Consumer packaged goods (CPG) brands often invest heavily in raw materials and inventory upfront, yet cash flow from sales might not materialize until months later. This is where efficient working capital management comes into play to ensure the company’s sustained growth.
In this article, we will discuss how to find working capital for CPG companies like yours to effectively secure financial resources for your operations.
What is working capital?
Working capital is the difference between a company’s current assets and its current liabilities. Current assets for a CPG company might include inventory, accounts receivable, and cash on hand. Meanwhile, its current liabilities could cover accounts payable, short-term loans, and payroll.
This metric is important to track as it serves as a key indicator of a company’s operational efficiency and financial health. Adequate working capital ensures that a company can cover its short-term obligations, such as paying suppliers, meeting payroll, and managing day-to-day expenses. In contrast, insufficient working capital can lead to liquidity issues, missed opportunities, and even insolvency.
How to calculate net working capital
To get your net working capital, simply follow this formula:
Working Capital = Current Assets – Current Liabilities
If your net working capital is less than 1, then this may indicate difficulties in meeting short-term obligations. This situation can be particularly problematic for CPG companies that often have significant upfront costs related to production, packaging, and distribution.
On the other hand, anything that falls between 1.5 and 2 is typically considered healthy. It suggests that the company has sufficient resources to cover its operational expenses and invest in future initiatives.
It’s essential to note that excessively high working capital, while seemingly positive, might signify inefficiencies such as excess inventory or underutilized assets.
How does working capital affect your cash flow?
Working capital can change, either positively or negatively, over a specific period, typically a fiscal quarter or year. These fluctuations can significantly impact another critical aspect of a CPG company’s financial health: cash flow.
Positive changes in working capital (from increases in current assets or decreases in current liabilities) typically result in a temporary decrease in cash flow, as cash is tied up or used to pay off liabilities.
On the contrary, negative changes in working capital (like decreases in current assets or increases in current liabilities) often lead to a temporary increase in cash flow, as cash is generated or freed up.
Sources of working capital for CPG companies
Maintaining a healthy working capital is crucial for a CPG business to launch or stay afloat. However, the nature of the industry often makes it challenging to access traditional bank loans and lines of credit. The industry has unique capital cycles, where companies purchase inventory months before it is sold, often with unpredictable external factors influencing demand.
As a result, CPG companies can struggle to secure financing from traditional banks. To overcome this challenge, founders must master how to find working capital through alternative financing providers, which include the following:
1. Equity crowdfunding
Equity crowdfunding connects startup founders with new angel investors or venture funding without straining cash flow on loan repayments. The downside to this option, however, is that it can be excessively dilutive, reducing the company’s ownership stake while still holding founders fully responsible for repaying the funding.
2. Inventory financing
For CPG brands looking to sustain growth, inventory financing emerges as a strategic solution. This non-dilutive option leverages your inventory as collateral, ensuring swift access to funds while demonstrating your ability to meet repayment obligations. Among available options, this may be the most certain route with the fewest disadvantages. Kickfurther, in particular, is an excellent choice for your inventory financing needs, offering a quick registration process and flexibility to set your repayment schedule.
3. Working capital line of credit
Akin to a credit card, this option offers a revolving credit account. CPG founders can borrow based on immediate needs and repay the amount over time, with a predetermined credit limit. This is a flexible choice as you can access funds as required, without the burden of immediate repayments. A credit line can also help smooth out cash flow fluctuations and provide a safety net for unforeseen expenses, offering further financial stability for your business.
4. Seed capital
Often sourced from private investors in exchange for a stake in the company or profit share, this choice can be instrumental for newer CPG startups. In many cases, initial funding is typically provided by contacts close to the founder, such as friends or family. Once secured to kickstart the business, seed capital not only provides necessary funding but also bolsters credibility for larger bank loans or venture capital.
Closing thoughts
To better understand the financial standing of your CPG company, look no further than your working capital. Keeping a healthy score for your working capital should be prioritized to sustain growth and competitiveness within the market. However, given the unique nature of this industry, this may come with several challenges.
Thankfully, an array of alternative financing options is available for CPG businesses looking for external funding, all of which offer flexibility that traditional banks may not provide.
Consider seed capital and equity crowdfunding for fast transactions that boost your network, given you can accommodate the loss of equity. Safer options are available for founders who want to keep full ownership through credit lines or inventory funding like Kickfurther.
Your choice of a working capital source should depend on your goals, priorities, and immediate needs as a business founder. It’s crucial to assess the trade-offs when selecting the right financing option for your CPG company.
How Kickfurther can help
Kickfurther is the world’s first online inventory financing platform that connects companies with a community of backers, offering funding that traditional sources may not provide. We empower brands to access funds for their largest expense—inventory—by reaching a community of buyers eager to support your growth. With Kickfurther, you can fund your inventory on consignment and repay the funds as you make sales.
Here’s why Kickfurther is your top choice for inventory funding:
- No immediate repayments: Pay back only when your inventory sells, with the flexibility to set your repayment schedule based on your cash flow.
- Non-dilutive: Keep full ownership and control of your business as Kickfurther does not take equity in exchange for funding.
- Not a debt: Kickfurther operates outside traditional loans, so it doesn’t add debt to your books.
- Quick access: Kickfurther can easily fund your entire order and cover supplier payments whenever needed.
Get funded within minutes when you register at Kickfurther! Sign up and join our funding marketplace today.
