Scaling an Early Stage Food Business – Part 4: Financial

Often a Founder of an early stage food company gets so focused on raising money they lose sight of what they need to do to efficiently manage the funds an investor is putting in the company. You have convinced an investor in the value of your product, management team, and marketing plan. Now you need to hit your growth objectives with the funds provided.
There are a few simple tools that will keep you on track towards increasing your company valuation before an exit or the next round of funding without running out of money. They include:

FORECASTING AND MANAGING CASH FLOW

At this stage of your growth, cash is king. Even with strong growth with good margins, you can easily run short of cash as working capital and other capital expenditures eat into available funds. Giving customers discounts to pay faster, while extending vendors as much as possible can be critical. An accurate method of forecasting cash requirements out at least 13 weeks and updated weekly is a necessity at this stage.

A COMPLETE KNOWLEDGE OF MARGINS AND COSTS

Do you know your true cost of goods sold? If you have a co-packer, are there add-ons for freight and other items that are eating into your margin? If you self-manufacture, do you know your material costs, waste factors, storage costs and related productions costs? A good target for a Gross Margin at retail is 50%. That means whatever your total charge from your co-packer or your complete costs of production and overhead, that figure should be doubled when you calculate your selling price. Your 50% margin should cover brokers, sales and marketing costs, freight, etc. Keeping track of these costs on at least a monthly basis is a must.

TRACKING PERFORMANCE OF YOUR SALES AND MARKETING EXPENSES

Many early-stage food companies squander scarce financial resources on a variety of ineffective sales and marketing projects. In store-demos, promotions, social media, etc. can all be effective but must be tracked and evaluated constantly. Looking at in-store demos, what is the true cost and what is their impact on sales. At first, they should increase sales off a small base enough to justify their expense. At some point, demos lose their effectiveness in building sales and should be scaled back with the sales effort being directed elsewhere. All sales and marketing expenses should have a clear objective and a target return on the investment.

HIRING ONLY THE RIGHT EXPERTISE AT THE RIGHT TIME

When growing from $1,000,000 to $25,000,000 in annual sales and beyond you will face many difficult staffing decisions. Do I bring on C- level people? Are independent contractors a better solution than full-time staff? What responsibilities do I give up when? My general counsel here is to not hire the high level executive team immediately. Look for great executors at the staff level in each subject area. The high-level functions are not yet a full-time job, are too expensive, and can be easily contracted out. A flexible staff person who does what you ask them to do and will come to you when they need help but does not need a lot of oversight is worth their
weight in gold at this stage.

DEVELOPING A FINANCIAL REPORTING SYSTEM FOR INVESTORS AND LENDERS

At this stage, you have now taken funds from an unrelated third party looking for a specific return on their investment. They will want to see your progress at least monthly, compared against the promises you made in your investor deck. Timely and accurate financial reporting is necessary. Generally, a monthly financial report with full financial statements completed before the middle of the following month is a good starting point. Your inability to satisfy your investors and lenders reporting requirements will create a high level of doubt in your ability to manage the rest of your business.

This concludes our four-part series on the main issues around scaling an early stage food business. I hope you found it useful reading. These posts are at a very high level and will give you an initial read on how your company is performing. We at New Food Strategies would love to learn more about the unique issues you are facing in scaling your food business.

If you are interested in talking to use further about your business please apply for our FREE growth consultation.

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