09: Finance
Accounting
Whether you’re self-manufacturing or working with co-packers, keeping accurate financial records is essential to understanding your business’s performance, making informed decisions, and managing cash flow. A solid accounting foundation will also prepare you for future growth and investment.
In this chapter, I’ll break down the key elements of accounting for a CPG business, the important financial statements you’ll need, and how to manage costs like trade spend and deductions.
Why is Accounting Critical for CPG Brands?
For CPG companies, accounting is about much more than just logging transactions. It involves managing the complexity of inventory, pricing, trade promotions, distributor fees, and often tight margins. Without clear and accurate financial data, your business can run into cash flow problems, mispricing, or even legal complications.x
Proper accounting helps you:
- Track how much it costs to make each product.
- Keep tabs on sales performance and profit margins.
- Manage cash flow so that you can keep the lights on (literally).
- Ensure you’re prepared when tax season rolls around.
Setting Up Your Accounting System
Bookkeeping: Before you can make sense of your finances, you need to have accurate records of all your transactions. This starts with good bookkeeping practices—tracking every dollar that comes in and goes out of your business. For CPG brands, this includes revenue from product sales, costs associated with production, and operating expenses such as marketing, payroll, and trade spend.
Accounting Software: Most CPG brands use accounting software like QuickBooks Online, Xero, or MyPocketCFO to manage their bookkeeping. These platforms automate much of the process, sync with your bank account, and generate financial reports like profit and loss statements, balance sheets, and cash flow statements.
Chart of Accounts: Setting up your chart of accounts is a crucial first step. This system organizes all your transactions into categories, making it easier to track your income, costs of goods sold (COGS), operating expenses, and other key financial metrics. Common categories for CPG brands include sales revenue, COGS, marketing expenses, rent, and trade spend.
Key Financial Documents for CPG Brands
There are a few financial statements that are absolutely essential for understanding your business. Let’s break down the most important ones:
Profit and Loss Statement (P&L)
Your P&L statement (also called an income statement) is a snapshot of your revenues and expenses over a given period of time. It shows how much money you’re making, where it’s coming from, and where it’s going. This document will help you determine your gross profit, operating profit, and net income.
Key Sections:
- Revenue: Sales from your products.
- COGS (Cost of Goods Sold): The cost directly related to producing your products (e.g., raw ingredients, packaging).
- Gross Profit: Revenue minus COGS—this is your profit before operating expenses.
- Operating Expenses: All the other expenses involved in running your business (e.g., rent, salaries, marketing).
- Net Income: The amount left after subtracting all expenses from your gross profit.
Keeping a close eye on your P&L lets you know whether you’re actually making money. If your expenses outpace your revenue, you’ll need to make changes fast.
Balance Sheet
The balance sheet gives you a snapshot of your business’s financial health at a particular point in time. It shows what your business owns (assets), what it owes (liabilities), and the difference between the two (equity).
Key Sections:
- Assets: Everything your company owns—cash, inventory, equipment, and receivables.
- Liabilities: Debts your company owes—loans, accounts payable, taxes owed.
- Equity: The owner’s share of the business after liabilities are subtracted from assets.
Your balance sheet helps you see how much liquidity you have, which can help with decisions like whether you can afford to make a big investment in new equipment or scale up production.
Cash Flow Statement
This document tracks the movement of money in and out of your business over a certain period. It’s crucial for keeping tabs on your company’s liquidity. Keep in mind, this document is not as helpful for managing the weekly cashflow needs for your business.
Key Sections:
- Operating Activities: Cash from sales and the money spent on running the business.
- Investing Activities: Cash spent or earned through buying or selling assets (e.g., equipment).
- Financing Activities: Cash coming in from loans or investors, and money going out in debt repayments or distributions to owners.
A positive cash flow means you have more money coming in than going out, while a negative cash flow means you’re spending more than you’re bringing in, which can be a sign of trouble. For many CPG brands, maintaining a positive cash flow can be a big challenge, especially if you’re paying for inventory upfront but waiting for payments from retailers.
Key Accounting Metrics for CPG Brands
There are several key metrics you should be tracking regularly to ensure your business is on the right path:
- Gross Margin: This is the percentage of revenue that exceeds your cost of goods sold (COGS). It’s a critical metric that shows how much profit you’re making before accounting for overhead.
- Operating Margin: This shows how much profit you’re making after covering operating expenses. It gives a clearer picture of your day-to-day profitability.
- Cash Flow: Having a positive cash flow means you can cover your expenses. Negative cash flow means you need to dig into reserves or borrow money to keep operating.
- Inventory Turnover: This tells you how often you’re selling through your inventory. High turnover is generally a good thing, but selling too quickly could mean you’re underpricing or struggling to meet demand.
Inventory Management
One of the most challenging aspects of accounting for CPG brands is managing inventory. Unlike service-based businesses, CPG brands deal with tangible products that need to be tracked, stored, and shipped. Accurately managing inventory is critical for ensuring that you don’t run out of stock or tie up too much capital in excess inventory.
- Inventory Valuation: There are several methods for valuing inventory, including First-In, First-Out (FIFO) and Last-In, First-Out (LIFO). FIFO assumes that the first products you produce or purchase are the first ones you sell, which is common for perishable goods. LIFO assumes the opposite—that the last items you produce are sold first. Consult with your accountant to choose the best method for your business.
- COGS and Inventory Costs: Your cost of goods sold (COGS) is a key part of understanding your gross margin and overall profitability. COGS includes not just the raw materials you use to make your product, but also any direct labor and overhead costs associated with production.
Tax Considerations
As a CPG brand, you’ll also need to stay on top of various tax requirements. This can include sales tax, income tax, and payroll taxes if you have employees.
Sales Tax: If you sell products online or in multiple states, you may be required to collect sales tax in different jurisdictions. Using a sales tax automation tool like TaxJar or Avalara can help simplify the process.
Income Tax: Depending on your business structure (LLC, C-Corp, S-Corp), you’ll need to file income taxes annually. Work with a CPA who understands the CPG industry to ensure you’re taking advantage of any available deductions or credits.
DIY or Hire a Pro?
At some point, every brand needs to decide whether to manage accounting in-house or outsource it to professionals. For early-stage brands, you might be able to handle basic bookkeeping yourself, but as you grow, you’ll likely need the help of a CPA or accounting firm that specializes in CPG.
- When to Outsource: If your financials are getting complex, or if you’re spending more time crunching numbers than growing your brand, it might be time to hire a professional. Outsourcing can save you time and prevent costly mistakes.
Need Help With Your Accounting?
(Sponsor)
Accountfully is the go-to accounting partner for emerging CPG brands. They specialize in helping companies like yours navigate complex financial landscapes, from managing trade spend and deductions to setting up proper bookkeeping and ensuring compliance.
Accountfully’s team can handle:
- Monthly Bookkeeping
- Cash Flow Management
- Inventory Tracking and Costing
- P&L and Balance Sheet Preparation
- Tax Filings and More
They understand the unique challenges of the CPG industry and can support your business as it scales, allowing you to focus on growing your brand. If you’re ready to hand off the accounting so you can focus on sales, check out Accountfully for more details.
The sooner you build strong accounting practices, the better off your CPG brand will be. By understanding your P&L, balance sheet, and cash flow, you’ll have a clearer picture of your brand’s financial health. With that knowledge, you can make smarter decisions, avoid potential cash flow crises, and position your brand for long-term growth.