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Three reasons FMCG businesses struggle with cashflow, and four ways to tackle the problem

01 December 2014

SME firms operating in the FMCG space may find that the post-downturn months are some of the most dangerous they will face. 

Certainly as confidence in the economy struggles to catch-up to growth, many healthy firms can end up facing cash shortages that can hold them back from enjoying the spoils of the uplift.

Tracy Ewen, managing director of invoice finance specialist IGF, explores the three main reasons that the FMCG sector is so susceptible to cashflow problems, and the steps firms can take to make sure their finances remain healthy:

  • Customer fluctuations. Most FMCGs have a wide array of customers, varying by size, peak season and reliability of payment. Some of these companies will only open their doors at certain times of year, depending on demand, and changes in reputation and competition can see demand move through sharp peaks and troughs. The combination of these factors makes the payments landscape very unpredictable, impeding a company’s ability to plan ahead.

  • Customer defaults. In the FMCG market more than any other, business churn is a major concern. The likelihood of a consumer goods company failing within the first three years is triple the national average and that makes for a high percentage of customers eventually defaulting on payments. This delay can leave those companies short of cash for a long time, even after sales pick up elsewhere. 

  • Inflexibility of outgoings. Whilst the risks to cashflow are undoubtedly higher in the industry, it gets no special dispensation in terms of its PAYE and VAT requirements. These inflexible deadlines can result in serious cash shortages and are made worse by positive spells of business growth which can generate large bills before payments arrive. 

It’s not easy for the FMCG industry to manage cashflow at the best of times, but the current economic climate will exaggerate many of these problems. Tracy offers four tips for getting on top of cashflow concerns:

1)Don’t always associate higher sales with better cashflow.  If large portions of your sales are made on credit, when sales increase, your accounts receivable increase, not your cash;
2)Anticipate problems in advance.  Prepare cashflow projections for next year, next quarter and, if you’re on shaky ground, next week. The key to managing cashflow is to be aware of any problems as early and as accurately as possible.  Financial services providers are wary of borrowers who suddenly need to have money today;
3)Seek advice. Many professional finance providers offer free advice, backed by many years of diverse experience as a free add-on to the paid-for financial services businesses use every day. Making use of that advice can save time and money where it’s needed most;
4)Find a solution that fits your specific needs. If you’re being held back by the gap between accounts receivable and money in the bank, there are finance solutions that can turn one into the other, cutting out the wait. 

Tracy concludes:
“As businesses are able to nurture the green shoots of recovery and grow in line with the wider economy, it’s important to remember the dangers that lurk in this seemingly positive transition period. Traditionally insolvencies tend to rise following economies’ emergence from years of recession and it is always a shame to see otherwise healthy businesses brought down by cashflow shortfalls.”

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