It's All About the Benjamins: Why Profitable CPG Businesses still Run Out of Cash

It’s a normal Tuesday morning in March.

You’re in your office, sipping on your coffee and scrolling through the emails that came in overnight.

You sit back and think about the business: sales are growing, margins look healthy, orders are fulfilled and delivered on time, and you just reported another month of positive net income.

Life is good.

A grin runs across your face. It’s been a rough few months, but finally the business is molding into what you’d imagined.

You’re a titan of industry.

Why can’t it always be like this?

After this reflection, you continue your list of things to do and decide to open the bank account before paying vendors for the weekly bill run.

Something seems off.

It’s low. A bit of panic begins to set in.

Payments to vendors, payroll, and credit cards are all due this week, but the cash isn't there.

It’s common for businesses to struggle with cash flow. A big reason why is that businesses focus so much on profitability and less on positive cash flow.

Profitability tells you whether your business is making money. Cash flow tells you whether you have the money to keep it running.

Okay, so what do we do now?

Open up your QuickBooks or NetSuite file and dust off that balance sheet you’ve avoided for months. Specifically, we want to analyze accounts receivable, inventory, and accounts payable.

For inventory businesses, these three accounts tell us why a company might be profitable but still struggling with cash. And they’re the primary inputs to the cash conversion cycle.

Understanding the Cash Conversion Cycle

The cash conversion cycle measures the time it takes for a company to turn its inventory investments into cash collected from customers.

There are three main components.

Days Sales Outstanding (DSO): How long does it take customers to pay us?

Days Inventory Outstanding (DIO): How long does inventory sit in our warehouse before we sell it?

Days Payable Outstanding (DPO): How long do we take to pay our vendors?

CCC = DIO + DSO − DPO

The goal is generally to keep the cash conversion cycle as low as possible without damaging vendor relationships, customer relationships, or inventory availability.

The longer your cash conversion cycle, the longer your money is tied up in inventory and unpaid customer invoices instead of being available to invest back into your business.

And that's not good. We want to invest in our business.

Actionable Steps to Take When in a Cash Crunch

1. Accounts receivable: Look at the accounts receivable aging summary. If there are overdue invoices, get on the phone immediately and call to schedule payment with those customers.
2. Inventory balance: How much inventory do we have on hand in terms of sales, and can we reduce that to an amount where we'd still feel comfortable fulfilling orders to customers on time? If so, minimize future orders from vendors to meet that inventory goal.
3. Accounts payable: How current are we on our payables? Do we have longstanding relationships with vendors that we could utilize to negotiate a payment plan?

The number of actions we could take in this situation is endless, but these are three that can be taken immediately and have success.

Every CPG business needs to review its cash conversion cycle regularly. It doesn't have to be complicated. Just understand how long your money is sitting in inventory, how quickly customers are paying you, and when your vendors expect payment.

And don't wait until your bank account is running low to start asking those questions.

A 13 week cash flow forecast can help identify cash shortages before they happen, giving you time to collect outstanding invoices, adjust inventory purchases, or work with vendors.

Because at the end of the day, your P&L might tell you you're a titan of industry, but it's the cash in your bank account that's going to keep the lights on.