263. Setting up an Inventory Management Software for Your CPG Brand

0:01Matt Lynn:Welcome to Startup to Scale, a podcast by FoodBevy. I'm your host, Jordan Buckner. Join me as I talk to aspiring entrepreneurs, seasoned industry experts, and everyone in between as we unlock the keys to growing from startup to scale.

0:18Matt Lynn:One of the biggest shifts a CPG brand goes through is moving from spreadsheets to a real inventory management system. And at first, spreadsheets work totally fine. I built T-squares off of it. You're tracking a few SKUs, maybe selling online, and things feel pretty manageable. But then wholesale orders start coming in, you're working with distributors, production runs get bigger, and that's when spreadsheets really start to break. So today I invited on Matt Lynn from Belay to talk about how CPG brands should think about implementing inventory management software, including when to do it, how to choose the right platform, and how to avoid kind of those mistakes that can happen when you implement a new system.

0:58Matt Lynn:So Matt, welcome to the show today. Thanks, Jordan. Glad to be here. So one thing starting now I want to talk to is like for founders who are early in their journey, when does it really become necessary to move from spreadsheets to some type of inventory management software? And kind of what are those warning signs that you encounter? Yeah, that's kind of a it's a good question. It's a little tricky because there's really no set point when you should be looking forward to add that. It kind of depends on the nature of your business. We've seen people operate spreadsheets through several million dollars in revenue.

1:32because they buy and sell finished goods. So it really comes down to when are you outgrowing those spreadsheets? When you have spreadsheets that feed spreadsheets that feed spreadsheets, and you want to centralize that and get things out of your head and just in spreadsheets into one place, it's about that time. So a lot of what we see with CPG brands nowadays, especially less turnkey brands and more manufacturing, at least contract manufacturing. And when you want to be able to really track the inventory that you have across multiple locations where your manufacturer, your warehouse, your 3PL, your garage, where you hold samples, just really be able to see everything.

2:09And that's about the time you want that system. And you really want that tech stack to start being centralized instead of having to get into three or four different systems in order to feed those spreadsheets. And you really just want one central location.

2:21Matt Lynn:Yeah, you know, it's interesting because I feel a couple of things, right? Like when I was running my energy bar our company, we manufacture our product. And even when we work with co-manufacturers, our inventory is like relatively manageable. I could basically like see everything that we have and I could keep it all in my head. And I realized for a lot of brands, when inventory, finished goods, raw materials are kind of out of sight, out of their mind, it's hard to really comprehend what you have and where and the value of it, one. But then two, can you fulfill orders, what your production timeline is, how long that inventory is going to last.

2:53Matt Lynn:And when you start having these questions that you can't really answer, I think it's good to start having that system where you can pull it all together. And, you know, even for me, I spent hours building this complicated spreadsheet that was tracking everything, but that was built around one product and three flavors. And once that we added a new size and new set of SKUs, everything was hard coded to those three initial SKUs. It wasn't built to kind of scale from there. And at that point, I was like, OK, we need to transition to something else because otherwise I'll be rebuilding all these formulas, literally hundreds of formulas from years ago.

3:27Matt Lynn:And I have no idea how to do that anymore. Absolutely. We see that quite a bit. And another thing, cost tracking, being able to allocate and get a total landed cost of the products from the raw materials that you're buying to the packaging, to the freight you move between manufacturer and warehouse. It can be pretty difficult, especially in these times when freight is very volatile. If you're paying any kind of duty, obviously it's really hard to have a set duty rate. The import duty you paid this month may be totally different from what next month is. And being able to just get a good idea of what your actual cost of goods are, inclusive of freight, inclusive of duty, inclusive of labors or tolling charges.

4:05So you can really get an idea as a business what your true margin is. And are you making enough money to be able to keep going?

4:11Matt Lynn:No, I think that's so key because I ran into that problem as well. I think a lot of other founders, when you calculate your cost of goods sold and ingredients packaging at a fixed point in time, like when you're buying it maybe or when you're kind of forecasting. And then three months, six months go by, you're placing new orders. A lot of times founders don't go back and recalculate those costs because maybe even if you order from the same supplier, maybe it's a different size and your freight is going to be different, which affects the landed cost of the product. Absolutely. And that's what we see with spreadsheets.

4:40Most people treat a spreadsheet like a standard cost. You know, here's my estimated for this flavor, it cost me X for this flavor, Y and Z. And like you said, because the rates are so volatile, you don't update that spreadsheet and you're making maybe your accountants making a monthly journal entry to book your COGS and it's off a number that you calculated three months ago. And now your most recent production or your most recent purchases are totally different and you lose that visibility in your financials. You think you're making more than you actually are. You're not aware that your margin has started shrinking.

5:10And then as you're expanding into, you know, other channels, retail distribution, especially that can really eat at that margin even more and you have no idea.

5:18Matt Lynn:So I think here's one thing that comes out pretty fast when I start talking with other founders and brands about the space is that they don't really know what kind of set of software they need, right? Because I think a lot of terms, there's ERP systems, right? Like enterprise resource management systems. There's your accounting systems, like QuickBooks online, inventory management systems. Then you have all your sales channels. You might be tracking some things in Shopify. Maybe you have a PL and they're using a warehouse management system. It gets kind of complicated. Like, what do I use? What needs to connect?

5:50Matt Lynn:And so I'm curious, like, what insights do you have or perspective on like what core systems a company needs? Yeah. And that's great. And that, you know, there's a lot of acronyms that get thrown out, you know, three letter kind of abbreviations that you hear. It can be very overwhelming. And even when you understand what those are and what they mean, then you start looking and then there's a hundred different inventory management systems. You know, you Google inventory management and immediately you're overwhelmed. So for most brands, especially, you know, emerging CPG brands that, you know, an ERP sounds great for everyone.

6:21It's a one-stop shop. However, with high prices, high contracts, user licensing agreements, for most brands, it just doesn't make sense. So you end up with a more decentralized tech stack. And so kind of where you want to focus is really, you know, your financial software. In the U.S., that's pretty much going to be QuickBooks Online or Xero. They kind of have the market cornered as far as that goes. Then you're looking for inventory management systems. You're looking probably if you're emerging, you have D2C. So you're looking for Shopify as your website back end or WooCommerce being another one.

6:54You're probably trying to get your name out there. We're looking at Amazon. And then depending if you can get into national retailers, distributors, you may be forced to have EDI capability. So that's another system we're looking for? How can I have a middleware that can automatically feed that information? So I think really when searching for products, we're looking for areas where we can link those together as much as possible. Try to get out of the weeds of the, you know, I have to go into this system to create this and then go into this system and do the same thing and then go into the WMS for my warehouse and do the same thing.

7:26So it's just trying to find those systems that connect. And that's the beauty of where we're getting to now with technology is a lot of things are really able to be connected. So when you're looking for an inventory management system, one thing I'll tell people is like, what are your needs? And make sure that this system has that. If you're strictly on Shopify and you have Shopify, Amazon, and your financial software, find something that can just connect those. If you are with, let's say, a KHE, a distributor like KHE, and they're going to require you to have EDI connectivity and they're going to require you to use SPS Commerce, one of the nation's largest EDI providers.

8:03So you want to make sure you're looking for systems that can easily and quickly and cost effective connect all of that. Because that's another situation you don't want to run into is that we end up with 10 systems and they all cost a lot of money. And before you know it, you're wishing you were still on spreadsheets just because you're not ready yet.

8:19Matt Lynn:There's been a lot of conversation. I've been hearing this phrase probably for about 15 years now of a single source of truth. The idea being like one system you can go into that has at least an overview of your entire business that maybe links out to other systems or something. Is that the reality? Are there systems or software that can be that single source of truth for a brand? Or is the reality that's going to be spread out amongst different systems? Typically, depending on what you're looking for, we can get a single source of truth for certain areas. But overall, you end up with a couple systems.

8:55Like when we're implementing inventory management systems from an inventory perspective, that can become the entire source of truth. So that's where you can capture all of your purchase orders. So you know what you have open. It's where you can capture your production order. So you know what your co-man or your self-manufacturing facility, what you have going. And it's where you can capture your sales order. So you can see how much inventory you have, how much inventory is coming in, how much is expected to go out. So it becomes the source of truth for inventory. And then you can compare to what your 3PL has.

9:23And we have that. Now, again, that's inventory source. We still end up with the QuickBooks being your financial source of truth. All of the financial information from purchasing, sales, production, all that good stuff will sink down. And then you have that. So you can limit the sources of truth, but typically you're probably going to have one for your inventory management and one for your actual financials.

9:44Matt Lynn:And then how about on the sales side? Do you find that there's, right, I know a lot of them are talked about as like inventory management systems, but then they kind of couple in sales. So you can match up purchase orders with sales orders or not purchase, but like sales orders are coming in with like the inventory that you actually have. And so does sales usually fit within one of those or is it kind of spread amongst multiple? Absolutely. And that's when looking for an inventory management system, like I said, that's one thing we want to find a place where I can connect all of my sales as much as possible.

10:13And so we're looking for inventory management kind of becomes your sales hub. You know, a lot have native integrations with the Shopify's, the online marketplaces, Amazon, Shopify, WooCommerce, eBay, Fair, direct connections. And even if there maybe isn't a direct connection, but they have an API capability to build into other systems, middlewares, give you EDI connectivity. Then there's always the chance that maybe you still have some house customers that they call you up or they send you an email when they want to place orders. And we manually do that. But that system becomes your hub, whether it's an automated sale or a sale you create manually.

10:49You can keep track of all of your orders by customer, by channel, just depending on the view you want to see it and keep everything at once. So you can really start predicting and forecasting how much inventory do I have? Well, with the sales that I have coming in, how much am I going to need? How much do I need to buy or produce? And really, when you can see it all on one spot, it helps make those decisions a little bit. instead of a sales forecast spreadsheet, a production forecast spreadsheet, and you're hoping to link those together somehow.

11:17Matt Lynn:I think that's really important, Matt. And so, you know, as someone's even thinking about getting started or maybe they have a system or two, but they're looking to kind of pull everything together, what are some of those other questions that they need or foundational data or processes they need to have in place before kind of onboarding into a new system? Yeah, I think one of the biggest pieces is am I ready for this? And what I mean by that is from a capacity standpoint. There is really no system that becomes plug and play. We've had clients who come and they think that if they just create an inventory management system, connect it to their other systems, that they can set it, forget it, the business runs itself.

11:54And unfortunately, that's just, that's never the case. We try to automate as much as possible, but there's always manual intervention. And any system that you implement, if you don't have the resources or the capacity or are willing to pay maybe an outsourced person to help you run that, You end up spending a lot of money with somebody to implement the system. You're paying for the system and then it can snowball really quickly because like anything else, you have to stay on top of it. You have to maintain it. So a couple of considerations from a cash flow standpoint. Can I am I am I able to pay the monthly fees for this without it dipping into anything else?

12:28Am I able to pay someone to actually help me implement that system again without it causing a cash crunch? And then from there, monthly fees and then the ability to just keep the system maintained. Do I realistically have that? Do I maybe need to hire someone or outsource some departments and then think about the system? What you don't want to do is just rush straight into it and then figure out after you spent several thousand dollars that, wow, I really don't have the time to do it. Then you're playing catch up and you've got a very expensive system that never gets touched.

12:56Matt Lynn:Yeah, I think that's big. I've also seen within this where maybe one team is using the software, but another is not, right? Like maybe the operations team is using the system because they were really pushing for, but sales isn't inputting all of their orders. And so there's a misalignment there. Oh, absolutely. Taking that and like working off of spreadsheets. They're like, okay, sure, there's some stuff in the software, but I'm still going to do my thing in the spreadsheets. Yeah, buy-in is a huge thing. When you have, you know, if you're a smaller brand and you maybe have just yourself as a founder or some employees, easier.

13:25When you scale and you have a larger team, a lot of people don't always love change. So they're used to doing it their way. It works for them. you're trying to get everyone on board with these wholesale system changes. Like you said, if the left hand isn't aware of what the right hand is doing, that can cause delays and issues. So you want to make sure that you have your team buy-in or everyone that's going to be using the system or at least understand what the goal is, why you're making these changes, how it benefits everyone, and how it benefits your brand and your company growth.

13:52Matt Lynn:So Matt, with Belay focusing on finance and accounting for CPG brands, I know one of the biggest problems you helped work through is the financial impact of running a inventory-based business, right? And like properly accounting for inventory compared to cost of goods sold. And so talk to me about that relationship and what a lot of brands get wrong around buying inventory, but then may not allocating it properly as cost of goods sold. Yeah, it's understanding what your margins are. And a huge thing for an outsourced accounting and just accounting in general, understanding your cash flow. As a CPG brand, inventory is your lifeblood.

14:32However, too much inventory and you've frozen up your cash. You can't expand. You can't do anything with that. Too little inventory and you can't make sales and you run the risk of losing accounts or losing customers. So it's a fine line of understanding when I need to order at what point. You don't want to just have it sitting on a shelf somewhere in a warehouse because that's doing you no good. You don't want to have not enough of it. But with that, you want to be able to a lot of things we see bookkeeping kind of falls to the wayside at times with brands. You have people who are great entrepreneurs.

15:02They understand their business, but then you get to the accounting piece and it kind of, you know, it's a deer in headlights look a little bit. And so if you can't take your inventory, your sales data, how much is costing you and be able to funnel that to a financial system and see the actual position you're in, then you can get a little bit lost. A lot of brands, you know, they'll have their CPA try to clean up their books at year end. They know they've had money coming in. They know they've had money going out, but they're not really sure how much they're actually making on their product. They're not sure if this is something that's going to be able to go if they need to address prices or address costs with vendors.

15:37So it's really being able to take a large amount of information, funnel it down, and really be able to make business decisions off of it.

15:44Matt Lynn:One of the biggest problems I had starting out, because I was kind of doing my own bookkeeping at the beginning, is booking all purchases as cost of goods sold, essentially, and moving into inventory as an asset first, and then allocating that as cost of goods sold as I sold units. And I think at the time, you know, we were relatively small. Pretty much the inventory we were buying, we were selling within a month or two. And so we weren't holding that much. But I think as a lot of businesses get larger or have more complicated products and product assortments, they really get lost in terms of like, how do I actually allocate the inventory that I bought and align it with an actual cost of goods sold?

16:25Matt Lynn:And I think a lot of people get confused, right? Because like, well, QuickBooks does not track the individual products that are sold. You might have a revenue number come in, but it's not associated with a specific product to deduct a specific amount of cogs from. And so how do you recommend brands manage that relationship of properly allocating cost of goods sold into an accounting system as well? I think that's huge. If you're cash basis, it's very easy. I buy a bunch of stuff. I code it directly to cost of goods. You're still losing that visibility and your margin month over month because let's say most brands are going to be a little bit cyclical.

17:02You're going to order a lot here and then maybe not so much for the next month or two. And when you look at it, you have revenue coming in and then you just booked everything you bought to COGS. And so a lot of months, it's going to look like a roller coaster. You're going to look like you made a lot of money or you lost a lot of money. You have no visibility into that actual margin. So what we want people to be able to see is, you know, booking it to that asset, having a system that automates. Now, we have people that do it with a spreadsheet. You're having to track and make manual journal entries every month into your accounting software, which is just a little bit cumbersome.

17:33Again, the goal of a system is to help save time and help you make better decisions. What that does is you have the system that can calculate how much you paid for that particular item, how much it costs you to produce it with your manufacturer to a fully landed cost. So you know that every time I sell this for$100, it costs me$30 to make it. I'm making a$70 gross margin off the top. And all that information flows to QuickBooks or flows to your accounting software. where you can really see that in real time on a monthly basis, see what your good gross margin is. Because let's be honest, as people look to scale and maybe they're looking to take on capital, that's one of the first things that any kind, anybody, any capital lender is going to look for.

18:14Can you make sales? And then they're going to look at your margin. And if your books are just a total mess and they can't really make heads or tails of it, they're going to pass before you even really get a chance to make your case.

18:24Matt Lynn:Yeah, I mean, that's true, because then they're going to be looking at your P &L, which is usually derived from something like QuickBooks, right? And it's such a pain to go back and try to fix those numbers and try to make it right if you're not tracking it all along. It helps if you're doing it through the process. And over time, it simplifies life because we have a lot of clients that come and they're going through a funding round or they want to raise capital. And then it's a mad dash to get their books looking any what clean so that someone can actually look at it and make decisions. As opposed to the ones who have kind of grown into the system, got in early, allowed their business to scale, learn the functionality of the system, how it works, it flows.

19:03And then they're ready to do that pretty much at any given time. At a month in, they could give those financials to a bank or a lender or anyone that's raising that capital and not be so stressed out.