Startup To Scale

94. Getting to Profitability for CPG Brands

February 27, 2023 Foodbevy Season 1 Episode 94
94. Getting to Profitability for CPG Brands
Startup To Scale
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Startup To Scale
94. Getting to Profitability for CPG Brands
Feb 27, 2023 Season 1 Episode 94

On today’s episode I want to address some areas that CPG founders are concerned with according to last month’s state of the CPG industry Report I released. For this conversation I’ve invited on Brad Ebenhoeh, founder of Accountfully to provide actionable guidance from a finance perspective.

We discuss reaching profitability, selling across multiple sales channels, and how to manage retail sales.

Startup to Scale is a podcast by Foodbevy, an online community to connect emerging food, beverage, and CPG founders to great resources and partners to grow their business. Visit us at to learn about becoming a member or an industry partner today.

Show Notes Transcript

On today’s episode I want to address some areas that CPG founders are concerned with according to last month’s state of the CPG industry Report I released. For this conversation I’ve invited on Brad Ebenhoeh, founder of Accountfully to provide actionable guidance from a finance perspective.

We discuss reaching profitability, selling across multiple sales channels, and how to manage retail sales.

Startup to Scale is a podcast by Foodbevy, an online community to connect emerging food, beverage, and CPG founders to great resources and partners to grow their business. Visit us at to learn about becoming a member or an industry partner today.

Brad Ebenhoeh

[00:00:00] On today's episode, I wanna address some of the areas that CPG founders are concerned with. According to last month's state of the CPG industry report I released for this conversation, I've been invited on Brad Ebenhoeh, founder of accountfully to provide actionable guidance from the county perspective.

We're gonna discuss reaching profitability, a selling across multiple sales channels, and how to manage sale retail sales. Brad, welcome to the show. Hey Jordan, thanks for having me on. Once again, looking forward to chatting and sharing some information. Awesome. I'm glad to have you. So, according to our survey, the primary concern for 43% of brands is reaching profitability this year.

What are the biggest obstacles that you see? Early stage brands are going through and reaching profitability. . Yeah, it's interesting even starting out like that brands are focused on profitability because we've been doing this for a decade or over a decade and profitability wasn't always the goal.

It was about growing top line, raising money, growing top line, raising money, growing top line, raising money. So now that the mentality [00:01:00] has kind of shifted last year or two, which I think is, it's nice, it gets back to the fundamentals of just being running a profitable, you know, cash positive business. . You know, remember one of the biggest obstacles in this is pure, you know, at the end of the day, it's top line sales and margins.

That's really the biggest two obstacles of reaching profitability as a emerging brand. Clearly overhead. And operating expenses, payroll, wages rent, things like that can really affect it. But I feel like a majority of small brands don't have a ton of that. A lot of them are bootstrapped in doing multiple things and multiple figures as they grow.

You know, if you're trying to be profitable and comparing and benchmarking yourself to a 2 million brand and your $200,000 top line revenue, like, it's not comparable, right? So I think you know, focusing on sales and growing sales is number one, but not just that, but profitable sales, and I know you always share this information of you know, what's great about.

National distributor versus a regional and local distributor, which one's gonna ha give you higher margins? Right? Understanding your inventory, understanding your unit economics. You know, what is a product gonna be to get you [00:02:00] landed in your warehouse, ready to sell? What are the costs?

You know, outbound costs the pick, pack and ship the fulfillment. Really breaking it down into each unit and identifying is. Possible getting it lower. Is this an actual cost that I need? Do I need a different co-man or a different manufacturer, different relationship with that aspect. And then really you know, testing your pricing right there's two factors in margins, the outflows and then the inflows.

So pricing can you sell higher? . That's on the customer side, right? That's on the retail side. Cost is kind of analyzing on the data. So again how do you achieve profitability young? This growing business is growing sales, but also profitable sales. I think that's the biggest key to this.

Yeah, I think that's important because. . As brands invariably grow retail doors, they end up having to take on more and more expenses that they didn't re necessarily plan for. And you work with a lot of c PPG brands. One area that I see a lot of misinformation about or just poor understanding, is the difference between like a product margin, which might include your cost of good sold, the need labor that's [00:03:00] going in there and the.

Cost of doing business with a retailer or a distributor. Things like trade spend, sliding fees, set up fees, right? A lot of these things that are billed as one time fees that occur every month for different reasons really e into that margin that brands thought that they had. Can you talk through like what some of those things are that you see just coming into a brand's p and l expenses that maybe they weren't planning?

Yeah, I think let's start we'll definitely break it on those two aspects. Start with the kind of the product cogs , the unit economics, not factoring in kind of the cost of doing business, right? Number one product cogs, like what does it take to get the product into your warehouse ready to sell to a customer, right?

Coman freight duties transferring between warehouse product cost packaging, et cetera, right? Really understanding that helps, but then also the other aspect of the margins on the other side of that is, , what are the costs to get to the customer? Right? Braid out, pick, pack, ship, logistics, fulfillment, credit card fees, et cetera, right?

And really understanding all [00:04:00] of those aspects. impact that unit economics of each your product. But also you need to understand by different this the different sales channels you have, right? So gonna Shopify on your website's a different game than it is on Amazon, right? As well as distribution.

So number one, understanding that, number two, the cost of doing business. This is by far the biggest especially if you're haven't been in the industry or dealt with this. This is the biggest like, mind blowing situation that that. Like I was talking to this guy the other day that's like, been as a salesperson for this small brand for years.

Not a problem. And then they just broke off a new product line and now he's dealing with KeHE and he's literally like, block blew his mind. He's like, can you believe that they do this? And I'm like, this guy's like 60. And I'm like, yeah. It's bizarre. But really, it's getting involved. I, number one is just understanding it and really.

That it exists getting involved in communities like food, Bevy by the syrup, C, B G, et cetera. So in getting that knowledge to you of what does this mean, leveraging other people's forecast, asking questions and that, number three, then putting it into a forecast, right? If I'm selling a [00:05:00] dollar, but I'm really only getting 70 cents for the next six months, make sure that that's involved in your.

You know, your unit economics basically. Right? Breaking that down into aspect and just so you're aware of it, I think the biggest gap is people aren't aware of it and then they see it and, you know, we've seen all your your newsletters and in the nightmare scenes that come up, but understanding that it exists, but then also when you're coming to agreements with them, making sure there's a second set of eyes on it and somebody that's got experience.

So you literally don't, Basically make a horrible decision for your company with having free fills on every, you know, retailer in the nation, which then is just gonna kill you. So you know, being conservative on everything really helps out, especially from a forecasting perspective. And by conservative, I mean, if you want it to be 75%.

But it's really gonna be, but maybe put it at 72 point half percent of what you're actually gonna receive, just so you can actually look at worst case scenario when you're looking at your forecasting and margins and things like that. No, I think that's great advice and I can tell you from my own personal experience in talking with tons of other founders it's very, very hard [00:06:00] to forecast any retailer, distributor, long-term volume in the first couple of months.

But I always recommend. Go with a much more conservative approach because if you have less inventory than optimal, then. Yes, that creates product and manufacturing headaches, but it's much better, in my opinion, than overproducing and having that product returned. I've seen that by companies, way worse.

If they overproduce, the product doesn't sell, they have to take it back. A lot of times they might not be able to resell it and have to take that full amount as a loss versus telling the retailer like, Hey. People love our product way more than we expected. That's great. You gotta work, wait a little bit.

But at least you know the demand's there. And so they're gonna be way more excited for kind of filling that product in and getting the demand versus a product that's not selling. . Yeah, it's crawling before you walk. And on top of that, when you buy a ton of inventory and you have that sucks your cash

So then how do you buy, how do you pay for it? Like you, you'll get stressed out. You'll have to possibly offload it, and then that hurts your brand perception as well from a pricing [00:07:00] standpoint. So I agree. It's like let's you know, even, you know, in any business, I feel like it's healthy to knock off instead of knocking off five things, like, let's do the one, let's execute at a high level.

Improve upon processes, learn mistakes, and let's go to number two and then number three, number four. And I think that that really helps out when you're, you're breaking them off into pieces versus going, you know, whole scale. And then committing like all your inventory to a distributor. Yeah. Let's talk about COGS a little bit as well, because I think that's something that.

Most people think it's fairly cut and dry, but can have a huge traumatic effect. I just talked to a founder yesterday who has egg in their product and egg prices have risen like three times what it used to be a couple months ago and it's so wild. So whereas one, they calculate their cogs and they're like, Hey, we have a great margin.

We're profitable now. They're like barely break even on the product that they're putting out there to no farther their own just because of the commodity prices and how. Have changed. And so, you know, how should brands think about looking at their cogs on a regular basis so that they know what they, they truly are?[00:08:00] 

Yeah, it's fascinating with kind of the egg situation and even over time, people that are, buying nuts or you know, freight costs, , just inbound freight, like, it's all crazy in terms of looking at that. But I, you know, when to start out, I think.

the big thing that a founder needs to do is understand all of this, but not overcomplicate the accounting of it, right? So making sure you understand your unit economics. What is the net cost? What is the packaging cost? What is this cost? What are, is that the final cost? Does that include the freight duty taxes?

Getting all that in place, right? And then being very conscious of when you're ordering when you're doing the next run, if there's a different cost change of updating your average cost or standard cost for that product. and then adjusting your unit costs as much as you can from a pricing perspective.

Maybe you can't impact it at the retail level, but maybe you can impact them more at the e-comm level or fair level or Amazon level, right? You have to be kind of to fluid and dynamic on that aspect. When clients come into us, we walked this process called the inventory workbook.

Walk through your [00:09:00] supply chain, understand the average standard cost of each product. And a lot of times we don't like re-look back on that. For when the client, until when the client says, Hey, my cost of change, or, I'm getting a new co-man. But I think it's like you have to take ownership and understanding of reviewing all those bills and expenses for each of the products that come into place.

And then when it's a lot more fluid and consistently dynamic and it's at a bigger scale than, than looking at more of an inventory management system from an accounting perspective. But at the same time, if you understand all of that break and you break out the costs, The product costs right before it's landed in your warehouse of packaging.

Raw materials come in freight duties, right? Boom. This is landed costs. What are the outbound costs? Freight duties, pick back, ship, this, this, this. And then you reanalyze and look at them every month. Have they changed? Is what's my most recent bill? It's that, you know, even if you go down further, like on the advertising, right?

Like costs or the commissions, all that, broker commissions, understanding all those aspects and looking at them consistently and adjusting as needed is just gonna help out with everything. You know, with your business. Definitely. [00:10:00] And I think what you mentioned there, I just wanna highlight is if you can like look at your cost changes on what they are every month if possible, that way you're up to date on how things are changing your business.

Cuz you might need to change your strategy. It might be that your product costs have driven up so much that you're actually losing money for every product that you're selling and some peak periods. And so when you're launching new accounts, you're actually doing so at the loss and maybe you still decide to do that, but you should at least know what you're getting into so you can plan from it from a financial perspective.

Yep. Yeah, there's, I can't tell you how many clients that come to us and we start, and then we get through this process. Checking out your union economics, looking at your pricing, looking at your cogs. And we, after we put it together, we're like, by the way, your cost is higher than your price.

And they're like, what? And it's like, well, you never did this. Like, you never like calculated this. So it's like, really? You know, you're, they're like, yeah, I did it. I did it when I, you know, I did it. And they're like, when was the last time? Oh, two years ago, three years ago. . Yeah. It's like your biggest cost.

Of cash suck, of managing a CPG or any inventory basements as inventory. So it's all the, you know, the devil's in the [00:11:00] details as everything is in the margins, so, well, and speaking about margins, I wanna talk about this concept of kind of thinking about your cash flow because it's something that makes sense, but I never really thought of as a founder.

And so that's if, you know, if you sell a product for let's say $1 and then have a 50% cost of good sold, you know, that would mean that every product you sell, you're making 50 cent, right? 50% of that. Now, to make another unit to sell again, you have to spend that 50 cent that you earned. Leaving you with no money left to cover all your expenses, right?

Salary, overhead marketing, plus you have to buy more units into the futures. So this is like a fundamental financing crunch that I see founders running into and not really fully understanding. Which is like, where's the money to buy the next round of inventory after I pay all my expenses? So what are our founders to do in order to get ahead to a positive cash flow?

And this is, you know, goes back to like, it's [00:12:00] grow profitable top line revenue at the end of the day, like, you know, and I see a lot of times in your Slack channel, like people saying, Hey, what are your typical margins? Well, this is why, like, you gotta get your margins above 50%.

You know, cuz you're gonna get hit down on trade span, cost of doing business, it's gonna move them down. But you gotta start out a position to get this aspect because what happens is you're going to your point, you spend 50 cents, you have to reinvest that. So then this all goes into additionally just pure cash flow management as well, right?

So paying for inventory, what are your terms of your inventory? What is the terms of your receivables? What is your cash cycle, right? So basically, if you have no money left over at this time to cover your overhead each month, your payroll, all that type of stuff, right? Basically what it comes into is you're basically, what is the money that I'm bringing in for financing?

Let's say it's equity or debt financing or whatever, and then how long can that last? It's managing it because, hey, upfront, if I'm buying in my inventory and I spend a hundred thousand dollars in inventory, and per your margins here, that means that I can generate $200,000 in sale. So upfront, I need to pay a hundred thousand dollars in inventory.

When [00:13:00] do I need to pay that? A lot of people, you have to pay that pretty much right away or within terms, especially as you're younger, right? And then when am I gonna sell to 200 K in sales? Is that gonna be month one, month two, month, three, month four, month five. Great. But also then when am I gonna get that money and how much money am I gonna get?

Right? So $200,000 of sales for this scenario, if we're just talking about, you know, unify ke distribu, . Well, let's say you sell 200 k in the first three months in revenue. Well, hey, you may get $140,000 total in months 3, 4, 5, right? So then you're reconciling and taking that money coming in here to there, to the other thing.

So like, as a founder of a business, what really helps out is understanding what profitability and profit loss means, which is really. Understanding the long term feasibility of your business. Am I running a profitable business? When will I get to be profitable? What is my break even and how long is that gonna take?

Whereas reconciling that to cash management, a r p management is much more balance sheet focused, but that's where understanding that it is a lot [00:14:00] and that's why. Accounting for inventory based businesses is a lot harder than service-based businesses. And that's why leveraging some of the account employee or whatever really helps out in understanding that.

But there is a ton of, you know, other people out there that can help, but it's really understanding that aspect. And what it comes in is, what you're saying is if in a vacuum basically, and everything happened within a 30 day period, month over. then it's a lot easier to manage it, but it doesn't.

So you have to kind of rob Peter to PayPal Paul over here. And it's not that aspect. It's more pay your inventory, I have it, sell it, this and that. And then the last thing you have to factor in all this is then okay, great. Which I you know, raising money, but also financing costs in the world of you know, credit line financing PayPal say cashflow loans, Amex, you know, all the stuff that exists these days with these service providers, Shopify that's kind of been thrown out cash.

Clearly it's tightened up a little bit the last six months, but before that, but all of a sudden you're. Adding 10% interest points on what you're, you know, or even more on what you're borrowing. So factoring all that into this whole cash management. So it's kind of a puzzle. It's a very complex puzzle and it [00:15:00] gets more and more complex over time.

It is, and I see a lot of founders, honestly, who. You don't come from finance backgrounds. Really having a tough time from that. And even founders who do come from finance backgrounds but have never calculated as an inventory about, you know, based business have a tough time. So it's definitely a big web.

And so all that to say like, what should founders really do to create like a breakeven analysis? Like for those who want to become profitable how should they think about like, what it takes for my business to reach profit. Yeah. I think number one is the whole margin analysis we did, right?

The full scale cost of doing business, product costs, logistic fulfillment costs and even, you know advertising, marketing commissions. Really breaking that into cost. Acquire a customer, cause that really factors into it. But, okay, so we would factor into this. Let's say you have the, dollar that you're talking about of sales or sell a product for a dollar.

And let's say in total, all those costs are 65 cents for every dollar. So you have 35 cents left over. Right? So then basically that's a good, that's 35%. You need to [00:16:00] calculate your fixed cost, right? Which is. The rent, the payroll, the, you know even interest expense on debt. You know, everything advertising, marketing or general, whatever you have going on sponsorships to the, you know, expo West expo, which literally, again, it's everything, everything costs money anyways.

Factoring in that aspect, you know, in full being conservative, everything, and say, what is my monthly outflow for all these outflows? Total them up, right? Let's say an average over a 12-month period. On average, let's say you're at a hundred thousand dollars per month, let's say, right? And then you're basically 35% is the breakeven percentage.

So you take a hundred thousand dollars and you divide it by 35%

and $285,000, right? So that means your break even top line revenue is $285,000 a month. So with a hundred thousand dollars average fixed expenses per month basically you need to be you know, 3 million, three and a half million business top line revenue to break even with that [00:17:00] cost structure I said, of a hundred thousand dollars of fixed cost and then a 35% kind of net margin or contribution. Margining after trade spent, after product cost, at cost and even like cost acquire, you know, advertising cost.

So you, that's kind of how you look at it, right? You take that and then that's where you're like, holy cow. And that's why I always. , you know, for these businesses, I'm not profitable. It's like, that's why you have to grow a top line, unless literally you have zero minimal overhead costs, which you can do it.

But that means you as the founder of the co-founder of the three co-founders, you're doing everything and you're not taking a ton of money and, and you're seeing as lean as possible. And I've seen it happen with, with, with various clients and other brands, but it's a lot of work. But that's part of being entrepreneur.

So, . Yeah. And I think that's why it's so important to like really do that analysis as, as a founder early and every, at least every year, if not twice a year, to understand like what's your current cost structure and what that means for your business. Because even if you're taking approach of like fast growth and maybe try bring on venture capital money, it's still important to do that exercise because you need to understand what goals you need to [00:18:00] hit in order.

Not run out of money, or if the fundraising cycle takes longer than expected, which it always does, you know, how can you cut back costs to really run at a, a leaner rate so that you can at least hold on until you get to the next fundraising round? Yeah, exactly. And it can be, you know, Hey, I have 12 months, and everybody's like, I got 12 months to go.

It's like, well, you have 12 months, but try to extend it to 16 months. And then you go to your VCs, you're like, look, I accept this. I was very conscious about money. I, Rose revenue a little bit more. I had better margins and that's easier next round and , that's not your next round. So it's all about, you know being aware of it and then actually executing on a consistent basis.

You know, I was talking with the founder recently on different types of debt. Sources and equity as well, and like how that really plays into your bottom line, your business. So you talked about this a little bit in terms of like Shopify Capital and different loans. Have you seen some debt sources that tend to be a lower interest rate than others or.

That founders [00:19:00] should maybe look into first or how founders should think about creating. I think someone mentioned to me almost, I love this term like a debt stack. So instead of choosing just one debt option, you start with the lowest and build on that to what your limits are. How do you kind of think about that as you're talking with brands?

It's interesting, right? Because it's the cheapest debt, like overall is really just traditional bank loans, right? But it's, you, it's impossible to get there until you're, you know, year three, year four, year five, right? And you're showing consistency in profitability and things like that.

I mean, bankers are bankers, you know, whatever these new cashflow loans. that exists. They are targeting people like you guys because they understand you need, you know, you need money to make money. You need money to buy inventory. You need money to basically market and promote your product and sell it.

I mean, the easiest way, right? Like, there's a couple things here. Number one is one of the one of the simple things, to be honest. If you have like really good. Personal credit store. I've seen some founders literally have credit cards that they've had over time that they keep kind of building up credit balances and then they just keep switching them to 0% and keep rolling 'em over to 0% and you're just managing the [00:20:00] payment every month.

Right. And you're doing that. It's a lot of work, but I've seen literally somebody to do that for like three years. And not give away any of this company and just manage that aspect. So like it's like being nuanced and finding solutions that exist could help out. So I just wanted to say that, cause that's something I saw that was really cool.

The cheapest that a lot of times can be people, your friends and family. Like that believe in you that want to do this, that can help pay this back at a 5%, 6%, 7% have maybe some flexible terms, right? So sometimes, hey, can I push this 60 day payment or whatever. So like, you know, do you know people that want to invest in you and do that aspect that could be even converted due to equity in the future or whatever, right?

So I would say check out those things and after that, . It is what it is. You know, Jordan, what you're saying is identifying those different loans that get you there, but then starting to set up your system. And I know you mentioned Keith Kohler, who I know KT financing. , you just put a, you know, information out.

It's all about literally like setting yourself up to year three, right? So not everything happens now, but in 2025 I'm be, am I gonna be bankable? Can I get an SBA loan? Can I get that consistent [00:21:00] 7% or 6% or 5% or whatever? That kind of handles that aspect. So there's really no bright line. black and white solutions.

If there was, everybody would go to it, then that place would literally increase its cost or fees or go out of business. So, yeah. And I love that you mentioned that whole idea of debt products with either friends and family, or even a lot of angel investors will consider that as well. Like if you have a, a good understanding of your margins and your cash flow for your business, it might actually make sense.

And, you know, you hear stories about Foundership done this where instead. Going out for equity, you actually do some of those deals as loans and you pay them back. Right? You do it in a way where you're like, Hey, I need this to like purchase inventory for a large wholesale order, and I will earmark that this.

The debt will get paid back first, right? And you always make sure you're delivering on that. And then some of those people who actually could be equity investors later, you can build a stable track record to say, Hey, this person I loaned money to, I built a relationship with them. They paid me back on time for the [00:22:00] correct amount.

Like it's someone that I can trust with my money. Therefore it's someone that I have a higher likelihood to trust for a long-term equity. Right. And I think that that gets underestimated a lot as well. Yeah. And then, you know, one kind of creative solution is like piecing this together, right? You have a friends and family who wants to give you money, a traditional loan, but then you have these, these products, right?

That are that basically are taking money first, right? Or you get, you sell a dollar and Shopify take a loan. , you get 80%, they take 20% or whatever, right? So you never actually have custody of those of those funds cuz it's going to them to pay back their debt. What if you create, have a creative solution of saying, Hey Uncle Larry, you wanna gimme a hundred thousand dollars at 7% interest and I'm gonna pay you every week, 20% of sales, or whatever the number is.

Yeah. So all of a sudden he's getting money every week. So he's perception wise, thinking, sweet, I'm getting this paid back. Go, go, go. and then you can kind of keep re-upping or whatever, right? Yes. Cause he's like, cool, I'm getting paid consistently where I like to, you know? So kind of be creative in those things.

If that comes into play or even anybody else, or even a consistent or current debt situation you have, maybe [00:23:00] offer a solution like that. Cause a lot of people what they want is cash flow. Like literally. Cause they just don't want to, you know, I don't want to not be paid for three years, but look, if you give a little bit every week, every week, every week, and it's just a percentage of sales, it keeps chopping away at that.

And I think it creates that great relationship. . I love that. And I think the biggest takeaway from this is there's a lot of creative takeaway or creative strategies that you can use as you're looking at, at debt and finance. And so when talking with someone, like when talking with someone like Brad or your team like, or any, whoever, use you for financing, right?

Like make sure that you are thinking about what are some of these creative solutions so that you're on top of it. But you can very much like realistically build a stable financial business. Brad, thanks so much for being on the show. Jordan, I really appreciate it. I loved it. Love the chat as always.

And really appreciate what you're doing with foodbevy in the community. You're adding a ton of value and resources to everybody.