This €10M fashion brand is profitable but will be bankrupt in 8 months. Here’s why.
You can be profitable in your P&L and then constantly run out of cash because you have an unhealthy business model.
This growing fashion brand from France is doing well and is growing, while we manage all their paid advertising on Meta/Google.
They are profitable, yet the business is problematic and they had to raise money yet another time because the bank account was going down and the founder was not super comfortable.
They want to grow and expand more, but the numbers for the next 12 months, if things don’t change quickly, are not going to look great.
With this cashflow prediction, they will run out of money by month 8.
As you can see, if everything remains stable, there will be a positive trend to recover cash, but they won’t survive months and months without money in the bank.
So their plan to grow, with these numbers, is completely unsustainable.
The Growth Paradox
But here’s the absurd part that not many founders spot: if they increase revenue, even when fixed costs remain the same and the marketing efficiency remains stable, they would lose EVEN MORE!
So when the founder said:”We need to increase revenue fast, so we will break-even”, he didn’t realize that he would have gone bankrupt even faster.
Anyway, here are the details: (for a 12-month prediction)
The Numbers Behind the Crisis
𝗕𝘂𝘀𝗶𝗻𝗲𝘀𝘀 𝗕𝗮𝘀𝗶𝗰𝘀:
↳ Starting Cash Balance: €2,890,000
↳ Monthly Fixed Costs: €108,000
𝗦𝗮𝗹𝗲𝘀 𝗙𝗼𝗿𝗲𝗰𝗮𝘀𝘁:
↳ Average Monthly Revenue: €570,000
↳ Expected Monthly Growth Rate: 5%
↳ Gross Profit Margin (COGS Only): 70%
↳ Gross Profit Margin (After All Variable Costs): 53%
𝗣𝗿𝗼𝗱𝘂𝗰𝘁𝗶𝗼𝗻 & 𝗜𝗻𝘃𝗲𝗻𝘁𝗼𝗿𝘆:
↳ Production Lead Time: 3 months
↳ Inventory Batch Size: 3 months
↳ Deposit paid: 3 months before sale (50% upfront)
↳ Balance paid: 2 months before sale (50% balance)
𝗗𝗶𝘀𝘁𝗿𝗶𝗯𝘂𝘁𝗶𝗼𝗻:
↳ Direct-to-Consumer: 100%
↳ Wholesale 30-day: 0%
↳ Wholesale 60-day: 0%
↳ Return Rate: 18%
𝗣𝗮𝗶𝗱 𝗔𝗱𝘃𝗲𝗿𝘁𝗶𝘀𝗶𝗻𝗴:
↳ Paid Ads Spend: €122,000
As you can see, on the P&L they are profitable and the profitability goes up…
↳ But at month 8 their bank account will go under.
And this is a cycle that keeps happening again and again.
Actually, the more they grow, the worse it gets.
So, they either fix the business foundations, or in less than 12 months we will be in the exact same scenario, despite all the paid advertising doing pretty well.
