The main shift is a focus on revenue to a focus on profit. YES, revenue does matter, but you should be actually making money on every new sale, not losing it.

2. Knowing Your Numbers and Financial Management

Understanding your business’s financial health is critical to reach profitability, even if finance is not your primary focus. Regularly monitoring and analyzing your financial statements can provide insights to make data-driven decisions. Spending as little as 15 minutes a day on financial management can significantly impact your business’s profitability.

3. Gross Margin

To drive profitability, you must focus on better-than-average gross margins and carefully manage expenses. Your gross margin should be at least 50% or higher to have a good chance of reaching profitability early. With most CPG products being $1-10, maximizing your margin is key. Many starting founders think their gross margin will increase with volume as they grow, but this rarely gets realized. So start with a strong gross margin.

The main components of your gross margin are ingredients, packaging, and manufacturing costs. You should be reviewing your pricing and partners for each quarterly to continuously reduce your costs and increase service.

4. Optimizing Revenue Streams and Cost Management

Every selling channel and store has a different margin requirement and cost structure, with some being more profitable than others. The key is to analyze your all-in costs for each so you know exactly how much you’re making.

Owned E-commerce typically has the highest channel margin for brands with small and light products, but is really expensive for beverage, refrigerated, and frozen products. Brands often have to sell in higher pack quantities to increase average order value and spread out shipping costs. Acquisition costs can definitely get expensive in this channel, so definitely a consideration in your overall costs.

Alternative channels (Foodservice, QSRs, Offices, Universities) typically have the next highest channel margin, as these accounts have minimal selling and distribution costs. They can be hard to get into, but generate great returns once you do.

Wholesale grocery is often the highest volume channel in the long run. While costs can seem pretty straight forward at first, keep in mind distributor charge backs, in store marketing, promotions, and demo costs.

5. Cash Flow Management

While profitability is essential, cash flow management is critical in CPG. Creating cash flow-based projections and shortening the cash conversion cycle can help navigate working capital expenses effectively.

6. Financing Stack and Flexibility:

Building a comprehensive financing plan aligned with long-term goals is crucial. Utilizing a mix of financing options, such as debt financing, revenue-based financing, production run financing, and factoring, offers flexibility to support different aspects of the business.

Debt financing has a cost paid with interest payments or a flat fee. The terms for short term financing can be a little confusing, so make sure you’re calculating everything on an annual percentage rate basis so they’re comparable. Having a healthy gross margin will also help you absorb the cost of debt.

When evaluating options, you don’t just have to choose one. Start with the lowest interest rate debt first, and work your way up from there. Keep in mind that it’s incredibly important to make your debt payments, so you don’t end up with late fees or in default.

Wrap Up

To achieve profitability and long-term success, try being intentional about building the company in alignment with long-term goals . Creating a financial plan for short, medium, and long-term objectives is essential to stay on track.