Why Cash Application Matters for Emerging CPG Brands (and How It Differs From Trade Spend)
Let's talk about something that might not be as exciting as your latest flavor innovation but is just as important: cash application. Trust me, for emerging CPG brands, mastering cash application is like building the Fort Knox of your cash flow. It's the unglamorous but essential foundation that lets you actually achieve those dreams of CPG world domination.
What Is Cash Application, and Why Does It Matter?
Cash application is the process of matching incoming payments to the correct invoices. It's how we make sure that when Kroger sends payment for that massive order of peanut butter bars, it gets properly recorded against a specific Kroger invoice instead of just thrown into a general money received column.
Why sweat the small stuff? Because in the CPG world, the small stuff is usually huge for your cash flow.
Accuracy. Without accurate cash application, your accounts receivable (AR) becomes a hot mess. You won't know who owes you what or how much cash you really have on hand. Accuracy is paramount for cash flow management for CPG brands.
Timely cash flow. Emerging brands live and die by cash flow. Delays in payment reconciliation mean delays in understanding your true financial position. That can impact everything from ordering more ingredients to investing in that shiny new marketing campaign.
Error-free records. Neglecting cash applications is a recipe for financial record chaos. Tighter, more granular accounts mean there's less room for error.
Automation is your best friend here, streamlining the process and boosting efficiency.
How Trade Spend Differs From Cash Application
What's the difference between trade spend vs. cash application? They both involve money, right? Yes, but they are as different as marketing and accounting.
Managing trade spend in CPG relates to external strategies you use to boost sales, including discounts, promotions, and incentives you offer to get your product flying off the shelves. It's something of a secret weapon for charming retailers and enticing consumers. Trade spend 101: An Introduction covers this in more detail.
On the other hand, cash application is the process of recording and matching incoming customer payments to relevant invoices. But interestingly, poor trade spend management can worsen your cash application headaches. If you don't carefully plan and track trade promotions, you might end up with:
Retailers taking deductions you weren't expecting or properly accounting for
Promotions muddying the waters of your invoicing and payment reconciliation
Uncontrolled trade spend eating into your profits and creating cash flow crunches
So, while trade spend is important for growth, you need to manage it strategically, hand-in-hand with strong cash application processes. It's a delicate balancing act.
Why Strong Cash Application Processes Are Critical
Let's get back to cash application and why it's a critical CPG accounts receivable best practice. Beyond good bookkeeping, strong cash application processes give you:
Improved cash flow management for CPG brands. Imagine knowing at a glance exactly how much cash is coming in, when it's expected, and where it's coming from. That's the power of a good cash application. It gives you the visibility you need to make informed decisions and plan for the future.
Reduced errors. No more frantic searches for misplaced remittances or head-scratching over mismatched payments. In turn, it saves time, reduces stress, and frees up your team to focus on strategy.
Enhanced decision-making. Accurate cash application data is food for strategic decision-making. Want to know your most reliable customers? Which payment terms work best? Cash application data can tell you. These insights are invaluable for aligning cash applications with growth strategies.
Happy suppliers. Efficient cash application means you can pay your suppliers on time. Strong supplier relationships are the backbone of a CPG brand. Keeping them happy means reliable ingredient supply, help when needed, favorable terms, and fewer supply chain headaches.
Optimized inventory. Accurate cash flow insights from cash applications help you optimize inventory management. No more guessing games about how much inventory you can afford. Better inventory management means less waste, better forecasts, lower storage costs, and happier customers.
Common Cash Application Challenges and Solutions
Cash application is important. We get it. But let's be real, it's not always smooth sailing. CPG brands face a unique set of challenges:
Complex payment terms. Retailers have their own payment schedules, terms, discount structures, and deduction policies. Keeping track of it all manually is a nightmare.
Standardize invoice formats and clearly outline payment terms, with contracted penalties in place for late payment.
Delayed reconciliations. Manual reconciliation is time-consuming, leading to delays in identifying payment issues and impacting cash flow visibility.
Embrace automation. Accounts receivable software with auto-matching capabilities can reconcile payments in a fraction of the time.
Discrepancies. Whether it's partial payments, missing remittance details, or incorrect invoice numbers — discrepancies are the bane of cash application.
Strengthen your communication channels with retailers. Use tools that can handle various remittance formats and automatically flag discrepancies for review. Plus, consider setting thresholds for writing off minor discrepancies to keep things moving.
High transaction volumes. CPG companies are drowning in paperwork. You deal with tons of invoices and payments from all those stores, which makes keeping track of everything by hand slow and expensive.
Get smart systems that process payments in big batches, use the cloud to grow as needed, update records instantly, and only flag tricky cases for humans to look at.
Aligning Cash Application With Growth Strategies
Here's how to align cash application with growth strategies:
Spot your MVPs. Cash application data shows which retailers pay on time. For example, if you’re a gourmet candy maker and you see that a particular supplier always pays quickly, focus on strengthening that relationship.
Fine-tune payment terms. If you run a canned cocktail company, your data might reveal that some retailers pay in 30 days while others take 60. Take heed of these insights and negotiate better terms across the board.
Forecast like a pro. Perhaps you make all-natural lip balms. Your cash data can highlight that you get more cash inflows in the summer. Use this information to plan your budget, inventory, production, and investments more accurately.
Maximize trade spend ROI. Use cash application data to check if your promotions work. For instance, if you’re offering discounts for your chickpea chip brand, you can see if those deals lead to faster payments and increased sales.
Aligning cash application with trade spend creates a powerful financial feedback loop. Cash application data informs smarter decision-making, which drives sales and improves cash flow.
Optimize Cash Flow With BBG
There you have it. Cash application may not be as sexy as a viral marketing campaign, but it's arguably more important for your CPG brand's long-term health.
At Balanced Business Group, I've seen time and time again how streamlined cash application processes can transform emerging CPG brands. Our finance services and accounting services can help you move from reactive firefighting to proactive financial management, freeing you up to focus on creating amazing products that people love.
Ready to take control of your cash flow and optimize your financial operations?
Contact Balanced Business Group for tailored consulting services, and let us help you build that Fort Knox of cash flow for your CPG brand.
Author: Pedro Noyola
Pedro Noyola is the CEO of Balanced Business Group (BBG), a company dedicated to helping Founders in the CPG food and beverage industry gain financial confidence. At BBG, Pedro combines traditional accounting with tailored financial guidance, providing industry-specific insights to ensure sustainable growth for passionate food entrepreneurs. He is also an angel investor and a mentor to emerging CPG brands via SKU and TIG Collective. Pedro’s career spans leadership roles at FluentStream, where he helped the company achieve recognition as one of the Fastest Growing Companies in America by Inc., and Telogis, where he was part of a team that grew the company’s recurring revenue from $50 million to $1.2 billion in under five years.
Pedro holds a BA and MPA from The University of Texas at Austin and an MBA from Harvard Business School. He is an active member of the Young Presidents Organization, continually seeking growth in both leadership and learning. Outside of work, Pedro enjoys family time and outdoor activities, drawing personal fulfillment from his roles as a husband and father.
