In the quest for competitive advantage, every dollar matters. But managing those dollars doesn’t always mean cost-cutting, particularly in today’s food and beverage industry, as salaries and wages have already been cut, workforces have already been reduced and capital expenditures have already been delayed. Instead, food and beverage producers and distributors must focus on growth. And being prepared to grow is critical to achieving it. Although there are a number of factors to consider, having a business intelligence foundation and knowing where to find the necessary capital are both very important in preparing to grow.
Building a business intelligence foundation
A culture based on business intelligence leads to better decision-making, increased agility in reacting to market changes, reduced operational risks, and heightened productivity. Many food and beverage producers are surprisingly unsophisticated in this regard. It’s more vital than ever for executives to have the ability to make strategic, operational and tactical decisions based on accurate and timely information. It’s almost impossible to grow without it. Mountains of critical data reside in numerous and disparate supply chain systems, many of which are not integrated from a reporting perspective. So management frequently finds itself forced to make decisions on growth opportunities without the necessary information to do so.
There are a number of tools that can be used to improve business intelligence. One example would be balanced scorecards. Action-oriented, balanced scorecards provide concise, at-a-glance information measuring progress toward strategic goals across the enterprise. They highlight financial as well as non-financial information critical to measuring relevant results. These scorecards typically measure performance using intuitive, simple formats such as red-yellow-green stoplights. They include predictive alerts, which help executives see which areas need their attention and where to focus key resources. These balanced scorecards must then drive corrective action. If performance in a scorecard category falls below acceptable thresholds, the scorecard should outline a remedial action plan to address the shortfall.
Balanced scorecards are just one example of a business intelligence tool. Other tools such as value stream mapping, material yield analysis, six sigma and product margin studies can also enhance business intelligence. All of these tools can be designed to help management make informed decisions on potential growth opportunities. Many companies also find it beneficial to begin with a pilot initiative focused on one key area or strategic objective. It allows them to create buy-in and excitement around the advantages of the business intelligence tools used, by getting a quick win.
Subsequently, the business intelligence process can be rolled out to the rest of the organization by building on the success of the pilot project. Gradually, a culture of performance measurement can then emerge across the company, with senior executives, middle managers and front-line workers all using the same reliable data to drive action and accountability. Ultimately, a culture built on robust business intelligence helps companies react quickly to market and regulatory changes, increase competitiveness and, more importantly, foster growth.
Knowing where to find the capital to grow
Well-managed processors and distributors with a strong financial position can typically secure financing for investment in facilities, equipment and increased production capacity. However, even well-managed companies must be aware of their borrowing capacity and its constraints. In addition, all funding needs are not created equal. For example, capital required to provide liquidity for shareholders because an owner is planning to retire will be evaluated differently by lenders than capital needed to expand production to meet increased demand. Savvy food and beverage executives look critically at their business imperatives and options before approaching outside lenders, taking into account what exactly is driving their financing needs.
A number of companies in the industry are coming out of a period of lower profitability and are borrowing more on their existing facilities. Some don’t have much, if any, excess borrowing capacity. But as their sales grow, those processors and distributors will need to increase inventory and production capacity and may have borrowing requirements in excess of their current availability – a scenario that can make for a rude awakening. Industry executives need to identify the areas where capital is most required to fund growth and then identify the financing needs and options available for those areas. Well-documented financial income statement and balance sheet forecasts that include cash flow and working capital analyses are usually very helpful in supporting this process.
Evaluating financing options can be a straightforward exercise when building inventory, buying a piece of equipment, purchasing a building or funding an acquisition. Since these activities can be documented clearly and accurately, traditional or senior debt lenders (for example, banks) are usually comfortable with providing these types of financing to borrowers. However, food and beverage companies may still be unable to fund 100 per cent of their required financing from traditional lenders focused on asset or cash flow formulas.
Consequently, in North America, many food and beverage companies are looking beyond senior debt lenders to alternative providers. Such alternate funding sources include providers of subordinated debt and other forms of mezzanine capital. Inevitably, these alternative sources of financing come at a higher price. While bank financing and senior term debt generally comes with an interest cost from three to eight per cent, interest on subordinated debt can reach anywhere from eight to 15 per cent, depending on the financial strength of the company and structure of the financing required. If equity warrants are included in the package, the interest cost can go as high as 18 or 19 per cent.
In reviewing their borrowing requirements, food industry executives should also assess alternative and complimentary funding options, which might balance their financing and provide capital requirements to maximize their profitability and return on investment from their growth opportunities. Companies can be diligent in the terms they offer customers and their receivables collection procedures. In exceptional situations, it might be possible to have customers fund working capital requirements that support the respective customer contract. Companies can also negotiate favourable terms with suppliers, allowing for more time to pay invoices. A word of caution, however – approaching customers or suppliers to ask for financing, covertly or overtly, can be an extremely sensitive issue. The last thing a food processor or distributor wants is to create doubts or concerns among customers or suppliers about its own financial stability, when in fact it is in growth mode.
Processors and distributors may also be able to take advantage of certain federal and provincial government financing vehicles that offer funding directly to the company through tax credits or other programs linked to employment. Business Development Bank, Export Development Canada and provincially funded trust funds can also provide direct term financing and guarantees to lenders. Food and beverage companies operating with a business intelligence foundation make sure they are fully aware of these government assistance options.
While stable companies with solid finances can find lenders, food and beverage executives shouldn’t be complacent and wait until capital is required before arranging the necessary financing. Having a good relationship with your financial partners is extremely important today more than ever before. Being proactive and communicative with them, while having reliable access to financial and operational intelligence, is critical to putting your company in a position to grow.
Jim Menzies, CA, is International Food and Beverage Industry leader for Grant Thornton LLP.