Solid FP&A is crucial for sustained growth and survival of a company. Too many are finding out during the COVID-19 crisis that they lack this capability
Our client was a fast-growing, nutritional supplement business that had originally started as DTC but was fast expanding into retail through some national distributors. Growth was firing up on all cylinders
- Facebook ads were driving DTC revenue through the roof
- Publix was already positioned as a strong national distribution partner
- CVS recently started carrying our client’s product and expanding their exposure
However, when the company hired us, something was not going right. The Company constantly found itself short on cash/liquidity and falling behind on inventory replenishment. The CEO/founder knew something was wrong but did not have an experienced CFO to help analyze the situation and identify solutions.
A 72 hour deep dive into the company uncovered several concerning patterns
- Some of the recently added distribution channels were not as profitable as they seemed. Returns, chargebacks, forced promotion/marketing expenses, delayed payment terms all resulted in a drain on cash
- This cash was vital to replenish inventory and continue marketing for the lucrative DTC side of the business
- The company had to divert inventory to the large store chains to meet its obligations, which led to out-of-stock inventor on its own website
- As a result, the Company was losing high margin DTC sales
- This led to a vicious cycle that drained the Company’s cash
Key Takeaway: Proper Financial Planning & Analysis is crucial for any business big or small
Growth is important and it may drive your valuation multiple but it has to be sustainable growth. This will be even more important in the post COVID-19 world. Contract manufacturing and e-commerce has changed the economics for these CPG companies. However, this case study highlights the importance of good old fashioned FP&A.
- What are your sources of revenue?
- What is the contribution margin for each?
- What does it take to grow the different channels of revenue?
- What is your optimal inventory level
- What does your working capital and cash-conversion-cycle look like?
- Where are you losing the most money?
These are all critical analyses that are often neglected in the blind pursuit for growth. This client’s “CFO” was more of a bookkeeper, where all revenue was lumped into one “income” line and all COGS were lumped into one line as well. There was no ongoing analysis around revenue, contribution margin or working capital. The quarterly reports were backwards looking and were not able to anticipate the problems ahead. It’s too late to hire a CFO / Head of Finance once you are in this vicious cycle. A fractional CFO can provide the support you need through an economical, on-demand arrangement.
