The Consumer Packaged Goods (CPG) industry is a booming part of the U.S. economy, but it’s not without its challenges. Planning for off-seasons, distribution issues and short-term capital constraints makes it harder for smaller CPG businesses to scale up. These challenges often mean it’s not enough to just have a great product and branding. Despite businesses best efforts, even the slightest cash flow mismanagement can put a stop to growth.
For those having trouble maintaining growth, or navigating the journey from start-up to scale-up, keep reading to find out how cash flow solutions for small businesses can help.
What is Cash Flow?
Cash flow is the amount of cash moving in and out of a business. Sales revenue, for example, counts as inflow, while labor and manufacturing costs are outflows.
If outgoing cash spent is more than cash coming in, cash flow is in the negative. If the opposite is true, where revenue exceeds overheads and outgoings, cash flow is positive. A summary of cash movement, and whether they’re in the positive or negative, can be found on a business’s cash flow statement.
Cash flow statements are used by business owners to figure out what money is on hand during a given period (working capital) for them to run business operations.
Why is Cash Flow Important for CPGs?
CPG traditionally is a low-margin, high-volume industry. Production is labor-intensive and often involves complex operations. The combination of these factors is likely why nearly ⅓ of startup CPG companies fail because they don’t have enough cash to meet short-term obligations. Cash flow, therefore, needs to be managed very carefully to ensure success, and more critically, survival.
The basic principles of cash flow are not lost on most entrepreneurs in the CPG industry. But finding the right balance with the timings of inflows and outflows is a challenge, especially when scaling a company.
Common Cash Flow Problems for CPG Businesses
1. Excess, or lack of, stock
When a business has too much inventory which typically sits in a warehouse or fulfillment center without being sold, this is called excess or ‘dead stock’. This drives unnecessary carrying and warehousing costs that can’t be covered by sales. In the opposite scenario, where businesses are under-stocked for demand, they can miss out on sales opportunities, leading to lost revenue.
Finding the right balance with stock can be tricky, and often it can be hard to predict demand even with the most in-depth planning approach.
2. Poor demand forecasting
Companies trying to grow their business should never underestimate the power of information. Trends, data, and industry insights help companies to form demand projections supporting their efforts to estimate how much stock they need, hire enough staff, ramp production levels up (or down), and so on.
But when demand is accurately projected, this can create more problems to solve. Underestimating demand risks stockouts, lost revenue, and greater pressure on suppliers which can impact relationships. The end result of all of this could mean customers have an unsatisfactory experience, and the business’s reputation suffers.
3. Rapid growth
When revenues climb faster than expected, it can be tempting for business owners to focus on short-term, quick-wins instead of building (or keeping to) a sustainable growth strategy. Small businesses are often unprepared for the simultaneous increase in overheads and expenses that comes with a spike in purchase orders.
The result is that despite more business coming through the door, the company isn’t actually growing because added production costs are disproportionate to higher sales revenues. but a company business expansion and these can be disproportionate to inbound revenues.
4. Seasonality
As we touched on already, CPG’s demand is often seasonal: swimsuits, halloween costumes, school supplies like pencil cases—all of these can see stagnation after a period of high demand. CPG business can often anticipate when peak seasons will start and end, but during the off-season demand is harder to predict, which in turn affects the ability to calculate future cash flow and, ultimately, the bottom line.
Cash Flow Solutions for CPG Businesses
With the right strategy, it can be possible to balance growth and cash flow, supporting momentum. Here’s five ways scaling CPG vendors can manage their cash flow:
1. Alternative financing
When cash flow problems arise, small business owners often seek different sources of funding. This may mean extending lines of credit (also known as runways), or pursuing bank loans, but application for this kind of funding can take a long time, and strict requirements often make them an unreliable choice for startups.
Alternative financing solutions, however, are tailored to small businesses with short-term cash requirements. Purchase order (PO) financing, for example, helps CPG brands meet demand by loaning them enough money to cover individual purchase orders. Other options include factoring, working capital loans, and inventory financing.
2. Managing deductions
Companies selling consumer goods often agree to trade promotions, ads, and other chargebacks as part of the relationships with retailers and distributors. But if they are not careful, they can end up signing distribution contracts which reduce their invoice totals by an excessive amount.
CPGs need to read the fine print with caution: what are the added distributor costs for product returns? Has the distributor passed on its discounts to the retailer and charged back to the consumer goods manufacturer? All potential deductions must be transparent and agreed to from the beginning. This attention to detail should be paid to all distributor and supplier deals, to ensure companies are getting the best possible price and terms.
3. Forecasting
Cash flow forecasts help companies break down receivables against payables. In other words, what a company owes and what it is owed. It’s important that CPG companies dedicate significant resources to these forecasts, since they experience seasonal demand changes and are subject to fast cash flow cycles—the price for not investing in the right help and data to ensure accurate forecasting can be as significant as the business’s survival.
To make accurate projections, CPG businesses can look at past cash statements and overall revenue levels, alongside consumer spending forecasts, to predict future cash flow. It’s also good practice to compare actual spending vs. budgeted spending month on month, which can help estimate what working capital will look like through the year.
4. Inventory management
Excess inventory (aka dead stock) can lead to avoidable cash shortages, and low stock means businesses end up missing opportunities. Additionally, for CPGs who want to distribute products to large retailers often need to
CPGs need to be aware of what is happening at each stage of their supply chain at all times to get maximum visibility on what they have in stock, for both raw and finished goods. If a retailer’s order comes in, it must be clear if there is enough material on hand to deliver; and if there isn’t, when there will be. Inventory management therefore should include frequent tracking processes, and the use of software systems which can provide businesses with real-time visibility over stock levels.
5. Tracking COGS
It’s hard to overstate the importance of measuring the Costs Of Goods Sold (COGS). This accounts for all direct costs within the manufacturing and sales process. For example, raw materials, freight costs, labor costs, and inventory storage, among others.
Often this increases as the business grows, but by calculating the total cost of selling goods, and looking for efficiencies where possible, CPG companies get a clear insight into their inventory turnover. This also means they can price products correctly to retain sales profits.
Get support that will help grow your CPG business with Setscale
CPG companies often have to operate with tight margins, especially when starting out. Cash constraints can present serious obstacles to growth, whether that’s stockouts from poor inventory management, unpredictable demand levels, or even sales growing at an unexpectedly high rate.
If you’re ready to scale, Setscale is here to support you. With our flexible PO financing solution, we can help support your business by covering the costs of new purchase orders, helping reduce the strain on your cash flow. Learn more about how we help CPG businesses.
