As a CPG startup founder, laying the right financial foundations is crucial for business success. Having worked with numerous innovative and better-for-you CPG brands, I've identified key areas that every early-stage founder should focus on. Let's dive into these essential financial building blocks.
Choosing the Right Entity and Tax Structure
One of the first decisions you'll make is selecting your business entity. For many early-stage CPG startups, an LLC (Limited Liability Company) is a great choice. It provides liability protection while offering flexibility in terms of tax treatment.
If you're the sole owner, your LLC can be taxed as a sole proprietorship. If you have partners or investors, it can be taxed as a partnership. This approach allows you to avoid the complexities of a C-corporation until you're ready for that step.
Remember, an LLC is a state-specific way of forming a company, but it's not a tax classification recognized by the IRS. You'll need to choose how you want your LLC to be taxed. For multi-member LLCs, partnership taxation is the default and a good starting point.
As your business grows and you consider seeking venture capital, you can always convert to a C-corporation. This flexibility allows you to start simple and scale your business structure as needed. BONUS: Also work with a professional to check whether sales tax applies to your product and in which states.
Setting Up Your Business Banking
Opening a business bank account should be one of your first actions as a new company. Look for a bank that is startup-friendly and offers features beneficial to growing businesses. Key features to consider include:
Short deposit hold times
Debit block protection
Connectivity to business technology and accounting software
Potential for lines of credit as your business establishes a history
While there are many options available, including startup-focused banks, for your first account, consider a well-established bank. They often provide good integration with accounting software and may offer easier access to lines of credit as your business grows.
As your business expands and you start sharing your banking information more widely (for instance, for direct deposits), consider upgrading to a treasury management portal with enhanced security features like debit block protection.
Managing Cash Flow
Cash flow is the lifeblood of any business, especially in the early stages. A simple yet effective tool for managing your cash flow is a 13-week cash flow forecast. This helps you:
Anticipate cash shortfalls
Plan for large expenses
Make informed decisions about timing of payments and collections
You can start with a basic spreadsheet to track incoming and outgoing cash. As your business grows, you may want to invest in more sophisticated cash flow management tools or work with a financial professional to create detailed forecasts. Check out our free Cash Flow Forecast template.
Understanding and Optimizing Your Margins
For CPG businesses, understanding your margins is crucial. A good rule of thumb in the CPG industry is to aim for a 4:1 ratio between shelf price and Cost of Goods Sold (COGS). While you may not achieve this ratio immediately, it's important to map out a path towards it.
Break down your margins for each sales channel (e.g., direct-to-consumer, retail, distributor). Consider factors like:
Manufacturing costs
Packaging
Shipping
Trade spend (promotions, discounts, etc.)
Distributor and retailer margins
Remember, different product categories may have different margin structures. For instance, beauty products might achieve lower COGS earlier but may require larger investments in customer acquisition.
Setting Up Your Accounting Systems
Proper accounting from the start will save you significant headaches down the road, especially when it's time to file taxes or seek funding. Here are some key considerations:
Carefully choose your accounting software
Work with a CPG-specialized bookkeeper
Move to accrual-basis accounting as early as possible
While you might start with simple expense tracking in a spreadsheet, as your business grows, you'll want to transition to a more robust accounting system. Accrual-basis accounting, which records revenue when earned and expenses when incurred (regardless of when cash changes hands), provides a more accurate picture of your business's financial health over time.
Preparing for Scale
As your business starts to gain traction, you'll need more sophisticated financial tools. A detailed financial model that maps out your gross and contribution margins by sales channel is crucial for:
Forecasting profitability
Making strategic decisions about which channels to prioritize
Understanding your breakeven point
Planning for funding needs
This model should include projections for multiple years, showing how your financial picture changes as you scale. It can also be a valuable tool when pitching to investors or applying for loans. This is a big part of what we do at The CPG CFO! Reach out if you need help.
Conclusion
Building a CPG startup is an exciting journey, and getting your financial foundations right from the start can make a significant difference in your success. These are general guidelines, and it's always best to consult with financial and legal professionals for advice tailored to your specific situation, especially as you grow and there is more money on the line. Remember, your financial strategy will evolve as your business grows. Stay flexible, keep learning, and don't be afraid to adjust your approach as you gain more insights into your business and market.
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