The ABC’s of Cashflow

Tips & Terms Every CPG Founder Should Know

We collaborated with Settle to answer all the cashflow questions you’ve been too afraid to ask. Brands use Settle to manage every part of their cashflow workflow. From paying vendors to tracking payments and invoices, Settle helps founders and small biz owners grow their brands faster and more seamlessly. For those who qualify, they also offer flexible working capital solutions to help smooth out pesky cashflow gaps.


So you’ve started down the journey of building your own direct-to-consumer brand. You’ve developed the product, created the branding, launched the website, and even spun up some ads. You’re making sales, wow(!) — maybe even a lot of sales — and you’ve reached a point where you realize you might be a little in over your head when it comes to your company's accounting and finances.

Even if you’ve got things under control right now, understanding basic business finance (it really boils down to money coming in versus money going out) has huge benefits for the future. Simple familiarity with key terms can help ensure you’re using your funds efficiently, staying compliant, and preparing for any unforeseen developments (😅). If you feel empowered about your cashflow, you’ll also feel more equipped to make strategic decisions when it comes to partnerships, retailers, and distribution.

Whether you’re selling sustainable hand moisturizer or mushroom-derived alcohol (we’d buy it), getting familiar with these finance 101 terms will keep things (cash)flowing in the right direction.

Cash conversion cycle

The cash conversion cycle (CCC), simply put, is the time it takes for you to do actual business. Day 0 of the CCC starts when you pay a vendor for inventory, and the cycle closes after all the production, freighting, customs, shipping, and sales to your customers, when you finally collect payment for your goods. The shorter the CCC, the more likely you’re operating efficiently. You want to keep things short — just like this definition.

Accounts payable and accounts receivable

Boiled down, accounts payable is the amount owed to suppliers and vendors (which can include contractors in some cases) before it’s paid off. Accounts receivable is the opposite—the amount that you’re owed by your customer for goods or services you’ve provided. Keeping track of your AP and AR (as they’re known in the biz) is essentially the core of managing your business’s cashflow—what’s coming in versus what’s going out, and directly influences your cash conversion cycle.

Payment terms (and net terms)

The cool thing about net terms is how simple they are to understand. The scary thing about net terms is that, because of their simplicity, they don’t leave much room for delinquency! Net terms indicate that the payment for your remaining balance is due on a certain timeline. So if you see “NET30” on an invoice, it means you would have 30 days to pay in full. You’ll commonly see NET30, NET45, and even NET60 days indicated on invoices and purchase orders. 

Keeping that pesky cash conversion cycle in mind, longer payment terms are generally viewed as beneficial to the purchaser because they allow for more flexibility and time to generate revenue. As you establish longer term relationships with your suppliers, it becomes easier to negotiate these payment terms (and negotiate you should!) to be longer because you build up the trust that you’re “good for the money.”

Another characteristic of payment terms to be aware of is that they can be specified to start at different times throughout the purchasing process. Some suppliers require payment as soon as production is complete, while others specify that payment is required after it’s been shipped. Be sure you understand these requirements and specifications when you negotiate pricing at the start of a project.

Supply chain

If we’ve learned anything about the pandemic’s lingering effects outside of healthcare, it’s that the supply chain matters, and that a healthy supply chain is not always a given. But WTF is it? When you go to the store and buy…well…anything, it’s actually gone through many, many steps to make it into your hands. A supply chain is that dynamic link between a company and its suppliers as it relates to production and distribution process. When operated efficiently, supply chains *should* reduce costs and improve a company’s competitive business “edge” in the marketplace. We’re still living through history right now, so when and how our current supply chain heals itself is TBD, but this is a great reminder to founders that they have to both be adaptable and plan ahead in order to succeed.

Purchase orders and invoices

One might suspect that a purchase order and an invoice are the same thing, but surprise!—this is not the case. The difference lies between who is receiving and who is sending. A purchase order is essentially a confirmation from the buyer to the vendor of what they intend to order, defining the overall terms of their purchase. Once that purchase order is fulfilled, the vendor submits an invoice (sometimes known as a purchase invoice) to the buyer, requesting payment.

Working capital

Working capital, which is the amount of capital available to cover day-to-day expenses (utility bills, employee payroll, rent, marketing), is a company’s barometer for growth. When there is not enough working capital to cover a company’s daily liabilities or expenses, then a company is at risk for stalled growth or worse, insolvency.

This is what makes CPG businesses trickier than other types of businesses: when you purchase inventory, your cash gets tied up and you have less working capital on hand. This is where different types of lenders can come in and help smooth things out which leads to…

Non-dilutive financing

In order to understand non-dilutive financing, it’s important to first understand dilutive financing. Dilutive financing is any financing that requires you to give up equity: think fundraising from venture capital (VC) firms or angel investors. That means non-dilutive financing is the opposite — it means you don’t give up stake in your company in order to get the funding. Non-dilutive financing takes many forms including grants, tax credits, crowdfunding, and even revenue-based financing. 

While dilutive fundraising has its benefits (namely that (1) you can raise a ton of money to fuel rapid expansion, and (2) gain access to an investor’s network, among other things), non-dilutive financing is preferable if you want to maintain a greater stake in ownership of your company (which is usually the goal). It’s important to remember that the two aren’t mutually exclusive and many brands will implement both for different purposes.

Here are some specific forms of non-dilutive financing:

Growth capital (AKA term loan)

The structure of growth capital (otherwise known as a term loan) is what most people probably think of when they hear the word “loan.” A lender, (usually a traditional bank) will give a business capital upfront, and the borrower will pay back the loan over time in equal installments—not unlike a mortgage or car financing. Term loans can be great, but they often require a lot of time and paperwork to set up. They also require all your company’s assets to be pledged as collateral in the event that you’re unable to repay the loan.

Merchant cash advance (AKA revenue-based financing)

Unlike a typical small business loan that might require physical collateral or heavy documentation, a merchant cash advance (MCA) can be given to a small business within about a week without jumping through too many logistical hoops. In exchange for upfront cash, an MCA provider will take a slice of the small business’ future sales to be paid back—hence the term “revenue-based financing,”  which you may have come across in CPG circles. The upside to this method is that the repayment schedule is directly proportional to the health and sales of one’s business. However, the downside includes significant fees, an unregulated financial exchange that leaves a business without a lot of protection or agency, and generally a very high APR relative to other options.

Asset-based line of credit

An asset-based line of credit is a specific type of lending in which a loan is secured through some form of collateral — that is, something real and tangible like inventory or equipment. It’s nothing to fear, exactly but it does require that you have something tangible that the lender could sell in the future if you’re unable to repay the loan.

Inventory financing

Inventory financing is a form of asset-based lending in which a financier provides a loan against the value of some or all of your inventory. This provides a company to pick up some financing in preparation of seasonal shifts in their demand, or to get through short term gaps when there’s too much inventory. It’s most common for companies with tons of inventory like retailers, restaurants—and, of course, CPG brands.

Factoring

Factoring is an arrangement where Company A (a financing partner) buys the invoice or debt from Company B (say, a brand like yours) and then handles getting it paid by Company C (a big box retailer, for example). This means that for a cost, your company can get paid faster and without a lot of the hassle of following up with the retailer. The strength of the retailer’s brand and reputation can impact the terms of a factoring agreement since a stronger retailer will give the financing partner more confidence to purchase the invoice and collect payment. An arrangement like this allows you to focus on building your business while reaping the reward of some steady cashflow.

Extended payment terms

Extending payment terms is basically a way of shortening that cash conversion cycle (CCC).  Standard net terms for purchases are generally in the 30-60 day range—and traditionally extending this window of time takes some negotiation to get to upward of 120 days. Companies typically do this so they can reallocate the dollars that would otherwise be tied up in inventory for other business needs, from marketing to payroll and beyond. 

While traditional negotiation works, it can be contingent on a preexisting relationship with that vendor, and it can potentially cause strain on the relationship if requested too often. Nowadays, however, a partner like Settle can step in to extend payment terms on your behalf. For a monthly fee, we pay the vendor upfront, allowing you to kick off the inventory purchase but not pay for it until 30-120 days later*, keeping both sides of the purchase happy. 

Tips for Improving Your Cashflow

Knowing the lingo around cashflow is helpful, of course, but what really matters is that you are able to hone what’s necessary to keep growing your business. Here are some tips for improving cashflow, and finding the runway you need:

Simplify your bill workflow into one place. As your business expands, you might slowly start to amass payment processes beyond comprehension. That is to say, things might start to get confusing. Keeping tabs on your invoices, accounts payable, bill payments, and vendor information will keep your cashflow tidy (and efficient). Luckily Settle’s cashflow management platform was designed specifically with CPG businesses in mind and can help simplify and automate what could otherwise be an overwhelmingly manual process. Using a cashflow management system early on also means that when it’s finally time to bring on that accountant you’ve been waiting for (congratulations are in order if you’ve made it this far in your business, by the way!), the handoff will be a piece of cake.

Determine what needs to be paid now, and what can wait. It’s a good, earnest inclination to pay your bills as soon as possible. However, as your business grows, it’s important to know which bills need immediate coverage from the cash you have and which are better financed to buy you time. Some POs are worth the cost of financing because they’re so large or complicated. Be strategic with how you utilize one of the most critical elements in growing your business: your time.

Don’t be afraid to mix-and-match financing options to suit your unique business needs. Most businesses require a mix of different loan types to help them reach their goals. You should consider factors like time, cost, and size of the loan in order to determine what makes the most sense for you. It’s not uncommon to see CPG brands deploying a mix of inventory financing, asset-based lending, and extended payment terms to boost their growth.

Pay your vendors using a cashflow management system like Settle. Extending your payment terms is one of the simplest ways to smooth out the gaps in your cash conversion cycle and ensure you’re not stuck in a payment pinch. By paying your vendors upfront on your behalf and allowing you to defer these large payments by 30-120 days, Settle gives you some breathing room (otherwise known as working capital) to spend on critical day-to-day expenses.

Integrate your payment system with your accounting system. Often companies get used to having siloed accounting systems and payment systems. This can make it challenging to keep your eye on cashflow, and to understand exactly which transactions are taking place at which time. Consider integrating your accounting system (be it Quickbooks, Xero, etc.) with your cashflow management system for better bookkeeping.

All in all, cashflow is about applying the right resources at the right time. Developing the perfect strategy—and being able to find flexible solutions that grow with you—can be a challenge. That’s why it’s important for every founder to know their financing options like the back of their hand. 

If you ever feel overwhelmed, stretched too thin, or lost in a sea of POs, try to remember this: As your business expands, your expertise in finance will sharpen too. With big ambition, growth is hard to avoid.