Credit lenders want to ensure a company has adequate cash flow to service its debt.
Given the unpredictability of the fresh produce industry, cash flow can be an issue.
According to the Community Development Financial Institutions Fund, “cash flow modeling is one of the more challenging aspects of the food production industry but is also one of the most important components to understanding risk.”
John Harris, president of Paradigm Fresh, Inc. BB #:295982 of Fort Morgan, CO, notes there are times when a line of credit is used up much faster than expected and pay may be slower than usual. “It’s a balancing act, for sure,” he says.
Maintaining this balance is important.
“We keep a close eye on our cash flow,” said John Russell, president of J.E. Russell Produce Ltd., BB #:115731 in Toronto, ON.
To ensure sufficient funding, he explains, “You have to control expenses, salaries, and bonuses as best you can and keep enough cash for a couple of months.”
Companies seeking to improve cash flow can take several steps:
• Establish a cash flow forecast- cash is king! It’s imperative to know and understand the product cycle as it relates to cash flow.
• Evaluate business processes- maximize operational efficiencies to free up cash, such as eliminating unnecessary steps and reducing expenses whenever possible. One caveat: make sure cost-cutting measures will not affect product quality, employee loyalty, or customer satisfaction—failure to consider these possible consequences could harm future financial performance.
• Managing customers- grow your customer base by building repeat business with better performing customers; at the same time, limit exposure to slow-pay or struggling customers.
• Evaluate invoicing practices- consider changing the company’s invoice process: for example, send invoices out immediately rather than at a specific time each month, offer discounts for faster pay (such as 2 percent for 10 days or net 30 days), and make it easier to get paid by considering online payment options like ACH. In addition, charge late payment fees or interest for late pay, but make intentions known so customers are aware of any changes.
Managing a credit profile is just as important as growing or marketing product or providing services. It takes the right steps to do so, like paying suppliers and creditors on time, improving operational efficiencies, and maintaining adequate cash flow.
The results and effort can be the difference between success and failure. An excellent credit profile can enhance trust with current partners, provide access to product and services in tight markets, increase demand for brands or services, create new business opportunities, and make credit available at optimal terms and rates when needed.
Take the time to check your company’s credit profile and manage it wisely.
This is a multi-part Credit and Finance feature adapted from the October 2019 issue of Produce Blueprints.