133. Core Financial Metrics as a CPG Business

myPocketCFO

Jordan Buckner: [00:00:00] One of the core questions that every founder needs to understand is how their business is performing. And if you aren't crystal clear, then it's time to really review your financial goals and how you are tracking your accounting and bookkeeping, which are a core of the business fundamentals. Joining me today to talk through how to review your financing is Alice Zhang, who is the CEO of MyPocket CFO.

It's a platform that helps you achieve financial independence through automated bookkeeping, simplified planning and analysis, and access to cash and capital. Alice, welcome. 

Alice Zhang: Thank you. Thanks for having me, Jordan. 

Jordan Buckner: So I talk with founders all the time and I'll ask things like, you know, Hey where are your gross margins or how's your business performing now compared to last year? And you know, maybe surprisingly, a lot of founders don't fully know or have , that information at their fingertips. But as someone who works with a lot of the founders, I'd love for you to kinda share some of [00:01:00] the common problems that you see founders running into and how they can kind of take a look at their financial statements and make sense of those.

Alice Zhang: Sure. Yeah. I would like to start with income statement. I guess that's probably typically the first financial statement that a founder or a owner would like to review on a periodical basis. Right. So I would say as a C P G founder I would be looking for two signals from the income statement.

It's really simple. One is about sales the other is about your expense. Typically just those two signals. When I look at income statement, I look at my sales side. You know, for early stage C P g brand builders, I would pay attention to sales growth. Because your starting point might be low, but you know, whether it's your partner, your investor, I think they're looking at signals where Can help them to understand, you know how big, you know, this company might [00:02:00] grow.

So it could be months over month growth rate. Could be quarter over quarter, could be a sudden jump because of you signed a big PO with some, let's say wholesaler or retailer, right? So definitely one is sales obviously. On the cost side. The second , is cost, right? Expense on the expense, especially under the today's macro economic environments tightening a lot of uncertainty.

A lot of founders are asking me how should I manage my growth so I could be more profitable? So I would say pay attention to three types of cost expenses on your income statement first, obviously it's cost of goods sold, right? Cost of goods sold, basically. It's a unit level cost.

It tells you per unit. Sales you make like per bar you sewed. Typically it comes as a percentage of your unit price. So you need to have that number, like literally at your fingertip. You should know it while you're asleep or you're [00:03:00] walking , or talking. 24 by seven, whether it is 50% gross margin. For 60%. , and how you can negotiate more with your co-packer, with your manufacturer or raw material provider to lower that, because basically, that's gonna have an effect on every unit, A product you sell. Then the next I said there are three cost category, right?

So apart from cost of goods sold, I would say second cost category is what we call operating cost. Under operating cost, typically I would like to separate out into direct cost. Indirect cost direct cost for C P G business. On the income statement, typically we would be looking at advertising and marketing expense.

That's a direct cost as well as shipping and postage cost. That's another direct cost. And when I say direct cost, that means the cost of this category is directly associated with the number of products you sell. Even though they're not in the [00:04:00] cost of good sold they're not involved in producing the good, but typically they're involved in selling of your product.

And there's a direct relationship between how much, how many units you sell and what's the cost of marketing advertising. What's the cost of shipping, right? So there's the one-to-one mapping relationship, and the those two are one of the most important drivers for you. Unit economics, unit profitability.

So pay attention to your marketing advertising, and typically . You could either break it down to like trade spend, that's one type of marketing. . There's also like a web ads, you know, whether it's Facebook or Amazon web ads spend. There could even be like a contractor spend on marketing or agencies spent.

They're all part of marketing and advertising. So if you're looking for, improving your unit economics look for direct expense, right? Look for improving or optimizing the r o i of your direct expense, [00:05:00] such as advertising, marketing, such as can you lower your shipping costs per unit rent.

Can you negotiate with your third party, three pl shippers to lower the cost? So that will be the second cost category, I would say founders and and owners, , they could be looking at, and by improving that, optimizing the r o i of that or have a direct impact on your unique economics profitability.

The third cost category on the income statement, there are a lot of categories and I lump all of them. And I call them GNA, general and administrative expenses. And typically we have another name for it we call Overhead. You've probably heard of the name before, right? Overhead is an indirect expense category, meaning you cannot have a one-to-one map between how much you spend and how many units you sell.

Typically overhead or G n A would include. Your payroll expense, could include some other general [00:06:00] contractor like a operation person you hire as a contractor, right? It includes your software and apps subscription. It includes office expense, it includes you know, travel expense.

So I. Pretty much any other expense other than marketing and advertising other than shipping cost for C P G could be typically could be lumped into ICO G N A or overhead, meaning that's a lump sum to support your business in general. It does not have one to one mapping into sales. Typically, you have to allocate that total amount across your entire sales either it's by unit or by your total sales, right?

So I would say pay attention to your G N A total as a total, whether it is five category for you or 10 different category for you, but anything other than advertising and marketing other than shipping, lump them to g n a and [00:07:00] pay attention to that spend as a percentage of your sales because the total amount has to be allocated across the entire sales or entire.

Business top line, right? So that will be the third category, like if you're looking for optimizing for your overall profitability, like your net profit, you want to break even, typically overhead is a third category should look into. If your overhead, g n a as percentage of sales is quite high, let's say is 50%.

And if you have a gross margin of 50% right, then , you have $0 left for marketing, which means typically you will be what we call below the line, you will be on profitable or net cash out on the monthly, quarterly basis, right? So the way I think for a lot of founders today, they asked me the question, how could I break even.

 How could it be profitable? Because it's a tightening macro-economic environment. [00:08:00] Then I would say if your gross margin is 50%, then your direct cost as a category I. As percentage of sales plus your overhead should roughly just be 50% of your sales, right? If your overhead alone is 50%, then that means because you have to spend some sales expense, you know, go to conference, do trade spend.

That means you are probably not profitable. So if you want to be profitable, you can. The levers are. Potentially lower your G n A as percent of sales or lower or increase your r o i on your sales and marketing spend. Right? So that's kind of roughly the framework I would say a founder could look into.

Jordan Buckner: Yeah, no, that's a really great call out for those three expense areas. And it's interesting because I've often found that emerging brands are frightened by their numbers, I think. Right? Because initially the majority of C P G founders and brands are going to be losing money for [00:09:00] one to up to six, 10 years sometimes, right?

If they're funded by investors, I. And so it can be, you know, kind of disheartening looking at what the numbers really are, but by truly understanding them and having them accurate, it gives you the power to make decisions and changes for your business. You know, I know one area you mentioned at first, which are your recall, some good sold.

A lot of times, one founders in inventory businesses inaccurately. Measure it, right? They'll put their inventory directly into an expense account instead of as an inventory asset. And then transitioning that into an the cost of goods sold account. And so I think that just gives you an inaccurate picture of what your finances are 

Alice Zhang: profitability.

Totally. That could wrap , your income statement messaging. Yes, 

Jordan Buckner: it is. Like for the outside and in internally. And so you know, I know one problem that a lot of founders have, you know, even if they get that right, is how often should I be updating my cost of goods sold in this environment because we see such fluctuations with pricing.

Alice Zhang: That's a great question. I would say it [00:10:00] like, I will wear my consultant hand, right? It depends. You know, I talk to a lot of founders. I'm still actually in search of a really robust, even, I think depends on whether or not you can have a robust. Inventory management system that'll be my view, right?

Or if you have a streamlined process to update your inventory and cost of goods sold. I think that , the assumption is startup founders and early stage c p g founder owner, they're extremely resource constrained. So typically a founder has to wear so many hats, multiple hats to the extent that they have to manage sales.

They have manage pitching, raise, fund they have to manage internal operation. I would say, Try to streamline your internal process. If you haven't streamlined either by Excel or some kind of tools. Obviously if you have a robust inventory management system, ideally you should be able to pull that.

Inventory near real time. That's ideal. So we could [00:11:00] help to update the cost of good sold. Right? What MyPocket CFO our adopted approach for our customer today is because I know how much time consuming it could be to just update the cost of good sold. 

We adopt approach where we allow , our founders to estimate their cost of goods sold based on their historical data. Could be in their inventory management system, could be in their Excel spreadsheet, but based on their historical performance or that we rely really on founders' judgment. that's why I'm saying it's got to be a collaborative process. So , we typically, based on historical data, we suggest. We get founders consensus to say, Hey, , we can start with cost of goods sold as 50% or 40% or something along that line, right? And then our system just automatically book for every sale.

We automatically book a cost of good sold. And then on the monthly or quarterly basis. So I would say if [00:12:00] pricing adjustment is so frequent I would suggest we could do monthly a chew up with your inventory. So monthly you do a inventory tally. And then we can chew up in the accounting book about , how much inventory you have sold, you have moved, you know, shipped to the customer versus how much on the book as cause of good sold.

We can do a comparison and we can true up journal entry to make that match. Right. So that will be my suggested way. But that brought up a really good question is, if you allow me, I wanna talk a little bit about. , the move between income statement, I talk about income statement and the balance sheet, right?

Yeah. So you mentioned early on many founders made a mistake of putting their inventory, like they spent money, purchase raw materials, spend money to their co-packer to produce the goods. Typically it's by batch, you know, every quarter or something. That should go into their inventory on their balance sheet.

That spend is not expense because you [00:13:00] produce the goods and those goods are still sitting in your inventory. They should be your asset, right? , if you have not sold, It cannot be expensed expense has typically has a direct or indirect match with your sales. That's why they're an income statement.

Income statement is all about sales and associated operating expense, meaning sales and general and administrative, right? If you produce something sits in your inventory in your warehouse, that should go your balance sheet, and , that goes to the other topic related to profitability. Let's say if, you know, early stage as you said, like a hundred percent right, a typical early stage. C p g founder, it by default, , we call upfront investment. It's very hard for you to break even or make profit because we have to do a lot of upfront investment. And one of the biggest upfront investment is inventory. As you know, right, because you sell goods that one, consider that as your asset, not [00:14:00] consider that as your expense and bookkeeping was.

It should sit on your balance sheet and the purpose of the balance sheet. Considers balance sheet contains your asset, your liability, and your equity, right? Asset is for you to burn over time to propel your sales. That's the relationship between balance sheet and your income statement.

So think of your balance sheet as your asset that you're gonna burn over time to propel your business for the long term. Right. , so if you spend a lot of money on inventory, that's not a bad thing. Could be a good thing. It sits on your balance sheet and it brought up another topic. If you need cash and capital, because you are in red, you don't have enough cash capital to support your operation, 'cause you're losing money every month may not be a bad thing.

Then look at your balance sheet. , you can probably finance your inventory, you know Any type of asset, especially current asset, [00:15:00] meaning short-term asset, that can be converted to cash fairly quickly. Include your cash in your bank. Of course, include your inventory. Include , some of the other, you know, accounts receivable even.

They're all your current. Asset. Consider your current asset as something, you know, there are channels actually you could turn those into cash to actually propel your operation, your growth. 

Jordan Buckner: And Alice, I think that brings up another problem. I see that I even had the beginning where I incorrectly used the profit and loss statement as a look at cash flows, right?

And so it was almost like I was. Thinking about the business on a cash basis instead of an accrual basis. , but we were using accrual systems and I was using it as if that was a statement of cash coming in and out the door, which is incorrect. Okay. And a lot of founders, I think are, are looking for that missing piece of like, how do I actually see all the cash coming in and out the door?

Because that's what I need to [00:16:00] know to survive basis. Like the inventory. Like, because if I don't have the cash, then the inventory doesn't. It matters. I need to sell it, but if I don't sell it, then I don't have any cash to operate. 

Alice Zhang: Totally. Totally. So that brought up another great topic. We can talk another time.

It's about cashflow management, right? So when we say cash, typically, I know for most of the founders, they think of cash seating in their bank. Right? , but that's a great point. I would encourage because I would encourage, first of all The C P G fund start using accrual-based accounting.

Start thinking in accrual-based way. If you burned cash but have not sold your product, that's an asset. That's inventory is an asset. Accounts receivable is an asset, right? You know, , I talked to an another founder you know, someone wants to get some working capital financing, right?

 So this brought up another topic. A lender, you know, a bank or digital lender. [00:17:00] Typically they will want to look at your balance sheet in addition to income statement. 'cause they want to understand , Especially what's your current asset? What's your current liability?

Can your current asset cover your current liability? If your current asset is bigger than your current liability, then you actually have extra asset. Then you could find ways to convert those into, like, , they may be able to lend you. Working capital. 'cause they know you're sitting on some asset, which is not exact cash, but can be converted to cash.

Jordan Buckner: Yeah. I think there's been a little bit of a bias too where founders think, oh my energy bar, that's not an asset because if I go out the business, no one's gonna want that. And so I think there's a bias in thinking in terms of like that your food product specifically can be an asset. 

Alice Zhang: Exactly, exactly like , the bars you produce could be asset and then like to the asset is for you to burn.

You can burn [00:18:00] your asset to propel your growth. So , that's what I want to introduce. There are quite a few other metrics. I would encourage founders to pay attention on balance sheet, you know, similar way as an income, you know, like current asset, current liability.

Those are two fundamental ratios. I think they should pay attention and also the relationship. Between current asset, current liability, 'cause that's a very key ratio. Any lender typically they will be looking at. 

Jordan Buckner: Yeah, there's a ton of talk about Alice. Thanks so much for being on the show today. We'll definitely have more episodes to dive into these topics, but I think the biggest takeaway is one, make sure your accounting and your bookkeeping is accurate so that you had good data to work on.

And then on top of that, find ways of reviewing. How your business performing to make sure it's going in the right direction. The biggest problem is when you look at your books or you have someone else look at your books and you're like, wow, I had no idea that our business was doing that. I had no idea we were spending so much on this service.

Right? As a founder, [00:19:00] whether you're losing money or making money, you should know exactly where that money is going so that you can control the fate of your business. 

Alice Zhang: Totally agree.

Jordan Buckner: Alice, thanks so much. 

Alice Zhang: Thank you. Thank you for having me again. Talk to you later.