Case Study: Luxury Retail Fragrance Brand
THE CONTEXT:
Cult sensation Le Labo Fragrances - “everyone in New York smells like Santal 33” - bootstrapped their business for years before being acquired by global beauty powerhouse Estée Lauder Companies. All of a sudden, they had to report their financials to a public company, but their financial infrastructure was not ready. We might even say that their books stunk…
Enter, a member of The Books. A quick assessment of the situation showed that:
The bank accounts hadn’t been properly reconciled in years, leaving confusing adjustments that the acquisition due diligence team could not understand; this meant the final valuation and selling price took a hit.
Inventory and COG was booked on an estimated basis because there were no controls over inventory counts. Making it even more complicated, fragrance was fresh-blended in store, so each retail store was effectively a manufacturing site converting raw materials (inventory) into finished goods (sales).
Each retail store ran its own standalone point-of-sale system, and used different names for each SKU, so extensive manual work was required to gather, consolidate, and cleanse the data in order to report something as simple as sales by scent.
Expenses were minimal, but not exactly managed. The brand ran profitably but never actually built a budget that helped the company assess ROI on spend as it grew. There’s even a rumor that the business was sold based on a plan scrawled on the back of a napkin…
Up until being acquired, finance was an afterthought to the business; but now the company was being asked to produce forecasts and financial reports on a monthly basis, within a public company window (3 day close! impossible), and with internal controls in place.
OUR IMPACT:
Prioritization was key in this clean-up effort, since the brand had to very quickly conform to its parent company’s reporting requirements.
Finalizing the acquisition accounting was the first priority, which required a clean balance sheet. A thorough historical bank reconciliation was performed, which identified missed expenses, double-counted expenses, and many unknown transactions. If only the brand had invested a little money in proper bookkeeping, they could have avoided this issue and sped up the close of the acquisition.
A month-end checklist was implemented to ensure proper process and timing of financial reporting. This included an overhaul of the monthly inventory process, and required that finance partner closely with the supply chain lead and retail store managers to implement more timely inventory counts.
It was clear that meeting the financial analysis and reporting requirements would be impossible without a better system to consolidate and report sales and inventory. We led an effort to identify and implement a standard cloud-based point-of-sale and inventory management system; using creative thinking, we selected a system most used in bars and restaurants (since these businesses hold inventory in raw ingredients but sell finished goods as a combination of ingredients). Building upon the strong relationship with supply chain and retail teams, we successfully led the roll-out of this system across 7 countries and over 40 doors, all within three months. After implementation, reporting that used to take 3-4 days of manual labor took less than 3 hours!
In order to comply with the parent company’s forecast cycle, we led the company’s first bottom-up budget exercise, aligning first with the founders on growth strategy, and then meeting with leaders across the brand to calculate spending needs that aligned to that strategy. Because the brand didn’t have detailed historical financial statements, this process required starting from scratch, but by overhauling the chart of accounts and creating more expense categories, we built a budget process that made future forecasting much easier.
THE BOTTOM LINE:
All of these issues could have been avoided by implementing some basic bookkeeping from the beginning. The biggest lessons learned were:
Set the right foundation with a detailed chart of accounts that allows you to understand your business and code transactions with enough granularity that you can forecast your expenses in the future.
If you have inventory, you need to implement strong inventory controls from the beginning, including timely counts and an inventory system (even just Excel!) that uses uniform data across all locations.
Always reconcile cash - even if you do nothing else.
At The Books, we implement these baseline best practices for every client. We have over a decade of experience building and scaling accounting teams for consumer brands, so we know what works and what doesn’t. We love working with founders and understanding what you need, and you’ll be surprised how much value you can actually get from an outsourced team. If you are interested in working with us, or just want to learn more, get in touch! We can’t wait to help your business grow.
