Why is cashflow so important to a wholesale food business?

When you’re running a wholesale food business, you’ll be dealing with the daily influx of supplier invoices, and balancing these cash outgoings against the income from your customers’ bill payments. With so many goods going in and out of the business, keeping on top of your cash position can be tricky – but being in control of cashflow is vital to the prosperity of your business.

Hassan Behcet looks at the importance of positive cashflow in the food sector, and why working closely with your adviser on cashflow management and forecasting is key to success.

What are the main cashflow hurdles for a wholesale food business?

The main issue with running a food business is that your stock is highly perishable. If you don’t manage your stock well, and you end up with a consignment of unsellable produce, it can have a big impact on your cashflow. When stock goes bad, you’re essentially throwing money down the drain – and that can generate a real cashflow problem for you to overcome.

Because of the perishable nature of your goods, you also have to make very rapid decisions, so you need the right cashflow management to make decisions quickly. In all businesses, if you know your cash inflows and outflows, you can control that cashflow. In the food sector, having this deep understanding of your cash position can be critical.

Many big wholesalers will deal directly with the major supermarket chains – and these supermarkets are only interested in their own margins and cashflow. Because of this, terms for payment from the supermarkets might be 45 days, not the 30 days that you probably want as a wholesaler with bills to pay.

Not getting paid for a further 15 days can cause real problems. So you have to factor these longer terms into your planning and ask some important questions about the potential fallout:

• What impact is that 15 day shortfall in your cash inflows going to have?

• Can you manage other customers so the shortfall isn’t a problem?

• Is this shortfall going to leave a big cashflow hole in your month?

These are important considerations and it underlines just how pressing having a good handle on your cashflow can be.

Will food companies generally be in a poor cashflow position?

If you deal with supermarkets, cashflow is likely to be tight. The large supermarket chains like to pay on their own terms and bolt their own systems and processes into the supply process. If you miss a PO number that can throw things out of kilter. You might not get paid for 60 days, if there’s an error, but the stock you’re buying in still needs to be paid for.

Lots of food businesses will also be buying in stock in foreign currencies. Exchange rates will fluctuate, so you need to buy when the pound is strong, but you might not be able to take advantage of that if you don’t have the available cashflow.

With Brexit and Covid, there is that double whammy affecting the majority of the EU-UK supply chain at the moment. This is slowing things down and also adding to the complexity of the import and export process.

How do you improve cashflow?

Borrowing money is one simple way to cure your cashflow, but that’s not always a good idea and can end up with you working up a debt that you can’t pay off.

Having good control over your reporting is a better idea. If you know when customers will pay, you can plan around that and maintain a decent cashflow position. If the customer pays you on 45-day terms, you need to manage that 15 day shortfall and find ways to keep the wheels turning in the business.

This could include:

• Negotiating better terms with customers and suppliers – working closely with both your customers and your suppliers can help manage cashflow well, so your payment terms are agreeable to both parties and everything is efficient and working well

• Being aware of suppliers cashflow needs – if you do want to extend your payment terms, you need to be mindful of the impact on your suppliers. If you pay them more slowly, this will impact on their cashflow position, so it’s good practice to treat them well and not to push terms too far – so you don’t damage those relationships.

• Analysing your spending and costs – a good spend management process can really help to lessen your cash outflows and boost positive cash flow. Review your overheads, cut down on expenses and get quotes from different suppliers. If you can secure the best possible prices and reduce your overall spending, that’s good news for cashflow.

• Reviewing your business credit rating – having a good credit rating can help to secure trade credit and external finance, so it’s a good idea to review your current credit score. If you know you’re likely to get a blip in your credit rating, for whatever reason, you must communicate that with your suppliers so they’re aware of the change.

• Using tech to improve your oversight of cashflow – It’s much easier to keep on top of cashflow with today’s cloud technology and online accounting. With live bank feeds, and the right education, you do have the tools there to manage cashflow in a far more effective way – as long as you put the effort in to keep your numbers up to date.

What about cashflow forecasting?

Cashflow forecasting can be highly valuable and allows you to predict your cashflow position at given times over the course of the coming week, month or quarter.

For cashflow forecasting to be a meaningful option, you need to know that your financial data is up to date and of high quality, and you also need to have a mindset where regular running and reviewing of forecasts will work well with your management style.

To get the most from forecasting, it’s important to work with an adviser from the beginning. You need the right support and knowledge to build forecasting in. It’s not a crystal ball but it does give you a good view down the road ahead – and that’s invaluable.

Your adviser also needs to be the right fit for you and for the business. We’re there to understand your goals, drill down into the business process and manage your finances in the right way – and good forecasting can be central to this level of financial management.

Will changes be needed to processes and systems?

If you want to grow your food business and be successful, inherently you will need to continue to review your viewpoint and your processes over time.

As your adviser, we can help you to push the envelope, question why things are done in a certain way and improve your underlying processes. Having an adviser involved at the start of the business helps you set the best foundations for success.

Your network will tend to be within the wholesale food sector, so you’ll be talking to owners who do the same thing as you. But it’s good practice to bring in ideas that have worked in other sectors. We work with hundreds of businesses across multiple different sectors, so we can bring that knowledge to bear on your issues. This means we can bring in ideas and approaches to the food sector that you may not be aware of, or didn’t know could be applied to your industry.

How can we help?

At Haines Watts North London we want to be part of your team. Being transactional and doing the basic compliance work is what you need from your accountant at the beginning. But you’ve got to get beyond that and start working with an experienced adviser.

We all know that cash is king. With good cashflow management and a trusted adviser in place it will be easier to build your food business and to grow it.

Get in touch with us to talk through the needs of your wholesale food business