Trying to fit all these pieces together makes it difficult to understand what the next few years will look like. So let’s go back to basics and set the stage.

The Basics of Cash Management

Here are the definitions of terms we’ll be using throughout this blog:

A cash flow forecast is derived from your financial plan and takes your P&L and balance sheet into account to determine how much cash you’ll need over a period of time.

Note: While EBITDA can be an indicator of your cash, don’t forget to consider balance sheet items like A/R, inventory, and A/P. As a CPG company, much of your money will be tied up in working capital. Depending on your business model or structure, this could be more than 50% of your cash usage, so make sure you think through these things.

Cash runway is how many weeks or months you have until you are out of cash.

Cash burn is cash receipts less cash outflows in a given period.

Cash burn rate is the average cash burn over a period of time.

4 Tips for Managing Cash Flow

If you’re facing a tight cash situation and need to extend your runway while figuring out funding, consider these four tips to manage your cash flow.

Tip #1: Build Up Your Cash Reserves

• Reduce working capital: Is there old A/R to collect or inventory to liquidate? 
• Send your invoices electronically and allow them to be paid electronically.
• Don’t pay things until they are due – hold onto the extra cash.
• Be mindful of future POs, liquidate excess inventory and try to convert it to cash. 
• Negotiate extended payment terms with suppliers or lenders.
• Request deposits in advance for large orders.

• Offer a small discount for early payment.

Tip #2: Manage Costs

• Think about headcount and hiring timing. Push out hires where possible, particularly for positions that don’t have an immediate return.
• Take a look at the business and understand what’s critical to support your business growth and what is excess or experimental. Instead of spending on experimental categories, double down on areas that are proven to work.

Tip #3: Emphasize Scenario Planning

What would you do if demand falls off? Or sales decline to half or less of projections? First, you must have a good set of actions for different outcomes. We typically look at a minimum of three types of scenario plans with our clients: 

Plan A+: Best case scenario, often your fundraising plan. How much market opportunity do you think your business can get if everything goes well over the next several years?

Plan A: Business plan/operating plan: Plan A is more conservative and likely the plan to which you manage your day-to-day business, sequencing out when you can invest in people, processes, and systems based on your best guess of current information and how you think your business will develop.

Plan B: Worst case scenario/bear plan: Plan B considerations include tough decisions like headcount cuts, vendor cuts, and price increases. You want to avoid putting yourself in urgent decision-making scenarios which can cloud your judgment. A blueprint or “lifeboat” ahead of time helps you survive rough waters so you can come out the other side.

We’ve been spending a lot of our time with clients on their Plan B. If you don’t have a “worst case scenario” plan, you should work on one now.

Tip #4: Focus on Your Gross Margins

• Make sure you have appropriate price points to support your business model – many startups are hesitant to make price increases.
• You want to ride up the wave – everyone is increasing prices for retailers and consumers due to inflation, and it is much easier to implement a price increase when you are not alone in your category in doing so.
• Consider your cost structure – negotiate product costs as much as possible to increase your margins. Investors are looking for a minimum of 40% all-in margins in the consumer goods space.  In addition to setting yourself up for solid financial metrics for your next fundraise, a healthy margin will extend your cash runway and give you more flexibility to invest in building the business. 

3 Common Mistakes in Cash Flow Management

Here are some common cash flow management mistakes we see startups making in the current economy and environment.

• Mistake #1: Not having a good understanding of unit economics. Many businesses set their gross margins too low. You must put suitable pricing structures in place, bringing up gross margin and negotiating COGS as much as possible. Growth is nice, but profitability matters right now.
• Mistake #2: Not understanding cash in-flow and out-flow timing. How long might it take to sell through inventory and collect accounts receivables? It’s crucial to get more granular with forecasting and gain an understanding of your cash conversion cycle, or the time it takes to convert the dollars invested into your inventory into cash receipts from sales.
• Mistake #3: Inventory buildup. Many companies overbuy, tying up cash and making it harder to move excess inventory. This may be due to overestimating demand, supply, or chain issues, resulting in inventory build-up at the wrong time. Some companies also purchase certain inventory levels in order to hit price breaks without the demand to clear that inventory. While this may improve short term margins on paper, it can have the negative effect of tying up large sums of cash and decreasing cash runway. You must develop strategies around excess stock levels, like converting inventory to cash via liquidation, discounts, warehouse sales, planning ahead for BFCM, etc. 

What to Do If You’re Facing a Tight Cash Situation

If your cash runway is less than six months, start looking for investors sooner rather than later. It will take you a lot longer to raise capital in this environment than in the past. Investors have been spending more time on due diligence, and are slower in writing checks, writing smaller checks, or pausing altogether. 

If you were able to get five investors before, you might need to find 10 to 15 to fully close the round now. If you’re a smaller business or don’t have access to funding as an early-stage business (which can be true even in good times), consider the following:

• Bootstrap- Constraints lead to creativity, and being forced to work with limited to no funding may lead you to discover a business model you may have not thought of otherwise.
• Focus on profitability vs. growth – gross margins matter now more than ever. Slow and steady can win the race, especially in a recessionary period. This will allow you to scale the business and position yourself to raise money in the future.

How Can Propeller Help You?

We help our clients understand their forecasts and budgets, actual costs, and the biggest opportunities for their business. We have a vast portfolio of companies in many industries, enabling us to make accurate predictions and see trends in real-time. Our ability to identify situations as they change in a fast-paced environment is of great value to our clients. 

When cash is tight, we can help you hone in on a 13-week cash flow forecast to make sure you’re able to manage through those periods, and our network helps clients meet experienced financing partners. Want to learn more? Connect with the experts at Propeller Industries today.