Capital Allocation in the CPG Industry
There’s one thing that all business leaders need to understand: how money works in your business. Seems simple enough, right?
While it’s true that some business models are easier to understand than others, CPG companies are notoriously complex—and keeping track of where your money is coming and going can become murky fast. Our own Jake Chapman, Steve Swanson and Nick Lipetzky recently chatted about forecasting, budgeting, fundraising and valuating within the CPG industry and how so many companies fail to connect finance with performance. If you’re familiar with our philosophy, you know that all actions and decisions need to agree with a larger vision. Capital allocation within CPG businesses is no different.
Wondering how to connect budget to strategy? You’ll want to read on to get our team’s expert insight. Watching the latest video below won’t hurt either.
Navigating the complexities of CPG finance
There’s nothing quite as intuitive as the old P&L statement. It’s easy to see how your business is making money and where you can reinvest profits. But as we mentioned earlier, measuring CPG finance is trickier than just a straightforward statement that records what your cash is doing.
Paying for inventory and vendors has to happen well ahead of time, especially if your business is direct to consumer. Add in the obvious fact that you can’t sell without available inventory and tracking your financial performance becomes much more complicated. If you have a lot of assets or inventory but not much in the way of operational cash, you’ll have to consider bringing on debt or equity, though those paths are not always clear. We’ll have more on that below.
Use negotiation to manage your cash flow.
One option for CPG companies is to negotiate payment terms in order to slow down the outflow of cash. At first, if you can agree to 15 extra days to make your payment, you’ll face less of a cash flow crunch. Reliably making payments within this wiggle room period will establish good relationships early on and can lead to building even bigger timeframes in the future. This will only increase your working capital and empower you to reinvest.
Pick and choose your discounts wisely.
Besides negotiating payment terms, many suppliers and vendors offer discounts. Be sure to shop carefully and never accept the first offer you’re given. There’s a lot of power in saying no to a discount—it could lead to larger discounts when you start to buy more inventory later on. This strategy will allow you to wield leverage with larger vendors within your industry.
Be strategic when issuing POs.
You can also leverage your PO issuing cadence to help control cash flow. By ordering the minimum inventory, you’re risking less and keeping more working capital at bay. Suppliers aren’t necessarily enthused by weekly POs, but it’ll help your business, especially in the early stages. This is another small but impactful way to control your cash—why give up equity when there are ways to hold onto working capital?
Don’t be afraid to take on debt early on.
Many business leaders instinctively choose equity to raise funds. If you’re relying on equity, you may be sacrificing other intuitive ways to manage cash and you also might be losing sight of a more holistic vision.
High interest rates scare people, and business leaders are wary to take on too much debt early on while growing their companies. Debt can be expensive at first, but in the long run, raising equity could be a much more expensive option. Consider the long-term strategy of your company: a loan with a scary interest rate that you can pay off in several months might just help build toward a high-growth 10-year plan.
Of course, there is an optimal amount of debt for every business. It’s impossible to get an exact figure, but we can create scenarios that help us adjust how much debt to take on. This can be burdensome, but debt is always cheaper than equity and it’ll still allow for a more comfortable, slower cash outflow when you’re faced with fast turnaround times between POs or launching new products.
Another reason to take on debt early
We always think it’s better to take on debt before you need to take on debt. Debt offers a lot more flexibility while your company is still growing, and it also allows you an opportunity to make valuable contacts early on. As your company is still young, it’s critical to establish relations within your supplier, vendor network and capital-providing networks. Find a comfortable amount of debt that you can support in repayment and you’ll avoid the more expensive option of raising equity over the long term.
Work with AmpliFi, the Modern Office of Finance
We said it above, but it’s worth repeating: CPG capital allocation isn’t an easy thing to navigate. But there are ways to build toward a sustainable and profitable future. You’ll need to thoroughly understand your cash flow, but if you can master that, you’ll find that it’s easier to hold on to working capital than it may seem.
AmpliFi serves as a modern office of finance for a variety of businesses, including a few that might look a lot like yours. Our team’s knowledge of capital allocation and cash flow management is deep. If you need insight into your own operation, it might be time to contact us.