Financials help you make better growth decisions
4-min read
Making a decision about a new growth opportunity should definitely include financial analysis. When founders come to me for help deciding which direction to go, I like to take a numbers approach. Keep reading to learn the metrics you should be tracking that impact your growing business.
You don’t have to have an accounting background to get a handle of your business financials.But if you stop at bookkeeping and don’t want to dig deeper, you’re not helping yourself.
That’s because bookkeeping is about telling you what happened but not why. Bookkeeping only concerns itself with day-to-day financial operations like entering invoices, reconciling bank statements and doing month-end close. It provides no insights or analysis to help you plan for future growth.
I sat down with Chris and Mike Angelastro from Provision Financial Solutions on the must-have’s in financial planning and analysis. The Angelastros work as outsourced providers for businesses at all phases of growth, including through acquisition. I asked them to distill down exactly what businesses need to be tracking:
· Unit economics for all SKUs
· Pro-formas for all revenue channels
· Keep up with cash flow statements and projections
· Know your resourcing needs
Let’s go through each one of these and identify the key factors that play into your growth plan, as well as helpful tips and common pitfalls to avoid.
Unit Economics
Unit economics provides contribution margin per unit sold. You want to determine your margin as it is today, and what it will be in the future with higher units. When working out your future state COGS, estimate changes to costs such as labor cost per production, volume discounts on raws, inbound freight, etc.
A common mistake is to fall in love with volume discounts too early, and then be sitting on discounted materials that cannot be monetized because sales aren’t catching up quickly enough. You don’t want to be in a position where your capital is tied up and you can’t act on a good opportunity when it comes. I know you are anxious to show good margins ASAP, but what is more important is a line of sight to good margins that is realistic and well researched.
Pro-forma out all revenue channels
Understand that not all sales are created equal and have different profitability scenarios from a channel perspective. For a good example on this, refer to my previous post Surviving KeHE. Factor in the sales terms (timeliness of payment) and make sure you are keeping with the pricing architecture expectations, trade spend, and marketing support for key customers within the channel. For more on this read Correct Pricing.
Cash Flow Projections
Understand the balance between payables and receivables. Start with a simple template like this one and enter it weekly. You’ll be surprised how good you’ll get on predicting future cash flow. The idea is to manage your cash so you don’t have to sell at a poor margin or stress about making ends meet. Sometimes it’s as simple as negotiating better supplier terms and customer payment terms. If you are growing quickly, cash flow projections will also reveal when you need to raise money or take out debt.
Resourcing Needs
Understand the cost of time and human capital. This includes production, logistics, training, sales analytics, merchandizing, inventory, purchasing, R&D, promotions, social media, ads, etc. What you and your people spend the most time on becomes the focus and priority of the business. You need to steer productivity by building operational and financial performance metrics tied to goals. You want to align team member incentives to goals. Establishing KPIs for each function, and being able to track it is key. I see this break down the most in the sales function. Sales people must own the P&L of the accounts they manage and have clear KPIs on deals they give and how well their accounts are performing.
Once you’ve established a baseline in these areas you can then run scenarios and evaluate new opportunities. For example, what would it look like to enter the hospitality channel? Maybe you’ve been selling B2B with online grocery like Imperfect Foods and wholesalers like Faire, but want to get people who travel to experience your product. First, you’ll need to work with wholesalers that supply hotels, apartment building lobbies, and vacation rentals. This is a pretty fragmented space and you may need more manpower on a daily basis to manage these accounts. But even if the POs are larger, and concentrated to your most profitable SKUs, how can you know if it is a good investment to hire more people? Once you understand the business model of the new channel and your financial picture you can then make a sound decision.
If this all seems daunting to you, or you are getting stuck, hire a professional. The nice thing about outsourced CFO level help is that one, it costs a fraction of what you’d pay an internal FTE, and two, you get the benefit of their experience with other businesses in CPG and adjacent industries (foodservice, restaurants etc).
Don’t wait to assess the risk/reward of business opportunities. Get comfortable with your financials so you can look at a range of scenarios and go for the best options.
Big thanks to Chris and Mike Angelastro from Provision Financial Solutions for these tips and guidance.
All my best,
Jennifer
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