In podcast episode 166 of Startup to Scale, host Jordan Buckner of Foodbevy and guest Brad Ebenhoeh of Accountfully sat down to discuss the nuances of financial modeling, forecasting, and budgeting for Consumer Packaged Goods (CPG) brands.
Jordan opened the conversation with the general vibe of the CPG industry. “Brands are going through a lot of financial challenges right now, but if you manage your money right, there's a lot of opportunities.”
Managing money is a vague concept, but Jordan and Brad go deeper into how to apply this concept to specific action items, like forecasting and budgeting. Jordan continued to speak on the importance of understanding financial health before making big decisions.
“What's really important though, is that you understand [the] financial health of your company so that you can make better decisions…A lot of that comes down to having a clear understanding of the finances behind your company.”
Both Jordan and Brad bring decades of experience supporting brands in the CPG industry, and they detailed how looking forward and planning finances can support a company’s longevity. The key to gaining longevity is through a well-thought-out forecasting process. One that is detailed, but most importantly, one that is engaged and ongoing to ensure it meets the business needs it is designed to support.
CPG brands can face financial challenges, even in the best of economic times. Navigating inventory and the cash cycles of stocking, selling, and managing supply chains can make cash flow management challenging, but with proper financial foresight, opportunities emerge.
Understanding a company's financial picture is crucial for making informed decisions regarding growth; whether that’s hiring, product expansion, or just meeting consumer demand better. Knowing how big decisions can affect cash–or how much cash is needed to safely support any changes–will put a business in a much stronger position to reach its goals. Forecasting is a key element to understanding the best way to plan and navigate these challenges.
Developing a forecast is crucial to forward-looking planning success. However, once a forecast is created, it needs to be used and modified if necessary to continue to serve its purpose. Don’t fall into the extreme ends of the spectrum Brad sees many brand owners sway toward. On one end of the spectrum are the companies that spend tens of thousands on detailed models they never touch. Brad says of these consumer goods companies, “They spend money on this deliverable and don't even look at it and leverage it.”
On the other end of the spectrum are the companies that get overly fixated on the data to the point it becomes too overwhelming and not informative. In these cases, the data loses its value and starts telling a narrative that does not exist throughout the company’s financial history.
Striking a balance between detailed planning and actionable strategies is essential.
Brad says,
“I think having a forecast in place makes a lot of sense. And just making sure you have a roadmap looking forward from a profitability and cash standpoint.”
Sometimes companies know the importance of a forecast and budget, but struggle to get started, or don’t know what is needed to develop a working forecast.
Jordan asked, “So for a lot of brands here growing, they may be under $5 million in sales. They're trying to understand what my company looks like, right? A lot of them are using something like QuickBooks Online. Maybe they have some basic accounting in place. What's the next level that they need to be looking at to make sure that they are looking for with their company and their growth instead of backward-looking?”
The key is to start with accurate, historical data. This backward-looking financial data provides the elements needed to project scenarios into the future. Next, focus on creating both annual budgets and longer-term forecasts.
Brad shares, “Budgets typically span 12 months and primarily focus on the profit and loss statement (P&L), while forecasts extend to three years and encompass P&L, balance sheet, and cash flow projections.”
▶︎ You can explore our detailed checklist and blog surrounding this exact subject, here.
Part of the forecasting process and looking ahead is developing and sticking to a budget. This can be compiled once you have the key data for creating your forecast. Brad shares how the budget is more P&L-based.
“An annual budget is focused more on the P and L, right? Like ‘What are my revenues this year, margins, overhead, et cetera’? Then you can get a budget in place for 12 months for a calendar year, or a rolling 12 months, and then you can assess it against a month-over-month.”
For smaller, variable businesses, budgeting may seem challenging. Start by analyzing past performance and key metrics to inform assumptions for future growth. Emphasize consistency and revise the budget regularly to reflect evolving circumstances.
Understanding performance starts with establishing goals, or metrics to track against. Establishing internal benchmarks, such as return on advertising spend or customer lifetime value, can provide valuable insights into business performance and guide decision-making. These goals and metrics will be very personal to brands, especially as they are in the pre-revenue or smaller revenue stages.
The trick is to find the goals and metrics that mean success for your organization and build from there. As an example, Jordan’s newer company, Joyful Co. uses customer data to get a sense of the lifetime customer value and focuses sales efforts there.
“For my gifting business, Joyful Co. I was starting to look for what's a good metric and Northstar that I can use with me and my team to determine where we want to go and really identify that with us being a relationship-based business, we're focused on lifetime value for our customers.”
Tracking these important goals and metrics will eventually help tell the story of your brand’s journey toward success. Investors are often more interested in the narrative behind the numbers than in perfect forecasts. Present a compelling story that aligns with the brand's mission and demonstrates a clear plan of action.
It is important to align the forecast with the vision of the company’s goals and desired outcomes.
Brad thinks the best way to show investors this story is through a forecast that paints the picture of the company’s progress. “I think the initial step is the storytelling, the community building, the like, ‘Hey, I had to have this, we did this, this is why we're doing it’. I don’t think investors expect perfection because they know it's never going to be perfect or accurate. It's just more of ‘This is an awesome product. This is an awesome story’.”
Starting with granular data and building projections from the ground up allows for a more realistic understanding of growth potential. Focus on key inputs such as sales channels, margins, and customer acquisition to develop actionable forecasts. Brad suggests this is the best way to approach a forecast, especially for smaller brands.
“We prefer looking at it–especially if you're smaller–from the bottom up, right? Like how do I get to this? So you could start understanding all the inputs that drive [the desired outcome] versus the top-down of this industry.”
For brands lacking financial expertise, partnering with accounting and finance professionals like Accountfully can provide invaluable support. Most founders are too busy to manage the process of things like invoicing, paying bills, regular bookkeeping, and other accounting tasks, let alone reviewing the data and making forward-looking decisions based upon it.
Regular bookkeeping, financial reporting, and advisory services can help brands navigate financial complexities and drive sustainable growth.
Brad says, “As a business owner, you're busy. If it's not in your inbox, you're not having a conversation about it.”
Accountfully provides regular, proactive accounting that gives businesses a look at historical and current data and also provides the ability to assess the data and create an actionable plan to forecast accurately. For Accountfully’s outsourced accounting clients, the regular financial review meetings provide a comprehensive overview of the historical data and offer some insights looking forward. This provides the baseline for beginning the forecasting process, should they decide to pursue a three-year forecast development.
Brad shares, “As we discuss everything looking forward it’s based upon, you know, accurate information that helps you set a good baseline to understand your business moving forward.”
By prioritizing financial understanding and leveraging strategic planning, CPG brands can move toward long-term success confidently. To develop a detailed and useful forecast and budget, it is important to have accurate, historical data to use to support the creation of a forecast and to develop a useful budget. Metrics and milestones should reflect the unique goals of your company’s success and tell the story of how you can apply projections in the forecast confidently.
Whether you’re forecasting to do more accurate cash planning or seeking investors, it is important to use realistic data and be active in the process. By applying this combination to your business, you can support longevity.
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