The Profit TV show airs on Tuesday nights, 10 pm on CNBC. Last night's episode featured Flex Watches, a company that makes watches and donates part of its sales to charity.
This week we are back to business (no more personal drama)! I didn't quite get the financial-number-crunching fix that I wanted, but this was a great episode. The case of Flex Watches will teach you more about marketing, though, than cash flow. But it did provide me with a huge cash flow Ah-Ha. Watch or read below for the lessons learned.
- The business started in 2010 and is based in Los Angeles
- Top-level earning numbers are below. Unfortunately, we didn't get all the numbers for all the years.
- Year 2011 (launch year): $500K gross sales, $129K gross profit
- Year 2012: $979K gross sales
- Year 2013: $436K gross sales, net loss $200K
- Year 2014: $311K gross sales, net loss $87K
- Year 2015: $279K gross sales, net loss $34K
- Current debt $71K
- Marcus Lemonis says, "I'm a firm believer that numbers don't lie," and he believes the drop in sales from 2012 to 2013 was due to a product redesign and price point change at the request of a retailer that carried their watches.
- Before the product and price point change, the watches cost $5 to make and sold for $35. That's a 15% COGS and 85% profit margin, which is great.
- The first year's gross profit of $129K means 75% of revenue was used in direct costs or cost of goods sold. This is too high and not sustainable. However, because it was their first year in business, this is understandable.
- Gross sales fell more than 50% from 2012 to 2013 due to a product redesign and price point change and the sales never recovered.
- The numbers show that they were profitable in 2012 and that they generated cash. We know this because over the next three years, they lost $320K but they are only $71K in debt. They used the cash in year 2012 to cover the losses.
- This is a classic, "If it ain't broke, don't fix it." When you have a business model that generates close to $1M in cash and is profitable, don't completely change it.
- We can question the decision entirely of changing the business model. However, assuming there were good reasons to do so, they should have used some of this extra cash to test market the new product and new price points before going all in. They should have used the remaining cash to invest in the current, profitable business model by expanding sales and increasing margins.
- Remember, in the DiLascia California T-Shirt company, Marcus said it was "wreckless" to turn every idea you have into a product. When Flex Watches did this, they in fact wrecked their business.
- And now .. for the big Ah-Ha. Cash flow is a tool, it is not your reward. It is not something to play with. You have to understand the difference between cash flow and profit on a conceptual basis and in your business. If you treat extra cash as a reward or as gambling money for a new business idea, you will waste it and miss out on the opportunities it provides to expand sales, scale your business and increase your profits.
Please note: The assumptions and opinions here are for teaching purposes only. I in no way mean to insult or throw shadow on anyone's character or business acumen. I understand that very limited facts are presented in the TV show, and I'm aware that there's always more to the story.