Growing an emerging CPG brand takes some financial finesse. Figuring out financing, cash flow, budgets - it's tricky but super important stuff! That's why we worked with the team at Settle to help you master your money to power up your biz and optimize your CPG finances. With the right money mindset and tools, you can take your CPG brand to the next level. So let's dive in and keep that growth momentum going!
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There comes a time in every startup founder’s journey where you must seek out financing to prepare for the next stage of growth. But before you jump into those conversations, it’s important to take a step back and understand the specific benchmarks that lenders and investors care about.
In a recent webinar hosted with our partner Naturally Austin, our Director of Credit Keanna Vear shared the most important metrics that lenders and investors look at when evaluating your business. Whether your startup sells socks, chairs, or protein bars, the math is the same, and you should ensure you have a strong understanding of your business’ position before moving forward with a new partner.
Keeping track of these five metrics isn’t only helpful to secure financing and find the best lender for your growth goals — it’s essential to the overall health of your business. Let’s break them down:
Like most founders, you’re probably very aware of this metric early on in the business. Revenue growth is the amount of sales your company makes over a given time frame, compared to the same period in the prior year. While lenders usually look at year-over-year (YoY) growth, they’ll examine month-over-month growth if you’re a new business and don’t have yearly figures yet.
YoY growth rate validates the demand in the market for your product. If you show healthy or strong growth, lenders and investors will be more willing to have a conversation.
Here’s how growth rates are typically categorized:
Slow or poor growth means your lender will likely want to discuss further to understand what is happening within your business. But don’t worry, growth can be improved.
There are a few ways to approach your growth rate:
Unit economics, otherwise known as gross margin, measures your company’s ability to generate a profit from product sales and is calculated by deducting the cost of goods sold from net revenue. Average margins vary depending on industry and distribution channel. We usually see higher margins in cosmetics and apparel, and in DTC (versus B2B).
To reach the ideal range for your industry and distribution channel, consider the following:
Liquidity refers to your company’s ability to turn its assets into cash, the main funding source for your business. Having enough cash shows that your business has sufficient operating runway and grants you control so you don’t have to rely on third parties to fund your operations.
There are two ways lenders and investors evaluate liquidity:
It’s natural for your liquidity levels to ebb and flow. However, you (and your lenders) should be more aware if they show steady decline rather than natural fluctuations.
Some businesses pull the following levers in order to improve their liquidity position:
Asset efficiencies, or how you manage outbound and inbound cash flows while buying and selling inventory, is essential for any company building a physical good. It has three components:
These three components make up what is known as the Cash Conversion Cycle (CCC). CCC is the number of days it takes for your company to convert the cash it spends on inventory back into cash by selling products. It can be calculated using the equation below:
CCC = DIO + DSO - DPO
Ideally, your CCC should be zero, which means that you’re paying vendors at the exact time that you’re collecting cash from customers. The reality, however, is that distributor payment terms and other factors may force an elongated CCC period. Working capital lenders like Settle can help lower your CCC by bridging the timing gap by paying your vendors when bills are due and collecting payment when you are paid by your customers.
Finally, leverage is the ratio of debt to equity used to finance your company’s assets. Both debt and equity are important pieces of scaling a business, but challenges arise if the scale tips too much in either direction. Too much debt presents the possibility that you may not be able to repay it in the future. Too much equity, on the other hand, means you lose ownership in your business.
A healthy ratio means debt and equity are about equal:
Now that you know what metrics matter most, it’s time to find your next financing partner. Whether you go with a traditional bank, a modern financing solution like Settle, or anything in between, remember to ask yourself, “Do my growth goals align with this lender or investor’s goals and expectations?”
With Vividly's custom ERP integration solution and advanced analytics, you'll have real-time access to all your critical business data at your fingertips. So you can easily dive deep into your financial data to see what's working for you. Learn more about how Vividly can help you streamline data and improve ROI here.
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