As hands-on business owners and leaders, managing cash and financing while scaling your brand is a constant hurdle. With long production cycles, intricate supply chains, and tight margins, cash flow issues can quickly threaten your business's viability. However, with the right strategies and financing options, you can turn these obstacles into opportunities for growth and scalability.
This blog post, based on our recent webinar featuring insights from ex-Head of Credit, Keanna Vear, myPocketCFO's Founder & CEO, Alice Zhang and Ashley Nicholson, Founder & CEO of BTR Nation, delves into the technical aspects of CPG cash flow management and working capital financing. We'll dissect the CPG cash conversion cycle, explore key metrics lenders scrutinize, and equip you with actionable strategies to optimize your financial operations and secure the funding you need to scale.
Critical Metrics to Measure Your Cash Flow Needs:
1. Time-horizon: Cash Conversion Cycle (CCC):
Understanding and managing your cash conversion cycle is essential for any CPG startup. The CCC represents -
"From the day you instruct your manufacturer to build inventory to the day that you receive cash from the sale of your product, how long does that take."
Unlike tech or SaaS companies, where cash conversion is relatively quick, CPG businesses often see their CCC goes up to 4, 5, and 6 months.
This extended cycle can strain your cash reserves, especially in the early stages when you’re scaling up production. By accurately forecasting your cash flow and understanding the length of your CCC, you can better plan your financial needs and avoid running out of cash when you need it most.
2. The Amount Of Working Capital You Need To Leverage = New Production PO Amount - Working Capital On Your Balance Sheet
Relationship Between Your Balance Sheet And Your P&L:
A healthy balance sheet allows you to draw on your assets to support business growth, while your P&L statement helps you track your progress and make adjustments as needed.
In CPG, managing these two financial documents effectively is key to ensuring your business can sustain its operations and grow. For instance, your balance sheet will show how much working capital you have—calculated as current assets minus current liabilities. This working capital is critical for financing your day-to-day operations, including production and inventory management.
What is Business Credit? Understanding Your Financing Options
When it comes to "leveraging," i.e., financing, CPG companies have several options, each suited to different stages and needs. But before exploring these options, it’s essential to understand business credit.
Business Credit can be broadly defined as the ability of a business to obtain goods or services and pay for them at a later date or to borrow money for business activities and repay it over time. There are two primary forms of business credit:
- Vendor or Supplier Payment Terms: These terms determine how much time you have to pay your suppliers after receiving goods. Typically, suppliers may require an upfront payment, with the remaining balance due within 30 to 45 days after shipment. Over time, as you build a relationship and a strong payment history with your suppliers, you may be able to negotiate better terms, such as a lower upfront payment or a longer repayment period. This is essentially a form of non-debt credit that can help manage your cash flow.
- Financing from Lenders: This involves borrowing money from a financial institution, like a bank or fintech lender, to cover your working capital needs. Unlike supplier credit, this form of business credit comes with interest and specific repayment terms. It’s a common solution for early-stage CPG companies that need to bridge the gap between cash outflows for production and cash inflows from sales.
Optimizing Payment Terms
Working capital management is not just about having cash in the bank; it’s about optimizing all aspects of your current assets and liabilities. This includes:
- Inventory Management: Efficiently managing your inventory levels ensures that you can meet demand without tying up too much cash in unsold goods.
- Accounts Receivable: Ensuring timely collection of receivables improves your cash inflows.
- Accounts Payable: Negotiating better payment terms with suppliers can delay cash outflows, giving you more time to use your funds for other needs.
By optimizing these areas, you can ensure that your business has the liquidity it needs to operate smoothly and invest in growth opportunities.
Leveraging A Portfolio Of Debt Lenders
Once you understand business credit, it’s time to explore the different types of financing options available to your startup. Here are the key options discussed:
- Working capital / PO-based financing: Lenders offer working capital loans based on your inventory and sales projections, not just your historical performance. This is particularly useful for CPG companies expanding into large retail accounts with significant upfront production costs. Unlike revenue-based financing, working capital-based financing often comes with more predictable repayment terms, making it easier to forecast cash flow.
- Revenue-Based Financing: This option provides funds based on your revenue projections and typically involves repaying a percentage of your daily sales. While convenient, it can be costly if sales fluctuate, as repayment amounts are directly tied to your revenue. This type of financing is often used by early-stage companies that need quick access to capital without the complexities of traditional loans.
- Asset-based-lending (ABL) Financing: Lenders offer loans based on your inventory or historical performance, such as factor financing or bank loans.
Common Metrics Lenders Want to See
When seeking financing, it’s important to understand what lenders are looking for. There are several key metrics, including:
- Revenue Growth: Indicates your company’s potential for long-term success.
- Unit Economics: Ensures that your business is scaling profitably, with a focus on customer acquisition costs and gross margins.
- Cash Burn Rate: Measures how quickly you’re depleting your cash reserves, which is critical for understanding your business’s sustainability.
- Liquidity: Reflects your ability to meet short-term obligations without needing to raise additional funds.
- Inventory Turnover: Assesses how efficiently you’re managing and selling your inventory, which is crucial for maintaining healthy cash flow.
Lenders are also interested in your historical ability to sell through inventory and collect payments from customers. If your sales are primarily to reputable retailers who pay on time, this strengthens your case for securing financing.
Strategic Partnerships: The Role of Fintech Solutions
Strategic partnerships with fintech solutions that understand the unique needs of CPG startups are crucial. For instance, myPocketCFO offers tools that provide a clear snapshot of your financial health, helping you manage everything from cash flow forecasting to financial statement preparation. These tools can be invaluable when you're preparing to approach lenders for financing.
Additionally, fintech lenders offer more flexible financing options tailored to the needs of growing CPG businesses. Unlike traditional banks that rely heavily on historical data, they consider future sales projections, allowing you to access the capital you need to meet large orders and expand into new markets.
Take Control of Your Cash Flow
For CPG startups, mastering cash flow management is not just about keeping the lights on—it’s about ensuring you have the resources to seize growth opportunities when they arise. By understanding your cash conversion cycle, optimizing your working capital, and choosing the right financing solutions, you can position your business for long-term success.
To explore these strategies in greater detail and learn how to apply them to your business, feel free to schedule a 1on1 consulting meeting with us HERE.
To access our entire webinar, Unlocking The Power of Cash Flow Management For Brands, click below.
