This article was first published in the July 2012 Irish edition of Accounting and Business magazine.
The world's population is growing rapidly, life expectancy and retirement ages are increasing, middle classes are burgeoning in emerging markets and Asian diets are shifting from rice to wheat and more protein-based meals. The government-supported Food Harvest 2020, with its three-pronged strategy of 'act smart, think green, achieve growth' challenges the agri-food sector to respond to this and grow significantly between now and 2020.
These ambitious targets come in the face of one of the most tumultuous periods experienced by the Irish economy - prolonged recession, the banking crisis, a dramatic drop in consumer confidence, rising energy costs, high unemployment, commodity price spikes and sterling depreciation. All agri-food companies have been stress-tested during this period, certainly proving the Darwinian business concept of evolve or disappear! Agri-food businesses, today, have adapted their business models, understanding that, as the business environment becomes more demanding and customers' needs become more complex, good decision-making is increasingly central to the success of every business.
Capitalising on opportunity
Ireland is a small nation on the fringes of Europe, competing on a global playing field. Scale, efficiency and good business information metrics are fundamental requirements to succeed in the game. Ultimately, profit and growth is about selling at as high a price as possible, and operating from a lean, efficient cost base. Where smart productivity initiatives are implemented, there is potential to grow margins, and free up working capital for the business.
Ireland is in the enviable position of having a grass-based production system and a temperate climate. With the ending of milk quotas in 2015, there is a widely-held view that milk output will increase by 50%. Speculation is rife that the US and Chinese markets will open for Irish beef. Brand Ireland is very strong internationally, as Ireland boasts:
- A healthy, well-educated nation and a positive reputation globally;
- A well-established culture of entrepreneurship;
- Proximity to key markets, particularly the UK and EU;
- An extremely successful indigenous food & beverage sector, known for:
- Food safety and provenance;
- High quality local suppliers; and
- Clean seas and grass-fed livestock;
- Capacity, capability and business environment for R&D and product development;
- Advantageous (and much envied)low tax regime;
- A state that is fully engaged in supporting the sector; and,
- Export experience and capability.
Research Access to capital is a real challenge for all businesses and can be seen as a sort of competitive threat: there is a limited amount available and all businesses are fighting for a share of that small pot.
Recent Grant Thornton research identifies two significant challenges identified by Irish businesses ‚Äì are duction in demand, and the cost and availability of finance. We believe that average breeds average. Average financial performance offers limited access to capital. Where financial performance is strong, a business is much better placed to attract funding, and from a wider variety of sources, including banks, private equity and venture capital, generally at a more competitive price.
The financial performance of a business has a significant impact on its ability to raise finance. Financial performance drives availability of funding. Demonstrating financial stability and generating as much free cashflow as possible is crucial, for two reasons:
- Having your own cash means you are less reliant on external sources; and,
- Stable and strong cash flow improves potential to obtain bank funding by making the business more attractive.
Ways to improve funding
(1) Ensure a dynamic and evolving business plan is in place.
Where an agri-food business has a smart, strategic, dynamic financialplan in place, it improves their potential to secure funding. Anecdotal evidence suggests that only 10% of small farmers prepare business plans. Given that this basic fundamental is not being observed, it would suggest that strategic planning is not high on their priorities and they aren‚Äôt as prepared as larger, more industry- focused operators. Access to credit, or lack of, may be a restriction on achieving the potential of Food Harvest 2020.
(2) Tight working capital management and cost control. There is always opportunity to generate efficiencies through constantly challenging existing practices and striving to improve them, eliminating ‚Äòfat‚Äô from the process, and freeing up cashflow.
(3) Review existing funding structures and ensure that the funding structure is appropriate to the business needs. For example, fixed-asset financing is generally long term, and often at a fixed rate, whereas working capital, by its very nature, demands revolving, flexible finance.
(c) Other sources of finance. Consider alternative sources of capital, such as invoice discounting, stocking finance, supply chain finance, angel investor, private equity funding, mezzanine finance, subsidies, grants, group funding 'crowd funding' venture capital and joint ventue finance.
(4) Consider non-financial measures that will drive productivity, and ultimately improve financial performance. For example, where an organisation has a culture of managing poor performers, this behaviour has a motivational effect on other staff, who feel their ‚Äògood behaviour‚Äô is appreciated.
Increasingly, financial institutions are requesting independent business reviews (IBR) to inform their decision making on extending credit to business. An IBR is a comprehensive business review, where weak financials and weak leadership are often quickly exposed. It is important, therefore, that these issues are addressed in advance of an external IBR - the old adage that you never get a second chance to make a first impression applies.
Don't ignore the situation! Some businessed are avoiding making strategic decisions, motivated by the recession and by fear. Doing nothing is a decision, whether conscious or otherwise.
Successful businesses take decisions which will lead them to prosper and gain a competitive advantage. Being on the right side of the funding gap will enhance your competitive edge in a tough market and increase the sustainability of your business.
Ciara Jackson is director and head of Food & Beverage, Grant Thornton.