09: Finance
Cash Flow Management
Cash flow is the lifeblood of your CPG business. You can have great sales numbers, but if your cash flow is poorly managed, your business will always feel like it’s on the brink of collapse. Simply put, cash flow management is about keeping track of the money coming in and going out of your business and ensuring you always have enough cash on hand to cover your expenses.
In this chapter, we’ll explore how to manage your cash flow effectively, especially in the unpredictable world of consumer packaged goods, where long payment terms, seasonal sales spikes, and fluctuating costs are common challenges.
What Is Cash Flow?
Cash flow refers to the net amount of money moving in and out of your business at any given time. It’s like your financial pulse—healthy cash flow means you can meet your financial obligations, invest in growth, and keep the business afloat. Unhealthy cash flow can lead to missed payments, inability to restock inventory, or worse, business failure.
There are two key components of cash flow:
- Cash Inflows: This is money coming into your business—primarily through sales, but also from loans, investments, and other sources like grants or rebates.
- Cash Outflows: This is money leaving your business. For a CPG brand, common outflows include payments to suppliers (for ingredients, packaging, etc.), operating expenses (rent, payroll, marketing), and debt repayments.
Why Cash Flow Management Matters for CPG Brands
For CPG companies, cash flow management can be trickier than it is for businesses in other industries. You may be selling into retail channels where payments come in long after the product is shipped, while your operating expenses—like manufacturing, marketing, and payroll—need to be paid in real time.
A few reasons why cash flow can be particularly challenging for CPG brands:
- Long Payment Cycles: Retailers often have long payment terms, typically between 30 and 90 days. That means it could take months to receive payment for products that have already been shipped, while you still need to pay your suppliers and cover overhead costs.
- Inventory Management: Managing your stock can tie up cash. You need to buy ingredients and packaging materials upfront, often before receiving payment from retailers or customers.
- Promotions and Trade Spend: Running promotions, such as Temporary Price Reductions (TPRs) or demos, often requires significant investment upfront, with the hope of generating long-term sales.
- Seasonality: Many CPG brands see sales spikes during certain times of the year (think holiday season for snacks or summer for beverages), but you need to prepare your cash flow to handle both the highs and the lows.
Tips for Managing Cash Flow
Build a Cash Flow Forecast
One of the best tools for managing cash flow is a cash flow forecast. A forecast gives you a forward-looking view of how much cash you expect to come in and go out over the next few months. It helps you predict when you’ll be flush with cash and when you might be tight.
Your forecast should include:
Sales projections: Use historical data or industry benchmarks to estimate your future sales.
Expected cash inflows: From customers, investors, loans, or other revenue streams.
Expected cash outflows: Including COGS, rent, salaries, taxes, trade spend, and loan repayments.
Update your forecast regularly to reflect changing conditions and new data.
Negotiate Payment Terms
Don’t be afraid to negotiate better payment terms with both your suppliers and your buyers. You may be able to extend your payment window with suppliers while negotiating shorter payment windows with retailers. For instance, you could try negotiating Net 60 terms with a retailer instead of Net 90 to shorten your cash conversion cycle.
Plan for Trade Spend
Trade spend—money spent on promotions, marketing, and retailer programs—can quickly eat into your margins. Before agreeing to any promotions, make sure you have the cash on hand to cover these costs. It’s also essential to tie promotions to sales goals so that you’re not burning cash on marketing efforts that don’t generate sufficient ROI.
Use Financing Tools
Consider using financing tools like invoice factoring or purchase order financing to free up cash. These options allow you to get paid faster for your invoices or orders, helping you keep the cash flowing even while you wait for retailers to pay up.
Invoice Factoring: You sell your unpaid invoices to a third-party company at a discount in exchange for immediate cash.
Purchase Order Financing: You get an advance from a lender to cover the costs of fulfilling a large purchase order, and then repay the loan once the retailer pays you.
Cut Costs Where You Can
Every dollar saved is a dollar that can improve your cash flow. Look for ways to cut costs without compromising quality. For instance, consider bulk buying ingredients or packaging to lower unit costs or optimize your distribution strategy to reduce shipping expenses.
Manage Inventory Efficiently
Having too much inventory on hand ties up cash in products sitting on a shelf. On the flip side, not having enough inventory can lead to missed sales. Use demand forecasting tools to balance your inventory levels and avoid overstocking or understocking.
Key Financial Documents for Cash Flow Management
To effectively manage your cash flow, you need to stay on top of your financial statements. Here are the key documents you should review regularly:
- Profit and Loss Statement (P&L): This gives you an overview of your revenue, costs, and profitability over a specific period. It helps you understand how well your business is performing overall and how much cash you’re generating from operations.
- Balance Sheet: This shows your company’s financial position at a specific point in time, detailing your assets, liabilities, and equity. It helps you understand your liquidity—how much cash or cash equivalents you have to cover short-term obligations.
- Cash Flow Statement: This is the most important document for understanding your cash flow. It breaks down the cash that flows into and out of your business from operations, investing activities, and financing activities.
Staying Ahead of Cash Flow Problems
To wrap up, the key to successful cash flow management is staying proactive. Regularly review your financial documents, adjust your forecasts as needed, and stay on top of your spending. By building strong cash flow habits early on, you’ll ensure that your CPG brand has the financial stability it needs to grow and thrive.
Next up: Debt Financing—understanding how and when to use debt to grow your business without getting in over your head.