270. Why CPG Founders Need to Know Their Numbers

0:00Welcome 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.

0:18Most founders start a food and beverage brand because they're passionate about solving a problem or about a product. Not because they love spreadsheets and being in those weeds. But as your business grows, understanding your numbers is one of the most important skills that you can develop to really understand how your business is growing or not. So today I've invited on Adam O 'Connor, Stefan, there is Smidge Beverage. And I want to dive into the financial realities of running a CPG brand from cash flow and margins to inventory planning and forecasting. Adam, welcome to Startup to Scale podcast.

0:57Adam O’Connor:Thanks Jordan, super excited to be here and talk a little bit about my story and kind of I come from a finance background so this is where I like to really dive in and share my experience and kind of what I've done and hopefully it can help other founders whether they're pre-revenue or they're in the in the midst of it I think there's always something you can learn when you look at your numbers. Well absolutely love that because this is a really confusing and chaotic industry when it comes into that. So to start out, you know, for those who aren't familiar, tell me a little bit more about the brand, the company and where you are today.

1:30Adam O’Connor:Sure. So I founded Smidge. Well, we launched in retail in 2024 and that's why I consider where I was founded, right? Everybody knows. Well, not everybody. It takes about, you know, could take 12, 18 months, maybe longer to get, you know, go from concept to physical product on the shelf. But 2024, we landed on the shelves. That's when the real race starts. So Smidge is is a low alcohol vodka soda. So we are two and a half percent alcohol by volume. So thus we're lower calories, 50 calories, one gram of sugar. We are going after a little bit of a white space as the non-alcoholic options have exploded with athletic brewing leading the way and many others kind of focusing on mocktails.

2:11Adam O’Connor:The non-alcoholic and sober curious movement has really gotten big in the last few years. So I thought, you know, why isn't anyone really marketing towards a lower percentage product or really grading one. And I came from the industry. I worked for a big distribution company, Wine and Spirits. And then I was over on a supplier side working for a big wine producer. And I just came up with the idea because I personally started to see, hey, when you're in the industry, you're always around it. Similarly, if you worked at an ice cream company, you'd probably be eating a lot of ice cream. Well, me on that other side, I was probably consuming a little more than I would have liked to.

2:46Adam O’Connor:And so I was kind of thinking, well, I still want to hang out, have fun, but I don't really want the negative effects anymore. And I kind of saw other people wanted the same thing. So got laid off from my full time thing working. And I said, this is the time. Let's do this thing. So yeah, fortunately, I had experience working in commercial finance. So budgeting, planning, price strategy, whether it was a line extension or, you know, working on existing products. So I had the knowledge of what it takes when it comes to pricing with a three-tier system. So three-tier, if any of you don't know, with alcohol, you have to have a distributor in order to sell to any other end customer, retailer, restaurant, hotel bar, etc.

3:25Adam O’Connor:So it's different than most other consumer good brands. But as you get bigger with whether you're, you know, chips, candy, whatever it is that you're making, you do tend to move to a distributor. And there's a lot of hidden fees, chargebacks, free fills, stuff like that. So I I was able to leverage my experience. And when I launched, I said, I'm going to make sure that my gross margin is strong, because if you can't get there, you probably shouldn't launch or you should keep working to get a good gross margin before you can go to market. So I love that. And tell me about like you had this experience in working within the industry at the finance experience.

3:58What was different between your previous career experience and being on the ground as a founder yourself with your own business? did it train oh i thought it works and then had a awakening of like oh these numbers are a lot

4:11Adam O’Connor:different than what i was dealing with well i would say you know it's different when it's your own money right and so you're making sure that you're almost you know exact i mean you want to make sure you leave no stone unturned you're making sure you're finding the best option with whether it's sourcing ingredients or packaging or even a manufacturer you want to make sure you're doing your due diligence beforehand even before you decide to hit you know go on a po so to speak, you want to make sure that you are fully dialed. So there's no surprises when that product lanes in your warehouse and you're getting all these invoices that you're like, oh, shoot, you figure out your columns are higher than you thought, you know, 10, 20 percent.

4:47Adam O’Connor:And you're like, now I have to sell this. And my my margin is, you know, it's upside down from what I thought it was going to be. So just taking time, not rushing process, you know, making sure you're, like I said, doing your best to find multiple different avenues and price check and whatever the instances but the finance stuff it was pretty comparable i would say i so i more so had to learn the sales side and marketing side of things i was never in sales and then you know here i am walking into a store trying to sell in my products and i'm like scared out of my mind you know are they gonna think this is the dumbest thing ever or saying behind a demo table but when you're passionate about something and you've created it and it was your idea then you start to see people like believe in it and you see how it's helped them or you know solve the problem for them um like it solved a problem for me then you kind of like this is easy to sell like it's your baby you're the best one like you're the only one well not the only one but you're the you should be the best at selling it when you've created it so no I definitely understand that and been in that situation myself having to like go in and do demos I'm like I remember the first time I walked to do a delivery to Whole Foods so we had an energy bar so I like delivered it myself by hand to the dock of Whole Foods and like show up knock on the door and like no one answers I'm like I like wait there for like five minutes i'm like banging on this thing i'm like going through the front and then eventually like someone opens the door and everything was fine after but i had that moment of like freaking out so yeah you gain i mean i have my fair share of those things when we were we started out self-distributed and i gained a lot of respect for what everyone does along the supply chain and i think that people forget how many steps it takes to get it from your warehouse to like physically on or even on the production line to the actual shelf there's a lot of things that need to happen.

6:29Adam O’Connor:And a lot of things can go wrong. So that's interesting. You mentioned kind of making sure you set out with a good margin for your product from the beginning. One of the biggest difficulties I find the brands have is the variability of costs, whether that's the ingredients or you mentioned distributor chargebacks, right? Like it might be 5 % one month and 50 % the next. And like, talk to me about like what you've done maybe at the beginning, kind of where you are now to get more financial kind of visibility into your performance and your growth? Yeah, so that's a great question. And I think it's easy to kind of build, like forecast is always going to be a forecast, but you've got to have something and you want to feel like you have pretty high confidence in it.

7:11Adam O’Connor:It's always going to change. There's going to be surprises. But for us in particular is you need to know where your business resides. So what I mean by that is where's bulk of your product going? In alcohol beverage, particularly in Arizona, where we're our only state we're in, it's a quantity state. So if one customer buys 10 cases and another buys two, the customer buying more is going to get a better price. If 90 % of your business is going out at that deeper price of 10 cases, it's going to cost you as a brand more money because you have to pad the distributor margin. So they're whole, right?

7:43Adam O’Connor:So if you're thinking, oh, I'm going to sell most of my business is going to go out at one or two cases. My margin is going to be super great because I'm not paying a distributor charge back. you're like well my plan is island budgeting three dollars a case for um bill backs right and then you extrapolate it out across the year i'm going to sell x amount of cases it's kind of i need to budget you know 20 grand for chargebacks if you don't know where your business is going to reside as far as like we call it like mix business mix you're going to get in trouble and you're going to get hit with all these bill backs whether it's from the distributor the retailer and you're going to get a big invoice saying here pay this bill and you might not have planned for that because you didn't know who's going to be buying it.

8:22Adam O’Connor:So knowing your customer, you know, always looking at your numbers, who's buying it, what quantity are they buying? And I'm just speaking for alcohol because it is a quantity based. Yeah. I assume other brands and industries, it's all quantity based. Like the more you buy, the better price you're going to get. So yeah, you've always, you have to be looking and then adapting like, oh shoot, you know, if your product is seasonal, like maybe summertime, you need to plan for, hey, we're going to have higher velocities. So we're going to probably have a bigger spend during, you know, summer months.

8:50Adam O’Connor:So I need to make sure I have enough cash flow in order to cover those bills, which are going to come probably, you know, 60 to 90 days after that. I guess I know that's one of the hardest parts, just the delay and some of the bills and charges that come in along with invoices and payments as well. So with you being kind of in finance, did you decide to manage all this yourself? Or at what point did you find a partner to come in to help you with the finance? Yeah. So I'll be honest, I've actually, let me think, I've hired and fired two accounting firms. I'm on my third and they are amazing. Very, very happy with them.

9:25Adam O’Connor:Belay, 4 million dollars account fleet. But sometimes you have to find the right fit and people that really know their stuff. Belay, very good at consumer goods. Very, very good. And they also know our ERP system, ERP, MRP, CIN7. So any questions, which all sings through QuickBooks. So finding the right fit is, it's no different than like hiring a salesperson. You have to find the right fit with people that have the right technical skills. And if you, because if you can't trust your numbers and it's not tying out and you don't feel confident, you know, if you don't know your numbers, you don't know your business.

9:59Adam O’Connor:So they've been an integral part for just feeling like, I don't have to worry about, is this correct? Is this true? You know, if you've got an investor saying, I want to see your P &L, like, shoot, well, I don't work on that. And the biggest thing was I learned this from a consultant that I had. Focus on only what you can do and delegate the rest once you get to a point where you feel like you've got some momentum. Because I'm not an accounting guy by any stretch of imagination. Finance is obviously very different. Forward-looking, accounting is looking back. So, yeah, they've been an amazing partner and I'm super happy to have them as part of my team.

10:31I love that. And without naming names for the other firms, what was difficult about the other companies that you worked with?

10:39Adam O’Connor:Chages? They didn't have a good grasp on the business, on how it works. I think I don't know that they ever worked with three-tier model or they didn't understand our price structure, like billbacks and, you know, planning for that and where it should go, even like on the chart of accounts. And so setting up your chart of accounts is really important. Belay did, you know, a lot of checking to make sure everything made sense. It was lined up. We worked really hard on that because that's also really important. And if you don't have a strong foundation, you're going to be pulling your hair out six, 12 months later when you're actually growing and you're everything's all jumbled and you're thinking, oh, shoot, and I don't have time to do this because I'm trying to grow the brand and keep up with orders and whatever else, manage a team.

11:17Adam O’Connor:So I think the foundation is super important. And I think often we're so excited to launch the brand. So pretty and cool. It's our baby and it's a grade and we want to sell it. But a lot of people tend to overlook the foundation, which is it's all, you know, finance, accounting, making sure your price structure. you know, you've raised enough money, so on and so forth. Now, that sounds really helpful. I mean, I think one thing that is a little misleading about the accounting industry is that there's a lot of accountants and bookies that lead you to think that like all accounting is the same, right?

11:49You have revenue coming in, you have fixed expenses, you have, you know, variable expenses, and it all kind of nets out to net profit. But there's like accounting for prep for like taxes, which is like fairly formulaic. But then there's accounting for actually like running your business and making decisions and having financial visibility into the thing, right? Like if everything is bucketed under cost of good soul, but not broken out into packaging, product, ingredients, like labor, all those things, you can't make a business decision based on that info. Or even with, you know, CBG specifically understanding deductions and wholesale pricing, all that, and how that plays in, it's hard to make decisions as a founder.

12:30And so once you've been able to get that foundation set up, what does that allow you to do then as you are making decisions on kind of the future now of the business?

12:40Adam O’Connor:Yeah, I think that's a great point that you make. And being able to make decisions quickly is important. I mean, when you're a startup and you're small, you need to be able to be nimble and pivot quickly. You know, maybe you pick up a new customer and they're saying, hey, this is you get a PO and it's from a distributor. And you're like, oh, my gosh, I have to plan for this, whether it's raising more capital or moving things around. I just think having that visibility and having a second set of eyes of people that are experts, because, again, accounting for a real estate business is very different than consumer goods.

13:08Adam O’Connor:Like you said, all the different, I mean, like I said, one of the firms didn't even know what a buildback was. So I probably should have, you know, thought about that more. But, you know, you live, you learn. But the other thing, too, is Belay, they also have the tax side as well in-house. And so they actually did our taxes this past year. So it's kind of nice I didn't have to find someone else. But going back to your point is just being able to not have to feel like, oh, my gosh, I have to do all this research to make sure that this is correct. and you know I don't want to be in the weeds and I don't have time to be in the weeds on this accounting stuff and making sure it's clean and so having someone else that can do it where you feel confident is huge has been huge for me because I can say I can make this decision and feel good with it granted usually scare out of my mind when the decision is made because just being a founder and consumer goods and when you're a startup so but it does help you know kind of ease that and you have confidence in it you know cash flow I know you mentioned a little bit too is like one of the biggest challenges for CPG brands.

14:06And so I'm curious how you've approached managing cash flow while also balancing, you know, your inventory, production, and growth and taking on new sales opportunities.

14:16Adam O’Connor:Yeah, I mean, everyone always said cash flow, cash flow, cash flow, and it will continue to be that way probably for a while. You know, with beverage, it's so interesting because the minimums are so large if you want to have any shot at a decent gross margin. And that's one thing that's just really tough. And sometimes you kind of have to bite the bullet. And I think it all ties back to your forecast. Like I mentioned, my consultant and I, back in 2024, we built a really robust forecast that I still use, you know, basically every other day or so. And it's all tied to velocity, right? So, Jordan, you know, you started to bring up velocity as number one most important thing.

14:49Adam O’Connor:How quickly are people buying it off the shelf? And it all ties back to that. So if you're thinking, OK, this is my velocity for the year, this is how many stores I'm in. This is going to back into my depletions, what I'm shipping or the distributor shipping to the store and so on and so forth, all the way down the line. You can get a sense for when do I need to produce? How much do I need to produce? And then you can kind of plan. This is how much capital I need because you've worked your cost structure. This is how much we need to produce. You go to your investors. This is what we need to keep us going.

15:16Adam O’Connor:This is from a production perspective. Now, there's also cash for operating expenses. But I think it all ties back to that. You have to build a robust forecast. And mine is just in Excel. It's great. It works for me, but I encourage founders to build what works for them. And it's always going to be forecast is forecast and playing a buffer because things are always going to end up probably a little bit more than you expect. As you know, there's hidden things and things go wrong. But yeah, I think it all ties back to the numbers like we're talking about. And I'm curious with forecast. Everyone does a little differently.

15:46How do you build out the forecast for your business? Are they only kind of sales and inventory need projections? are you doing cash flow forecasts as the business goes based on different scenarios like what are you thinking about into the future yeah so i think like i said with beverage the minimums are so large

16:02Adam O’Connor:unfortunately we do have a long shelf life so we don't have to worry about that as much like with some other brands so we are able to kind of produce a little bit more because it could last longer and so that was just something that that is a benefit so when we produce we do try to get to the economies of scale where we have a strong gross margin but you know it is for for other founders. I mean, it's a fine line. You have to say, OK, you know, how quickly can we sell through this and then, you know, be able to produce more. And I think what I've heard is as you get even bigger, that the cash requirement becomes even bigger problem just because of, you know, inventory needs.

16:36Adam O’Connor:But yeah, I mean, it's all, you know, our drink is very simple. Like we don't have a tub of ingredients or materials. So it does make things a little bit easier as far as like forecasting and planning from an inventory perspective. Very fortunate that we don't have all these different types of skews and things of that. But, you know, I have some friends that they have all different cocktail types with different varieties. And they're like, I wish we just stuck with tequila, you know, because it gets complicated quickly. And it's hard to plan because you don't know, you're never going to know exactly how much you're going to need.

17:06Adam O’Connor:So. Yeah, that's helpful. I mean, at one point in T-Squares, like we had raised some money, but we're always keeping an eye on cash and built out like a four week cash forecast that was like specific. where I was documenting, you know, like invoices, payments coming in and expenses and bills that need to get paid to like manage the, basically like month to month where cash was coming in and out to keep an eye on things. Have you had to get that detailed or? Yeah, it's funny because, well, so Belay, they do a weekly cash flow like snapshot and it's like APAR and then kind of what's coming down the line.

17:44Adam O’Connor:Any transactions that they're not sure where it should get bucketed. But I feel like if I could give any founder advice, always be raising or managing your cash flow, because don't be like me. I'm guilty of it, where you get to the point where you like you raise, you get, you know, you're able to get more money in. And then you get to the point where, oh, shoot, I haven't been constantly trying to do that. And you run into the issue of now it's like we're up to the end. And it's like you get you raise more and then you're like, wait, you only come back when you need more. you're a CPG founder, but you always, someone, you know, people always say always be raising, you know, if you have to keep it going.

18:20Adam O’Connor:As you know, it's consumer goods is not a cheap endeavor. But yeah, that's my advice is, you know, never stop. And eventually you can get to a scale where you're funding yourself, but it does take a little bit of time. Yeah, I think that's actually a good point because you're right, like founders will raise when they need the money. But the strongest position is actually when you don't need the money, because I can share from experience with investors I know as well it was when you're like oh here's like we're successful like we're doing all this growth without you like that's fine like just wanted to let you know and they're like wait wait wait can I invest you're like actually no we don't need your money and they're like no but like please like what about I add this and this and then they're like trying to beg you to get in versus you try to beg them for money right yeah I mean you can raise too much for sure but I think being able to kind of find the fine line like I said like a little bit more than you think just enough, but always, I mean, you need to be six to 12 months out all the time.

19:16Adam O’Connor:And part of that just goes back to knowing your numbers, what's your run rate, how's your margin doing, where can you trim expenses to like conserve some of that cash, like for us, summer slows down in Arizona, believe it or not, even though it's hot, people go out of town. So we don't do as much, you know, in-store activation. So that does help, you know, payroll. But, you know, when we get towards the fall months, you know, we're going to be doing a ton of activation in stores, we're probably going to be on promotion more. So that comes up. So you have to be able to plan for seasonality and know like the peaks and valleys as far as what's coming.

19:47Those are good advice. I love the point about investing, planning for peaks and valleys and knowing seasonal parts of your business. And as we wrap up, I love to hear if there's like, is there one financial process, report or habit that you think every CPG founder should implement in their business that have the biggest impact? cost?

20:05Adam O’Connor:It's a great question. I mean, I think like, like I said, know your gross margin, like the back of your hand. If someone says, what's your cause, you should know to the penny. And you also should know like in theory, you're obviously what your gross margin is. But even more important is what's your contribution margin? What are you taking to the bank or not? You know, after all the trade spent slotting, unfortunately in alcohol, there's enough slotting fees, but in traditional consumer goods, there is slotting. So what are you taking? Contribution margin is very important. Everyone's like gross, gross, gross, gross.

20:34Adam O’Connor:It's important, but contribution is most important. And so I would say just know what falls into that bucket, make sure that it's enough to keep you going. And if you're again, if you're launching and you're, you know, in the 10s to 20, even I would say try to be in 40, 40 % gross, because that'll help you afford the trade spend below the line, so to speak. Again, it just ties back to having a strong forecast having a good accounting firm that can say hey but um you went a little bit overboard on this you know temporary price reduction look at these bill backs we're getting from the distributor and the retailer like your trade spend is going through the roof you need to chill out so planning like a whole year out of when we're going to be on promotion forecasting that it all ties together and because i've heard brands go under because they were prepared to pay the bill that comes after the fact you're selling a ton but then you're like oh shoot i can't afford to pay it, pay this.

21:26Adam O’Connor:So that's my that's my two cents. Make sure your price of your products can afford the trade spend. Love that. Adam, thanks so much for being on today and sharing about Smidge Beverage and your financial journey. Appreciate having you on. Yeah, thanks for having me, Jordan. And for everyone listening, if you need help with your finances for your CPG brand, definitely check out today's sponsor, Belay. They work with a ton of CPG brands. And as Adam has shared, know what it's like for every CPG business. And so can make sure that you're set up for success from the beginning and can flag issues like increased trade spend so that you don't get dinged for it months later.

22:02Adam, thanks so much again.