Cash flow management in the Canadian food and beverage sector
It is well understood by all industries that strong profitability is critical to running a sustainable operation and securing financing when needed. With the current economic climate, the Canadian food and beverage industry is especially challenged on a number of fronts.
Typically, the go-to strategies in the profitability equation are increasing sales and/or implementing cost cutting measures. But the food and beverage industry today is operating in a far from typical climate. The on again/off again rounds of tariff threats, combined with rising input costs, inflation, lower spending levels on the part of consumers, and supply chain disruptions and delays, have complicated the profitability equation for producers, manufacturers, and retailers alike.
The primary reason that most businesses fail is a lack of proper cash management. Many operators tend to spend their time building their business instead of placing controls on managing daily cash flow. In other words, net income and cash flow do not always work in tandem.
The perils of negative cash flow
Without proper cash flow management, business owners could easily find themselves increasing their profitability but having no cash in the bank. When cash outflow exceeds cash inflow, this negative cash flow can be a strong indicator of financial difficulties and potential debt problems.
The following are two of the most common cash flow management issues:
- The dreaded cash lag- A cash lag is the time between making payment for the initial receipt of goods and receiving payment from customers for goods sold. Time can be significant in the food and beverage industry, especially for food processors, as purchased materials need to be put through the manufacturing process, packaged, and then sold and shipped to customers.
Each person in the industry’s complex supply chain needs to collect its accounts receivables. However, every link in that supply chain is stretching out their cash flow as long as possible because they face the same demands.
By way of example, food and beverage manufacturers could easily experience extended cash lag cycles. On paper, their profitability looks strong with sales at good margins and all the materials and processing work paid for. However, there may be no cash inflows coming in for a number of months.
- Keeping pace with growth – Companies in a growth mode are often cash strapped because of additional expenditures and working capital needs, especially financing accounts receivable and inventory.
Most companies need to invest in new talent, marketing, and capital assets and/or machinery and equipment at the beginning of a growth cycle. The cash outflow for these expenditures is made well in advance of receiving the cash inflow benefits. As sales (i.e., receivables) increase, growing companies also need to build inventory to meet new customer demand.
These working capital items need to be financed either through the bank or their own funds. Without financing, cash flow will be very difficult to manage during periods of growth or slowdowns.
Building your working capital
There are some simple ways to solve daily cash flow issues and be able to obtain sufficient working capital financing to navigate uncertain economic times. Here are three recommendations to help your business improve cash flow management:
- Communicate with your customers
Given the market challenges, it is crucial to work with your supply chain constituents. Transparency is key. For example, you may be able to renegotiate terms with retailers to minimize cost increases, explore domestic ingredient supplier options, negotiate potential discount opportunities with suppliers, or lower packaging costs by eliminating waste, switching to cheaper materials, or reducing package volumes.
- Manage accounts receivable
There is only one thing worse than not making a sale: that is, making a sale and not getting paid. If a customer is late on payment, it is not enough to assume that they will eventually pay. There needs to be follow-up and active communication about the timing of receipt of payment.
Managing accounts receivable should be a daily function. One tactic to encourage prompt payment is to offer customers a discount – for example, a 2% discount if paid in 20 days, or 1% if paid in 30 days. If a customer is past due, try offering them a discount if they pay immediately to help ease cash flow issues.
- Streamline inventory management
Payment for goods and materials occurs at the beginning of the cash flow cycle. The last thing that businesses want is to disappoint their customers with short shipments due to insufficient inventory levels or be stuck with excess inventory for months on end.
Food and beverage operators especially need to walk a fine line between carrying more inventory items (SKUs) than needed and falling short and unable to fulfil orders. However, carrying too many SKUs can complicate cash flow. Also, the risk of obsolescence or food spoilage is high.
Also, the “all things to all people” business model has proven to be unsuccessful. In some cases, it might be helpful to streamline SKUs to eliminate items that are slow moving, or too costly to produce or source.
Managing inventory turns is of the utmost importance given that bankers prefer to finance companies that carry fewer SKUs and have high inventory turns.
The bigger cash flow picture
The thought that business profitability matters the most is short sighted. The financial health of any food and beverage company also depends on understanding and managing cash flow.
Cash is truly king as it provides operational flexibility and the opportunity to enhance product lines, invest in research and development, and manage the barrage of tariff and pricing fluctuations. In fact, it is common for investors and lenders to request cash flow reporting and forecasting, in addition to or even instead of, the standard profit and loss forecasts.
This is not to say that businesses must manage cash flow on an hourly basis. Cash flow statements (typically updated quarterly) can provide important insight into a company’s financial health.
The bottom line for running a profitable and sustainable operation is that every business decision should be evaluated from both a profitability and cash flow perspective.
About the author
David Filice is a partner in Fuller Landau’s Restructuring and Insolvency practice, and a member of the firm’s food and beverage team. He can be reached at dfilice@fullerllp.com or 416-645-6506.