How a Profitable CPG Company Can Still Run Out of Cash

A founder can look at a profitable P&L on Monday and still spend Tuesday deciding which supplier has to wait.

That is not an accounting paradox. It is a normal consequence of how consumer products businesses convert cash into inventory, inventory into sales, and sales back into cash. Growth can widen the gap: more raw materials, more packaging, more receivables, more promotions and more retailer commitments can all arrive before the cash from the growth does.

I have managed that tension at scale. In a consumer-products business that grew beyond $30 million in annual revenue, gross margin reached roughly 37% at points and EBITDA roughly 8% to 10% of net sales. The portfolio spanned functional snacks, seasonings, baking products and private label across distributors, Amazon and major retailers. Those results did not make liquidity automatic.

Profit measures economic performance over a period. Cash determines whether the company can meet the next obligation when it is due. In CPG, management has to operate both at once.

The P&L recognizes a sale before the cash cycle is complete

A sale may improve the income statement as soon as the revenue is recognized. The related cash can remain tied up for months.

Consider the operating sequence behind a packaged fruit snack:

1. Contract for agricultural ingredients, often months before the finished product will be sold.
2. Pay a deposit or accept payment terms tied to production, shipment, delivery, or a later date.
3. Purchase pouches, cartons, labels, and other components.
4. Receive and pack the product.
5. Hold enough finished goods to support distributor and retailer demand.
6. Ship or release the order to a distributor.
7. Wait for the distributor to receive and process it.
8. Receive an ACH payment, then reconcile deductions that may arrive separately.
9. Dispute invalid charges and wait for recoveries that cannot be forecast with precision.

Depending on the ingredient, supplier, and customer, the full cycle from the first cash commitment to final collection could extend to 180 days.

That is why a profitable sale can still require financing. The company may need to fund the second purchase or production run before it has collected the first.

Inventory is not the same as available product

We often targeted approximately six months of total inventory: two months of finished goods and four months of raw materials and packaging components. That buffer reflected agricultural purchasing, lead times, retailer expectations, and the need to navigate demand peaks and valleys.

But total inventory value can be misleading.

A warehouse can hold plenty of inventory and still be unable to fulfill the order in front of it. We might have the fruit ingredients but not the correct packaging. Or we might have packaging for a product whose raw material was unavailable. Cash could be trapped in items that did nothing to solve the immediate fulfillment problem.

Total inventory dollars can create a dangerous sense of security. What matters is whether the company owns the complete combination of raw materials, packaging, and finished goods needed to fulfill current demand. If the business has the strawberries but cannot fund the missing pouches, the inventory on the balance sheet is not protecting revenue. It is consuming cash without producing a shippable order.

When suppliers are already carrying large accounts-payable balances, they may stop extending credit. A new supplier may require payment in advance. At that point, reported inventory and open customer orders provide little comfort. The company needs cash for the one component that allows the order to ship.

Net 30 does not mean cash in 30 days

Distributor payment terms can create a false sense of precision.

With UNFI and KeHE, terms could be stated as 2% 10, net 30. In practice, the timing of the early-payment period could begin when goods were received into the distributor's warehouse, even when the distributor arranged pickup. The brand did not always have clear visibility into that receiving date.

The first payment was only the beginning of the reconciliation process. An ACH would arrive and the finance team would match it against outstanding invoices. The deductions file could follow separately. Then the work began:

• identify the deductions applied to each invoice;
• determine which charges were contractually valid;
• connect scan-based promotions to the correct retailer and period;
• challenge shortages, fees, or duplicate claims;
• track disputes until resolution; and
• account for older claims that a distributor might reopen.

Trade spend and deductions averaged roughly 20% to 25% of gross revenue in our business. An average, however, does not describe weekly liquidity. In one week, deductions could consume most of a remittance. In another, a successful dispute recovery could produce unexpected cash.

Neither event was reliably timed enough to fund payroll or a raw-material commitment.

A major retail launch is a financing event

Founders naturally focus on the revenue opportunity when a large retailer says yes. Finance has to model the cash commitment that comes first.

A launch can require:

• incremental raw materials and packaging;
• a larger production run;
• safety stock;
• slotting and setup fees;
• promotional accruals and scan-backs;
• distributor deductions;
• customer-specific compliance work; and
• receivables that may not convert to cash for weeks or months.

One Food Lion launch produced approximately $90,000 in cash slotting fees. CVS slotting also consumed substantial cash. Charges of that size can be taken from a single invoice, which creates a liquidity impact that is very different from recognizing the cost gradually in a planning model.

Large launches were difficult for almost any retailer with more than 250 doors. Competitors with abundant equity or debt could fund inventory and promotions that we could not. The commercial opportunity might be real, but the company still had to survive the cash trough between committing to the launch and collecting the proceeds.

If management is approving a major retail launch by asking only whether the account will be profitable, it is reviewing an incomplete analysis. Large accounts can look attractive on a P&L while creating a cash requirement the balance sheet cannot support. The question that protects the company is: how much cash will this launch consume at its lowest point, for how long, and what happens if velocity, deductions, or collections are worse than planned?

EBITDA does not pay debt principal

Positive EBITDA does not include every demand on cash.

In our case, material uses below EBITDA included interest, debt principal, and legal expenses. Capital expenditures were comparatively light because the operation used relatively modest machinery, but debt service still competed with inventory and operating needs.

When a board celebrates EBITDA improvement without reviewing the cash forecast, it is celebrating only part of the result. EBITDA does not pay debt principal. It does not fund the next supplier deposit, absorb an unexpected distributor deduction, or purchase packaging for the next production run. Improving EBITDA while liquidity tightens is entirely possible in a growing CPG company. Management has to operate both numbers at once.

The EBITDA-to-cash bridge must show every material demand that EBITDA excludes:

This bridge often explains more than the P&L itself.

The weekly cash forecast is an operating decision tool

When liquidity is tight, a cash forecast cannot be a finance-only spreadsheet built from accounting assumptions.

Each week, the team had to gather the information that actually moved cash:

• Which inbound shipments would arrive next week?
• What payment event did each supplier's terms trigger?
• What was scheduled for production?
• Which components were missing?
• What shipped this week, to whom, and when was payment realistically expected?
• Which distributor deductions or promotional charges might hit?
• Which payables could be extended without stopping supply?

Finance then applied judgment and probability to those inputs. The forecast was updated weekly, while incoming funds were monitored daily. Payments were generally released once a week, sometimes later than originally planned.

The forecast drove decisions. It could change the production schedule, delay a purchase order, prioritize a pouch supplier, intensify collection efforts, or defer a hire or outside contractor.

That is the point of cash forecasting. A report that does not change a decision is documentation. A useful forecast tells management what it can commit to, what must wait, and what could break if an assumption is wrong.

Five warning signs that profit is not converting to cash

1. Receivables grow faster than net sales. Revenue is being recognized, but collections are not keeping pace.
2. Inventory grows without a corresponding improvement in fill rate. Cash may be trapped in the wrong SKUs or components.
3. A second production run must be funded before the first is collected. The peak cash requirement is larger than the margin analysis suggests.
4. Distributor deductions are planned as an annual percentage but not forecast by week. The P&L may be reasonable while near-term cash remains unpredictable.
5. The business is profitable before debt service but repeatedly stretches critical suppliers. EBITDA is not covering the full cash burden.

What founders should review every month

At minimum, place these measures beside the P&L:

• cash balance and undrawn availability;
• 13-week cash forecast, updated with actual results;
• receivable aging and realistic collection dates by major customer;
• inventory by raw material, packaging component, finished good, and aging status;
• payable aging with critical-supplier priorities;
• expected deductions and open disputes by distributor or retailer;
• debt principal and interest due; and
• the cash requirement for every approved retail launch.

Profitability is the foundation of a durable company, but it does not fund raw materials while the business waits for a distributor to pay. Growth does not make that timing problem disappear.

A CPG company runs out of cash when the timing and scale of inventory, receivables, deductions, debt service, and growth commitments exceed the liquidity available to carry them.

Raising additional capital may be necessary, but it does not repair a weak operating system. More financing only buys time if the company still cannot connect reported profit to usable inventory, collectible receivables, realistic deductions, supplier commitments, and debt service. The real work is making those connections visible and acting on them before the cash forecast forces the decision.

Author note

Julien Dabi is the founder of Netter Group and a Los Angeles-based fractional CFO. Over 15 years leading finance and operations in CPG, including a decade at Natierra, seven years as CFO, and later serving as CEO, he worked across functional snacks, seasonings, baking products, private label, natural and conventional retail, Amazon, and complex imported-product cash cycles. He now helps founders of growing CPG and consumer-products companies strengthen cash visibility, understand customer and product profitability, and prepare for major retail, financing, and operational decisions.

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