEOs and management teams. I’ve seen several common themes emerge, lessons learned if you will, which have tended to repeat themselves in my experience. (Credit to Sequoia Capital for # 2 and # 3):
- You can do it all… but just not all at the same time.
- Simplicity scales. Complexity doesn’t.
- When debt is cheap, company fundamentals will always take a back seat. But this all changes quickly when debt (and equity) gets expensive again.
- Always think through the worst-case scenarios on all aspects of your plan (external environment, competition, revenue, cost of Goods, marketing ROI, SG&A, cash flow). Then brainstorm how you would mitigate the worst-case scenario from happening.
These are the top five challenges that I’ve seen repeatedly as a CFO (and why I counsel my FLG clients not to fall into these traps):
- Set an aggressive revenue plan and invested in corresponding levels of inventory but then fell short of the revenue plan.
- Invested in headcount in advance of revenues and revenues fell short.
- Bought the right amount of inventory but got the mix wrong.
- Top line growth strategy was to go broad across channels (DTC, stores, wholesale, marketplace (selling other brands), and International), only to realize that this complexity drives high overhead costs, resulting in losses that can only be fixed by simplifying the structure you built.
- Turnover on your team leaves you scrambling to get the basics done.
Here are my suggestions for avoiding these five challenges in the first place.
#1: Investing in Inventory Then Falling Short in Revenue
First, the CEO and CFO need to discuss whether this plan is realistic. This situation is particularly risky if you have significant investments in inventory.
If the plan isn’t realistic, you risk cash being tied up in slow-moving inventory because customer demand isn’t there. This becomes even more problematic when dealing with seasonal products. If you end up having to run promotions to sell-through inventory your margins will drop, and you risk damaging your brand. The worst-case scenario here would be if you had to sell the inventory below cost to clear it or if you have vendor commitments for future buys that you can’t cancel.
My recommendation is that it is always better to pace inventory buys with solid evidence, with data points demonstrating that you are hitting your revenue targets. It’s also ok to run out of stock if you must (hey, scarcity helps build a brand, doesn’t it?), and you should be ok with using air freight to expedite availability of your best-selling products.
#2: Investing in Headcount Then Falling Short in Revenue
Again, it is advisable to ask tough questions around the pace of hiring. “Why can’t we stretch out the pace of hiring?” Modeling out the worst-case scenario can also help here. Remember that headcount investments and payroll expense is like rent or capital expenditures; this decision creates fixed costs you will live with for a long time. If sales fall short, payroll as a percentage of sales deleverages your investment. And the cost of over-hiring includes not only payroll expense but also severance costs as well as the human costs – people’s livelihoods. Everyone knows how RIFs (reductions in force) erode morale and disrupt operations.
So again, like Scenario 1 above, it is always better to pace hiring in line with actual vs forecasted revenue trends.
#3: Bought the Right Amount of Inventory But Got the Mix Wrong
Let’s face it: this will happen. You can’t avoid it. Trends change. You see this now with the big retailers stocking up in their 2023 production plans on what was in demand in 2022. These inventory plans have 9-month lead times and aren’t flexible for the most part, but, as a CFO, you can help mitigate the risk. One tool you have is to only buy only 85% to plan, leaving 15% “open to chase.” Having a nimble supply chain and chasing back into best sellers is the right strategy, albeit more difficult with our Supply Chain challenges.
#4: Going To Broad Channel, Too Early
This scenario is one of my pet peeves. The problem with going “broad channel” is that every new channel creates its own SG&A (sales, gross margin, and admin expense) structure, which is a nightmare to manage as a CFO. If your enterprise doesn’t have sufficient scale, you will have too little revenue spread over too high a cost structure, leading to unprofitable performance.
I always try to avoid this by using mitigation strategies such as testing retail location investment opportunities using store pop-ups, for example. I also like to manage capex expenditures tightly, making capital investments as returns come in over a 1–5-year time horizon so that you aren’t disbursing cash up front before you even have key learnings.
#5: Team Turnover Leaves You Scrambling
I have found that this often happens when you have a smaller team and someone leaving creates a single point of failure. One way of avoiding this conundrum is to have your team cross-train across jobs and keep communications strong across the team.
Also, I stay close to my employees and try to understand their life goals. If they want to move on, I want them to talk to me about it proactively so I can help them make a good career decision which simultaneously allows for me to plan when they do leave.
I hope these insights are helpful for both CEOs and CFOs, working together, to drive profitable growth. If your team needs assistance solving similar issues, don’t hesitate to contact us for help.