Episode 3: Finance and COGS - Numbers Numbers Numbers

(upbeat music) Welcome to Food Products FAQ. A podcast where we discuss how we make food products and the steps it takes to make yours. I'm Adam Yee, and I'm Brian Chao. And we're both independent food consultants who've been working through the food industry for a decade. And we're here to share with you how we make great food products that have been sold in thousands of stores. So today, we are gonna talk about finances and cogs. And Brian, can you just share to the world what cogs means? Cost of good salt, so essentially all your raw material that makes up your final product, plus the labor, any inbound freight cost, things of that nature, just to get you a firm foundation of how much money you're putting in to create the products that you're trying to sell. And why is this important for essentially a food company? Oh, cogs are extremely important because if you don't know what your cost is, then essentially you don't know how much to mark up. You don't know if you're actually gonna make money or even break even. So this is extremely critical, especially when working with any type of food scientist because we are intended to create a product that is profitable for you and for you to understand what it profitably looks like. We're not just product developers who don't look at cogs or and we're not just any culinary individual that just makes it taste good. You can only increase the price so much. A lot of the products in the food business is not very elastic. It's only so much you can charge and only so much that people are willing to pay. Yeah, I've been surprised, even the bigger companies I worked at, depending on the formulator who's kind of in charge of directing, making a product, they don't have no idea how much a food actually costs, right? And cogs is a huge part of that. Yeah, and that's the beauty of working with consultants like us because if somebody's in the industry, there's already finance teams and procurement teams that'll come up with the information or find that information. And if you're in a larger consulting firm that they may not actually look into that information because they're specific focus, is strictly to get you a deliverable, which is a commercially viable product. Whereas Adam and I actually take a little bit further and actually enhance the experience or deliverable for our clientele. Yeah, I think for us, we're more laser focused on the position you're in right now, right? I think the people can afford, you know, other third party manufacturers, they have the luxury to spend that. But the people we work with kind of don't and I'm pretty proud of this recent thing I submitted where we figured out whether to use essentially food service garlic versus frozen garlic and there was a huge big increase in savings, specifically because of the scale that may factor was in and also the kind of convenience it is to have that frozen capability where they can store it. Just a lot of factors we're saying, we should do frozen garlic business will save this much. And there's just so many different factors involved. I will say I am quite surprised about how people don't kind of brush off the numbers. Do you want to mean? Yeah, I mean, I think some people, it's I think it's an older school of thought where you focus on one thing at a time and it's a very stage gate process. We'll talk about numbers later down the road. Whereas from Adam and I's position, we actually want to bring that to your attention first because how do you make a decision if cost isn't a factor? I think that ends up being one of the top three priorities for a lot of different brands. Aside from just taste, it's also what is cost effective, especially the economy that we have been experiencing. Sure, we're looking at uptick, but a lot of consumers are very cost conscious and we want to be able to present that type of information to the brand owner so that you also become cost conscious because your consumers are the ones actually buying your product but they're not buying it, why is that? Almost like we cost. Yeah, and you know, cost is a very interesting game. I mean, it goes all the way from, you know, the raw material you get, which we talked last time to the Sun, but also the facility, the labor, which has been surprisingly for me, actually labor has been a really huge factor, especially when you compare overseas prices to national prices and even California prices to that extent. It's shocking just how much labor can stack on over time. And, you know, eventually you still have to face the reality of your competitors who are selling for a certain price as well and you can't price your product extremely high because people will just not buy it. There's a lot of strategy when it comes to COGS and how we figure that out. There's also a lot of trade-offs to COGS as well, but in general, it's just this, it's this extremely important metric. It's the easiest one you can control, honestly, because all you need to do is divide a bunch of stuff and really get granular on even the minutes it takes to minutes probably to extreme. The hours it takes to make a product. I always, now I've been telling people, you really gotta pay attention to the hours it takes to do things because most manufacturers are focused a lot on the time it takes to create as much product as possible. And you will dabble into more of the contract manufacturing search and how to work with contract manufacturers in another episode, but that is very important is to take a look at what are their tolling fees, which is the cost per unit for the output from a contract manufacturing perspective. And if you're working out of a commercial kitchen, commissary kitchen, accelerator, incubator program, what is your overhead looking like? 'Cause essentially if you are a founder that aren't paying yourself just yet, when you find rays, you need to look at back paying yourself for all the hours you put into the whole launching process. - Definitely, and that's a good segue to fundraising. So, you know, we did talk about ideas and we talked about product development, but I think this is a pretty important part for most founders. And I'll put myself in this camp because I was fortunate to be able to raise money for my two companies, pre-product, which is a huge benefit. And most founders do not have that benefit. So, raising money is really hard, but there's a lot of ways to do it. And eventually you can't get there. I will say honestly that this year has been a lot tougher than other years to raise money, but it is still doable. Do you talk to a lot of companies that have raised money or are most of them loose-trappy? - Good about our bootstrapped, but some of them are private equity owned. Some of them are VC backed. And some of them are actually found the office in which they operate more of the small business association, leveraging a SBA 7A loan to acquire a company and then grow it from there and then flip that particular company. - Oh, really? - Yeah, it's essentially looking at different types of models and how people invest in whatnot and how they want to grow. So we can dabble into a little bit. I think your strength, a lot of it comes from that VC, angel investors, friends and family rounds and you can speak a little bit more to it's that. I can also speak a little bit in terms of how family offices operate or how larger investment arms of say, Jeremiah Mills Mars, Mondalez try to operate and kind of round out how funding could happen. And also grants. We can talk about how hard it is to get a grant. - Yeah, indeed. So I'll break into kind of the more, I don't know if you want to call this traditional way of funding, but so with better meat to end so both foods, we raise venture capital and our friends and family round. And we are fortunate to get both. So I'll be able to get both. To start, venture capital, I think it's the most commonly known way to raise money, I would say, in terms of like a hype standpoint. Most tech companies raised by a venture capital in hopes that the venture capitals get a return on investment at the end of the day. And there was a point in my career where we talked about food tech and the food technology industry, what do you call it? What can I say? I would just say specifically the alternative protein industry. And that was a time where venture capitalists were interested in that technology and they would fund a lot of companies with that technology. And I found it to be really, really fun for lack of veteran, it was really fun. And I was fortunate to pair up with people who knew how to raise money. And specifically, there's two things I've noticed is that when you raise venture capital money, you need to one have a good network. So you just have to have a phenomenal network. Like for better meat call, Paul Shapiro was a animal activist who literally, his living was raising money. And he could do that. Another one was Eric Wu from Sobba Foods. He had a company before Sobba Foods, so he had a network there. So that's a very rich network. And it's also a proven network too. We also noticed that there's a sort of language involved in talking to venture capitalists. And it's essentially a job. It is term sheets, it is safes, it is everything under this. about raising money under the venture capitalist lens. There are so many rules and so many different ways to do it. It's kind of crazy even. And they expect to return on investment at the other day. And generally these are like five to 10 year ROI's. And it's a risk for them. And usually they bet on 100 companies that they expect one to make 100x return pretty much. And so that's like the, that's like our experiences of venture capitalists. It is a pretty rough road. And I think nowadays it is pretty hard for a food company to get venture capital until you have extreme traction, mainly post product and mainly a way to find a way to exit. And there are certain companies that have done this for a long time and that have appeased a venture capitalist route. But I would say these are generally three to five ex investments. And most of the people who sell off their food company, generally actually if you look deep down to their financials, which are hard to find, or they're just hard to dig in, generally is a bad deal. What am I saying here? It is a route. It is a route to fund. It is a very difficult route. And it is a very foreign route if you don't know how to work with it. You have any questions about that, Bryce? It's hit a lot. Yeah, I think let's position it so that where-- What value did you bring on to the investment deck or the cap table for yourself? Because you are part co-founder and/or transition into advisory role. What does that look like? And are you open to those type of projects, too? Yeah. So are you saying like the equity split? Yeah, all of this, by the way, for the audience. This is all equity-based, not debt-based. That's true. Yeah, we should clarify that. So for Adam, are you looking or open to these type of projects where somebody offers you equity? How do you structure that type of deal? And what do you add to the cap table and investment deck if you are to sit as a co-founder/advisor? So equity is monopoly money. It might be worth something if the right seller makes it that way, but it's very rare for that to happen. But I think I'll be very frank, every time I started a company, I had a salary plus equity. And I think that's very important to keep in mind. So for me, I prefer a salary more than equity, because it's just the chance of equity actually for wishing specifically for a co-pood company is honestly pretty low. It takes a long time, and you don't know if it's going to work or not. There may be what 10 companies in the whole ecosystem that have actually made a really, really good return on investment in terms of food. So I would say that in terms of equity is fine if you're sending an email or something like that. But there is a point where you really need to put money into this deal as well. And I think-- I just I would say that you should probably pay your consultants fairly with money instead of equity. I just think sometimes it can be deceiving, especially if people handle equity the wrong way. It's nice to feel-- it's nice to feel ownership. I do feel like there's a trend, though, of people taking less equity for more money. I agree with that. I typically don't work on a project for an equity base, because essentially, especially when working with consultants, you don't know that individual or they don't know you. And a lot of co-founding is, although beginning working with relationship with each other. And if the first very small project doesn't work out, and your stocked in this being bound equity-wise, essentially, they have to buy you out, or there's a whole lawsuit around it, or you're just kind of relegated, or they keep fundraising without you presence. And then your shares are diluted so much that you're not getting any return or vice versa. So I always advise that if anybody's asking for equity, it's like, well, let's take a look at other options. And that could be taking a look at bank loans. That could be taking a look at friends and family fundraising or even crowdfunding. And Adam, have you experienced crowdfunding by any chance? I've looked into it a lot. And mainly because another industry I dab on is board games. And I want to see how people's do board games for crowdfunding specifically. It is now, in my opinion, very industrialized. So you have to pre-launch a crowdfunding campaign to get the actual money for a crowdfunding campaign. It usually involves paid ads, honestly. And that's kind of an unfortunate situation. Crowdfunding is useful if you have a base already, and they want to support you. But if you don't have a base at all, it is extremely difficult to crowdfund. Because you have a lot more, it's not the mouse to feed for crowdfunding. It is much more difficult to achieve that. So you're either going to give away free product or pieces of equity. And that just gets really messy at the end of the day. But I will say that a sweet spot is a friends of family round as specifically for companies. We also kind of call this angel investing. I lump in the same bucket, but I just feel like they deliver the same check, mainly because they're in the same kind of wealth class. And I would say for better me co-annisable foods, a good stimulus for us was specifically asking our wealthy friends and family and angels to invest in us. Specifically using low legal liability type methods of funding like safe notes. And generally when you're in the friends and family are angel round, these people are well enough off where 10K doesn't mean a lot for them, for instance. Yeah, I mean, at the end of the day, if you're going through the whole fundraising round, you basically want to work with those who are high net worth themselves and are invested in you in your brand. More specifically you because you haven't necessarily launched the particular product. So it's a lot of it is built upon the faith. And that as you're going through later series of fundraising, then essentially it's built upon the product, it's built upon the team. And if you want those type of team members to bolster your investment deck, adding on advisors, adding on co-founders, you want to look at well-rounded skill set of people who have been in the network or been in the game, if you will. And that adds more to people investing, whether it's a VC firm or more angels, so that they are more confident in what is the outcome of not just the product but the culture of the company that's being built. Yeah, I would say the most powerful thing about food is that it's a cool industry. And that can mean a lot of things. But generally you know the founder and you know the product. And the product makes you feel something. And if you talk to the right people, they will believe in you and they will invest in you. And I think that that is more powerful than other types of industries. I don't know, you can't get this through a board game essentially, but you can get it through a food product. And that's what I noticed the most when he's talking to a few people is that, let's say kind of see your personality and why your product works. I've heard many stories about people investing just because of that. Yeah. And it's a proven track record of fundraising based on the individual or team in of itself. And you're not fortunate in that sense. There are accelerator programs and there are incubator spaces. Those are also hard to get into because of the application process, but there could be a wealth of information that's important in that sense. I do support sometimes from a time to time being a mentor, being a paid mentor for a propeller Nola, which is out in New Orleans, Louisiana. It's a nonprofit that supports a lot of the food and beverage folks out in New Orleans specifically. And essentially, a lot of its office hours in which there is very specific within an hour and a half type of topics, whether it's from a fundraising standpoint, figuring out how to fill out grant applications and getting even more support from propeller Nola itself. So I'm sure there's other states and/or federal level support from an incubator slash accelerator program. And there's a lot more that's starting to pop up. So don't be discouraged to say that, oh, I can only fundraise from a VC or high net worth people to be able to get to where I am. I think it's really up trying to understand what is your end goal and how can you achieve that? There are multiple channels to fundraise to get the finances going so that you can pay off your working capital in terms of your cogs and things of that nature. So I think it's one of the books I recommend for people is "Rapping Your Brand" by James Richardson. And "Following Him Online" is also a really good note as well. Do you know specifically, he generally tells people who are starting a food business that-- it seems like a sweet spot for funding is around 500K is what I've heard at least. So there's a certain point where you're pretty safe if you have 500K. of dry powder essentially, of the ability to spend for production and marketing and all that. And with 500K, it seems like a sweet spot where raising that is substantially impressive, but it's not too much, and it makes sense for a food company. What are thoughts on that? Yeah, if you fall under the 500K mark, essentially it's a different path. You're operating more as a small media business rather than a venture-backed type of company that's looking for that exponential growth that, as James Richardson is saying, you want that skateboard effect of going uphill, the exponential growth. So there's two different models that we're looking at. One is exponential, which is looking at venture capital to infuse and actually grow. And then the other is a very slower, more risk and worse, which is more small business operations. That's where you can take a look at loans. You have your business plan. You talk to your local bank and see how you can get debt to be able to prove that you can pay off the debt with interest to the bank so that you're able to utilize it for capital expenditures on equipment or working capital in terms of raw material and finished goods watchistics, things of that nature. I think those are important to delineate so that you can go and choose one direction or the other. If you decide that this particular product is innovative and has legs to grow, then essentially you want to position yourself into that 500K mark. If it doesn't and/or your mindset is not in that exponential growth, but more of a very slow linear type of growth, that's okay too. There's plenty of opportunities. You want to position yourself in a different manner. And I think there's people who read a lot of the news in terms of, oh, new products are being launched. You want to take a look at the finances at the end of the day. And/or structure your finances that you are able to hit break even sooner rather than later. Because essentially a lot of these venture backed type of companies, they need to be able to break even within two years or so to really kind of, and some of them don't. Most of them don't actually. It's what I was on recently. And that's essentially the ideal goal is to get to the two-year mark, to break even so that you can fundraise a lot more. And if you can't prove that, then essentially it all relies on you as the fundraiser to really prove why. And it makes it extremely hard in this type of economic situation to prove why if you're not being able to show the finance behind it. And that's my overall thought is you can position yourself one or the other or pivot into the more small, medium business if that's your goal. I think one thing we should touch upon is exit strategy. And really, you have two ways to go about it. If you're a venture backed, you either go IPO, which is extremely hard to do, especially for food. And then the other is emerging acquisition, in which you're hoping to be acquired by a larger brand and things of that nature. Adam, have you experienced M&A or IP or anything of that nature? Nope, I have an unfortunate. I'm not loaded with millions of dollars at the moment. I experienced some closures though, which kind of hurts a little bit. Luckily, the two companies I found is are still running and they're still kind of gearing up for potential acquisitions, so to say. But throughout the, just the grape, grapevine of different food founds and all that, most people do get acquired. Most people say they're acquired. And then it's kind of a 50/50 split about the details if this acquire was a fire sale, which means that they business actually failed. And they stayed faced by having someone gobble up their assets or if it was actually successful. I think a couple of successes for food specifically are Rxbar, Rouse. I believe Ciette was also a very successful acquisition from PepsiCo. And sometimes it's just really hard to tell. There are documents online that you can really dig into. But you'll realize a lot of the things that have been acquired are sold or they will have a lot of, how can I say this, ties, strings attached. That's the word. Regarding how it's paid out, regarding how well it's going to do. If it doesn't do well for instance in the next five years, you will not get paid out. There's a lot and there's stock options too, which may also be an issue. And I've heard a lot of stories about some horror stories even of bad equities have gone really bad. So I mean, I'm just saying a lot of negativity right now, but I will say it is despite hearing the successes in the food industry, it is pretty rare to get acquired in the food industry. Yeah, exactly. Yeah. To add on to that, that's where I work with private equity and some family offices that actually do the acquiring. And they're looking for deals. They always look for deals, which basically mean you're not in position to ask for a higher multiple, if you will. If you're in the small business realm of things, if you're a brand that's not doing well, you typically aren't able to command and ask a great asking price, three to five X multiple off of your EBITDA or seller discretionary earnings, if you will. And that's just because if you if you are in a better position, you would have fundraised whether it's through debt or equity and are continuing to grow and then you'd be asked to be acquired by the larger corporation rather than what's the word great companies are bought not sold. Yeah, that's that's exactly. Yeah. So I think if you're thinking about building brands, you also want to kind of think in the back of your head how you want to appropriate exit the company and what is the likelihood. Now, you don't have to say that that's your end goal. You don't have to pitch in that particular manner, but you want to understand the framework of who you are pitching to. So if you're pitching to a VC, some of them back in the day are thinking about IPO because that gives them a lot of wiggle room to talk to the media, hype things up and then sell for extremely high price. And after that, they're good to go. They're they're pretty golden. Because if the stocks plummet, they've already sold their their fair share. If you're looking from emerging acquisition standpoint, you want to be able to understand who you want to target and kind of set that as a goal as to these are the financial metrics you want to hit in terms of revenue in terms of size and how you want to grow. So that becomes more attractive for these private equity firms or these fortune 500 private owned companies to take over. So I think that's important to understand because that informs and you don't have to necessarily say that to a consultant, but that helps inform your product portfolio that helps inform R&D because either you're trying to launch and getting to multiple line extensions and category expansions as soon as possible to make yourself more desirable as a company. Or you just really double down on singular skews and try to figure out how to grow from there because that informs us on how we would do the product development and how we would figure out commercialization because then if you can't really inform us that we're going to be going around in circles. And that's got a waste of time for everybody to be honest. Yeah, and that's really important to understand too. It's the amount of capital you have does really matter about how much you can invest in it and you know we have we have some expertise and understanding the best way to invest, especially in R&D standpoint, the best way to optimize your product. Yeah, and I would say stay away from grant money and don't rely on grant money. It's very hard to get there are the SBIR which is that small business innovation type of grants. And that's typically relegated towards new innovations or new processes. It does take a long time to get there years or what? In terms of the application process, it's an annual application. But to get all the paperwork in and to read 50 pages and things of that nature and get a grant writer to go through the old process unless you wanted to go through the old process yourself as the audience, it takes a lot of time out of your day. And you're essentially risking of figuring out if you're actually going to get paid by the government for this type of innovation. A lot of times that's also kind of tied to the USDA grants that's more localized for growing the local economies from an agricultural standpoint. You typically have an advantage if you either partner or have a PhD because a lot of the times you're writing grants. So you could expedite the process because you're very familiar with the process and are trained to be able to submit with the appropriate documentation and asking for the appropriate say professors to kind of back you up. And that's the easiest approach. That's not to say you can't do it. Again, you can go back to incubator and accelerate programs as some of them do and often are associated with some sort of university to get an action to help you get the money going in that capacity. That's interesting. Yeah, I hear a lot of people think grants are essentially free money. It just takes a really long time to get them. Anything that is free money will take a very long time to get, essentially. Yeah, it's not hard to get, but it's not easy to get either. Yeah. Yeah. So basically how much funding is available from the federal or state level and most of it's coming from a federal level and that can be affected by budget cuts and things of that nature from a federal level too. So just because there may be a new ingredient like that innovative wise entering into the market, the ingredient game is a very, very long game to play. Yeah. Let's go to talk about margins. I think this is kind of the second half of our podcast interview or knockout guys interview podcast episode MSRP's and margins, which they're kind of this literally a blood that's pumping your business. Frank, can you explain what MSRP and margins are? Especially MSRP. Let's start with that first. Yeah, MSRP is your market suggested retail price assuming you are selling into retail. So essentially you want to bake into the profit margins for yourself, the distributor margins and the retailer margins. And that's what you kind of set is this is my suggestion in what you should list as your retail price in the store. That way everybody makes their appropriate margins and/or that becomes negotiated. And essentially the profit margins that we are going to speak about is really trying to understand for every unit that you're selling, whether it's by the case if you're going wholesale or by the unit if you're going more direct to consumer and things of that nature, how much you're actually going to make off of it? Because essentially at the end of the day, this is a business and the blood flow of business is the actual cash flow if you will. Cash flow of blood flow is a different. I always think cash is your life force, honestly. That's how I always describe it. And so if you give up cash, you're kind of giving up your life force because if you run out of cash, you're essentially dead. It's kind of grim, but yeah, MSRP is super important. When I like about the food industry is that there's a floor and then there's a ceiling. And the floor is essentially your cost of goods and all that and your competitor or your competitor is set, whether you're premium or not or local or not, that's kind of your ceiling. And generally you want to fit a certain margin to achieve it. And the great news is that time and time again, most food companies will always suggest a 50% profit margin. Yes, which is a lot larger comparing yourself to say a restaurant. And a lot of it's mainly because you're automating through manufacturing the process. So you're cutting down as much labor as possible as you're looking to scale. And you also have a volume game as you're buying in-value raw materials to make your products. So you're getting discounts, so less packaging, less middleman in things of that nature. If you're going to direct a consumer, I've heard that it could be anywhere between 60 to 80% depending on the category that you're in. If you're in supplements, they typically get to the higher to the 80% or so. So on average, I'm seeing 70%. That's not to say that you are going to lose some of that margin if you're to work off of Amazon and things of that nature. But that's a good ballpark number. There's so many different categories in the food beverage and supplement side of things that you want to take a look at. What are broad strokes of profit margins to anticipate so that you can market up accordingly? Yeah, I think for a D to C, there's something called cost for acquisition costs that also kind of scale as well, which are essentially social media ads from either meta or take talk or anything of that nature. So that really cuts into it. Generally, from what I understood is that especially now, like the D to C margins are getting harder and harder to achieve because of the higher cost for acquisition costs. And for retail, there are cuts as well as you go up the chain as well. Depending on how many third parties are involved, for example, distributors will take a cut, retailers will get a cut. So that's why it's very important to have a healthy profit margin. Yeah, exactly. Because if you don't understand all of that, even if we create Adam and I create the best tasting product that hits your branding and things of that nature, if you're not able to sell the products, then essentially there's no room for new product development or anything of that nature. And we kind of have to bring this to your attention because it's not all just fun and games. It's, you know, this is a business at the end of the day. And we want you to succeed so that we can succeed with you. We can grow with you. Yeah, what have you seen to be like when you when you look into this and you look into the hood of most businesses, what have you seen to be kind of these red flags about how to improve margins? So when you look into like their business and their products, what have you noticed that most companies don't really pay attention to? Yeah, I think if you're starting with the lean mentality as a startup company or being bootstrapped as a small unit business, it's understanding. You know, what kind of inputs like packaging? It does not have to be the most luxurious package to really sell to people. Packaging is one of the most expensive components in launching a product. And it's expensive because when it's the most custom of your products or inputs, but also it conveys the information that you need to the consumer. So a lot of time is spent into the packaging, but sometimes it's really just conveying enough information so that you don't go through a product recall from a packaging standpoint to be able to just get things off the ground in small enough volumes and say, we have some sort of proof of concept or product market fit. I think another thing is people are bogged down into getting perfection. We do not need a perfect product at the end of the day because if there was such a thing as a perfect product, we wouldn't need to go through the whole marketing and getting consumers to taste test. Yeah, it would just take off the shelf. And I think the whole industry as a whole would be much easier and a lot more people to play in if it was that easy to create a perfect product. And we'd be paid to have a lot more money. But yeah, one of these examples I always say is liquid death just sells water in a can and they do really well with that water in a can. What I've noticed specifically and what I've noticed has been hard to translate specifically to the clients is less is more interestment ingredients standpoint. So if you have a product that has like 30 ingredients, that actually will cause you a lot of headache, logistical headache. Because it will also cost a lot more to because you are giving us such small quantities at premium prices. And I'm always a fan of less ingredients per product. Why? Because it looks bad on the label, but to it will save you good amount of money to long run. Yeah, not only that, but the less manual processing because there are some clients that would take the extra step to roast and then now we're kind of defining what is this roast level or let's say they are grinding things themselves. It's like what kind of equipment or ingredient is something that we can match whether it's from a food service level or an ingredient at a manufacturing level. It becomes very granular and hard to replace because the people are familiar with a particular texture, a particular color, particular flavor. And that's your unique touch. That becomes very hard to start to scale. And that becomes very expensive because the most expensive part was the labor to go into it. How do you translate that? You don't want to multiply by 100 fold of people to replicate pitting of a specific fruit or skinning a particular fruit a specific way. Yeah, and we were going to just trade off for this too, right? And all your grandma's recipe might have 30 ingredients, but it doesn't scale correctly. It will be very hard for it to be a profitable business. And sometimes you have to make these trade-offs to make sure your business is viable. And that is up to you, honestly, at the end of the day. For us though, it is all about optimizing the process enough where it makes a viable product for your business. Definitely, definitely. And I've experimented and taken a look at different models and different types of clients and how they look at the numbers. It really depends on, you know, early in the conversation around funding, right? If it's private equity backed or they would have fun raised enough to create a venture studio, which we haven't spoken too much, but a venture studio essentially is venture backed type of company that's going to work within that company holding. with designers and food scientists and chefs, et cetera, to create multiple concepts into businesses So that any one of them could take off. So it's essentially a more risk Manage mitigated type of approach, but it does mean that the people that are involved are Pretty financially savvy and well-networked to be able to get to that point And yeah, since it's it's a game of there's playing the same game. It's where When they fundraise they're hoping that one of these a 20 companies is going to take off or They would be able to have multiple Let's say seven of the companies that they could pull into or fund so that it covers the other 13 that doesn't do well Yeah, it's funny with interest details is pretty much I always describe it as cutting out the middleman, which is companies Like the any middle companies that VCs invest into like magic studios cut out the middleman Yeah, but I don't even know if I haven't even heard of one specifically in food of entry studio company It doesn't right unless you have one on the top of your head. I just don't think those are I've never seen one take off or Or it becomes accessible. I think a lot of them end up Being acquired from a pivot at Cree standpoint Red butt brands is one that I'm aware of it's still too early To to understand where they're going, but they've launched a few products I do have a good friend who launched a beverage in that Enter studio. No, then I met one of their Head culinary slash innovation person. They've launched a better free cereal type of product. So we'll see Of those two of the many different products that they're launching or incubating Where were things go in the years to come? I mean, I think specifically like the finances that you have the more you understand your finances and I've heard a lot of this One example is in food funded. This is pretty much what all the all the experts talk about the more you know your numbers The much better you are in the food industry Just understanding literally every penny every second The more granular you are with those metrics, which you can't control. I think it will help you in the long run Yeah, it doesn't have to be perfect numbers right nobody can predict or read into the future of what the market looks like or anything of that nature But it should be reasonable right you're looking at 50% profit margins how you want to scale and And part of it is looking into what is the cash flow look like what does your Proformer on a PNL/income statement look like and if you're going to buy Equipments and build out infrastructure. What does your balance sheet? Look like I think those three fundamental Financial statements or how you can read and understand any type of business It's a lot on your plate. I'm sure and as an audience member But I think that's that's something that you should take a look into and have proper due diligence because These are the exact numbers that retailers are Kind of insinuating or hoping if they are if you have good numbers then a retailer would definitely you know buy your product and move your product Same with distributors same with investors same with banks And the same could also be said with any stakeholders, you know those suppliers of ingredients in the form rep so that we talked about They want to know if you're a viable business. They don't want to just send Samples to a business that may not even take off You know they'll just tell you just go buy from a wholesale or or Buy online or something of that nature if it's just a concept or you're just too small for them Same could be said with contract manufacturers They don't want to work with somebody who's like really small and can't actually fit their lines Yeah, and there there are a lot of con or I would say contract CFOs or part-time CFOs. I can help you with this I think it is pretty important to nail down and it is pretty important to understand these numbers Because again like every single jump you're going to take in the food industry is all about the numbers Exactly And it's this game is about cash flow at the end of the day because you Put money down a lot of money down in creative product and it hasn't sold yet And you're sitting in a warehouse and you're trying to push the sales So basically you've tied up a lot of money in what is known as working capital That capital is working the sense that if you could get your return So long as you're moving the product if you tie it up that means a raw material and your finished good is just Somewhere that's not being sold so it's it has the potential to work. It is working But it has not worked for you Definitely, let's talk about some so you know, we can talk about the class flow and financial protect is all we want But for what I have seen is that there's always pitfalls and there's always Things that make the price like either shrink your margins or just have a huge spike in cost For what I see in our document we have a list of certain things that we should be aware of so Brian how would you explain a few of those Yeah, I think one thing is MLQ pricing versus tiered pricing whenever I look at the cost of gets sold um and provide cost cards or your final formulation It factors into inbound freight costs on an MLQ basis What that means is on a minimum order quantity that's the most risk Or conservative I should say the most conservative pricing in terms of cost. There's no more expensive cost From there You're able to start scaling up because then from a tiered pricing standpoint you're buying at larger volumes Which means you get price breaks where there's a 5 10 15 however much it is That allows you to figure out as I scale I should get lower cogs And as I get lower cogs that means I get better margins Or I could price things a little bit better in terms of marking down my MSRP That goes into your whole operational commercialization strategy But also your pricing strategy Both of those inform the R&D process Because it's a it's a fine game of Where's your supplier coming from where's your contract manufacturer coming Located and how do you ship this type of products the further you have to ship and if you have to ascend with then with a refur That's frozen or refrigerated that starts to add up and if you're not Understanding any of that then you have a very expensive product that's not gonna actually take off Yeah, let's also talk about kind of a co-packer fees, right? So Generally they're pretty straightforward. I'd say there's a contract yet to negotiate for them But what have you noticed specifically for contract for co-packers specifically in terms of a fee standpoint Yeah, a lot of the established contract manufacturers the good ones they offer on a tolling basis Meaning that they know how much efficiency their their line is and so they anticipate to have some sort of volume Output on a given shift or day and they'll charge per unit So then you actually take that number whether it's like 50 cents a unit 20 cents a unit all the way up to like a dollar something per unit Depending on our complex or labor intensive. It is you add that to your total cost of goods sold on a per unit basis Then you can start to figure out oh It's a very expensive contract manufacturer because the process may be expensive one thing to note is your first Production run or what we call the line trial or pilot run or commercialization run Essentially that doesn't make the contract manufacturer any money They break even and if lucky because they're trying to figure out feasibility And so you may pay you may be paying a lot for the first run Yourself, but also keep in mind that contract manufacturer could be making a lot more money because they're very efficient With another contract so they're having to do trade-offs and try to grow with you And so keep that in mind you're very first run And a few after in terms of tweaking and making sure you're efficient Is going to cost you a hell of a lot more money than when you're actually at scale and are very efficient Yeah, and I will say that at least for us like we And for me specifically when I worked in like tech transferring to the co-factor or taking like my formula to a co-factor You can negotiate after running a few times the amount of products that You run because they're gonna Kind of plan for the worst and slowest case scenario and then if you find efficiencies in that and you communicate to them They like that they think they're smart for doing that and they'll don't negotiate Pricing down they might ask for more units that yet to buy but in general We found that to be very beneficial as we work with the go backer Definitely and we'll speak a little bit more in terms of what to look for or questions to ask in a co-packer or co-man We use this search so not interchangeably those two terms Yeah, I think that's the something to think about is when you pay a contract manufacturer You're paying the tolling fee which encompasses the electricity the utilities, the labor But also the setup and cleanup fees Yes, it's only that that people don't really understand that it's like I just producing products like are you bringing allergins into this because if you are That's a cleanup fee that takes time for for resetting up and and making sure your product isn't cross contaminated And I think that's that's something that people need to understand is when you're launching product that that cleanup or cleaning in between product runs is going to set you back. Yeah, and also human mind over times of premium. So if they go into over, you know, that's 1.5 right? 1.5 times pay for each worker. That adds up. That adds up a lot. And if you can afford it, my first job to granola bar factory Costco would pay an exorbit amount of money to get us into overtime for that show. So workers loved it. Oh man, we had to make so many different, or the same Costco bar. By the way, it's soft and chewy in the yellow box. It was something I dealt with the whole year. So overtime is good for people like Costco, but for you as a small business, it will add up fast and will really, really urge your margins. Yeah. So keep that in mind. So I think also to keep in mind is that there are plenty of other ways that your margins will be reduced. And we're only dealing with the R&D slash manufacturing. And I mean, we can talk about, we will talk about way, way later down in the series about trade spend and maybe even distribution or our deductions. But there are a lot of things you have to be aware of. Surprises, so to say, in the food industry when it comes to scaling your food product. Yeah. So this is all information not to scare you. This is to inform you to empower you. And that if you're to ask these type of questions, the trained consultants like Brian, like Adam and I, we've, we've taken a look at these numbers. You know, we can give you an honest feedback. We can tell you that you should mark up a little bit more to anticipate for some sort of issues. Or we'll tell you when we're looking at sourcing raw material, like it's better to import or it's better to use a flavor or some sort of ingredient that helps with your cost reduction. And that may compromise your brand. So that, those are conversations to have in the R&D process. And it's better to have it in the R&D process than at launch when you already have spent so much money and your product may not be the right fit. You're right, Brian. I wonder, you know, we're not here to scare you. This is just the reality of the situation, both the funding and the margin standpoint. And this is how the industry works. And there are definitely some pitfalls in there and there, but hopefully this will give you kind of an overview about what we've noticed in the industry and also like what we plan for in the industry. I think this is a good ending for this topic. Numbers, numbers, numbers, I hope you weren't bored with that. I don't know how many times I've been in a accounting class or something. I just fell asleep in college. We're not your accountants. We're not a CPA. Get a CPA. Yeah, get a CPA. And what we can do is we could support you because part of our deliverables, at least my deliverable is to send you a cost card, which is your cost of good sold. Look at inbound freight cost assumptions, looking at all your costs on a per pound basis, where your tolling fees looks like, where your packaging looks like, and then we can structure it on a price per pound, price per kilo of your overseas price per unit. And then finally, price per case, because buyers look at a per case from a retail perspective. If you're doing wholesale is typical on a per case, if it's direct to consumers by the unit. So you have to do the numbers in of itself, but we have a good sense of this is where you should play in a range. And if it goes up beyond that, how can we rectify that or is that a good positioning, new brand positioning to tend to into? Stay tuned for next episode. We're talking about nutrition, labeling, and supplement labeling. A lot of tools out there and we'll help you sort which ones we use.