You’ve poured time, money, and heart into building your product. But are you ready to scale without knowing your numbers? That’s a recipe for stress and struggle. Understanding your financial readiness and gross margins isn’t just smart—it’s your business’s lifeline to lasting success.
While you’ve heard the grim statistics that about 20% of small businesses fail in their first year, and that number climbs to nearly 50% within five years, it doesn’t have to be that way.
Understanding your financial metrics is the most effective way to drive business growth and scale your product lines.
So, what exactly does financial readiness mean, and what are gross margins?
Let’s dive in.
Up until now, you’ve been buried in the 101 million details it takes to create and launch your product.
Now, it’s time to step back and look at your business, rather than your product, critically—especially your financials.
• Did you burn through most of your capital during R&D?
• What’s your exact production cost?
• How much revenue have you generated so far?
• Most importantly, what’s your gross margin?
If you're not familiar with gross margin yet, don't worry—we’ll break it down later. For now, just know that it’s a simple percentage that’s easier to track and compare over time than raw dollar amounts. And it’s essential to scale a product successfully.
To build on this understanding, you’ll also want to explore a few more concepts: cash burn rate, cash flow, and runway planning.
Your cash burn rate is how quickly you spend available funds—something startups are especially vulnerable to. Cash flow matters, meaning make sure you have enough incoming cash to cover expenses and stay operational.
Finally, runway planning comes into play for scaling a product. You need sales to not only cover your costs but also generate enough extra capital to fuel future growth.
At the end of the day, "runway planning" and "scaling a product" simply mean securing your financial foundation so your business can thrive.
As a manufacturer, when preparing to scale, one of the most critical financial metrics to evaluate is your gross margin. Let’s examine what that means for your business's sustainability.
A higher gross margin generally means the company has more resources left after generating the product to cover operational expenses and invest in growth.
Conversely, a lower gross margin means precisely the opposite, typically resulting in lower overall net profits.
The gross margin is a primary gauge of a company’s ability to control production costs and profit from its core products.
If your gross margins are trending upward, your production process is improving, or your component and labor costs are falling.
Contrarily, a downward trend in gross margin could signal declining sales, rising costs, or inefficiencies in production.
Gross margin is one tool in your arsenal to determine your company's overall health. As such, it bears regular monitoring.
While understanding gross margins is crucial, it’s equally important to recognize some common financial missteps that can derail growth if left unchecked.
In the excitement of creating a new product, especially when starting a new company simultaneously, it can be easy to overlook mundane business details.
If you don't meticulously track your production costs, you’ll have no concept of whether your pricing model is sufficient. This leads to an incorrect gross margin or the inability to calculate one at all.
In fact, attempting to scale before you’re confident your company can generate a profit often depletes your capital reserves faster than expected.
Failing to monitor your cash flow and ensure that you have sufficient resources on hand can lead to issues with both employees and vendors.
These are just a few of the more common mistakes that new startups make.
The best strategy is to avoid these pitfalls. However, if you find yourself in one of these traps, extricating your company as quickly as possible and regrouping with a new plan could save everything.
Now that you’re aware of common pitfalls, it’s time to focus on how you can proactively measure and strengthen your financial foundation through gross margin analysis.
With that in mind, let’s dive into the nitty-gritty of how to calculate your gross margin.
Take your total revenue and subtract your cost of goods sold (COGS). This is your gross profit. Now, divide your gross profit by your gross revenue. This percentage is your gross margin.
For example, if you have a product that sells for $30 but costs $20 to make, your gross profit of $10 results in a gross margin of 33%. (30 – 20 = 10; 10/30 = .33)
Then, how do you know if you have a good gross margin?
Generally, a healthy gross margin for manufacturing consumer packaged goods (CPG) can range between 40% and 60%+. Some products can vary significantly, so you’ll want to do some sleuthing for your specific industry and product line.
So, how can you improve your gross margin?
To build a healthier margin, you could raise your prices if the market allows. You could also work with your vendors to cut costs by seeking alternative sourcing strategies or even negotiating lower minimum order quantities (MOQs) to hold costs. You could also work with your employees to find ways to improve production efficiency, thereby lowering overall costs.
Most likely, a combination of these elements will help raise your gross margin and safeguard long-term business success.
With a clear understanding of your financial metrics and how to assess them, you’ll be in a much stronger position to move forward confidently.
Hopefully, you now have a deeper understanding of how your gross margin indicates your company’s financial stability by funding entry costs, trade/in-store promotional activity, and higher selling resources/brokers to support selling your goods and services.
Ensuring a solid gross margin and sufficient capitalization to fund future growth gives you the green light to scale your product line.
Once you feel confident in your financial reports, the next logical step is to seek advice from professionals about moving into retail shelving.
A Master Broker, like CPGBrokers & Associates, provides sales consultation services and manages marketing and distribution services to launch and manage brands into a broad range of consumer retail channels while differentiating them in the marketplace.
