Cutting costs is not the only option for food and beverage companies to increase their profit margins.
Improving profit margins is an on-going struggle for many food and beverage companies. The sector is susceptible to risk in many areas, such as:
Volatile commodity prices. Fickle weather and unforeseeable disease outbreaks often drive the prices of inputs up, adversely affecting the whole supply chain.
- Uncertainty in global trade policies. Barriers to trade like high tariffs and stringent regulations increase compliance costs, especially for companies that rely on export.
- Growing competition. The low entry barriers to the food and beverage sector regularly open doors for new companies. These competitors put more products in the market, erode margins further, and intensify the existing competition in the sector. Especially, competition between retailers puts the supply chain under upward margin pressures by demanding discounted prices and fast shipment.
(1) A one-standard deviation increase in delayed payments is estimated to reduce profit growth by between 1.5% and 3.4%. [Research by the International Monetary Fund (IMF), ‘Governments’ Payment Discipline: The Macroeconomic Impact of Public Payment Delays and Arrears’, (March 2015)]
These issues could considerably reduce businesses' earnings in a sector known for its narrow margins. While prices fluctuate, policies change, and competitors come and go, there is one thing under your control that will always help offset downside risks. That is the cash flow on your balance sheet. As long as you manage this often overlooked source of funds well, you improve the bottom line of your company. Research has shown that during the last recession, companies that managed to grow their earnings before interest, taxes, depreciation, and amortisation (EBITDA) consistently were more resilient and survived the downturn (1).
With the current global economic outlook, food and beverage companies will need to enhance their cash flow management as much as possible. That will, in turn, allow you to boost organisational efficiency, mitigate financial risk, and increase your shareholder value. You can start charting your path to better margins today by following the five guidelines below.
(1) By the time the depth of the recession came around, resilients had an astounding 25-point higher EBITDA than nonresilients. [Research by S&P Capital IQ; McKinsey analysis, 'Stronger for longer: How top performers thrive through downturns', (December 2019)]