When our friends at Foodbevy polled hundreds of emerging CPG brands in their State of the Industry report, there was one common theme that stood out: profitability. One of the top concerns these brands had as they entered a new year of business and growth was to scale with healthy margins. Now that the economic landscape has changed a bit, and funding is less accessible, profitability is paramount for brands seeking to be lasting and sustainable enterprises. Accountfully specializes in outsourced accounting for CPG brands, so we led the charge in organizing six areas that need to be addressed in order to achieve just that.
First, make sure you have our one-pager handy by clicking the thumbnail below. Then, crack open your computers and your spreadsheets, here we go. Six ways to increase your profitability are right here.
Fact: margins will decrease as you grow. This means you need to establish healthy margins from the beginning. Identify the products and quantities you know are higher dollar earners and focus on selling those.
When Foodbevy founder, Jordan Buckner sold his product, Tea Squares, he identified the appropriate pack volume to sell so that he maintained a healthy margin.
“I used to sell our energy bars wholesale with an inner pack minimum. Then I increased the minimum to a master case, and then to half pallets. While you might lose some smaller customers, it increases your profitability for every customer you are serving.”
In the meantime, it’s probably a good plan to address the lower-margin items and see where they may become higher-earning items. That may mean addressing raw material costs, packaging, shipment, supplier cost…you name it. The best place to start, however, is to identify these costs on the micro level so you have the ability to understand them and work toward a plan to improve these margins. Don’t assume that your growth will solve the problem. Adding more overhead will only decrease your profitability.
One of the biggest mistakes we see repeatedly with new clients is lumping all of the sales channels together in their calculations and reporting. Especially in the current retail world, where omnichannel is more the norm, the fees and costs associated with selling from one channel to the next can vary aggressively. The fees and storage associated with selling on Amazon will be much higher compared to your D2C/Shopify sales, for example. Lump in retail/grocery and wholesale, and you’ve got a big range of margins at play. It is in your best interest to understand what each channel truly costs. You may have a high-performing channel pulling the weight of an underperforming one. It may make sense to nuke the overwhelmingly costly channels and focus on the more profitable ones. Maybe the retail and Amazon channels are slim, but make sense for exposure. The only way to decide this is to understand each channel individually.
We alluded to this in our first point, but it deserves its own paragraph. Figuring out your cost of goods sold (COGS) is not a one-time thing. Sure, it’s an important achievement and a must when establishing your pricing and products, but it is also an active, ongoing exercise. We saw so many challenges in previous years surrounding material cost fluctuations, labor shortages, and overall supply chain challenges that drastically influenced COGS for companies overnight. Ask questions surrounding pricing, terms, and supplier capability on a regular basis and act on areas that can be improved. As the classic saying goes, “Don’t put all your eggs in one basket” and be prepared to make changes for the better as needed.
Jordan Buckner experienced a drastic improvement in margins when he found a local ingredient supplier with more expeditious delivery.
“I had a decent almond supplier in Washington state that shipped to our Chicago warehouse, but, shipping accounted for 30% of our ingredient cost, upward of $400 per shipment. I was able to find a Chicago supplier with free dropoff, reducing our costs 30% and increasing our delivery speed. Make sure you're regularly optimizing your supply chain.”
Without a doubt, the biggest challenge of an inventory-based business is cash flow. It takes dedicated, smart accounting habit-forming to train your cash management skills. The catch-22 is you need cash to buy the inventory to make money, so oftentimes you are relying on an infusion of capital to get started and can be unsure of the typical timeframes between purchase, manufacture, and sale. Those supply chain-related challenges mentioned above also affect your cash cycle drastically overnight and become an unplanned hiccup. There are ways to map out and plan for a more nimble cash cycle. One of the biggest benefits our CPG clients enjoy is access to their account team’s insight into their cash cycle.
If you are still managing your own cash, there are basic bookkeeping tasks that can support implementing a healthier cash cycle. Outside of quality accounting habits, there are funding options that can help, if done tactfully. More on that in our next paragraph.
Accounting buzzkill alert: just because you can get a quick, easy infusion of cash, doesn’t always mean you should. There, we said it. While there are so many amazing, flexible debt and fundraising options available, they still come with consequences you need to consider. It behooves you to truly understand the costs involved: annual percentage, the speed at which you need to pay it back, and how much the payments are. Many of the more automated versions of funding can be the sneakiest. These algorithm-based options will often take cash out automatically depending on sales volume and can also come with a hidden business lien. Do your best to read the contract and calculate what it will cost to pay the loan back. We always suggest engaging with a person that you can trust and communicate with. Think more along the lines of a local bank that has a supportive point of contact you can consult with. Our in-depth discussion with Keith Kohler on The Month End podcast outlines these considerations. We discuss the types of funding, the business stages they suit, and the pros and cons of each. Going back to margins, however, make sure you understand how much you have to repay these loans.
The CPG community is one with a lot of helpful businesses and individuals who want you to be successful. If you haven’t familiarized yourself with the unlimited resources available through the FoodBevy website, make sure to browse through the guides, articles, downloads, and how-tos. This literal bevy of resources is a must-stop on your CPG journey. In addition to these great resources, are listings for a multitude of partners; from marketing to packaging, and beyond.
Accountfully provides outsourced accounting to CPG brands that are designed to support your business at each stage. Our service levels support inventory management from basic bookkeeping to advanced finance and advisory. A great first step is to download our Inventory Handbook eBook, which addresses all of these tips in more detail.
In our one-page downloadable guide, featured above, you will also find many of these resources in one place. From our inventory team to you, we wish you success and are here to help you should you need more information and accounting support. When you are ready to discuss these items and see how we can support your needs, let’s set up a time to chat.