09: Finance
Creating a Financial Business Model
- Why You Need a Financial Business Model
- Step 1: Define Your Revenue Model
- Step 2: Estimate Your Costs
- Step 3: Forecast Your Sales
- Step 4: Set Your Pricing Strategy
- Step 5: Calculate Your Break-Even Point
- Step 6: Build Cash Flow Projections
- Step 7: Plan for Growth
- Final Thoughts: Build a Model, But Stay Flexible
At the heart of your strategy is your financial business model, the blueprint for how your business will generate revenue, manage costs, and ultimately, achieve profitability.
This chapter will help you understand how to build a solid financial business model tailored to the unique needs of a CPG brand, guiding you through key considerations like pricing, margins, and cost structure. Your business model will be your compass as you navigate the complexities of manufacturing, distributing, and selling your product.
Why You Need a Financial Business Model
Before diving into the numbers, let’s talk about why a financial model is crucial to your success. Think of your business model as the roadmap for your company. It outlines:
- How much money you need to get started and keep operating.
- How you’ll make money (revenue streams).
- How much your products cost to produce and what you’ll need to charge to cover those costs and turn a profit.
- What your margins will be, factoring in retail markups, distribution fees, and promotions.
Without a well-thought-out financial business model, you’ll be flying blind, making it harder to secure funding, manage cash flow, or make strategic decisions.
Step 1: Define Your Revenue Model
The first step in building a financial model is figuring out how your business will make money. In CPG, your revenue will likely come from a mix of sales channels like:
- Direct-to-consumer (DTC) through your website or e-commerce platforms like Shopify.
- Retail sales in grocery stores, independent markets, and natural food stores like Whole Foods or Sprouts.
- Foodservice and B2B sales, such as supplying restaurants, catering services, or corporate cafeterias.
For each of these sales channels, you’ll need to understand their cost structures, how much volume they can move, and what margins they offer.
Step 2: Estimate Your Costs
To price your product and predict profitability, you need a clear understanding of your costs. This includes Cost of Goods Sold (COGS) and operational costs:
- Cost of Goods Sold (COGS): This includes everything that goes into producing your product—ingredients, packaging, manufacturing labor, and shipping to warehouses. If you’re working with a co-manufacturer, this will also include any tolling or production fees.
- Operating Expenses: These are your ongoing business costs and include:
- Salaries and wages (for you and your team).
- Marketing expenses (e.g., digital ads, promotions).
- Warehousing and fulfillment.
- Sales commissions or broker fees.
- General overhead like rent, utilities, and insurance.
By mapping out your COGS and operating expenses, you’ll have a clearer picture of how much revenue you need to cover costs and achieve profitability.
Step 3: Forecast Your Sales
Forecasting sales is one of the trickiest but most important parts of building your business model. To get started:
- Look at industry averages for similar products.
- Use your current sales data (if you have any) to forecast future performance.
- Consider the impact of seasonality, promotions, and new product launches.
Start with a conservative forecast and create multiple scenarios (best case, worst case, and expected) to prepare for different outcomes.
Step 4: Set Your Pricing Strategy
Your pricing strategy will play a huge role in whether or not your business is profitable. When setting prices, consider:
- What the market will bear: Look at what similar products are selling for in your category.
- Cost-plus pricing: Calculate your COGS and add a markup that ensures you’re profitable after accounting for retail markups, distribution fees, and promotions.
- Competitive pricing: How do your competitors price similar products? Are you competing on price, quality, or some other factor like sustainability or convenience?
Remember, CPG brands often operate with slim margins, so make sure your pricing covers your costs and leaves room for promotions and trade spend, which can eat into your profit.
Step 5: Calculate Your Break-Even Point
The break-even point is where your revenue equals your costs, meaning you’re not losing or making money—yet. It’s crucial to know this number so you can set realistic sales targets. To calculate it:
- Total Fixed Costs ÷ (Price per Unit – Variable Cost per Unit) = Break-Even Units
This will tell you how many units you need to sell before you start making a profit.
Step 6: Build Cash Flow Projections
Cash flow is the lifeblood of any business. You need to know when money is coming in and going out to ensure you can cover expenses. A cash flow projection looks at your inflows (sales, loans, investments) and outflows (payroll, rent, COGS) to predict your cash position at any given time.
Make sure to build in some padding for unforeseen expenses and slow periods, especially in the early days when cash flow can be tight.
Step 7: Plan for Growth
As your brand scales, your financial model will evolve. You’ll need to invest in areas like marketing, product development, and team growth, which will change your cost structure and revenue potential.
One key aspect of growing a CPG brand is managing trade spend, which refers to the money you spend on promotions, discounts, and retailer programs. These programs are critical for getting your product on the shelves and staying competitive, but they also add to your overall costs.
Another consideration is distribution. Once you’re ready to expand beyond local or regional stores, you may need to work with a distributor like UNFI or KeHE. This will impact your margins and require careful financial planning.
Final Thoughts: Build a Model, But Stay Flexible
Your financial business model is a living document. It will change as your business grows, so revisit it regularly to update your forecasts, adjust for new opportunities, and account for unexpected challenges.
It’s tempting to think you can bootstrap and wing it, but a solid financial plan gives you the clarity and confidence to make decisions that help your brand thrive. Plus, if you’re seeking investment or loans, potential investors will expect to see a well-constructed financial model that shows your path to profitability.
Next up: Cash Flow Management—how to keep your business running smoothly by understanding the ins and outs of your cash flow.