How to Forecast Cash Flow as a Seasonal CPG Business

The Consumer Packaged Goods (CPG) sector is a big player in the U.S. economy. It supports 10% of national employment, and the market’s value is currently estimated at $635 billion—the largest CPG sector in the world. 

That doesn’t mean starting a CPG business is an easy venture, however. The seasonal nature of demand for many consumer goods products makes running these businesses an unpredictable art. Many unfortunately fail not due to lack of demand, but problems handling cash flow because of when that demand falls.

To avoid this, businesses can take advantage of quieter periods to upscale their planning through effective cash flow forecasting. In this blog, we look at how to make a cash flow forecast, and the specific steps a business selling CPG goods can take to better predict demand during both on- and off-seasons.

What is Cash Flow?

Cash flow is the net amount of cash that goes in and out of a business: namely, inflows of cash received, and outflows of all money spent. 

A business’s cash flow statement (CFS) summarizes all movement of cash and equivalents. That way, owners and stakeholders can understand what money is available (working capital) to run the business within a specific time period.

Although traditionally the CFS is not considered as important as other financial statements (like the income statement and balance sheet), it does help businesses understand performance trends that can help them plan both short-term and long-term.

Why Do Some Seasonal CPGs Struggle With Cash Flow?

CPG businesses can find it challenging to plan for off-seasons. Retailers that sell outdoor sporting goods, holiday decorations, and other products that depend on weather or seasonal events will naturally have significantly higher cash inflows when sales are high. Demand levels during these periods are relatively predictable; inventory is moved faster as a result; and the general uptick in sales and revenue allows businesses to cover overhead costs and, ideally, profit.

In the off-season sales are slower, and can even stagnate. Even though businesses can predict when peak season will end, during off-seasons any customer demand becomes harder to foresee. An apparel vendor specializing in swimwear would find it more difficult to anticipate the volume of sales in November because people are, overall, less likely to go to the beach – however, some may still be planning overseas trips, so demand still exists.

The varying levels of demand and revenue for seasonal CPGs can make cash flow management a difficult and delicate process. That’s why cash flow forecasting is especially important for these businesses.

What is Cash Flow Forecasting?

Cash flow forecasting can enable businesses to anticipate future cash levels by analyzing estimated inflows and outflows over a set period of time. Forecasts can be used in the short or medium-term, and are data-driven from either daily cash levels (direct forecasting) or historical data (indirect forecasting) to project cash levels. 

Even though many CPG entrepreneurs understand the principles of cash flow, they may still struggle to accurately forecast it—especially when the market is as unpredictable and volatile as it is today.

How to do a cash flow forecast

To predict cash flow levels to inform a more resilient business strategy, CPGs can examine and anticipate future sales and expenses. The components of a cash flow forecast are:

  • Opening balance — the amount of money a business has at the beginning of a specific period (e.g., 12 months)
  • Cash inflows —  break down of receipts by category e.g., sales revenue, investments into the business, loans, or other cash receipts
  • Cash outflows — break down of payments by category e.g., materials, rent, utilities, inventory purchases, taxes, or other cash outgoings
  • Net movement — subtraction of total outflows from total inflows
  • Closing balance — the net movement added to the opening balance, calculating total cash remaining at the end of the forecast period 

The Benefits of Cash Flow Forecasting

Inventory management

Efficient inventory management is critical to cash flow. Balancing stock levels, lead times, and sales projections can help avoid cash shortages due to excess inventory, or missed sales opportunities due to insufficient stock. 

Forecasting cash flow provides businesses with a clearer view on the inflow and outflow timings. This allows them to align inventory levels with anticipated demand, reducing the risk of overstocking, and minimizing the costs of storing products over time.

Working capital

The difference between a business’s assets and liabilities is called working capital. This is what the  business has left once it has subtracted what it owes (liabilities) from what it has (assets). Forecasting shines a light on the timing and anticipated cash inflows and outflows so businesses can ensure they always have the right amount of working capital available—not too little, or too much. It also helps identify ways to reduce the working capital cycle—the time it takes to convert net assets and liabilities into cash—by improving inventory management. 

This oversight can also help businesses strike more favorable terms with suppliers, ensuring payments aren’t required during a time when they know they won’t have as much working capital available. 

Planning and testing

Starting and growing a business can burn through cash, and make the cash flow cycle fast and often unpredictable. Cash flow forecasts, even if they’re more short-term than long-term, allow businesses to plan for when they have cash surpluses, and make strategic decisions based on these estimates.

Tips for Cash Flow Forecasting

CPG businesses with seasonal demand can take certain steps to make their forecasting simpler and more accurate, while gaining a better understanding and handle on cash flow management:

      1.  Starting with forecasting objectives

Many businesses are seeking to improve their working capital, or planning, strategy. Their goal may also be to evaluate the best investment decisions, or manage debt. Here are some of the most frequent forecasting objective areas:

  • Liquidity planning: A business’s ability to cover any short term costs—wages, debts, taxes etc.— can be improved by effectively managing day-to-day cash flow through additional sources of capital that improve liquidity, like loans or purchase order (PO) financing.
  • Growth planning: Many businesses in the CPG sector find it difficult to maintain growth when filling POs and paying suppliers eats into working capital. Forecasting can help them plan for strategic growth investments during their off-seasons.
  • Debt reduction: By projecting monthly cash inflows with direct and indirect forecasting, businesses can decide on the best time to use available cash to pay off debt.

       2.  Assessing financial history 

Businesses can look at past cash flow statements and review sales figures and total revenue from the past two years. They can then calculate basic expenses over that period—this can give them a sense of what to expect, from seasonal shifts in demand to long-term trends.

       3.  Calculating rolling cash flow

Historical data is often used to enhance future cash projections. For this reason, instead of simply looking at a fixed period (i.e., one month) businesses often use rolling cash flow forecasts to measure the money coming in and out one month after another.

This allows them to account for past performance and business continuity trends, like supply chain disruptions, or changing work practices. Instead of static forecasts, rolling cash flow forecasts help businesses with varying income and expenses, and lets them assess their financial situation in real time.

        4.  Comparing budgeted spending with actuals

Finally, businesses can improve cash flow forecasts by comparing actual spending versus what has been budgeted. Looking at the differences between these data points gives valuable insight into cash flow patterns, and can help businesses adjust forecasts accordingly.

Manage Cash Flow With Flexible PO Financing

Setscale’s tailored PO financing solution can help small and growing CPG businesses maintain vital momentum—no matter the time of year. To complement effective cash flow forecasting, we provide a non-dilutive finance solution for individual purchase orders so that companies can better manage their working capital, and address cash flow problems.

We don’t get paid until you do. Find out more about what we do, or apply today to get started.



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