Essential Financial Models to Reduce Business Risk
(Listen on Apple or Spotify. Full transcript below.)
Is it possible to de-risk your food business?
With small business statistics showing that the majority of small businesses fail, how do you ensure that your business survives? And is it possible to reduce business risk to actually build a thriving business?
I’ll be the first to say that it’s impossible to completely remove risk, but I do believe you can reduce business risk through the creation and maintenance of three essential financial models.
3 financial models to help reduce business risk
Starting and operating a food business can be an exhilarating yet daunting experience. One crucial area that often perplexes founders is financial planning and management, but with a focus on the right tools and information it can be the key building a successful business.
3 Essential Financial Models to Reduce Business Risk:
Pricing Model
Break-even Analysis
Cash Flow Projection
Businesses at All stages should be using these essential financial models
Financial models are not just essential for startups, but also for existing businesses.
Growing too slowly, growing too quick, launching a new product, selling into a sales channel where the margins are too low — all of these things can cause a business to run out of cash and ultimately close their doors.
No business stays the same for ever, as you seek to make strategic business decisions, understanding the financial risks and making decisions to reduce or mitigate those risks is important.
Pricing Model: The Cornerstone of Financial Planning
A pricing model helps you identify the best price for your product - and so much more. It is acritical financial model and the one we recommend every founder starts with to ensure product market fit - meaning that your target customer can afford your product and they can afford it at a price that enables you to build a business in alignment with your debt and risk tolerance.
The pricing model also shows the product profit margins in each of the channels that you currently sell in, or plan to sell in, and that provides a clear indication of the cash flow your business will produce as well as the level of reliance on debt or outside funding that your business will have.
The lower the margin, the lower the cash flow. The lower the cash flow, the riskier the business.
The Good Food CFO's Perfect Pricing Calculator is a versatile tool that helps founders navigate various pricing scenarios, ensuring well-informed decisions and healthy margins. Whether you’re setting prices for the first time or negotiating with distributors and retailers, this tool provides the data needed for strategic pricing.
Break-Even Analysis: For Setting sales & spending targets
The breakeven analysis answering the question, how many units of my product do I need to sell to breakeven? Or in other words, how many units you need to sell to cover your monthly expenses.
As noted above, positive cash flow reduces business risk. Step one is to ensure you’ve got your products priced right. Step two is to sell enough products to at least cover your operating costs. This won’t happen on day one, and may take months.
Seeing the unit sales goal will help you create and execute a sales strategy to bring you to your break-even point as quickly as possible.
Cash Flow Projections: for financial sustainability and Growth
The key to reducing business risk? Ensure you have, or have access to, enough cash to reach your break-even point and then some. The cash flow projection show us how much money we need, and when we're going to need it, to make it to that break even point.
All of the information you need to build this financial model is already at your fingertips from working through the pricing model and break-even analysis. Here, the information is simply reorganized to forecast the projected bank balance in your business account every week or month until you achieve break-even.
Then it can be used to plan for growth. The cash flow projection is perfectly set up to help you determine if any outside funding will be needed to grow your business, launch a new product, expand into a new sales channel, you name it!
The Good Food CFO’s Cash Flow Projector is one of our most popular tools, for good reason!
Strategic Decision Making Through Financial Models
Starting with the pricing model, and progressively moving to more complex models like the break-even analysis and cash flow projection helps de-risk decisions and in turn can reduce business risk.
Tune into The Good Food CFO podcast
for all the details
Gain all of Sarah’s insights and practical tips for building and utilizing these financial models and reducing business risk in this episode.
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Episode Timeline
00:00 Introduction to Essential Financial Models to Reduce Business Risk
04:17 The Importance of Financial Models
19:28 Overview of the Three Essential Financial Models that Reduce Business Risk
20:12 Understanding the Pricing Model
34:24 Break-Even Analysis Explained
49:07 Cash Flow Model Insights
Full Episode Transcript
Welcome to the Good Food CFO podcast. I'm your host, Sarah Delevan. Joining me once again, as always, is our producer, Chelsea Steer. Hey, Sarah. Today, you are walking us through some pretty big stuff. You are sharing with us the three essential financial models for food businesses. And I guess I want to start off with my very first question. What makes these models essential for reducing business risk?
I think that's a good question. I think that they're essential because it helps you understand the foundations of your business, right? Without giving too much away, we're talking about your pricing model. We're talking about your breakeven model. We're talking about your cashflow model, right? These are essential because if you don't know your margins, you don't know how cash is going to be flowing or not flowing in your business. If you don't know
what your breakeven point is. You don't know what your sales targets are, right? So these are models that give us information that help us to build our businesses, that help us know, okay, how much debt am I likely to have to take on? How much cash do I need to get this business going? How many customers do I need to have to start breaking even? Like, these are all huge pieces of information that are wildly helpful to founders and quite frankly, help us understand like,
what getting there is, where is there, right? Like, how do we make this business work? And what are the pieces of information that will let us know if we're on track or off track? And I think these essential models do all of that. Yeah, and it sounds like from what you're saying, right, is really keying in on what are the decisions that are gonna get me where I'm trying to go. Yeah, and we share at the top of the episode, right, that like,
a founder reached out to us and basically asked the question, like, how do we de-risk a business? And there really is no such thing as de-risking, but you certainly can be informed as you go to launch a business or as you go to launch a new product. And that's really what this is all about to reduce business risk. If you don't have a pricing model and you launch, you could be losing money with every sale and not have a sense of that until you're like really deep into it and out a good amount of money. Right.
So we're trying to help avoid that. You know, after going through the conversation with you, something I took away from it was that it's not just about how am I getting there? What are the decisions I'm going to make and all that? But it gives a level of I'm going to use the word confidence, but it's like confidence, peace of mind, ability to sleep at night. Right. Because.
you have a much clearer picture. Now, we cannot predict everything. Like you said, you cannot de-risk everything, but you can stand firm or feel confident in, I know where things are at. Yes, I agree with that. And this is sort of stealing from a future BABOYOT episode that we're going to air here that I just had recently, but something else is like standing firm in your pricing, standing firm in your model.
Right? Because like a great example is if you haven't done your pricing model and you don't know what you need your margins to be and therefore what you need your price to be in order to align your business with your level of risk and debt tolerance, right? When someone comes along and says your product is too expensive, it should be sold at X price. You are tempted then to sway with them and go, okay.
I'm afraid that my price is too high, that my product is too expensive. I'm going to change it. If you've got the model and you go, I understand where you are coming from, but here is why my price is what it is. then you know that you need to just do the communication, right? Create that brand that makes it all make sense. And so I think, yes, it does help you sort of stand firm in many things in your business. I love that. Well, Sarah, before we get into the…
three models to reduce business risk. I brought a new story today that I would love to share. It's kind of a feel good article that I think highlights how regional food systems can have a really big impact on the communities that they're in. I'm into it. This sounds great. So the article that we are going to be talking about today is from Civil Eats. And I don't know if you saw this, but Civil Eats has actually removed their paywall. And so any stories that we've shared from Civil Eats,
are now free to anyone. you know, as always, we'll include the link in the show notes of this episode. And anybody who wants to do a deeper dive or read more about the story, they can find the link there. The article is titled How a Vermont Cheesemaker Helps Local Farms Thrive. And it covers the story of brothers and cheesemakers, Matteo and Andy Keeler, who are founders of Jasper Hill Farm in Greensboro, Vermont.
Yeah. The brothers actually grew up visiting Greensboro. They would regularly visit Caspian Lake, which is in town. They always dreamed of owning land in the area. I think it was the late 90s, they decided to do so. They actually took the risk. They jumped in, even though at the time, land prices were
particularly high in the area, because if you remember the late 90s, aging myself, this was the time of the dot com bubble. And there was a lot of tech money out there. And at the time they were buying up land, particularly in this area. And it was like non farmers that were, you know, buying up this land. But so they did. The brothers decided to make the jump. They bought the land and
At the time, if I remember correctly from the article, they were craftsmen, both of them. But as they moved into Greensboro and started spending time there, they decided to change course. They decided to become cheese makers and to really work the land. And that's how they founded Jasper Hill Farm. But Jasper Hill was not merely about profit, making money.
It was also for them about leading a life that had purpose at its core. Matteo is actually quoted in the article saying Jasper Hill grew out of this notion that a whole life is encompassed by three intrinsic needs, meaningful work in a place that you love with the people that you love. We started with this idea.
that we need to figure out how to capture more value and retain more value and take control of price, essentially, in a way that would give us some agency in the future of our participation in a market system. And that is how they came to cheese. They saw cheese as this value added product that fit the bill. This is, I think, a good
like stopping point or time to talk about like the realities of the dairy industry. If we go back to 1973, I'm going to share a little history here. There was a gentleman by the name of Earl Butts who served as the Secretary of Agriculture under President Nixon. And infamously, Earl Butts said that farmers should quote, get big or get out. And this philosophy essentially encouraged
agricultural consolidation and the industrialization of farming. And as a result of that, the number of farms in the United States began to steadily decline. And it has continued to decline ever since. In the article, Civil Eats calls out the 2022 Census of Agriculture. And what that census tells us is that the number of dairy operations that are actually able to sell milk
has decreased by almost 39 % in just five years. And in 2020 alone, over 2,500 US dairy farms were forced to cease operations. So we're seeing a lot of consolidation. We're seeing a lot of the closing of family farms. And a big part of this is the reality that in the commodity market, you don't know what you're going to get paid for the milk that you are selling until
after you've already delivered it. And that price can be different every single time you sell milk. So how can farmers be successful in a market like this? It's insanely difficult, especially if you're not willing to consolidate or industrialize to a certain degree. Yeah. And going back to the topic of our main episode today, how can they make any plans? How can they, if they have no idea what the price is? And so
That brings us back to Jasper Hill, right? The brothers actually pay two times the global market rate for milk to make their cheese. And one of their suppliers is a farm Hillside Homestead. And their founders have actually shared that the price of milk, let me see if I can get this right, the price of milk has stayed the same
since the 80s, even though their costs have gone up. Yeah. I think an interesting thing, and I don't have all of the details and facts on hand right now, and perhaps it's something we talk about in the future. But when you talk about a commodity market, you as the farmer, whether you're selling cherries or grapes or milk, have zero control over the price that you get to sell your product at.
There's a lot that depends on supply and demand, right, and various other factors. And so you grow or, you know, produce a product and then you put it to market and then you are told how much you will be paid for that product. And so what this is essentially saying is that since the 1980s, the price of milk that farmers have been getting paid has essentially remained the same. Of course, there's a bit of fluctuation, but it's essentially the same.
And if we talk about or think about all of the costs that have increased since 2020 alone. Alone. Yeah. And now we're looking back to the 80s. mean, the struggles of a dairy farmer are just compounding as this conversation goes on. Right. Yeah. But to bring it back to some positives and back to Jasper Hill and what they're doing. So they actually also not only are they paying that, you
double the market price to their suppliers, but they also are committed to sourcing only within 15 miles of their farm. And what that does is it allows 82 cents of every dollar of profit to stay within the state of Vermont, but even further, 62 cents of that dollar are staying in Greensboro itself, which is
really making Greensboro one of the most financially rewarding places to be a farmer in the United States right now. It's really interesting. I love how in the article they also share how the brothers track this information and sort of keep an eye on it. It's really cool. Yeah. And the brothers have actually said they can afford to pay that higher price because they sell cheese at a premium.
Mateo is actually quoted as saying, we're building a pipeline to markets where there is disposable income. And it's interesting because some of Jasper Hill's best customers are, if you remember me talking about at the beginning of this story, those same people who were displacing the longtime farmers in Greensboro and that were buying up all that land. But now their money gets to play a part in supporting
supporting the community. And so by producing and selling these artisanal cheeses directly to specialty retailers and consumers that are willing to pay that premium, Jasper Hill essentially was able to bypass the global commodity market, which you were just talking about. I want to pause here and talk to you about just what you were saying about the fact that
Jasper Hill is creating a premium product. This is something that I've talked to a number of good food founders about, something that I struggled with when I had my food business years ago. And that's the idea that you might be creating a product that you can't afford to buy personally, or you're creating a product that people in your immediate community cannot afford to buy. And there is a
I think an ethical dilemma that comes along with that, especially in the case where you've had people displacing farmers and now they are your customers, right? But what we learn from Jasper Hill and in this article is that while the farmers, let's just say, right, or perhaps even the folks at Jasper Hill, if we're using this as an example, might not be the typical consumer of that cheese,
there are long tail benefits of Jasper Hill's market position and the fact that they are a premium product. If they weren't selling at a premium, they couldn't afford to pay farmers 2X the commodity rate, right? And if you're not paying the farmers the 2X commodity rate in order to sell a lower priced non-premium product, how are you benefiting the farmer? Right? They're just in the same situation as the standard commodity market. In fact,
For Hillside Homestead, the supplier we talked about a minute ago, their partnership with Jasper Hill has become crucial for their farm's viability because those higher milk prices from Jasper Hill not only have improved their profitability as a farm, right? But it's helped them to qualify for loans that they wouldn't have before and utilize that to really establish their own farm.
And they've actually, they talk about in the article about how they're taking what they've learned from Jasper Hill and they now have a long-term goal to diversify their income by launching an ice cream company. I mean, I'm just, I mean, that's amazing. And I'm just sort of sitting here thinking like the reason we, or the way that we got to what I always refer to as artificially low priced food.
despite the fact that retailers are price gouging and definitely raising prices higher than what they quote unquote need to based on the cost that they're incurring for eggs and things of that nature. We got here by exploiting farmers. We got here by exploiting the land. We got here by doing a number of bad things. And so I think we have to grapple with all the realities of our
world in a way, right? And say, okay, what is the path to making things better for everybody? It's imperfect because our world, our industry is so imperfect. But what can we do? What are the positive impacts that we can have even in this imperfect industry? And I think Jasper Hill and this article is really demonstrating that we can create a premium product. We can
pay our producers more. We can do what we can to improve the lives of the people in our community and in our supply chain. And I think that if we're doing that regionally, throughout our country, the things are just going to get better and better. And the imperfectness of our industry and our world will start to change a little bit. The more people that are employed that are not
being taken advantage of that have better working conditions that can actually perhaps afford a home and to not work multiple jobs and on and on and on. And to what you're speaking about, I think one of the things that has really allowed Jasper Hill to do that is not prioritizing rapid growth, maximum profit, but really strategizing horizontal growth that allows them to
grow at their own pace to maintain their identity and to support those around them. Absolutely. And I think if we go back to what Earl Butz said, get big or get out, that mentality still exists in our food industry today. I mean, that is what we see touted, right? Like, you're a CPG brand, you got to get big and you got to get big fast, right?
But in order to do that, consolidation and industrialization occur, right? It occurred in farming, it occurred in processed food, and it continues to occur. And so if we're trying to do something differently, if we're trying to create an impact, I think we have to do the opposite of that. And I think we talk about that often here, but this is just a moment where we can go, here's why. If we don't want to perpetuate consolidation and industrialization, and we want to
have more businesses like Jasper Hill, more communities like Greensboro, Vermont, we have to go, okay, not get big or get out. Yeah. And I think also not only should we strive for this, but it's possible. Yes. It's possible. All right. Well, thank you for joining me for that story. I told you it would be heartwarming and feel good. And really energizing. And I think
confirming of why we do what we do, why so many of our listeners do what they do as well. And so thank you on many levels for bringing that article to the podcast today, It was wonderful. I love that. So why don't we take that energy right into our three essential financial models? Sounds good. Let's do it.
As a Good Food founder, do you ever feel like your work is done in a silo? Is it difficult to feel confident in your business and financial decisions because you don't have a sounding board? Well, in our weekly CFO office hours, you'll not only get the chance to work shoulder to shoulder with the Good Food CFO herself, Sarah Delavan, but also with a small group of your peers.
Together, you can support each other through the work of building a business on your own terms. Passes are available now on our website. Just visit the goodfoodcfo.com and click on coaching. And now back to the show. So Sarah, like we mentioned in the intro, you are going to be sharing with us today three financial models to reduce business risk.
that you think that every founder, no matter where they are in their business, no matter what stage they're at, that they should be not only using, but checking in with regularly so that they can make better informed decisions around the business and reduce business risk. And I know that when we get this question, as we've gotten it recently a couple times now, often the founders are looking for a way to sort of reduce the business risk
of those decisions. So I think we should start with the fact that there is no such thing as de-risking a business, right? There's always going to be things that are outside of our control. And for that reason, there's inherent risk in operating a business, right? Being an entrepreneur in general. But what we can do is control the things we can control, namely making informed decisions and financial models, specifically the ones we're going to talk about today. They each do that.
They each provide us with information so that we can make informed decisions in different ways, and they actually build on one another. And so where are we starting? I want to start with something that I actually think a founder should do if they have not launched yet, or if they're going to launch a new product, or even if you're several years in business and you don't have this model, I want you to start here first. And that is with a pricing model.
So we have had pre-launch businesses, right? Founders come to us with brilliant ideas, brilliant products that they aren't on the market yet. There's really like no like true competition for them, right? They're absolutely going to be filling a hole and a need in the marketplace, but the pricing model rooted in the cost to produce the product doesn't work. And so when you say it doesn't work, what do you mean by that? Essentially what I'm saying is that the
price is too high for the market, right? This product is expensive to produce and in order to get the margins that the business would need to be successful, right? Or that fall into sort of what we like to refer to as good margins around here, the price would be like way too high for the market to bear. Very few people or perhaps no one would buy the product. Or if we were to reach a sellable premium price for the product, the margin isn't large enough for how the founder
maybe wants to grow the business or deliver the product. Here's an example of that. Particularly with like a frozen product, not a lot of founders want to ship frozen product D to C. So if you've got something that's frozen, which is really popular in the good food space, right? Because it's no preservatives, it's all natural, no fillers. It's expensive to ship D to C. It may be more cost effective to ship in large quantities to a retailer. And so through retail,
is how the founder ideally wants to sell this product. But if the margins in the retail channel are too low, right, they're not high enough to make this a sustainable business, then it doesn't make sense to launch the product. And so what you have to do is if you build out your pricing model and you realize this is not going to work, I either need to find a way to make this product, you know, less expensive to physically produce,
or I need to find some ingredient alternatives, whatever it might be, it's important to know that before you launch and take the time to sort that out, rework the pricing model, and then launch. And I think you make a really good point, Sarah, about looking at, is there a way to make this product more cost effective in the way that you're making it? And I think that a really important thing for founders to think about there is at what
cost, and I say cost in terms of quality or type of ingredient, and really be able to say if there isn't a way to make the product the way they want to make the product aligned with their values and sell it at the price that they would need to sell it and that people would actually pay that price, no matter how amazing the product is, it's probably not going to work, right? Yeah.
I mean, that echoes back to my conversation with John Haskell, right? In, I think it was episode 117. If we don't have a value proposition that works for our customers, they're not going to buy the product. If we sell our products at a price that doesn't result in the margins that we need to have cash in our business, right, or to make it to our breakeven point, then our business won't last. So it's not a smart decision to move forward with a price that's too high or margins that are too low. You have to reduce the business risk,
rework the product, you have to rework the process or the mix of things, right, to get that product and the pricing model, right. This is typically pre-launch work, right. We've, like I said before, we've had founders come to us with brilliant ideas. We're working through this part of the model and they can't get it right. And we say, okay, let's pause where we are now. You go back and do your homework. You create new relationships. You learn new things. And if you find that you've got a model that
that can work come back and then we'll work through the next steps in the process. Yeah, I can definitely see why this is like number one. This is that foundational work no matter the business. Yeah. And the other thing too is like whenever you launch a new product, I want you to work through this model, right? Like make sure that the pricing works for this new product.
And then anytime you're changing, and maybe you are changing an ingredient, maybe you are changing a process in an existing business, bring it back to your pricing model. Update your pricing model because it really does inform things like your breakeven analysis and your cash flow, hint, hint, which are two other models that we're going to talk about today. And I think that's such a good point too, because I would imagine
If I'm a business and let's say I have like four products, right, that I sell in my, on my menu or right in my line. And I decide, we're going to make this one change for this one product. And I've already been going along margin on that's great. I'm not worried about that product, but maybe the new ingredient is 20 cents more per unit or something. And I think 20 cents, not a big deal. And I don't go back to the pricing model and I don't look at it.
Well, a month, two months from now, when I'm like, wait, why don't we have the cash to pay this invoice or this thing? Like it is exponential in that way. Yeah. I mean, especially if it's a primary ingredient. Now I'm thinking back to the the ingredient brothers episode, right? Where Aaron talks about, you know, if something is a substantial ingredient and that went up 20 cents a gram or 20 cents per recipe unit. Yeah.
will have a big effect as opposed to something that's like a minor item. And if that went up 20 cents a gram, but you're using like two grams or like a fraction, you know I mean? Like what I'm trying to say is like the weight of the effect is different depending on what portion of that recipe that ingredient makes up. So it's good to know that. Here's the other thing. I'm going to give you an example in the opposite direction. I work with a founder whose
a primary ingredient, not the primary ingredient, but a primary ingredient, the cost cut in half, possibly even more. And because no one was really revisiting these pricing models, the margin on that product was through the roof. And we had no idea because no one looked. And when someone on the team went and was doing updated recipe costing, they actually came to me and they're like, hey,
since you did the recipe costing, you know, a year and a half, two years ago, my numbers look really different than the numbers that you got. Like, will you comb through this and make sure I didn't make a mistake? And so I went like line by line through their worksheet, you know, that they were using for costing and everything was accurate. So was like, all right, well, let me see what the difference is between my version and their version. Did the recipe change? Did something happen? And then there was this glaring
cost change in a primary ingredient. so I emailed the team and I was like, here's the big difference. This change in product price, ingredient price is massive. Is the new price that you're using correct? And it was like, yeah, here it is on the invoice. it's like, yo, the margins are incredible on this product. And so we've been selling it at a premium price. It is a premium product, but it opens the door for a conversation of could we reduce the price of this product?
mean. And of course, you don't just jump in and say, the margins are high, we're going to reduce it. But it opened the door for that conversation that we didn't know was a possibility that we could be having. So it's so important to look at this model for so many different reasons to reduce business risk. Absolutely. I can see how it touches so many different decisions, which is what we're talking about. Exactly. So Sarah, for a founder who maybe doesn't have this pricing model in place to reduce business risk,
They are listening right now and they're like, I got to get on this. What can they do? How can they get started at reducing risk to the business? What should they do? Yeah. Well, I think you can visit the Good Food CFO website. We have what we call the perfect pricing calculator. An exciting sort of news on this is that this calculator has been in existence for a while. And originally, the way that we built this was that you could enter the cost of your product. You can enter your
retail price. So whether that's your D to C price or the price that you want on shelf, right, as you maybe sell to a retailer or even sell through distribution. And then you can also enter in the price that you, you know, the margins that the retailer will get and the margins that the distributor will get to identify, okay, how much is the distributor going to pay me and what will my margin be and how much will the retailer pay me and what will my margins be? But what we've seen over the years is that people come to this calculator with different
pieces of information. So someone might come to this calculator and go, well, I don't know what the distributor's margin is exactly, but I know that I want to sell my product for $4 to the distributor and I want to sell it on the retail shelf for eight. Right? And so what would that make the margins for the distributor and the retailer? Maybe they know that the retailer wants
a 50 % margin and they know that the distributor wants to be paid for 50 for the product. Well, then what is that going to make my shelf price? Like, is that going to change or will I be able to get the distributor and the retailer to agree to terms that get my product on the shelf where I want it to be? Right. There's all of these different pieces of info that people have. And so we've updated the perfect pricing calculator. So now when founders come to it to reduce business risk,
they can enter whatever pieces of info they have and get the information that they are seeking. Previously, you kind of had to do some guessing like, well, what if I sold it at this price or what if I, you know, change the margin to this? And now like we've taken away that sort of extra work and made the tool more flexible for people. So a really exciting thing is that if you purchase the perfect pricing calculator in the past, while we cannot update like your
version directly, you can go back to the website, log in and just click on the link and you'll get the updated version of the perfect pricing calculator. then you can just copy and paste your information in there. So you'll have the latest version. So I'm really excited about this because it's, think something that I should have done a long time ago. And I too have used this tool in like many different ways. And so I'm excited that it's available for everybody to reduce business risk. I love that. That's really awesome. And again,
I mean, even just while you were talking about that, I was like, yeah, what a great negotiation tool. yeah, what a great decision. Like when we're talking about decisions, right, I am seeing all the use cases here. Well, that's a really good point that you bring up because the pricing model is not just about what is the standard price of my product, right? You're going to have conversations with distributors where they want something specific or a retailer
where they want a particular margin that another store doesn't necessarily want. Right. I've got a, an office hours member who's got retail, the retailer margins on her product are 30%. That's not going to exist across the board. That's a really great margin for her business. Right. Some retailers are going to want 40, 50%. So as she goes into those conversations, she can come to the perfect pricing calculator and go, all right, well, what if the retailer does want 50 %? How much does that lower?
what they're paying me or how much does that increase the price of my product on shelf and is that going to work? Yeah. So great point about bringing up the negotiations, promos, all of that kind of stuff you can bring back to what is essentially a pricing model, but we just call it the perfect pricing calculator. That's awesome. So we're starting here with our pricing model, we're using this perfect pricing calculator. Once we have that and again,
This is going to happen multiple times over a business. But in this one scenario, I'm trying to figure out, I've got this product, I'm ready to go to market with it. I got the pricing where I want it. I know it's viable. What's the next step? The next step that I recommend is identifying your break-even point or doing what's called a break-even analysis. So this is essentially answering the question, how many units of my product
do I need to sell to break even? And when you know your break even number, you then essentially know your profitability number as well, right? It's essentially like one more unit in theory above break even would be profitability. Okay. And I want to take a minute and talk about why this is important, right? Because every model should have a purpose. And as I said before, these three build on each other as well, right? So if you think back to some of the margin
episodes and conversations that we've had, we talk about the fact that when we start a business, it has no money. And we need to find money and put it into the account so that that business can buy things. And typically the business is going to spend a lot of money before it makes money, like full stop. Right? Like sometimes tens of thousands of dollars, sometimes hundreds of dollars, depending on how you go about starting your business. But then it's going to reach a phase where it's going to be spending
more than it's making, right? So you start out with like, I'm not making any money, but I'm spending money to get this business set up. Then we start making money, but we are not yet making as much money as is required to cover all of our ongoing expenses. And then we're going to reach a point where we earn just enough money in revenue, right, to cover our expenses. And we want to know when that point is, because again, echoing back to my conversation with John.
most businesses fail because they don't make it this far. They don't make it to break even and then eventually to profitability because they run out of money before they get there. And so if we're trying to avoid that, right, I guess the only kind of de-risking that you could have in your business is like knowing how long it's going to take you to cover your expenses with revenue, right, and actually making it to that point.
Even then, it's not foolproof. No plan is foolproof. But I think that that's step number one to reduce business risk. How many units do I need to sell to break even? And how many units do I need to sell to be profitable? This is the core next piece of information that we need to talk about. And I imagine that we've talked about what this model looks like here on the podcast. And I think that you can actually approach this in lots of different ways. This is one of those
areas where it's like, however this works for your brain, build out the model. So I'm going to give you some best practices, of like really basic guidelines, but then you as the listener, the founder, can build this out any way you want. If you're the type of founder who's like, I don't know, Excel, and I don't want to do that and just give me a template, we can help you out there. But truly, this is a model that just make it really simple. Do you know what I mean? Yeah.
So the first thing I want you to do, and this sounds a lot like a financial forecast, right? Like, again, if you've been around here for a little while, the first thing I you to do is lay out your monthly fixed operating costs. Detail them if you need to, right? Be like, okay, these are my insurances. This is my website fee. This is my rent. You know, just the things that are fixed in your business, the fixed costs, right? Not your cost of goods sold, just your fixed costs, the ones that you're going to pay monthly. Yeah. Then you might think about like, I have this one time
annual insurance or I have a quarterly workers' compensation bill or something like that to pop those into. If you want to keep this really simple, you just kind of want to have like a monthly average number. So I would go with your highest month, right? So if there's a month where like some annual bills hit like maybe in March, you've got an $800 LLC fee and you've got all of your other expenses, use March as like the monthly numbers that you're using in this model, right?
Then we're going to move to cost of goods sold and you know your cost of goods sold and you also know your gross profit margin if you've worked through the pricing model and I'm going to assume that you have, right? So let's just say that from the pricing model, we know that our cost of goods sold are 30%, which means our margin is 70 % on a product. And we're also really simplifying this right now and pretending that we only have one product, okay, just to keep it really simple. So
Margin plus cogs is always going to equal 100%. I don't know if I've ever like really said that on the podcast, which is how we know that if our cogs are 30%, our margin is 70. And what that means is for every unit that you sell, right, every $1 of revenue that you generate, 30 % of that dollar is going to go to cost of goods sold and 70 % of that dollar is going to go to your gross profit line. So let's say you've got a $10 product, right?
When you sell that $10 product, that means $3, 30%, goes to cost of goods sold and $7 goes to gross profit. Make sense? Yeah, I'm with you so far. Okay. So then if you sold 100 units, you would have $300 going to cost of goods sold and $700 going to gross margin. Now here's where we get to the break even part. If you've calculated your operating expenses and they are $1,000 a month,
That means that you need to generate $1,000 in gross profits, not revenue, to cover your operating expenses. A lot of people get confused about this and they think that they need $1,000 worth of revenue to break even. So that's like a big lesson number one here, right? We need $1,000 in gross profits to cover those operating expenses.
What we need to do is go, okay, if I need $1,000 in gross profits and 70 % of everything I earn in revenue is going to be my gross profit, then how much do I need to earn? And I've done the math here for us. And if we generated $1,450 in revenue, we would have $1,015 in gross profit. We'd have enough to cover our $1,000 in operating expenses.
And that means if each unit is $10, we have to sell 145 units. You're getting a lot of really good information about what it takes, right, in your business in that simple math problem. Yeah. This model gives us many things. It's giving us an awareness of what the critical sales numbers are for our business, right?
and really gives us a sales target that we can use as the starting point for a sales strategy, which is huge. When you start a business and you're like, I don't know how much I need to sell to break even, you sort of don't have an end point, a goal. It's like running a race and you're like, I don't know how far I need to run. So don't know if I can sprint right now. I don't know if I can, if I need to like go slow and steady because I'm going to be running a marathon out here. You know what I mean?
It also gives us the opportunity to think critically about that number and reduce business risk. And we're using 145 in a month, right? But somebody might do this math and get 10,000 units in a month, right? Depending on the price of the product, depending on the margins of the product, depending on the operating cost of the business. And so what then it gives you the ability to do is say, can I produce that many units the way that I'm planning to produce them? Maybe I thought I was going to self-produce
in a kitchen that I pay by the hour, but it really seems like I would need a co-packer to hit these numbers, right? How many individuals or stores or food service accounts will it take to reach 145 units in a month or 10,000 units in a month? And how long do you think it will take you to reach this point? And I want to dig into this a little bit because when it comes to having a model and it says, okay, you need to sell 145 units in a month,
Something that gives us, as I said before, is like a sales number, right? And then you can take that number and go, who am I going to sell to? Who am I going to reach out to? What is the case size of my product? If I'm selling 10 units in a case, then I know I have to sell, you know, 14 and a half cases to get to my 145. Who's most likely to buy those cases? It just.
that this it starts to like trickle down for you and you can create a plan to reduce business risk. 100%. And I think that that's such a good point that you're making around, know, we've talked about this before many, many times, like when you start to say, hey, have you done a sales forecast? And everybody's like, no, no, no, no, no, no, no, no,
And I think that's what everybody gets stuck on, right? Is going, no, this is what I need. So how am I going to at least make what I need happen? Yeah. Here's another thing this does for us, which I think can be tricky. And I hope I don't overcomplicate the conversation here, but when we discount our product, it reduces our margin. means then it increases the number of units we have to sell to cover our costs.
If we increase our operating costs, it increases the breakeven point. It increases the number of units we have to sell to cover those costs. And it's such a common sense kind of a thing, but I feel like in the heat of actual business operations, people lose sight of that. And I talk a lot in office hours and with my clients about business being a math problem. And it's our job as founders and CFOs to go, okay, how do I make this math problem work?
and then just execute on it and reduce business risk. And so if we're really honest with ourselves about how can we reach this number, how quickly we can reach this number, if we need a co-packer or not to hit this number, if we should maybe reduce our overhead costs a bit to lower that break-even point, right, until we actually get our sales up there. There's so much value in this model for that reason. This is another point.
I should also say where pre-launch founders may say, don't like the way this looks. I'm going to go, I'm going to step away. I'm going to do a little bit more work. I'm going to think about this model. Maybe I want my margins to be higher. Right? So like you might go through the pricing model and have a 55 % margin and feel good about it based on things we've said on this podcast. Right. And then you go to the breakeven analysis and you're like, 55 % is on the right side of 50, but it's not.
right for me based on this analysis. it's going to take, Exactly. And I want to have my breakeven point maybe be a little bit lower to reduce business risk. The other thing I want to say here is that this model is not showing us cash flow. It is absolutely not telling us that at 145 units will be cash flow positive. It is also not taking into account where the money is coming from to produce more product.
Right. Okay. So this is something I actually want to stop you here, because I think this is something that I know I kind of like get caught up on sometimes. And I know there are founders out there listening that get that have gotten caught up on this as well. You're saying that this model doesn't show you where the money is coming from to continue to produce product. Right. But what we just looked at, or what you were talking about in terms of breaking down the revenue.
Right. Into that 70 % margin. And then you said 30 % going to cogs. Right. So if I have that 30%, that $3, right, as we said, going, is that not the money to produce my next round of product? It's not. That's the money it costs you to produce the product you just sold for $10. And so- representation of the money you spent.
So you spent three to produce the product and you sold it for 10. And so now I have seven. Right. And so you might have 10 in your bank account if you didn't pay the bill yet, or you might have 10 in your bank account if you borrowed that three and you haven't paid that three back yet. But I think that that's a great question because again, not again, I haven't said it today, but I know I've said it before. The P &L is a tool, right?
These models are a tool. They represent certain things to reduce business risk, but they don't show us real cash flow. They don't show us the sort of like, how much money do I need to make it to 145 units, right? We know from episode, what is it, 52, that rethinking cash flow, that when we look at a model like this and we go, I'm profitable.
I, you think I will have enough money to make the next round of products that I need to make. But the reality is, reality is no, you could use that gross margin to make more product or you could use that gross margin to pay your operating expenses. Right? You, you can't do both right off the bat. If it's not enough. Yeah. There comes a point where you can, the breakeven analysis is not showing you that. The breakeven analysis is showing you when you will break even on the P &L.
know what mean? And when you'll be close to sustainability, close, not all the way there, right? And it's kind of like a milestone. That's how I would think of it. Your breakeven point is a milestone that you need to reach in your business to reduce business risk. And then I think what you're saying, right, as we go through this whole process, then you can start building on that. Exactly. Yes. And
this model, as I said before, like the three I'm laying out today, they build on one another. And the cash flow model is the number three model that I want to talk about today, because you've got a sense at this point of your cost per unit, right? You know what your margin is. You've got a sense of how much you need to sell to hit breakeven and profitability. Now it's time to make sure that you've got the cash to get there. And that's where the cash flow model comes in.
It's going to show us how much money we need and really when we're going to need it, as well as the total amount of money that we're going to need to make it to that break even point. How can you take the information, right, that you've gotten from that break even analysis and translate that into understanding this information? Yeah. Well, number one, you've got a lot of the data.
that you will need for your cash flow model already. And it's kind of just like laying it out in a different way. Okay. Right? So number one is you've got your operating costs. I love to start with operating costs. I love that bottom-up model. So take those operating costs that you have and now you're going to lay them out instead of just like picking your most expensive month and using that as sort of like that break-even point that right in the analysis we just did.
Now we're going to actually lay out our actual monthly expenses, January, February, March, April, across 12 months or more of a cashflow projector. That's number one. Then you have a sense that you need to hit 145 units of product, right? You're potentially not going to get there overnight. Maybe you will. Maybe if 145 is the answer to your business equation.
you go out and you identify customers and you're like, okay, I can sell 145 units in month one. For most businesses, there's going to be a ramp up and there's going to be a relatively significant ramp up, could be a year, could be two years, depending on the model, right, to get to that breakeven point. And so what I would like people to try to do, what you have to do here, and you will not be 100 % right, you just have to do your best, is to lay out, okay, how much do I think I can sell in month one?
Will it be 10 units? Will it be 10 cases? Right? Pop that in. What is the revenue from that? Okay. And you can lay out your revenue. Okay. This is what I think my growth will look like until I hit or exceed that 145 units. So that's operating expense information we had from before. It's a target, you know, unit sales number we have, and now we're just kind of getting more detailed about it. We're making our best guesses.
The other way you might approach this is to say, what does it look like if I hit my target 145 units in six months? Right? Or like how much would I have to sell every single month? Or what if I tried to get there in 12 months? What would that look like every single month? Like you can approach this even with like a here's what I would like to do and what would that look like in reality? Exactly. And I actually liked that approach as a phase one approach because we want to see cashflow.
And sometimes we think fast growth is a great thing, but it can actually be more expensive. so kind of playing around with that number can be really helpful and really insightful. The thing we don't have from the models that we've built so far is how much we're actually spending for our inputs. like our ingredients, our packaging, right.
in the timeframe we're actually going to buy it. So when we're looking at the pricing model and when we're looking at the break even model and why they don't represent cash flow is because we're using a product margin. And the assumption there is that we buy exactly what we need to turn it into a product and then we sell that product right away. Yeah, you're looking at a per unit cost. Exactly. Yeah. But in reality, we might be buying 100 units worth of product and packaging at a time, a thousand units of product.
10,000, right? It's again, going to be different based on your business. Maybe you're doing copacker runs and they have a minimum of 5,000. So you're going to do a 5,000 unit run and you're going to have all of those costs hitting and we're just going to say in January. And then your sales projection is like, well, I think I'm going to sell 10 cases in February. And I think I'm going to sell another 10 and then another 10. then those people will be ready for a repurchase, right? And so you're mapping that out.
And what that allows us to say is, I need, making up numbers here, I need 10 grand to produce these 5,000 units. And I need that upfront. And then I'm going to need cash for my operating expenses. And all the while, I'm not generating quite enough revenue to have a break even month. And so the amount of quote unquote negative cashflow, right? If we add up that negative cashflow, that's going to show us the total amount of money.
that will need to be invested in the business to get us to probably break even and beyond. Because again, even at break even and especially depending on how we're producing our product, we're going to have these like moments of really big spend. Yeah. Even what you're saying now is just going back to the last section where we were talking about break even is making that idea that that 30 % cogs is just a representation even more clear. Yeah.
Right? Yeah. Because yeah, you're right. I've already paid for 2000 units. Exactly. Exactly. so what I think, so then when we tie all of these things together, like I said, they build on each other. I think if you sit down and you try to do a cashflow projection first, it could be overwhelming. also don't, your margins are important because that informs how are you going to sell and where are you going to sell and
is the value proposition, right? Like they each sort of do different things, but I think the cash flow can be a culmination of all of that and that sort of final test of how long will it take or how long do I have, right? How much money do I have to go X number of months before I run out, right? It makes that sales target number
even more concrete. Yeah. Right? And even more helpful. And again, I love to build multiple models. So I'm going to build one that says, I'm going to reach my sales target in a year. And then I'm going to build one that says, I'm going to reach my sales target in two years, depending on how big that target number is. And I'm going to see what the effects of that are on my cashflow. Because again, if we're growing very quickly, we're buying more and more product
more quickly, do you know what mean? As opposed to sort of slowly growing what that production looks like. And we're often surprised, even I'm surprised when we run models and we see like what this actually looks like. so this, again, I just want to reiterate, this is the opportunity to say, okay, how long will it take me or how long do I have? If I have $100,000, I have to figure out and I can figure out within my cash flow model.
how long that $100,000 will last me and therefore what my timeframe is to get my business cashflow positive. Yeah. And so, Sarah, you mentioned with the cashflow projector, you're putting in your operating expenses, you're putting in those inputs. What else can founders put into this model and get out of it to reduce business risk? I think that's a great question. If you are going to sell to a retailer, right, or if you're going to go
you're planning to go through distribution, you absolutely want to have your free fill costs entered in there. You want to have any slotting fees that you're going to encounter in there. You're going to want to have any quarterly promotions and things in there. So you want to make this model as real as possible. It's not going to be based in reality right off the bat. That's another sort of thing I want to demystify here.
When I build my first cashflow model for someone, like we don't know what the sales growth rate will be like, for example, right? And that's something we have to figure out. So I'm entering in all of my operating expense costs first, then I'm entering my cost of goods sold as like a percentage, which I know is just, is not a real representation. And then I go back to the team and go, okay, here's the current version of the model. Here are the things we need to make this a true representation of reality and to reduce business risk.
Do we like this growth plan? And if we do, then how will we be purchasing our inputs? And then I pop those in. Okay, now we've got our inputs. Now we've got our sales mapped out. Who are we going to sell to? And when they come to me and they say, okay, we're gonna sell to Whole Foods or we're gonna sell to REI or we're gonna sell to, know, UNFI, whoever it is, or we're gonna sell direct to consumer. Okay, then we're putting in, maybe we're doing online.
marketing and ad spend in the budget for D to C. We're definitely putting in some shipping costs for D to C. If we're doing the retail stuff, then we're going, okay, we want to onboard with these customers in these timeframes. These are the associated free fills and promotions. So you really like start to dial it in. So at the beginning, you have a general plan and an assumption, but it's still going to give you valuable information. And then you hone and hone and hone.
and make informed decisions with it as you go. I love that. I love the idea of, yeah, this is not a model that you're going to build out and go, here's the plan. This is what everybody stick to this. But this is the starting point to reduce business risk. And then as we go, we're going to check and we're going to adjust. And I love the idea of having this like living breathing model, especially as you kind of talked about there when
Yeah, you've done all of this work. You found your break-even point. Maybe you're even working towards that break-even point or you're almost there. You're starting to look ahead to what does the cashflow look like now that it's turning positive. And then from there, you're probably thinking, all right, now how can we grow this? Or how do we then stabilize after we hit that point? You know what I mean? We use
our sort of basic cashflow model a lot for this work. And we're actually have been behind the scenes beta testing something that we're currently calling the growth planner. And I want to mention this because I think it will shed light on like the process, right? I'm a CFO. I do not create a forecast or a model and assume it's the finished
version. This might sound cheesy, but I often think of myself as a writer or a creative person who's going, okay, this is my first draft. This is my first draft and in business, I need collaboration. It might be just collaboration from the founder. It might be collaboration from the founder and the salesperson on the team or the broker or whomever is involved in the various parts of the business.
And so this growth planner, we've used it now for, I want to say like five different clients and we're sort of beta testing it with some of our office hours people. So if you're interested, join us in office hours while we're beta testing it to reduce business risk. I don't know how long it will be there. It's a very customized model. But for a client, I built 10 different scenarios. And what that means is that like the operating expenses were all the same, right?
The product costs were the same because we know what the cost of the product is. And essentially we were looking at, okay, growth through distribution. At least that's what we thought we were doing, right? So I built models that were like very aggressive growth, very slow growth, know, growth to 5,000 stores, growth to 2,000 stores, just various things that were like we wanted to consider as possibilities. And then we took that model to the advisory team. So there was an investor there.
There was a sales expert there, the ops person was there, right? And I love this kind of collaboration, but it can also just be the founder where you sit down and you go, okay, here are the models that we have built. And what I usually just go, what are your thoughts and what is your feedback? Because I want to know, are people scared by these numbers? Are they encouraged by these numbers? You can see very clearly what that future investment is going to be.
or what the investment need is going to be like across all of the different models. And I was really fascinated like out of those 10 in a one hour conversation, it was unanimously decided that we're going to set a low, like a much lower five year sales target, store target than what our biggest models were to reduce business risk. It was much closer to our smaller models. And we were also going to do some slower month over month growth, you know, without going into
to details, had models that were 100 stores a month or you just kind of like very, very aggressive and consistent monthly growth and stuff like that. It was really cool to see a group of people come together and the investor and the founder kind of be like, that's a very expensive version of growing a business. Let's do a more moderate one. Okay, now based on these numbers, when we thought we were going to go all in on distribution,
we actually think we should split our focus between distribution and D2C. And so it gives you the ability to make informed decisions. And I would even go a step further, Sarah, beyond saying informed decisions. I think something that it makes very clear to a team, to a founder, right, is that you have choice. Yes. You have agency.
Yeah. You get to decide the path forward. Yeah. And someone in your world might be saying, you got to grow this thing. You got to get into these stores. And you're like, okay, I need you to that. And then you lay out the numbers or your CFO lays out your numbers and you're like, my God, that would cost us $1.5 million over the next two years. That doesn't align with my risk tolerance or my investors like, no.
We're not going to be able to give you that much more. So then you go, okay, then what is the model that makes sense for us? And here's the thing. In this case, we had a model that was like, I think it was like $1.8 million of additional funding that was needed. And like the breakeven point, you could see that at a certain month. You could see profitability. You could see over the full five years, like how much cash you would have in the bank according to this model, right? We got it down.
This is crazy. think we got it down to an investment of like $250,000, like additional investment for them of 250 on like the low end. And of course, like we're still putting, putting things into the model and like adjusting and fine tuning that model. But our starting point was 1.8 million needed. And now we're at like 250. And they'll probably ask for five or something, right? Because there are things you can't control. It's not an exact thing, right? It's a model. But
That's quite a difference. And so as you're saying, you can look at the information and go, nope, I don't want that. And the cool thing about this, kind of just thinking back through this episode, is you get to do that with every one of these models. Yeah. Right? And when you start with the quote unquote easy one, which is the pricing model, it doesn't take a lot of time. It takes time and effort, but it's the least involved model to build out to go yes or no.
Do I want to move forward on this path or do I want to stop? Do I want to spend more time here before I move forward? And then if you decide to move forward, you can do the same thing. What is that breakeven point? What does that mean for me? Do I like the sounds of that? Do I think this is possible? Do I want to move forward? And then if you say yes, then you get into the cash flow and then you sort that out. And it's not de-risking completely, but
If it stops someone from getting into a business that can put them in a huge amount of debt, could create a financial burden that they don't want or need in their life, I suppose that is a form of de-risking. Maybe I've come full circle on that. Yeah, maybe it's not about de-risking the business, but it's about de-risking our decisions. Yeah, yeah. I think I'm comfortable with that. Okay. I do want to shout out, as you've talked about this cashflow model. Yeah.
we do have a cashflow projector as well on the Good Food CFO website that is going to be kind of that first step, right, in getting into your cashflow. And then as you mentioned, the growth planner that's a little bit more complex, a little bit longer term that you're beta testing right now. And I will say, you said that you're beta testing in office hours, but I also want to shout out as a reminder that all of our Baba Yacht members also get to beta test any
courses or tools that we are working on. Yeah. so Chelsea, because you sort of manage that part of our business, how can Bobby Oup members reach out to get a file, a copy of the file and to test it? What's the best way for them to do that? Yeah. So we will have a form in the members area of our website. So members can log into their members area and they'll see the form right there on the homepage.
I want to use the growth planner. Yeah. And then we will send them everything they need to access that tool. Perfect. And I will add the reason it's beta testing right now is because it's highly customized. And so what we're working through in this process is like, how do we create a version of this tool as we do with all of our tools? Like, how do we make it so that it can accommodate everyone's needs in a single format? And so we're trying to accomplish that.
And so the more beta testers we have, the better because we can learn a lot about what your needs are and how to build the tool. And it can actually help to speed it up, you know, to market. And if you're a beta tester, you get that puppy forever. yeah, we, we as a thank you for your like feedback, which is really the only thing we ask if you use it, you know, you'll get some coaching around it. You give us feedback and you get the value and the ability to use it.
for the life of your business. So I think it's a win-win. To learn more about any of the tools mentioned in this episode, visit our website at thegoodfoodcfo.com and click on courses. And if you're a Baba Yacht member and you'd like to beta test the Growth Planner, visit the membership homepage to sign up today. Thank you for joining us here today. If you enjoyed this episode or found it helpful or inspiring in any way, please share it with your founder friends on social and rate and review the podcast wherever you listen.
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