By Keith Kohler G’93/WG’93, President of K2 Financing and food industry consultant
Over the years, I’ve had the privilege of advising a wide variety of companies in the food and consumer products spaces. And I’ve reviewed probably about 10x that amount in business plans and company financials. Along the way, I’ve accumulated a few lessons that continually ring true for startup food businesses:
1) It’s all about the cash. This is especially true in the beginning: cash requirements, cash flow, and use of cash. About 90% of business plans I see have at least basic pro-formas (let’s not even talk about the 10% that don’t), but in 7 years I can only recall seeing 1-2 decks, developed by someone else, with a detailed cash flow statement. Are you able to put together a thoughtful cash flow statement before you launch your business? To do so, you’ll need to know everything about your product financials and also your sales channels.
2) Get help. If financials and sales to the trade and such aren’t your thing, don’t pretend like they are. Find someone who knows what they’re doing. And if you work with a CPA or financial professional, make sure he/she has done financials in the same type of business as yours. A particularly tricky area to master is accounting for inventory.
3) Inputs. What are the cost of your inputs now? And, more importantly, what are they likely to be into the future? If you’re putting together a food product, you have to account for volatility in commodity products, specialty ingredients, or potential variances in packaging supplies.
4) Co-packers. If you are using a co-packer, how well do you know them? Is there any possibility that they will raise prices or, sometimes even worse, change the terms of your agreement at a moment’s notice? I have numerous examples where a co-packer’s financial situation changed resulting in issues such as making a client pay for all ingredients and even some co-packing costs up front. That can throw your cash flow into immediate chaos. Alternatively, negotiating a favorable agreement can be a lifesaver, particularly early on.
5) Customers. Before you even start selling to anyone, do you know which customers are the most advantageous to your cash flow? Please do not sell to any customer on consignment (such as the mass-drug channel – Walgreen’s, CVS, etc.). There are two major reasons: you’ll have to take the product back if it doesn’t sell or if it expires, and consignment sales do not count as a eligible accounts receivable, so you wouldn’t be able to obtain A/R financing (future article subject). They are notorious for both consignment and crazy extended payment terms (often at 90 days or more).
6) Payments. Most retailers/distributors pay within 30-45 days, and it is your responsibility to stay on top of that to insure that they actually comply with their obligations. Always request ACH payments where available instead of adding days waiting for a physical check (and then the holding period once you deposit it at your bank). And many, at their exclusive option, will often take a discount off your invoice (such as the common 2% if paid within ten days), so you need to account for that in your cash flow and projections.
Bio: Keith Kohler is a finance and strategy consultant who specializes in the food industry, particularly in natural, organic, specialty, and gluten-free/allergen-free products. He has helped numerous companies obtain different forms of debt financing and has also participated in several equity transactions. He is an investor and V.P. of Business Development for GF Solutions, LLC, a new allergen-free manufacturing facility located in Methuen, MA.