Paying your company’s bills is just as critical as collecting your own receivables.
Between fluctuating ingredient costs, perishable inventory, international shipping delays and payments spread across co-packers and freight forwarders, your cash can be tied up for months before your food products even reach customers.
The good thing is, you have a surprising amount of control over how and when your company’s debts are paid.
Start from the inside out
First, adopt good internal controls for the payment of your bills:
- Consider seasonal payment patterns. The food manufacturing and distribution industry is no stranger to seasonal demand ebbs and flows. Structure payment schedules that accommodate busy and slow periods, especially if you’re paying growers or suppliers with harvest-based cycles.
- Monitor commodity price fluctuations. Ingredient costs can be all over the map. futures markets and consider forward purchasing contracts when prices are favorable, but ensure your payment terms align with your cash flow projections.
- Factor in regulatory and compliance costs. FDA registrations, food safety certifications, import duties and tariffs all impact cash flow. Budget for these recurring expenses and negotiate payment plans where possible.
Next, explore how to effectively manage your company’s existing debts and maximize your cash flow:
- Keep interest-earning cash in the bank for as long as possible. If you don’t already have an interest-earning account, look into money market accounts or other interest-bearing options. Also consider using excess cash to pay down lines of credit to reduce interest costs.
- Periodically update your cash flow projections. Accurate projections help you make informed decisions about when to pay bills, when to negotiate extended terms and when you have excess cash to invest back into inventory or operations. Strong cash flow projections also strengthen your position when negotiating credit terms with suppliers or discussing financing options with lenders.
- Borrow against the cash values of executive life insurance policies. This can reduce your net interest cost, because life insurance loan rates are generally lower than bank rates.
Then concentrate on external forces:
- Negotiate payment terms that account for shelf life and turnover rates. If you’re dealing with perishable goods, work with suppliers and distributors to align payment schedules with product movement. Fast-moving items might warrant quicker payment for better pricing while slower items need extended terms.
- Consider consignment arrangements for certain ingredients or packaging materials. This keeps inventory off your balance sheet and defers payment until you actually use the materials in production.
- Time payments around currency exchange rates. If you’re paying international suppliers in foreign currency, monitor exchange rate trends and execute payments when rates are favorable.
- Coordinate with freight forwarders on consolidated shipments. Paying for freight in bulk or on extended terms can reduce per-unit shipping costs and improve cash flow.
By implementing these industry-specific debt management strategies, you’ll free up working capital
and gain more control over your bottom line.
Need guidance on developing a better cash flow strategy? Reach out — we’re here to help.
This document is for informational purposes only and should not be considered tax or financial advice. Be sure to consult with a knowledgeable financial or legal advisor for guidance specific to your business situation.