Fast-moving consumer goods (FMCG) businesses must juggle the ongoing costs of manufacturing with periodic income from batch orders, which can cause cash flow issues and bottlenecks.
But, given the complex world of FMCGs, what’s the solution? How can your business gain better control of its cash flow to fuel growth?
Whether you’re struggling to fulfil orders or unable to offload surplus stock, getting your hands on liquid cash can be the difference between success and failure.
Join us as we explore how to generate healthy cash flow for your manufacturing business and help you scale production to new heights.
Why is Managing Cash Flow Important for FMCGs?
FMCG manufacturers often have to produce thousands of products to meet consumer demand and achieve greater economies of scale to stay relevant within the busy market.
Unlike an estate agent who could sell a handful of houses to make significant profits, FMCG manufacturers rely on the sheer quantity of numbers to grow.
Scaling your manufacturing operation to reach these numbers requires a healthy cash flow to cover the costs of raw materials, new machinery, maintenance, storage facilities, and much more.
In an ideal world, FMCG businesses would receive instant payment every time a product runs off the end of the production line.
However, the lag time between the upfront investment to produce a batch of goods and receiving payment from buyers can be months.
Recent research by Tungsten Network and the Institute of Finance and Management revealed that 47% of buyers confess to 10% of payments going out late and 16% admit that 20% of payments are never on time.
As a result, manufacturers are unable to inject the funds they need to create more products and production grinds to a halt.
Maintaining a steady cash flow is essential for creating a sustainable business with consistent growth and the freedom to take on new contracts without disappointing buyers.
So, What Are the Key Drivers Behind Poor Cash Flow Management?
1. Compulsory Outgoings. As with all businesses, FMCG firms must comply with the same PAYE and VAT requirements at regular intervals throughout the financial year. These fixed outgoings can hit businesses when they least expect it as positive spells of growth precede an inevitably hefty tax bill.
2. Defaulting Customers. The consumer goods market is notoriously volatile, risky and cutthroat. UK consumer goods brands are three times more likely to fold in their first three years of launching than most companies. The risky nature of the business means FMCG manufacturers often face customers defaulting. Defaults leave a huge delay between investing in production and receiving payment.
3. Fluctuating Demand. The demand for most consumer goods will vary throughout the year and undergo some form of seasonal fluctuation. Whether you’re manufacturing romantic chocolates in February or festive advent calendars in December, the demand from buyers won’t be consistent throughout the year. Fluctuating demand can leave FMCG businesses strapped for cash one moment and unable to spend it the next. Sharp peaks and troughs in demand are never good news if you want to maintain a steady cash flow.
The unpredictability of incoming payments and the certainty of outgoing costs means managing cash flow is vital for FMCG manufacturers to achieve sustainable growth.
How to Improve Cash Flow in a Manufacturing Business
While getting your hands on liquid cash can be challenging for FMCG businesses, it’s by no means impossible.
The very fact that FMCG giants like Nestlé, Procter & Gamble, and PepsiCo have reached such lofty heights is a credit to their ability to generate liquid capital and acquire a smorgasbord of smaller brands.
So, how can your business improve cash flow and negotiate the unpredictability of the industry to stay on the straight and narrow?
Encourage Speedy Payments
The first rule of thumb is to remember high sales don’t necessarily indicate positive cash flow.
High Sales ≠ Positive Cash Flow
Your sales could be through the roof, but if you don’t receive payment on those sales for ages, your cash flow is no better than if you’d made no sales at all.
High sales are never a bad thing but try to negotiate your contracts to achieve a consistent stream of incoming cash, instead of huge lump sums every few months.
If you offer customers a credit period when they make an order, consider shortening this period to reduce the delay between shipping goods and receiving the cash. Many businesses incentivise speedy payments by offering discounts to customers who pay on the spot.
Alternatively, single invoice factoring lets you access advance payments on individual unpaid invoices to avoid long lags and maintain a steady stream of cash.
Spend Cash When You Have It
Spending cash may seem counterintuitive when you’re trying to improve cash flow, but trust us, there’s method behind the madness.
Too many FMCG companies make the mistake of thinking positive cash flow will generate a profit. However, in reality, a high positive cash flow may indicate your business isn’t maximising its output and you could be losing sales opportunities due to stock shortages.
While all businesses should keep cash reserves as a safety blanket if things go wrong, holding excess cash at certain periods of the year is likely to cause cash flow problems down the line.
There’s no point in accumulating cash if you’re not going to use it.
Investing in sophisticated inventory management technologies can help FMCG manufacturers strike the right balance between supply and demand. This way, any excess money can be used to ensure your business is operating at maximum capacity.
Fill in the Gaps When Customers Default
If one of your customers defaults, the payment delay can take a serious hit on cash flow and impact your relationship with customers who can afford to pay.
Avoid extended periods of paused production with single invoice factoring. Receive advance payments from other customers before they’ve even paid you.
Advance payments help you bridge the void left by the defaulting customer and keep production rolling to satisfy orders from other customers.
Use Cash Flow Forecasts
With market uncertainty making it difficult for FMCG businesses to maintain a steady flow of cash throughout the year, investing in accurate forecasting models is vital.
Whether you’re using customer analytics to map current trends or using historical data to predict peaks and troughs in demand, forecasting could help your business plan ahead and avoid prolonged droughts.
Accurate forecasting allows you to pull money forward before cash flow becomes a problem down the line.
Maintain Steady Cash Flow with Lendflo
Here at Lendflo, we’re committed to helping FMCG businesses access cash when they need it most.
Receive funds in seconds with our smart digital platform, which integrates with leading accounting software.
We help businesses of all shapes and sizes to maintain a steady cash flow and offer the best rates on individual invoice financing.
Are you ready to inject your FMCG business with the funds it needs to scale production and grow to new heights?
Get your hands on the cash you need with advance payments on outstanding invoices.
Discover Lendflo today.