Navigating the financial landscape as an early-stage Consumer Packaged Goods (CPG) brand can be daunting. With limited resources and the need for rapid growth, founders often struggle to find the right financial tools that are both effective and affordable.
In a recent webinar hosted by Naturally New York, Alice Zhang, co-founder and CEO of MyPocketCFO, shared invaluable insights on how startups can streamline their financial operations without breaking the bank.
Understanding the Challenges
"I assume you're here because you're either looking to optimize your financial stack or you're thinking about putting one together," Alice began, highlighting a common concern among founders. She pointed out that many financial applications cater to larger enterprises, making them overly complex and costly for smaller businesses.
The Dilemma:
- Complexity vs. Simplicity: Advanced financial apps offer powerful features but often require significant time and resources to implement.
- Cost Concerns: High subscription fees and additional labor costs can strain limited budgets.
Alice emphasized that for businesses under $1 million in revenue, these tools might not provide a good return on investment (ROI). "When you're under $1 million, especially under $5 million, these tools might not be worth the investment," she noted.
Building an Effective Finance Stack
An efficient finance stack is crucial for managing your financial operations smoothly. Here are five essential components tailored for early-stage CPG brands:
1. Bookkeeping and Accounting Systems
Accurate bookkeeping is the backbone of financial management. Think of your bookkeeping system as a CRM for all your financial transactions, centralizing data from various sources.
Key Takeaways:
- Adopt Accrual-Based Accounting: This method separates the cost of goods sold (COGS) from inventory spending, ensuring accurate gross margin calculations. One key insight is that "Your gross margin should only go together with orders sold." It should not be influenced by inventory purchases, which can be irregular.
- Centralize Financial Data: Utilize platforms like QuickBooks Online (QBO) or MyPocketCFO to aggregate transactions, providing real-time visibility into income and expenses.
Why It Matters: Accurate financial records are crucial for understanding your business's health and are essential when seeking investment or loans. Adopting accrual-based accounting helps maintain financial accuracy and makes your business more attractive to investors.
2. Finance Operations
Efficient management of invoices and bills saves time and reduces errors. As a founder juggling multiple roles, streamlining finance operations is vital.
Strategies:
- Automate Invoicing and Bill Payments: Tools like Bill.com or Melio can automate these processes, reducing manual workload.
- Leverage Existing Features: If transaction volumes are low, the invoicing and bill management features in your accounting software may suffice.
Insight: Managing fewer than 20 invoices or bills per month can often be handled manually. However, as your business grows, adopting automation tools becomes essential to handle increased volumes efficiently.
3. Inventory Management
Keeping track of inventory is critical for product-based businesses, but it doesn't have to be overly complicated.
Simplify Inventory Tracking:
- Use Basic Tools: When focusing on growth, managing inventory using a spreadsheet can be acceptable. This approach saves resources while still providing sufficient oversight.
- Periodic Inventory True-Ups: Conduct monthly or quarterly reconciliations to adjust inventory levels without the need for real-time tracking.
Benefit: This method balances the need for oversight with practicality, allowing you to allocate resources to areas that directly impact sales and expansion.
4. Cash and Capital Management
Understanding your cash flow and capital structure is essential for sustainability and growth.
Recommendations:
- Separate Personal and Business Finances: Transitioning to a business credit card and bank account ensures clear financial separation and simplifies bookkeeping. It's highly recommended to "switch to a business credit card ASAP" for better expense tracking and legal compliance.
- Manage Equity and Debt: Maintain accurate records of loans, interest payments, and equity investments using tools like Carta or Capshare.
Insight: Proper cash and capital management not only keeps your business compliant but also builds trust with investors and lenders, making processes smoother and maintaining good standing with financial partners.
5. Reporting and Analysis
Real-time access to financial data empowers you to make informed decisions.
Actionable Steps:
- Regular Financial Reporting: Generate Profit & Loss statements, balance sheets, and cash flow statements to monitor the health of your business.
- Monitor Key Metrics: Keep an eye on gross margins, burn rates, and runway to make strategic decisions.
Why It Matters: Having visibility into your financials helps you pivot strategies and allocate resources effectively, ensuring your business remains agile and responsive to market changes.
The Importance of Accrual-Based Accounting
Accrual-based accounting records revenues and expenses when they are earned or incurred, providing a more accurate financial picture.
Benefits:
- Accurate Gross Margins: It matches revenues with the expenses incurred to generate them, giving a true reflection of profitability.
- Investor Readiness: Meets standard financial reporting requirements, making your business more attractive to investors.
- Regulatory Compliance: Essential for tax purposes and adhering to accounting standards.
Avoiding Common Pitfalls: Under cash-based accounting, large inventory purchases can skew your COGS and gross margin. Remember, "Your gross margin should only go together with orders sold," not influenced by irregular inventory spending.
Aggregating Sales Data for Real-Time Insights
With sales spanning multiple channels—Shopify, Amazon, wholesale distributors, and more—consolidating this data is crucial.
Strategies:
- Centralize Sales Channels: Utilize platforms like Shopify to aggregate orders from various sources, providing a unified view of sales.
- Real-Time Revenue Recognition: Implement systems that offer daily income views, enabling timely decisions.
Benefit: Centralized data enables a holistic view of your sales performance, helping identify trends and optimize channels for better profitability.
Optimizing Expense Management
Efficient expense management starts with separating personal and business finances.
Steps to Take:
- Open Business Accounts: This ensures clear financial separation and simplifies bookkeeping.
- Utilize Expense Tracking Tools: Software like Expensify or Receipt Bank can automate expense reporting and reimbursement processes.
Additional Tip: Business credit cards can offer perks and benefits tailored to your needs. There are many options available even for startups, so explore providers that align with your business.
Simplifying Inventory Tracking
Avoid overcomplicating inventory management at an early stage.
Recommendations:
- Focus on Finished Goods: Concentrate on tracking the total spending on inventory rather than every raw material and component.
- Periodic True-Ups: Adjust inventory records periodically, which balances oversight with resource allocation.
Insight: This approach allows you to focus on growth and getting your product to market, which is more critical at this stage than intricate inventory tracking.
Efficient Invoice and Bill Management
As your business grows, automating invoicing and bill payments becomes increasingly important.
Approach:
- Manual Management for Low Volume: Founders can handle finance operations when transaction volumes are manageable.
- Adopt Automation Tools: Use platforms like Bill.com or Melio to automate processes as the business expands.
Benefit: Automation not only saves time but also reduces the likelihood of errors, ensuring accuracy in your financial records.
Conclusion
Building an effective financial toolkit doesn't have to be overwhelming. By focusing on essential components and adopting tools that align with your business size, you can achieve financial clarity and support your company's growth.
Final Thought from Alice: "Think about it from an ROI perspective. Invest in systems and tools that offer tangible benefits for your business size, allowing you to focus on growth and scalability."
Next Steps
Enhance your financial operations and set your CPG brand on a path to success:
- Watch the Webinar: Gain deeper insights by watching the full webinar on our YouTube channel.
- Request a Demo: Discover how MyPocketCFO can automate your bookkeeping and provide expert financial support. Request a demo today.
Empower your business with the financial clarity it needs to thrive in a competitive market.
