You may have heard of financial modeling. You may even know it can be a helpful tool to grow your business. But what does this actually mean? In what ways is a financial model helpful? What are the tangible benefits a financial model can provide? Let’s take a CPG (Consumer Packaged Goods) startup, for example.
Here are four ways a CPG startup can benefit from a good financial model. Even if your company isn’t in the CPG industry, the benefits can still apply to you. Read on!
#1 - A detailed financial model crystallizes the goals of your CPG startup.
“If you don’t know where you’re going, any road will take you there.”
- George Harrison, “Any Road”
It’s good to have a goal. Distribution in 10,000 grocery stores by 2025. 1.5% market share. A $10 million dollar revenue company. Perhaps these are good goals. But perhaps they are not. A financial model helps you test your goal by taking you deeper. How many SKUs will I have in those 10,000 stores? What will the weekly velocity be? What pricing drives the best velocity? Exploring the subcomponents of the goal and doing the math in a financial model helps you develop confidence in the goal.
#2 - The financial model forces you to think about the pesky details.
“There is no magic in magic. It’s all in the details.”
- Walt Disney
Can you believe a blank shipping label costs nearly a dime? Do you know the cost of the glue used for your folding carton? Is the ingredient cost in your cost of goods sold calculated based on a hypothetical quantity at scale, or on the actual quantity you can afford to order today? How much film waste do you have each time you start your wrapper, and how does that affect your cost of goods? Often-missed costs like these quickly eat up the gross margin of your CPG business. A good financial model forces you to consider all the details, whether it relates to cost of goods, credit card processing fees, online retailer marketing fees, other fees (does anyone really know what all those other fees are?), third party logistics fees, and on, and on.
#3 - A good financial forecast tells you if and when your CPG startup will run out of cash.
“Cash, though, is to business as oxygen is to an individual.”
- Warren Buffett
The fear of running out of cash is both common and understandable. Missing payroll or even sweating potentially missing payroll is gut-wrenching. The inability to buy ingredients for next week’s order is incredibly frustrating. If you had known you were going to be short of cash, you could have done something about it, right?
When building your financial model, you will consider the volume and profitability of your sales. In addition, you will consider other cash-related issues such as the timing of customer payments, up-front deposits required by your co-packer or raw material supplier, the quantity of inventory needed, new equipment required, and even how long you can delay the rent payment before the landlord knocks on the door. Armed with a financial model that considers all your sources and uses of cash, you can confidently move through your business seasons.
#4 - The financial model helps others understand the financial story of your business.
“A good financial model is worth a thousand words.”
- Anonymous
You have a terrific product that addresses a market need. You’ve developed strong ongoing customer relationships. All your sales trends point up. It’s time to bring on new investors, key employees, or develop other strategic relationships. “How much cash do you need, and when?” investors ask. “Am I joining a financially viable CPG business?” potential employees and strategic customers and vendors ask.
In lieu of smoke and mirrors, you advance the well-thought-out, comprehensive financial model. “Let me walk you through the financial story of our business...,” you begin. Your financial model tells you about the health and needs of your business, and once you know the story, you can share it.
A financial model won’t guarantee your business’s success. It will, however, give you confidence in your understanding of the future, enable you to make informed business decisions, and give you a tool to share your confidence and knowledge with others.
It’s true that financially-minded and spreadsheet-savvy individuals can tackle a “DIY” financial model in Excel. To create a robust and comprehensive financial model, however, it’s best to rely on an experienced CFO. They can dive deep into your business to thoroughly understand the drivers of your company, then create a powerful, easy-to-use tool that reflects the unique situation of your startup. Then, you can use the model to experiment. A good financial model is built to survive many rounds of changes as you test assumptions and visualize the effects of pulling certain levers in your business (CFOs can certainly help with that, too). You end up with an actionable strategic plan based on solid financial analysis.
For startups, it’s not always reasonable to hire a CFO full-time. Even with a full-time CFO, your company may not have the expertise (or bandwidth) needed to create a robust financial model. Seasoned CFOs are still within reach. CFOs are available on a fractional basis through Ascent CFO Solutions, giving your company a completely custom arrangement for your particular needs. I encourage you to reach out to us here.
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About the Author
Paul Harrison, MBA, is a Fractional CFO with Ascent CFO Solutions. With 25+ years of financial and operational experience, he’s worked with high-growth companies whose customers include the majority of the country's largest retailers, including Whole Foods, Trader Joe’s, Walmart, Costco, Kroger, Aldi, Home Depot, and Amazon. He’s also created financial models that facilitated profitable new product introductions and worked with lenders and investors to secure the necessary financing. Learn more about Paul here.