270. Why CPG Founders Need to Know Their Numbers

Welcome to Start Up To Scale, a podcast by FoodBetting. I'm your host, Jordan Buckner. Join me as I talk to aspiring entrepreneurs, seasoned industry experts, and everyone in between, as we unlock the keys to growing, Start Up To Scale. Most founders start a food and beverage brand because they're passionate about solving a problem or about a product, not because they love spreadsheets and being in those weeds, but as your business grows, understanding your numbers is one of the most important skills that you can develop to really understand how your business is growing or not. So today, Ivan Valladon, Adam O'Connor, he's the founder of Smidge Beverage, and I want to dive into the financial realities of running a CPG brand from cash flow and margins to inventory planning and forecasting. Adam, welcome to Start Up To Scale podcast. Thanks, Jordan. Super excited to be here and talk a little bit about my story and kind of, I come from a finance background, so this is where I like to really dive in and share my experience and kind of what I've done, and hopefully I can help other founders whether they're pre-revenue or they're in the midst of it, I think there's always something you can learn when you look at your numbers. Well, absolutely love that because this is a really confusing and chaotic industry when it comes into that. So to start out, you know, for those who aren't familiar, tell me a little bit more about the brand, the company, and where you are today. Sure. So I found it, Smidge. Well, we launched a retail in 2024, and that's why I consider Rev was founded, right? Everybody knows, well, not everybody what it takes about, you know, could take 12, 18 months, maybe longer to get, you know, go from concept to physical product on the shelf. But 2024, we landed on the shelves. That's when the real race starts. So Smidge is a low alcohol vodka soda. So we are 2.5% alcohol by volume. So thus we're lower calories, 50 calories, 1 gram of sugar. We are going after a little bit of a white space as the non-alcoholic options have exploded with athletic brewing leading the way. And many others kind of focusing on mottails. The non-alcoholic and sober curious movement has really gotten big in the last few years. So I thought, you know, why does anyone really marketing towards a lower percentage product or really grading one? And I came from the industry. I worked for a big distribution company, wanted spirits. And then I was over on a supplier side working for a good wine producer. And I just came up with the idea because I personally started to see, hey, when you're in the industry, you're always around it. Similarly, if you worked at a, if you worked at an ice cream company, you'd probably be eating a lot of ice cream. Well, me on that other side, I was probably consuming a little more than I would have liked to. And so I was kind of thinking, well, I still want to hang out, have fun. But I don't really want the negative effects anymore. And I kind of saw other people wanted the same thing. So dot laid off from my full time thing, working. And I said, this is a sign. Let's do this thing. So, yeah, fortunately, I had experience working in commercial finance. So budgeting, planning, price, price strategy, whether it was a line extension or, you know, working on existing products. So I had the knowledge of what it takes when it comes to pricing with a three tier system. So three tier, if any of you don't know, with alcohol, you have to have a distributor in order to sell to any other and customer retailer, restaurant, hotel bar, etc. So it's different than most other consumer good brands. But as you get bigger with whether you're, you know, chips, candy, whatever it is that you're making, you do tend to move to a distributor and there's a lot of hidden fees, chargebacks, free fill, stuff like that. So I was able to leverage my experience. And when I launched, I said, I'm going to make sure that my gross margin is strong. Because if you can't get there, you probably shouldn't launch or you should keep working to get, get gross margin before you can go to market. So I love that. And tell me about like you had this experience and working within the industry, you had the finance experience. What was different between your previous career experience and being on the ground as a founder yourself with your own business? Did the trend, I like harder to work and then had a awakening of like, oh, these numbers are a lot different than what I was dealing with. Well, I would say, you know, it's different when it's your own money, right? And so you're making sure that you're almost, you know, exact. I mean, you want to make sure you leave no stone on terms. You're making sure you're finding the best option with whether it's sourcing ingredients or packaging or even a manufacturer. You want to make sure you're doing your due diligence beforehand. Even before you decide to, you know, go on a PO, so to speak, you want to make sure that you are fully dialed. So there's no surprises when that product lands in your warehouse. And you're getting all these invoices that in your like, oh, shoot, but you figure out your cause were higher than you thought, you know, 10, 20%. And you're like, now I have to sell this. And my, my margin is, you know, it's upside down from what I thought it was going to be. So just taking time, not rushing process, you know, making sure you're like I said, doing your best to find multiple different avenues in price check and whatever the instances. But the finance stuff, it was pretty comparable, I would say. I said, I more so had to learn the sales side and marketing side of things. I was never in sales. And then, you know, here I am walking into a store trying to sell my products. And I'm like, scare out of my mind. You know, are they going to think this is the dumbest thing ever? We're saying behind a demo table. But when you're passionate about something and you've created it and it was your idea, and you start to see people that believe in it and you see how it's helped them or, you know, solve the problem for them. Like it solves problems for me. Then you kind of like, this is easy to sell. Like, it's your baby. You're the best one. Like, you're the only one, one up the only one. But you should be the best of selling it when you create it. So. No, I definitely understand that. And been in that situation myself having to go in and do demos. And like, remember the first time I walked to do a delivery to Whole Foods. So we had an energy bar. So I like delivered it myself by hand to the dock of Whole Foods. And like, show up, knock on the door and like, no one answers. And like, I like, wait, there's like five minutes. I'm like, bang on this thing. I'm like, I'm going through the front. And then eventually like, someone opens the door. And then everything goes fine after. But had that moment of like, freeing out. So yeah, you can gain. I mean, I have my fair share of those things when we were, we started out self-distributed. And again, a lot of respect for what everyone does along the supply chain. And I think that people forget how many steps it takes to get it from your warehouse to like, physically on the, or even on the production line to the actual shelf. There's a lot of things that need to happen. And a lot of things can go wrong. So that's interesting. You mentioned kind of making sure you set up with a good margin for your product from the beginning. One of the biggest difficulties I find the brands have is the variability of costs. Whether that's the ingredients or you mentioned distributor charge bags, right? Like, it might be 5% one month and 50% the next. And like, talk to me about like, what you've done, may at the beginning kind of where you are now to get more financial kind of visibility into your performance and your growth. Yeah, so that's a great question. And I think it's easy to kind of build like forecast is always going to be forecast. But you've got to have something and you want to feel like you have a pretty high confidence in it. It's always going to change. It's going to be a surprise. But for us in particular is you need to know where your business resides. So what I mean by that is where is bulk of your product going in alcohol beverage, particularly in Arizona, where we're currently state we're in. It's a quantity state. So if one customer buys 10 cases and another buys two, the customer buying more is going to get a better price. If 90% of your business is going out at that deeper price of 10 cases, it's going to cost you as a brand more money because you have to pad the distributor margins to their whole, right? So if you're thinking, oh, I'm going to sell most of my business is going to go out at one or two cases. My margin is going to be super great because I'm not paying a distributor charge back. If you're like, well, my plan is island budgeting $3 a case for billbacks, right? And then you extrapolate it out across the year. I'm going to sell X amount of cases. It's kind of, I need to budget, you know, 20 grand for chargebacks. If you don't know where your business is going to reside as far as like we call it like mix business mix, you're going to get in trouble. And you're going to get hit with all these billbacks, whether it's from the distributor, the retailer, and you're going to get a big invoice saying here pay this bill. And you might not have planned for that because you didn't know who's going to be buying it. So knowing your customer, you know, always looking at your members, who's buying it? What quantity are they buying? And I'm just speaking for alcohol because it is a quantity based. Yeah. I'm going to assume other brands and industries, it's all quantity bay like the more you buy it, the better price you think it gets. So yeah, you've always, you have to be looking and then adapting like, oh, shoot. You know, if your product is seasonal, like maybe summertime, you need to plan for, hey, we're going to have higher velocities. So we're going to probably have a bigger spend during, you know, summer months. So I need to make sure I have enough cash flow in order to cover those bills, which are going to come probably, you know, 60 to 90 days after that. I guess. And that's something one of the hardest part is just the delay and some of the bills and charges that come in along with the invoices and payments as well. So with you being kind of in the finance, did you decide to manage all this yourself? Or at what point did you find a partner that come in to help you with the finance of things? Yeah. So I'll be honest. I've actually, let me think, I've hired and fired two accounting firms. I'm on my third and they are amazing, very, very happy with them. Belae, four million hours of countfully, but sometimes you have to find the right fit and people that really know their stuff. Belae, very good at consumer goods, very, very good. And they also know our ERP system, ERP, MRP, since seven. So any questions, which all things through quick books. So finding the right fit is it's no different than like hiring a salesperson. You have to find the right fit with people that have the right technical skills. And if you, because if you can't trust your numbers and it's not tying out and you don't feel confident, you know, if you don't know your numbers, you don't know your business. So they've been in. interval part for just feeling like I don't have to worry about is this correct? Is this true? You know, if you've got an investor saying I want to see your P&L like, shoot, well, I don't work on that. And the biggest thing was I learned this from my consultant that I had focused on only what you can do and delegate the reps once you get to a point where you feel like you've got some momentum because I'm not an accounting guy by any stretch of imagination. Finances with obviously very different forward looking county is looking back. So yeah, they've been an amazing partner and I'm super happy to have them as part of my team. I love that. And without naming names to the other firms, what was difficult about the other companies that you worked with? Changes, they didn't have a good grasp on the business on how it works. I think I don't know that they ever worked with three tier model or they didn't understand our price structure like billbacks and you know, claiming for that and where it should go even like on the chart of accounts. And so setting up your chart of accounts is really important. The lay did a lot of checking to make sure everything made sense. It was lined up. We worked really hard on that because that's also really important. If you don't have a strong foundation, you're going to be pulling your hair out six, 12 months later when you're actually growing and you're everything's all jumbled and you're thinking, "Oh shoot, and I don't have time to do this because I'm trying to grow the brand and keep up with orders of whatever else managed to team." So I think the foundation is super important and I think often we're so excited to launch the brand. So pretty and cool and so baby and it's a great and we want to sell it. But a lot of people tend to overlook the foundation, which is it's all finance accounting, making sure your price structure, you've raised enough money, so on and so forth. Now that sounds really helpful. I mean, I did one thing that is a little misleading about the accounting industry is that there's a lot of accountants and book users that lead you to think that like all accountants are the same, right? Yeah, revenue coming in, you have fixed expenses, you have variable expenses and all kind of nets out to net profit. But there's accounting for taxes, which is fairly formulaic. But then there's accounting for actually running your business and making decisions and having financial visibility into the thing. Everything is bucketed under cost of goods sold but not broken out into packaging, product, ingredients, labor, all those things. You can't make a business decision based on that info or even with CBO specifically understanding deductions and wholesale pricing, all that and how that lays in. It's hard to make decisions as a founder. And so once you've been able to get that foundation set up, what does that allow you to do then as you are making decisions kind of the future now of the business? Yeah, I think that's it's a great point that you make and being able to make decisions quickly is important. I mean, when you start up and you're small, you need to be able to be nimble and pivot quickly. Maybe you pick up a new customer and they're saying, hey, this is the get a P.O. and it's from a distributor and you're like, oh my gosh, I have to plan for this. Whether it's raising what capital or moving things around, I just think having that visibility and having a second set of eyes, people that are experts because again, accounting for a real estate business is very different than consumer goods. Like you said, all the different, I mean, like I said, that one of the firms didn't even know what a bill back was. So I was a like and probably should have thought about that. But you know, you lived you were. But the the other thing too is Bale. They also have the tax side as well in house. And so they actually did our taxes this past year. So it's kind of nice. I don't have to find someone else. But going back to your point is just being able to not have to feel like, oh my gosh, I have to do all this research to make sure that this is correct. And you know, I don't want to be in the weeds and I don't have time to be in the weeds on this accounting stuff and making sure it's clean. And so having someone else that can do it where you feel confident is huge has been huge for me because I can say I can make this decision and feel good with it. Granted, usually a scare out of my mind when the decision is made because just being a founder and consumer goods and when you're a startup. So but it does help, you know, kind of ease that and you have confidence in it. You know, cash flow, I know you mentioned a little bit too, is like one of the biggest challenges for CPG brands. And so curious how you've approached managing cash flow while so balancing your inventory production and growth and you take on new sales opportunities. Yeah. I mean, everyone I said cash flow, cash flow, cash flow, and it will continue to be that way for a while. You know, with beverage, it's so interesting because the minimums are so large. If you want to have any shot of the decent gross margin, and that's one thing that's it's just really tough. And sometimes you kind of have to bite the bullet. And I think it all ties back to your forecast. Like I mentioned, my consultant at night back in 24, we built a really robust forecast that I still use, you know, basically every other day or so. And it's all tied to velocity, right? So Jordan, you know, you started a brand velocity is number one most important thing. How quickly are people buying it off the shelf? And it all ties back to that. So if you're thinking, okay, this is my velocity for the year. There's so many stores on then. This is going to back into my depletions, what I'm shipping for the distributor shipping to the store. And so on, so forth, all the way down the line, you can get a sense for when do I need to produce? How much do I need to produce? And then you can kind of plan, this is how much capital I need because you work your cost structure. This is how much we need to produce. You go to your investors. This is what we need to keep us going. This is from a production perspective. Now there's also cash for and for operating expenses. But I think it all ties back to that. You have to build a robust forecast and minus just an Excel. It's great. It works for me, but I encourage founders to build what works for them. And it's always going to be forecast is forecast. Playing buffer because things are always going to end up a little bit more than you expect. As you know, there's hidden things and things go wrong. But yeah, I think it all ties back to the numbers like we're talking about. And I'm curious with forecast. Everyone does a little differently. How do you build out the forecast for your business? Are there only kind of sales and inventory need projections? Are you doing cash flow forecast as the business goes based on different scenarios? What are you thinking about into the future? Yeah, so I think like I said, with beverage, the minimums are so large. And fortunately, we do have a long shelf life. So we don't have to worry about that as much like with some other brands. So we are able to kind of produce a little bit more because it did last longer. And so that was just something that is a benefit. So when we produce, we do try to get to the economies of scale where we have a strong, gross margin. But you know, it is for other founders. I mean, it's a fine line. You have to say, okay, you know, how quickly it can be sell through this and then, you know, get able to produce more. And I think what I've heard is as you get even bigger that the cash requirement becomes even bigger problem just because of, you know, inventory needs. But yeah, I mean, it's all, you know, our drink is very simple. Like we don't have a top ingredients for materials. So it doesn't make things a little bit easier as far as like forecast you're planning from an inventory perspective. Very function is that we don't have all these different types of skews and things of that, you know, I have some friends that they have all different cocktail types with different varieties. And they're like, I wish we just stuck with tequila, you know, because it gets caught quickly. And it's hard to plan because you don't know you're never going to know exactly how it watches you're going to need. So. Yeah, that's helpful. I mean, we're at one point in T squares. Like we have raised some money, but we're always keeping an eye on cash and built out like four week cash forecast. That was like specific where I was documenting, you know, like invoices, payments coming in and expenses and bills that need to get paid to like manage the basically like month to month where cash was coming in and out to keep an eye on things. Have you had to get that detailed or? Yeah, it's funny because while some delay they do weekly cashless like snapshot and it's like APAR and then kind of what's what's coming down the line. Any transactions that they're not sure where she can get bucket it. But I feel like if I could give any father advice, always be raising or managing your cash flow because don't be like me. I'm guilty of it where you get to the point where you're like you raise or you get, you know, you're able to get more money in and then you get to the point where oh shoot, I haven't been constantly trying to do that and you run into the issue of now it's like we're up to the end and it's like you like you get you raise more and then you're like wait, you only come back when you need more. You'll see the G founder but you always someone you know people always be raising, you know, if you have to keep it going. As you know, it's consumer goods is not a cheap endeavor but yeah, that's my advice is you know never stop and eventually you can get to a scale where you're funding yourself but it does take a little bit of time. Yeah, I think that's actually a good point because you're right like founders will raise when they need the money but the strongest position is actually when you don't need the money because I can share from experience with investors I know as well. It was when you're like, here's like we're successful like we're doing all this growth without you like that's fine, like just want to let you know and they're like, wait, wait, can I invest? You're like, actually, no, we don't need your money and they're like, no, but like what about I add this and this and then they're like trying to beg you to get in versus you try to beg them for money. Right. Yeah, I mean, you can raise too much for sure but I think being able to kind of find the fine line like I said, like a little bit more than you think just enough but always I mean you need to be six to 12 months out all the time and part of that just goes back to knowing your numbers, what's your run rate, how's your margin doing, working your trim expenses to like conserve some of that cash like for us somewhere slows down in Arizona believe it or not even though it's hot people go out of town so we don't do as much you know, install activation so that does help you know payroll but you know when we get towards the fall months, you know, we're going to be doing a ton of activation in stores. We're probably going to be on promotion more so that comes up. So you have to be able to plan for seasonality and know like the peaks and valleys as far as what's coming. Those are good advice. I'd love to point about investing, playing for peaks and valleys and knowing seasonal parts of your business. And as we wrap up, I'd love to hear if there's like is there one financial process report or have it that you think it is. every CPG founder should implement in their business that have the biggest impact. That's a great question. I mean, I think like, like I said, know your gross margin, like the back of your hand. If someone says, what's your coves, you should know to the penny. And you also should know like interior, you know, obviously what your gross margin is. But even more important is what's your contribution margin? What are you taking to the bank or not? You know, after all the trade spent slotting, fortunately now, all there's enough slotting fees, but in traditional consumer goods, there is slotting. So what are you taking? Contribution margin is very important. Everyone's like gross, gross, gross, gross. It's important, but contribution is most important. And so I would say just know what falls into that bucket and make sure that it's enough to keep you going. And if you're, again, if you're launching and you're, you know, in the tens to 20, even I would say try to be in 40%, 40% gross, because that'll help you afford the trade spend below the line, so to speak. Again, it just ties back to having a strong forecast, having a good accounting firm that can say, hey, you went a little bit overboard on this, you know, temporary price reduction. Look at these bill backs we're getting from the distributor. And the retailer, like your trade spend is going through the roof. You need to chill out. So, planning like a whole year out of when we're going to be on promotion, forecasting that it all ties together. And because I've heard brands go under because they work prepared to pay the bill that comes after the fact you're selling a ton, but then you're like, oh, shoot, I can't afford to pay this. So that's my, that's my two cents. Make sure your price of your products can afford the trade spend. Well, that and thanks so much for being on the day and sharing about smidge beverage and your financial journey. I appreciate having you on. Yeah. Thanks for having me Jordan. And for everyone listening, if you need help with your finances for your CBG brand, definitely check out today's sponsor, Belay. They work with a ton of CPG brands. And as I don't share it, know what it's like for every CPG business. And so can make sure that you're set up for success from the beginning. And can flag issues like increased trade spend so that you don't get ding for it months later. I don't think so much again. Thanks. Appreciate it.