Financial Management in a Small High Growth Food Business
Summary of Key issues
1 Introduction Financial Management is core to the survival and success of any organization or business. For small food companies with high growth aspirations – and growth potential – financial management is crucial to delivering on your potential without running out of cash along the way. Compare a small food business on a growth path against for example the local hairdressers on the corner: The food company must invest significantly in new product development – creating the recipes, testing, packaging, ensuring regulatory issues are addressed, finding a manufacturing solution etc. all cost money upfront. To have “products” the hairdresser simply needs to ensure staff are trained in latest styles and techniques, and invest in equipment to make sure they can deliver on these techniques, but investment is relatively speaking at a modest level. The food company typically sells to retail chains on credit so needs to plan how to finance the (extensive) credit period, and the amount of inventory needed to service the customer orders. As the company grows these challenges grow too, and cashflow becomes ever more challenging as significant money is tied up in debtors and inventory, and even a highly profitable company can be under permanent cash pressure during the growth phase. Again the lucky hairdresser gets paid immediately and does not need to hold any inventory. As the food company develops and grows major financial questions will arise – • should we outsource production?
• for how long?
• Is it financial desireable/ feasible to look at insourcing production and if so when is the optimal time.
The capital investment needed to manufacture food product efficiently is usually huge compared to the level of investment a hairdresser needs to make. Food companies have many other financial decision making challenges, for example how do we price our product at a level that gives us healthy profits but positions our product competitively in the market place, and in an industry where the distribution channel is extremely powerful. As most Irish food companies need to export to grow, financial risks such as foreign exchange exposures are often a major challenge. Whereas the local hairdresser sells in euros and pays rent and staff in euros, the food company may be selling and buying in multiple different currencies. And the list goes on… ____________________________________________________________________________________________________________
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So what is financial management, and what does “good” look like?
There are 5 major components to financial Management:
a) Planning and Reporting systems
Agree, set and deliver on targets. This is explained below using the analogy of a
SATNAV
Good planning pulls together many of the other components of financial management –
to plan you need to get accurate product costings, make decisions about pricing,
funding, which markets to chase and how etc., and pulling together al of these issues in
a coherent finabcial plan will tell you whether your pricing, costing and volue
assumptions add up to a viable business.
Reporting systems are then importat to keep you up to date at all times as to whether or
not your plan is working.
b) Cashflow Management:
Ensure that the company has enough cash available at all times to deliver on the goals
and plans set by the owners.
This includes raising capital; setting up systems to ensure that the company cash is
neither wasted nor pilfered; chasing payments from customers and others (incuding
grant bodies) and paying suppliers, employees etc.
c) Financial risk management systems
Foreign Exchange, Commodity input price volatility, Debt, employee fraud…. All of
these create risks that need to be measued and addressed
d)Compliance
Reporting to external stakeholders as legally required promarily for tax purposes, this
means setting up good systems so that you can efficently deliver VAT, PAYE, PRSI
and Annual returns, and also ensure that you are as tax eficient as possible, ie availing
of all possible advantages available to a small byusiness of your type
e) Financial/ commercial Decision making systems
Commecial decision making to optimise profitability and create shareholder value
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Financial Management is about reaching your targets in the optimal way without
exposing the business to too much risk
To understand what financial management is all about imagine you are sitting in a car somewhere
horribly cold, about to set off on an important journey to a distant cross border destination you
have never visited before. You know you will have to make the journey under really tough winter
conditions, and the route and terrain are completely unfamiliar to you.
Ask yourself what you would like to have in that car.
If you are sensible you will make sure to have:
a) A good SATNAV: A CLEAR PLAN AND TIMELY ACCURATE REPORTING SYSTEM
While the more old fashioned may still prefer the map, a SATNAV gives you the optimal route to
the destination you are aiming at, will tell you how long it will take to get there and even how
much it will cost.
This is like the financial plan for your business – what exactly is our top target for each of the
next 5 years and beyond that, and how exactly will we deliver on these targets – for example how
can reach our target turnover of €9m and profits of €1m by 2017. Most importantly for small food
business, the plan shows you the cashflow implications of your proposed growth trajectory.
Companies are often shocked that the working capital implications of growth (meaning money
tied up in inventory and customer credit) can mean that a profitable business produces very little
cash.
The SATNAV is a simple metaphor for the planning and financial reporting elements of a wellrun company. You would not leave home to an unfamiliar faraway destination without clarifying
the best route, and taking a SATNAV to make sure you stay on route.
Financial management at its core includes agreeing clear targets with all stakeholders - banks,
shareholders, management and employees. So for example to borrow money from the bank you
will need to commit to targets on revenues, profits and cashflow generated for each year until the
loan is repaid. You will then need to plan in detail how to achieve this - the best route to reach
these targets.
Don’t wait for the bank to force targets on you, make sure you set your own agenda and set your
own targets in line with your own risk appetite, lifestyle aspirations and value system.
Pulling together your plan simply means working out what volume of products you can/ plan to
sell at what rice and product cost, and then planning the level of overhead spend you will need to
support that volume of sales – what management, sales and product team will you need? How
much marketing will you need to do? Hpw much will administration and premises cost you?
You will also need to set up reporting systems to monitor progress. Just like the SATNAV tells
you where you are and how long it will take to reach your target, financial systems should give
accurate updates on progress vs. plan all the time (management reporting systems) and guide us
back on track whenever we deviate off the route - i.e. off budget. This means that it is important
to develop a culture in the business whereby the financial forecast is really important and if you
miss the months target you pull together as a management team to take corrective action to get
back on track quickly. It also means that if you have good reporting systems you can maintain
strong credibility with your bank by keeping them updated on progress, and also where
appropriate explaining why at ties you are off track.
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15/08/2016 Good reporting systems means timely, accurate and adequately detailed to be able to identify
accurately why the company is off track on delivery of the plan.
Nobody would try to drive to Moscow in the middle of Winter without thinking through risk
management issues and having a clear route to destination, yet many businesses stumble along
without a really clear destination, without thinking through financial risk management until it is
too late, and a very high proportion of SMEs have no real planning systems let alone reporting
systems.
b) A full fuel tank and some form of ongoing access to cash and if you are crossing very
difficult terrain (central Australia?) a plan of where to stop for fuel. CASH
MANAGEMENT
This is the cashflow management element of financial management in a business – you need to
raise the right amount of capital from the banks and shareholders to make the upfront investment,
and then monitor the level of cash at all times including looking ahead always to when you night
run out of cash and where you might raise it.
Establish good links with your bank even if you don’t think you will need to borrow. A growth
opportunity may arise that requires investment and you will be glad to have the links already in
place to access the money if you choose to take up the opportunity to expand.
c)
Snow chains, a puncture repair kit and blankets in case you get snowed in. RISK
MANAGEMENT
You will automatically think ahead and assess the risks you are going to be exposed to and
prepare accordingly. Likewise a business should assess their exposure to Foreign exchange
fluctuations, commodity prices (is your business impacted by the price of milk powder? Sugar?
Cocoa?) debt pressures, credit risks and supplier failure risk. If any of these issues could
potentially damage your business seriously, you should look at putting risk management
processes in place to deal with this.
Often the best risk management systems are the simplest. For example if you have revenues in
sterling and all your costs are in euro, consider whether you can transfer some of your costs into
sterling by purchasing inputs in the UK.
d)
personal and car related papers of passport, licence, tax and insurance COMPLIANCE
REPORTING
Just as you have to be able to produce these papers when asked, you have to have a system in
place to produce the necessary tax reports on time – annual returns, VAT returns, PAYE and
other employment tax returns and any other sector specific sports you need.
e)
car dashboards dials that work, inclding a rev counter: KPIs and commercial decision
making systems
It would make you pretty nervous if the fuel gauge was out of action or the warning lights didn’t
work. This is like reporting systems that include clear well chosen KPIs, so for example you
need to onitor the level of cash and how you are using the cash, and just like the warning lights
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15/08/2016 you need to be scanning for risk factors at all times. The Rev counter is the dial that tells you
when to change gears as otherwise you will be wasting fuel. In a company this means decision
making systems around pricing, investing, product portfolio management etc that ensure you are
not wasting money.
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