The management of cash flow (i.e., the handling of cash that goes in and out of a business) is an important task when operating within the food supply chain. It requires careful oversight, especially during successful and challenging times.
Businesses working within the food supply chain particularly face difficult issues in relation to high costs of transportation, products, and shipping. Navigating challenges becomes a lot simpler when business owners make use of readily-available solutions.
To better handle cash flow, consider a technology and financial platform like Silo. This fintech solution not only streamlines operations and cuts down on unnecessary labor costs, but also works to provide businesses with capital offerings, making it a great way to successfully manage your business.
Let’s discuss the primary challenges managing cash flow in the food supply chain, as well as some solutions to make it easier.
What is cash flow?
Cash flow refers to the amount of money that businesses receive and how much is spent over a certain amount of time. It’s measured via liquid assets, investments, and financing activities. It does not account for liabilities.
Why is cash flow important in the food supply chain?
Managing cash flow in the food supply chain is important because it allows businesses to reinvest in the growth of their company, distribute profits to shareholders, purchase better equipment, and streamline production. By controlling cash flow, businesses are able to make better financial and strategic decisions.
However, post-pandemic challenges and high inflation have made it increasingly difficult to grow cash inflows and decrease spending due to high demand and an increase in the cost of transportation, goods, and shipping. These price increases have impacted both businesses and consumers.
Common cash flow problems
Here are some common cash flow issues often experienced by businesses operating in the food supply chain.
Shrinking profit margins
Decreased profit margins occur for many different reasons, including high or low product prices and a lack of product value.
In recent years, businesses operating in the food supply chain have faced decreasing profit margins because product, transportation, and shipping prices have continued to increase. Quality issues have also become commonplace for some businesses.
These problems have made doing business tricky, as companies have had to increase prices to pay for operation costs while still being mindful of end costs for consumers. Without an adequate customer base, companies face even smaller profits.
Underestimating costs
Cash flow management involves many moving pieces. While historical data and industry standards can be referenced, constant economic and market changes make it difficult to accurately price costs, especially if there are challenges with supply chain management, vendors, high shipping times, and inflation.
Financial mismanagement
Accurate bookkeeping is one of many ways to ensure a business’ success. Utilizing poor accounting principles can cause a business to find itself in the red without even realizing it before it’s too late. It’s important for businesses to accurately account for the cash that comes into and goes out of the business.
But that’s only the beginning of financial management, as other situations can require additional oversight. If applicable, businesses must also consider the impact of taking out a loan. Mismanaging debt or overestimating the ability to pay it back can mean fewer profits in the future, especially in cases of high interest rates.
4 methods for handling cash flow issues
Although cash flow issues can be quite prevalent without proper management, there are ways to get a better handle on them.
1. Understand and optimize your Cash Conversion Cycle (CCC)
A Cash Conversion Cycle measures the number of days it takes for a company to convert resources and investments into cash. By understanding your business’ CCC, you can better calculate how long it takes to pay bills, manage existing cash, and handle loans.
Businesses can improve their CCC by streamlining administrative and production processes, building better relationships and negotiating with suppliers, and acquiring capital to invest into the company, thereby reducing inefficiencies and fueling growth.
2. Minimize costs
When inflation and demand are high and supply is low, cost-cutting is essential. Businesses should analyze their expenses to identify where costs can be reduced. For example, evaluate suppliers and consider if you can negotiate prices or switch to a lower-cost supplier.
Next, consider streamlining the production process with automation, or adjust labor to maximize output.
Last, review overhead costs, including transportation, communications, logistics, and administrative staff time.
3. Revisit your business plan
Businesses rarely follow the course of their initial business plan. In fact, as the company continues to grow, it’s only natural that preliminary processes will evolve. As such, it’s important to reflect on your business’ past successes and challenges. Consider revisiting core elements of your business, including facets of operations, sales, staffing, production, and marketing.
After a thorough review, it’s recommended to create an up-to-date business plan with forecasting models. This way, it’ll be easier to face future problems, after you’ve already made a plan for how to deal with those challenges.
4. Get paid quicker
While getting paid in a timely manner may seem like an obvious solution, it’s not always the easiest to execute when payment is largely dependent on other people. However, there are some tips and tricks that business owners can employ to speed up the process.
Consider implementing an invoice tracking system to better understand timelines and invoice dates. On this note, it’s important that business owners send out invoices in a timely manner.
Also, it helps to simplify the invoicing processes by making them easier to pay (e.g., via electronic transfer). Consider offering as well installment plans, discounts for early payments, and, when in doubt, don’t be afraid to remind people of their invoice due date—nobody likes giving away money, so sometimes you’ll have to ask for payment more than once.
You can get a handle on cash flow issues with the right techniques
Managing cash flow may mean breaking down the process into smaller, digestible steps. Start with an accounting system that makes sense for your business, one that streamlines the process so you can do what you do best—sell products, of course.
Don’t be afraid to revisit your business plan and make decisions on production and staff that will increase your profit margins. It helps to also build relationships with vendors for the best pricing, as well as regularly review internal and external processes to cut inefficiencies. While certain decisions can be difficult, your bottom line will be what’s at stake.
