Better cash flow management can save CPG startups right now
Tried and true methods for extending your runway
In the olden days (just a few short months ago), the average company had less than 30 days of cash on hand. For nearly all companies today, especially those in the consumer packaged goods (CPG) space, having several weeks of financial runway now seems like a luxury.
For startups in the CPG space, having an updated cash flow management strategy could determine whether your business (and your larger network of partners and vendors) survives or not. And there’s a larger consideration here too: the likelihood that our economy can rebound has everything to do with ensuring that our businesses remain open.
Why is cash flow management important in CPG?
CPG is traditionally a low-margin, high-volume industry category. And, it’s a labor-intensive and operationally complex space, which helps explain why nearly one-third of startups in the CPG space fail because of a cash liquidity crisis. Most CPG entrepreneurs understand the basic concepts of a cash flow forecast yet struggle to incorporate it into their business strategy. The result? Shorter runways and less breathing room.
Get your cash flow plan in place
A cash flow projection (also referred to as a cash flow forecast) is essentially a breakdown of expected receivables versus payables. It ultimately provides an overview of how much cash the business is expected to have on hand at the end of each month. Updating cash flow plans sounds a lot more daunting than it really is, and it’s one of the most important things any company can do right now.
With the right tools and training, these projections typically take less than an hour to produce but can go a long way in determining whether the business can survive the COVID-19 disruptions to sales and supply chains — and can help course-correct before it’s too late. With this forecast, business owners can immediately understand whether accounts receivable are lagging, how to speed customer payments and even whether to renegotiate agreements with vendors and distributors.
Extending your financial runway
For most companies in the CPG space right now, their financial runway is looking pretty short. Below are some tried and true methods for extending your runway by increasing cash coming in and reducing cash going out.
Increase cash by:
- Assigning a risk rating for outstanding accounts. Most CPG companies will have accounts receivable balances (the amount of money your customers owe you) as of today and hopefully not many of these are past their due date. Assign a low-, medium- or high-risk rating for each customer to understand which invoices and customers will cause greatest risk to your business. Assign a specific person in your team to liaise with these customers by phone.
- Understanding financing opportunities. Can you leverage the existing financing relationships you have by fully drawing down on your line of credit? Perhaps you can extend this line of credit further with your bank? Have you already applied for your PPP loan? Are you successful in having funds allocated?
- Financing your assets. Have you considered using your assets as collateral to secure financing and hence receive cash? This could be financing a piece of equipment you own outright of perhaps a form of inventory financing. You can also sell your assets to release cash. A word of caution: be careful this doesn’t cripple your inventory reserves and hence squash your margins.
Decrease cash out by:
- Taking care of outstanding accounts payable. Write down a list of what you owe other people and when. Rank them in order of importance with the biggest bills and most important relationships first, and then get on the phone to those people. Can you extend your runway by agreeing to a payment plan with them? Can they change your terms, so you have longer to pay? One final word of advice: Don’t be a chump and just not pay bills. People will remember how you behaved during this crisis.
- Negotiating your rent: Nothing is off the table in this current environment. Maintain consistent communications with your landlord, because your survival is also in their immediate interests too. Discuss a reduced rent in the shorter term and explore committing to a longer contract to create a true win-win situation.
With a little bit of organization and knowledge, your business can extend your financial runway through these practices.
Lorne Noble is fthe ounder and CEO at Simple Startup, a Boulder-based finance and accounting firm specializing in serving CPG, tech and retail clients all over the U.S. Simple Startup offers growth-focused bookkeeping, investor ready accounting, fractional CFO services and online startup finance education.