Financial Modeling Best Practices for CPG Startups

2021 was a banner year for CPG entrepreneurs. It felt like startups were successfully fundraising left and right, with plenty of upward momentum in the industry and optimism about the future. 

Flash forward two years, and the startup landscape looks drastically different. Startup fundraising isn’t a sure thing anymore. But don’t let that deter you—VC deals are still happening, you just need an airtight financial model to support your pitch, as VCs are now digging into financials more than ever.

Financial modeling is about more than just impressing VCs. It’s also a tool that your startup uses to make strategic decisions and plan for what’s to come, ultimately determining the future of your startup. 

Financial Modeling is Make or Break for CPG Startups

In this rapidly changing environment, investors are conducting more due diligence than ever. And that includes a close look at your financial model. 

Prospective VCs want to know that you have a thoughtful plan in place to make your goals a reality, and that you are thinking long-term. If financial uncertainty is looming, then you should understand how to recession-proof your finances.

Think of your financial model as a record of truth for what your organization has already done and what you expect to do in the future. The model is an active tool that should inform your business decisions and help you solve problems. You should go beyond just financial data and include a range of informative business metrics. 

When you’re under pressure to pull through with an investment, it’s easy to think of your financial model as a homework assignment you need to put together for VCs. However, your model should ultimately be for your organization first. If you can’t use it on a day-to-day basis, it won’t deliver value for your organization in the long run.

Best Strategies for Financial Modeling

Financial modeling seems like a daunting task, particularly if the finance side of entrepreneurship isn’t your strong suit. Use these three financial modeling strategies for CPG startups to get the ball rolling. 

1. Build a Model for Your Startup 

Ultimately, your financial model needs to be crafted with your startup’s unique needs in mind. That’s part of what makes this so tricky. There is no one-size-fits-all solution. 

Your projections need to be achievable for your startup and based on tangible data points. The model itself should be simple to work with. 

The Founder’s Dilemma

One pain point that many CPG startup founders encounter is finding a balance between conservative and aggressive modeling. Founders tend to be natural optimists and high achievers, and self-imposed pressures often make it difficult to be realistic with your modeling. 

If you’re too conservative in your approach, your startup just won’t look appealing to investors. You’ll risk being overlooked as just another lifestyle brand. 

Alternatively, if your financial models are too aggressive, you risk looking naive or even out of touch. Setting these unrealistic goals could set you up for failure and land you in hot water down the road with investors who didn’t get what they expected. 

Understanding your unit economics inside and out is key. If your performance ultimately doesn’t match up with your financial projections, you’ll need to know why it happened and be able to explain that to your investors, rather than doubling down or making excuses for poor performance. 

Financial Modeling Components to Watch

While you’ll need to tailor your model to your specific needs, there are a few performance metrics that every CPG startup should keep an eye on. These include: 

• CAC by channel: Understanding your customer acquisition costs is crucial to your long-term growth. Break your CAC down by channel to determine which acquisition strategies are most effective.
• Cash flow needs: To keep any early-stage startup alive, you need to pay close attention to your cash flow. In particular, your financial model should take your payback period and inventory needs into consideration.
• Multiples and exit environment: Keep a close eye on your fundraising and how it affects the possibility of an eventual exit. CPG startups don’t have the same high spending needs that SaaS startups do, so keep your fundraising in check to avoid diluting your shares.

2. Keep it Simple 

A financial model that’s straightforward will set your organization up for smart business decisions. If your model is too complex, it will be difficult to use it and also update it as you grow and your environment changes.

Start with Historical Data

The best place to start when building your financial model is with your historical data. This helps you make more accurate projections based on how your startup has already performed. 

If you’re brand-new to the market and don’t have much previous performance to reference, look at CAC levels and other relevant financial data for CPG startups that are similar to yours. Then, focus on accurately calculating your most important expenses. 

Model What You Measure

Don’t make assumptions about your future performance when building out your model. Instead, base your model around data you’re able to measure in real life. Even a small assumption could push your entire financial model wildly off course. 

Financial modeling is something you need to do on an ongoing basis. Not only will you need to calculate your budget and your actuals each month, but your team should also do a deeper financial dive once per quarter. If you don’t have a CFO or accountant on staff, that’s where a fractional finance firm like Graphite can step in.

This deep dive is the perfect time to look at metrics like your average order value, CAC by channel, repeat purchase rates, and profit margins. 

Break Down Your Expenses and Revenue

A major component of any financial model is understanding what your expenses look like to help you predict future spending. There are lots of financial model templates that are straightforward and easy to use to help you get started. 

Some expenses to break down include: 

• Payroll: This is one of the biggest expenses for many startups, but it’s well worth it. A top-notch team helps you navigate the ups and downs of bringing a product to market. 
• Ad spend: In many cases, ad spend is closely tied to customer acquisition, so don’t overlook it. 
• Monthly expenses: For smaller startups, the easiest way to break down your ongoing expenses is to go through them charge by charge and vendor by vendor. Larger companies might opt to calculate expenses as a percentage of revenue. 

You also need to break down your revenue to make future projections. 

For startups in the CPG space, drill down into the specifics of all of the sales you’ve earned. Consider details like channel (i.e. in-store, Amazon, your website), subscription or a la carte, and product type.

3. Know Your Numbers

When you’re talking to VCs, you need to be able to speak to your numbers with confidence. Knowing your numbers inside and out will also enable you to make business decisions more efficiently. 

One way to do this is to break down your customers into cohorts, or segmented groups, based on specific demographics or behaviors. Cohort behavior is usually tracked in monthly or quarterly buckets to help you better understand who’s buying what. 

Here are just a few of the key metrics every CPG founder should be evaluating:

• LTV: Average customer lifetime value is a particularly important metric for B2C startups. When calculating your lifetime value, make sure to take into account all of the spending you had to do to get there. This ranges from product, packaging, and production costs to shipping and logistics costs, and discounts and returns.

• AOV growth: If your average order value is growing, that’s a good indication that your product range is improving and expanding appropriately. Break down your AOV by new and repeat customers, and be sure to consider how discounts factor into these purchases as well.

• Customer retention: In addition to looking at your overall retention rate, look at which types of customers keep coming back and how much time is between purchases.

• CAC breakdown: Increased revenue numbers mean nothing if you’ve had to dramatically increase your spending to get there. Look at your CAC (customer acquisition cost) across all channels to see which approaches are most effective.

• Geographic distribution: If most of your customers are coming from a specific area, figure out why and use that to drive future business strategy. 

Build Your Financial Model with Graphite

A well-built financial model continues to work for you long after its initial creation. When in doubt, focus on keeping a record of truth. Your model should represent what you actually think will happen in the future and be built on real data. 

If your initial numbers don’t measure up, don’t get discouraged. Instead, use that data to figure out what went wrong and course correct. Alternatively, if your numbers are strong, use them as a tool to maximize your growth potential. 

You don’t have to build your financial model on your own. The Graphite team has extensive experience working with CPG startups, and we’re here to help you build a financial model that drives your business decisions and is VC-ready. 

Get in touch to learn more about getting financial modeling support, or get started with our free financial model template.