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Profit before growth; cash before everything
New Hope Network and TIG Brands present Natural Products Business School monthly. On May 23, Elliot Begoun shares how to create a solid business behind a brand.
3 Min Read
New Hope Network is excited to be partnering with TIG Brands on our first workshop for Natural Products Business School. Each month, Elliot Begoun will lead a 60-minute workshop guiding brands on relevant topics to help their businesses. Register here for Natural Products Business School–Profit Before Growth and Cash Before Everything, which is scheduled for 1 p.m. ET Tuesday, May 23.
We are in uncharted territory. We can’t deny that early risk capital is scarce. Founders are being forced to get further on less. What if we put profit before growth and cash before everything?
For the last decade-plus, a surplus of early capital has been available. As an industry, the norm became chasing growth for growth’s sake. Profit be damned; we can solve that later. But the pendulum has swung, and this pa
th no longer makes sense.
I am passionate about encouraging entrepreneurs to build not only great brands but good businesses underneath those brands. While many see this capital constraint as a concern, I see it as an opportunity. It is an invitation to get off the freeway of growth and choose the meandering country road.
It is a difficult choice because it contradicts what we’ve encouraged and celebrated as an industry. We don’t laud the brands that have spent years, even decades, getting to their first $5 million in sales. Becoming profitable and cash-flow positive leads to self-determination and optionality. It takes discipline, patience and resolve.
Let’s talk about how to take the freeway exit ramp and find that bucolic country road. It all starts with your unit economics. An exercise I would like each of you to do is a waterfall of your contribution margin. You can do this by the customer or by the channel. Start with your SRP, and then start backing out all the direct costs of supporting that transaction. This includes promotions, freight, fulfillment, acquisition, COGS, etc. This template can help you.
What is left is your contribution margin. These dollars or cents contribute to the fixed cost of running your business. I would bet—and I am not a betting man—that many of you will find that the end number is negative. That means that every time you say yes, you are investing in that opportunity.
The next thing to understand is the Lock Box Principle, which is all about cash. Every opportunity you say yes to requires you to take cash out of your business and put it in a locked box you can’t access. Inventory, receivables, marketing and trade expenses go into that box. You can’t use those dollars to fund other elements of your business. This column explores the concept in more detail.
When you understand these two core principles, you’ll see how growth is the most voracious cash consumer and how it might not be what is best for your business.
This is a significant change in approach and is too nuanced to cover in this one article. As part of the Natural Products Business School, we are holding an hour-long workshop to dive deeper into this exploration. Join us at 1 p.m. EDT on Tuesday, May 23.
Learn more and register for Natural Products Business School.
Elliot Begoun is a 30-year industry veteran, author, podcast host, founder of TIG Brands and champion of Tardigrades. TIG Brands supports a community of entrepreneurs interested in building nimble, capital-efficient, resilient brands that become Tardigrades, not Unicorns. Learn more about TIG Brands’ programs.
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