Big ag shows how to weather Brexit
Food and drink companies facing Brexit will need to find strategies to uncover efficiencies. They could learn from major players in global agriculture, where even the largest businesses are often at the mercy of erratic commodity prices and weather cycles.
These firms have succeeded by aggregating marginal gains through small improvements in efficiencies. Working capital has been a key factor. We looked at the cash conversion cycles of 150 largest companies across the broader sector in Europe. This cycle is the time it takes a company to convert resource input into cashflow. The shorter it is, the more productive the balance sheet. Over the past five years, the average improvement in cash conversion cycles among agricultural companies was at least three times larger than any other across food and drink.
Working capital is a critical resource that companies need to manage. Reducing the amount of working capital used releases cash into the business for other strategic objectives and can reduce ongoing financing needs.
But businesses must also balance competing commercial and financial priorities. Start by focusing on three areas.
Firstly, a company should assess the full range of financial solutions. This includes considering the full spectrum of supply chain finance options, from pre-payments to receivables, cash management solutions and assessing internal cross-functional processes.
Secondly, board focus and governance framework. Unlocking value here often requires commitment to organisational change. Thus companies need to ensure working capital is a boardroom discussion. It should be incorporated into planning cycles, agendas and KPIs.
Finally, management information: if you can’t measure it, you can’t manage it. We work with companies to analyse processes, benchmark performance and identify opportunities for improvement. This holistic approach involves functions beyond just finance, and requires small, consistent improvements for the long run.
In uncertain times, working capital issues may not be top business priorities. Equally, delivering marginal gains may not appear worth the effort or excite shareholders like a strategic acquisition can. However, with time and scale, the rewards can blossom and as global agriculture shows, doing so on a vast scale can have a major impact on margins and profitability.
Elena Paitra is Global Corporates’ head of food, beverages and tobacco sector coverage at Lloyds Bank