But there’s a danger every growing DTC brand faces each Q4 that you need to be aware of before you place your inventory PO’s.
There is a huge risk involved with placing large inventory PO’s for Q4:
If you don’t end up hitting your holiday sales goals, you can run out of cash, and even worse – you can go out of business.
But don’t worry. I’m here to help.
The following are 3 tips for reducing the risk of over-ordering inventory for Q4, which will help you place the large inventory PO’s you need to hit your sales goals alongside confidence and peace of mind.
Let’s dive in.
Tip #1 – Confirm You Can Survive a Worst-Case Sales Scenario
Before you place the big inventory PO that you need to hit your Q4 sales goals, you need to confirm that your business will survive if you miss your sales goals by a mile.
How should you go about doing this?
Create a cash flow forecast that assumes that you purchase enough inventory to hit your most aggressive sales goals, but you end up hitting lower, worst-case scenario sales numbers.
You need to be 100% honest with yourself about what the worst-case Q4 sales scenario is.
Plug this into the cash flow model and confirm that the business will survive long enough to sell through the excess inventory in Q1 and Q2 of the following year.
If the model shows that you don’t run out of cash, then you may be fine to place the aggressive inventory PO.
If the forecast shows that your business would run out of cash before you sell through the excess inventory, then you may need to cut back the size of your Q4 inventory PO or look into financing your inventory purchase with the right debt facility.
Tip #2 – Put the Right Debt Facility in Place
Another way to reduce the risk of over-ordering inventory for Q4 is to procure a debt facility specifically for financing your inventory purchases.
Why does this reduce the risk of missing your sales targets?
Because when you put the right inventory financing facility in place, you can pay the lender back for your Q4 inventory purchases in Q1, Q2, and Q3 of the following year as you sell through the excess inventory after the holidays are over.
The ability to match debt payments with the sell through rate of your inventory smooths out your cash flow and allows your line of credit to finance the business’s operations during a period when you would have otherwise run out of cash.
The trick here is to delay or reduce any new inventory purchases until you’ve right sized your inventory levels and paid back most or all the debt you took out to finance your Q4 PO’s.
Tip #3 – Confirm You Can Spend Enough Ad Dollars to Hit Your Sales Goals
My final tip is to confirm you can realistically spend enough ad dollars to hit your Q4 sales goals before you place a large inventory order.
Why is this important?
If you are experiencing big year-over-year sales growth in Q1, Q2, and Q3, it doesn’t mean you can necessarily experience the same growth rates in Q4.
Because in Q4 you have a very compressed timeline to spend all your ad dollars.
There are typically only about 6 weeks between the time that consumers start holiday spending and the mid-December cutoff date for shipping carriers to get your product to consumers before Christmas.
What does this mean?
This means that you need to spend all your Q4 ad dollars in a compressed 6-week time period. I’ve seen brands realize in November (when it’s too late) that they can’t hit their sales goals because 6 weeks wasn’t enough to spend all the ad dollars needed to hit their goals.
It may not be October yet, but sit down with your ad buyer(s) ASAP and have them map out a daily ad spend and ROAS plan, with a high concentration of spend occurring during the 6-week holiday shopping season, and get them to confirm that they can realistically spend that much money.
There’s an art to pulling this off in reality, and great ad buyers know how to do it.
But it all starts with creating and discussing a daily ad spend plan months ahead of time.
In conclusion, to avoid the risks of over-ordering inventory for Q4, take these three steps.
- First, assess if your business can survive a worst-case sales scenario.
- Second, find the right debt facility to finance your inventory purchases.
- Finally, confirm that you can spend enough ad dollars to meet your sales goals.
If you need help building out cash flow projections or sourcing inventory financing, reach out to us.
We’re experts at preparing for the Q4 holiday rush and we’d love to help!