Part 1: Prepping for the Holidays with Fractional CFO, Jon Blair
We chatted with Jon Blair, Founder of Free to Grow CFO, on how to ensure brands have all of the tools they need to have a successful holiday season. Read our interview below!
Tell us a bit about yourself; what types of businesses have you worked with and how many Black Friday/Cyber Monday holidays have you been through?
I'm Jon Blair, founder of Free to Grow CFO. We are Fractional CFOs for growing Direct-to-Consumer and E-comm brands. We provide the CFO expertise and advice that high-growth DTC E-comm brand founders need to scale their brand alongside healthy profitability, cash flow, and confidence. In terms of how many BF/CM holidays I’ve been through, having come from the brand side, being on the founding team of Guardian Bikes, I went through 5 or 6 BF/CM there alone. But if you were to then take the last 18 months that I've run Free to Grow CFO working for several different brands and you were to count all of their BF/CM holidays, I've probably been through collectively well over a dozen BF/CM, maybe even more.
How important is BF/CM to your client’s business? How does it differ from other holidays in your retail calendar? Any variability by industry?
BF/CM is extremely important to our clients’ businesses. BF/CM is really like the pinnacle of the holiday season, in terms of demand. We always like to call it our Super Bowl, in the DTC E-comm world. For the brands that I’ve worked with over the years, BF/CM has accounted for anywhere between 30% and 70% of annual revenue. So it’s extremely huge.
Some of the brands that I work with that are highly seasonal may go all year long not making money or being very close to breaking even, but then make all of their profit for the year in Q4 when the holidays hit, with a concentration around BF/CM. BF/CM differs from other holidays on the retail calendar because it’s just by far the biggest. It does depend on the industry vertical because there are industries that have certain holidays and promotions during the warmer months. Like outdoor products often do big sales around Memorial Day Weekend, Labor Day Weekend and 4th of July. So yeah, there are definitely always promotions, some of the bigger ones commonly being around summer and warmer months, but in reality, still for every brand I work with, Black Friday/Cyber Monday is by far the biggest holiday of the year. And again, it oftentimes represents 30% to 70% of their annual revenue.
How far out do you typically start planning for BF/CM?
Interestingly enough, we are actually in the middle of planning this out with our clients right now. So, timing of when you start really depends on where your supply chain is. A lot of our clients have their supply chain in China, and when your supply chain is in China, quite oftentimes the cutoff date for getting purchase orders in to suppliers is around the beginning to middle of August, in order to ensure inventory will arrive for Black Friday/Cyber Monday. Depending on how long your lead times are, this cutoff date could even be the beginning to the middle of July.
The brands we work with that have offshore overseas supply chains have been planning for the last month or so. So, planning from an international supply chain perspective, July-ish is when you start planning.
The goal is always to try to delay or postpone placing orders as much as possible, so that we can gather as much sales data as possible before we commit to those orders. The earlier that you have to place them, the more you risk being either under or over order because you’re essentially having to guess. If you're lucky enough to have a domestic supply chain with shorter lead times, planning usually starts at the end of the summer, like July or August, from a supply chain standpoint.
Now, if we’re talking about sales and marketing planning, that usually starts around the same time because the supply chain team needs to sync with the sales and marketing team to get their gut check on what they think the sales forecast is going to be. So, sales and marketing is having to talk about what their sales forecast expectations are for November and December, all the way back in July and August.
What types of challenges tend to come up across the business during this important planning cycle?
Coming from a direct-to-consumer e-commerce perspective, one challenge I’ve seen businesses have is determining whether they are willing and able to invest enough in ad spend to achieve their BF/CM revenue goals. For example, if the target is to generate $20 million in revenue with a 4x return on ad spend (ROAS), it would require a total ad spend of $5 million during the holiday season. The holiday season is only about 4 weeks, so if you break that down $5M down it comes out to about $178k a day in ad spend.
You need to make sure you start planning for this in August on a daily level. If you don't have a daily plan that you are putting together well in advance, the holiday season is going to blow by and you’ll eventually realize you didn’t hit your ad spend goal. And because of that you’re probably not going to hit your $20 million holiday sales goal either.
Another challenge is definitely cash constraints. If you're placing orders in July and August for inventory that probably won’t arrive until anywhere from the end of September to early November, you're building up all this inventory that you own and probably have to pay for, but you're not selling it until Black Friday / Cyber Monday kicks off. People don't really start buying for the holidays until that third or fourth week of November. So you end up sitting on this stockpile of inventory for several weeks leading up to BF/CM and sales are probably down because people haven't started spending on the holidays yet —that really, really consumes cash.
So how do you deal with that? Well, this is where the right working capital financing comes into place. Ampla’s Growth Line of Credit is a perfect example of putting the right debt in place so that you can strategically load up on inventory. 30- 60 days before the holiday shopping season starts, you can finance the purchase of that inventory with your Ampla Growth Line of Credit. Then when cash starts coming as people start spending Thanksgiving weekend and do so for the next, like three to four weeks, you can use that cash to pay down your growth line of credit and pay back the debt.
It’s a win-win. Ampla loaned you the money, you paid a little bit of interest for it, but you were able to load up on the inventory that you needed. You paid the loan back once you sold the product, and now that that Ampla Growth Line of Credit smoothed out your cashflow, in a situation where if you didn't have any working capital financing, you may have run out of cash and not even survived to hit the holiday shopping season.
Accurately forecasting demand is also a really huge challenge. Considering that we’re talking about placing orders in July and August for demand in November and December, its easy to see how this can be a challenge. We never know how the demand's actually going to pan out. We just never do. Of course, you try to bring in as much data as you can by collaborating with the sales and marketing team and having them pull their marketing analytics year over year data to try to model out what your demand is going to look like. But you never know for sure. So how do you offset that risk? Again, a big of doing that is having the right debt capital in place.
Here's the thing, if you have the right line of credit, (again, I’m a big fan of the Ampla Growth Line of Credit) you pay that line of credit back as a percentage of sales every single day but you can take as many drawdowns as you want up to your credit limit. So if you end up missing your sales forecast by a bit and you're holding onto some extra inventory, It's okay because the Ampla Growth Line of Credit is still financing that.
Let’s say you have a big holiday season but don’t hit your most aggressive sales goals. You’ll have some excess stock going into Q1 so you just put any future purchase orders to your supply chain on hold, or at least reduce them a little bit. As sales come in you pay back your line of credit and once you get your inventory right sized, then go start placing additional POs. So what has happened there is that the Ampla Growth Line of Credit has smoothed out your cash flow, again in a situation where you might have otherwise run out of cash and potentially gone out of business.
So, in summary, I would say the two biggest challenges that I see are: (1) Brands being unrealistic about how much ad spend they need to spend on a daily basis in a compressed 3-4 week time horizon to hit their sales goals. And the solution is to get planning months and months ahead of time and plan cross-functionally between supply chain, finance and marketing on a daily basis to put together a daily ad spend plan that actually ladders up to your sales goals. (2) And then the second one is cash constraints, which is closely aligned with the risk of inaccurate demand forecasts. And the solution there is getting the right debt financing in place so that if you do get a little bit heavy on inventory either right before or right after the holidays, that debt is financing that excess inventory and you pay it back as you sell through it, post the holiday season, right-size your inventory levels, pay off the debt, and then live the fight another day and keep growing your business.
What other departments and leaders do you collaborate with for the planning cycle? Who is a must-have collaborator during the process?
100% the leaders of Supply Chain, the leaders of Finance, and the leaders of Sales and Marketing. It has to be cross functional. The sales and marketing leader needs to inform the demand forecast for the Supply Chain leader to calculate POs, delivery timing, order quantities, etc., I serve as the finance leader for many brands, I sit in between marketing and operations, and I'm running cash flow projections and profitability projections on the scenarios that they're giving me for demand and purchase forecast. I'm kind of the connective tissue that's like letting us know how risky or not risky a particular decision is as we're planning. So, absolutely the three major functions, Marketing, Finance, and Operations/Supply Chain—It has to be a cross-functional planning effort to get ready for the holidays. There’s no other way to do it.
What's the most surprising/unexpected thing that's ever happened to you or the brand during the actual BF/CM sales promotion?
I’ve been through over a dozen of BF/CM sales promotions, so I’ve seen a lot. I’ve seen everything from running a massive Facebook campaign for the 3 weeks leading up to Black Friday and getting massive traffic to the brand's website but no one was buying. It was the assumption that the sales faucet hadn’t turned on yet because it wasn’t Thanksgiving yet. But then BF/CM comes around with very little return on ad spend. The sales never turned on and it was a complete flop. Afterwards, we had to halt all inventory purchases and cut a lot of overhead costs and go into the following year, very, very defensive. That was a huge, huge bummer.
But in January of that same year, I also saw a brand that did less than $300,000 in revenue in January and ended up doing $7.5M in November, and $7.5M in December completely unexpected. So, I've seen flops and I've seen just like capturing massive upside that was unexpected. You just really don't know what to expect.
If you could give a piece of advice to other operators prepping for their first holiday sale, what would it be?
Honestly, the biggest thing is to just start planning early and to make it cross-functional. I know I've already touched on that, but like starting early on, all major functions. Start planning early on the supply chain side. Talk to your vendors early and often about the expectations of purchase orders that you're gonna place and expectations of delivery and lead times. Talk to your finance team early and often about what the range of possibilities are for demand forecasts and supply chain. Talk early and often with your sales and marketing team about the monthly, weekly, and daily plan leading up to the holidays for promoting your sale, spending on awareness for the sale, and the daily ad spend in that compressed 3-4 week time horizon for the holidays.
Planning early is what will make for a successful holiday. Every time I've seen a brand plan too late, they were caught by either leaving sales on the table by stocking out, leaving sales on the table by just not being ready to spend, or just overall not being prepared cross-functionally.