Hungry for better cash flow?
A wave of significant change is moving through the food and beverage industry redefining the way companies grow, operate, and manage risk. Increased commodity prices, adjustments in consumer demand and food safety regulations have dramatically impacted the business strategy of leading companies in the sector. In such a well-established market that offers limited growth, companies are required to implement efficient business practices to remain competitive.
While food and beverage companies have a lot on their plates, one thing is clear: today’s growing preoccupation with risk in the supply chain and the focus on working capital are affecting industry priorities in the food and beverage space.
Current challenges in the food and beverage market
Competition in the food and beverage industry is getting tougher with pressure on prices and margins continuing downward and commodity prices rising. The ability of corporations to recognize relevant challenges and opportunities, develop appropriate and timely responses, and execute effectively will continue to be critical to their short and long-term success.
While the market is changing, food and beverage companies are too. In particular, shareholders and management are focusing their attention on cash flow efficiency. Today, any company delivering materially less value than it’s capable of, is likely to find itself a candidate for acquisition.
This growing trend towards acquisitions is prompting many to rethink their purpose: are they a growing business with a healthy balance sheet, or are they a candidate for acquisition? These companies face increased pressure on costs and financial requirements due to global competition, forcing new and innovative strategies as necessities to remain a serious player in the market.
Working capital: Food for Thought
There are two key financial measures that can determine financial strength and healthiness: profitability and cash flow efficiency. Although both indicators are important, cash flow efficiency has become more important than profitability in the current market environment.
Some companies appear to have pursued a deliberate policy of trading off working capital improvements against sales growth or margin expansion, according to research presented by PWC. Over the past few years, working capital levels have deteriorated by almost 2% globally, a trend that is reflected across all industry sectors. If all companies achieved cash flow management best practices, 4.9 Trillion dollars could be released, according to PWC. However, some business executives argue that many of the most readily available opportunities for improving working capital performance have already been exploited.
Also, within the food and beverage sector, there are some significant differences when comparing food manufactures companies with, for example, companies in the brewing industry. A recent study highlights this polarization where good performers were able to release cash and fund their own growth, while bad performers deteriorated and had to find additional cash to fund their growth. In other words the good performers are getting better and the bad are getting worse (Ernst & Young).
Active working capital management is an extremely effective way to increase enterprise value. Optimizing working capital results in a rapid release of liquid resources contributing to an improvement in free cash flow and thus to a reduction in overall borrowing and capital costs. Optimizing working capital leads to an effective increase in enterprise value or Economic Value Added (EVA). One business practice in particular, supply chain finance, is gaining momentum throughout the food and beverage industry. Supply chain finance (SCF) is about much more than just extending payment terms, rather, SCF optimizes the entire supply chain. In many cases, suppliers are offered early payment terms at attractive rates as their rate is tied to that of the buyer, which strengthens buyer-supplier relationships.
A solution with PrimeRevenue
PrimeRevenue is the leader in supply chain finance in the food and beverage industry. Several leading, global brands are successfully using PrimeRevenue’s platform to optimize their working capital. The key reasons why more than 20,000 customers have chosen PrimeRevenue can be summarized in three unique offerings, which are crucial for implementing and managing successful SCF programs:
Spend and working capital analysis allowing companies to make better buying decisions and negotiate optimized payment terms, putting the power in their hands to improve their working capital.
Multi-funding structure giving food and beverage companies the option to select the financial institution funding their supply chain finance program at rates that are highly competitive.
Onboarding suppliers and educating procurement by introducing the supplier finance program to both the procurement team and to the suppliers and communicating the benefits and structure of the financing process. PrimeRevenue’s solution also presents legal click-through agreements and collects all required information from your suppliers for registration into the program.
