The Strategic Role of Financial Modeling in Scaling a CPG Brand

You've built your food and beverage brand on passion, innovation, and a relentless drive to bring exceptional specialty products to the market. When it comes to scaling up, strategic financial modeling is a cornerstone of sustainable growth. 

At BBG, we see financial models as blueprints for businesses’ futures. You must consider every assumption, expense, and revenue projection, then translate that information into hard data. Built with enough scrutiny, these models reveal every potential roadblock and opportunity. With these in mind, you can hit the ground running and maintain momentum as your brand grows.

Understanding Financial Modeling

Financial models are customizable snapshots of a business's financial health. They combine past performance with future forecasts and highlight the relationship between various financial metrics. 

Essentially, a financial model connects the dots between your decisions and their effects across all areas of your company's finances. This allows you to see how one seemingly small change can ripple through your whole business, making you a more strategic and financially savvy leader.

Key Benefits of Strategic Financial Modeling 

A robust financial model establishes an understanding of the factors driving your business plans. It makes sure everyone is aligned on critical financial decisions and ensures ideas have realistic potential in terms of cash flow and profitability. 

The benefits of strong financial modeling include, but are not limited to: 

Turn Assumptions Into Actionable Plans

We all make assumptions when it comes to financial planning. Perhaps investing in a major marketing campaign will fuel growth or expanding your wholesale network will boost revenue. A financial model forces those assumptions out of your head and onto the table. 

Visualize Success

A well-constructed financial model acts as a single, unified financial plan for your business, where all the moving parts come together. This is critical, especially for CPG food and beverage brands that experience seasonal fluctuations in demand and inventory.

Make Decisions With Confidence

Strategic financial modeling empowers you to make informed, data-backed decisions. You can run different scenarios, like testing the impact of entering a new market, launching a new product line, or raising prices. Instead of relying on guesswork, you have insights to support your choices.

Appeal to Investors

A detailed financial model isn't for internal use. Investors want to see clear evidence of financial acumen and strategic thinking. A well-crafted model shows you're serious about making responsible business decisions guided by facts. This inspires confidence and significantly improves your chances of securing the funding necessary to fuel growth.

Looking for investors? Our Equity Investment Guide for the Natural Food Business unpacks equity investments in startup food brands. 

Which Financial Planning Software Is Best?

We know there are a million financial modeling software tools on the market. And, while dedicated tools promise appealing features, they have limitations. In particular, they're often overly specialized for certain use cases. Or, costs might become unsustainable as your company grows and your modeling needs increase in complexity.

For that reason, we recommend connecting Google Sheets with your QuickBooks Online account. This approach offers unparalleled flexibility, customization, and budget-friendliness. It empowers you to build a financial model for your unique specialty food and beverage business without breaking the bank or being constrained by inflexible software.

Practical Steps to Implement Financial Modeling 

Building a financial model may sound like the realm of accountants and financial analysts. However, the process is surprisingly manageable when you break it down into steps.

1. Define the Rows and Columns

The foundation of a financial model includes three core components: the income statement, balance sheet, and cash flow statement. Each component is built like a table:

• Rows: Represent the different line items of your financial statements, such as revenue, expenses, and assets

• Columns: Usually represent time periods, allowing you to track changes and forecasts

2. Build the Core Components

Let's break down how to construct each component.

Income Statement:

• Revenue: Project sales across different product lines and sales channels. Consider:

• Historical sales data, adjusted for seasonality

• New product launches or market expansion

• Pricing strategies and their impact on volume

• Discounts, promotions, or wholesale pricing

• COGS: Calculate the direct costs associated with production. For CPG brands, this includes:

• Ingredients or raw materials

• Labor costs tied to production

• Packaging and shipping expenses

• Gross profit: Subtract COGS from Revenue to determine your gross profit. This is a crucial metric for evaluating production efficiency.

• Operating expenses: Include indirect costs not tied to creating your products. Examples are:

• Sales and marketing expenses

• Rent and utilities

• Administrative costs, such as salaries

• Net income: Subtract operating expenses from gross profit. This reveals your profit or loss after all business costs are considered.

Balance Sheet:

• Assets: List everything of value your company owns. CPG businesses might include:

• Cash and cash equivalents

• Inventory, including finished products and raw materials

• Production equipment and property

• Accounts receivable (money owed to you by customers)

• Liabilities: Detail your financial obligations. This includes:

• Loans and lines of credit

• Accounts payable (money you owe to suppliers)

• Taxes owed

• Shareholder equity: Represents the value remaining after debts are subtracted from assets. This reflects ownership in your company.

Cash flow statement:

• Operating activities: Tracks cash flow from core business operations, including:

• Cash inflows from sales

• Cash outflows for COGS, operating expenses, and taxes

• Investing activities: Records cash movements from long-term investments, such as:

• Purchase or sale of equipment

• Investments in other businesses

• Financing activities: Details cash flow related to debt and equity, such as:

• Proceeds from loans or issuing stock

• Debt repayments

• Dividend payments to shareholders

3. Link and Integrate

In your financial analysis, create formulas that connect components. For example:

• Gross profit margin: (revenue - COGS) ÷ revenue x 100 

• Operating margin: (operating earnings ÷ revenue) x 100

• Net cash flow: cash from operations + cash from investing + cash from financing

• Debt-to-equity ratio: total liabilities ÷ shareholder equity

Need assistance building a financial model? Learn how Balanced Business Group's finance services can help you improve your financial health. 

4. Run Scenarios

Now for the fun part. Experiment with different possibilities, such as:

• Price changes: What's the impact of pricing adjustments on your profit margins and overall sales volume?

• New product launches: Explore the potential ROI if you launch a new snack product or introduce a vintage.

• Investments: Analyze the potential payoff of investing in new equipment or scaling up your marketing.

Think of your financial model as a dynamic tool. As your business evolves and new information becomes available, update your model. This ensures projections stay aligned with reality and remain valuable long-term.

Important Considerations for CPG Businesses 

Here are additional considerations for CPG companies:

• Inventory: Closely monitor inventory levels within your model. Ensure sales forecasts are realistic compared to production capacity and lead times. This helps prevent stockouts that disrupt sales growth and frustrate customers.

• Debt repayment: If you have loans or lines of credit, include these in your model. Verify that your cash flow can comfortably support your repayment schedules.

• Trade spend: Allocate sufficient budget in your model for trade spend. These costs impact profitability and are often underestimated, especially when expanding distribution.

As your business evolves and new information becomes available, update your model. This ensures your projections stay aligned with reality and remain valuable for long-term planning.

Leveraging Financial Modeling for Business Success 

Financial modeling can help you meet your business goals and thrive. This process gives you the clarity needed to predict the future of your finances. What’s more, it gives you the confidence to make informed decisions and the control to navigate challenges as your business grows.

Consider partnering with the experts here at Balanced Business Group. We specialize in custom financial models that address your industry's unique challenges. 

Contact us today to supercharge your CPG business's growth.