Working Capital Advisory (F&B Industry)

What is working capital and why is its management critical to new F&B businesses? Are there any best practices in optimising working capital? Stanley Tan, Head of the Working Capital Team in DBS Bank, answers these questions.

1. For new F&B businesses, could you explain what working capital is, and why its management is important?

Working Capital involves financing the day-to-day operations for a business. It is linked to the company’s business model and supply chain. In the F&B space, they are two broad business models: Retail (selling to consumers), and B2B (business-to-business).

For F&B retail, working capital would include payments received from customers, the amount of inventory/food ingredients it keeps on hand, as well as its payment cycle to suppliers.

For B2B, this includes payments from buyers (e.g., restaurants), inventory (e.g., food ingredients to manufacture packaged foods), and payments to suppliers.

Working capital management is critical as it is linked to liquidity/cash flow. Businesses need to ensure there is sufficient cash for operations; for new businesses in particular, there is a need to ensure sufficient cash reserves to tide through the start-up period.

2. What best practices are there to optimise working capital?

Working capital management involves a holistic assessment of the cash conversion cycle –where/when do I have cash outflows, where/when do I get cash returns, and where are my areas of strengths and risks.

Best practices are built upon this assessment. For example, a restaurant operator could choose to differentiate itself on the quality of its food ingredients. It might invest working capital into the on-site food production process (for freshness) and deemphasise other aspects, like full-table service. This then translates into how it manages its suppliers, for e.g., between food ingredient suppliers (critical) and non-food equipment suppliers (less critical).

The emergence of the “fast casual” sector is linked to this - “Fast casual” combines casual dining and fast food convenience. This has led to successful companies such as Chipotle, Shake Shack and Panera in the US.

For food producers/manufacturers, working capital best practices are often linked to optimising the production process (e.g., reducing working capital tied up through extended inventory days and inefficient production means) and how it manages its distribution channels - where/how does it sell and on what terms.

3. How have the skyrocketing operations costs over the recent years in Singapore affected the working capital of small F&B businesses? Do you have any management advice for them?

Singapore F&B retailers have been hit in particular by the limited supply and high cost of manpower. Assuming labour continues to be scarce/expensive, one should review the business model and determine where/how best to compete. For example, food delivery services are emerging, whereby food is pre-ordered online, prepared off-site, and then delivered to office/high-density areas for pick-up. The labour needs are vastly different from that of a physical food retailer.

4. Is there a rule of thumb on how much of a cash buffer, for example x months of working capital requirements, that you typically advise a F&B company to put aside before thinking about investing excess cash in other higher-return assets?

There is no magic number – much depends on the business model. That said, 3-6 months is a rough guide for a stable business (longer if business is starting up). If a company is looking to deploy excess cash, it could also ensure incremental yield without sacrificing too much liquidity, for e.g., by setting up a ladder of fixed deposits.

5. At what point should an F&B business start to consider outsourcing receivables?

Receivables outsourcing or financing is largely for B2B companies and is suitable for a company looking to optimise or free up cash flow. This could be for a variety of reasons: to fund investment (e.g., machinery), expansion or simply to focus management resources on other operational matters. The business should have a loyal customer base, ideally with regular/repeat customers.

6. What financial instruments would you recommend for small F&B businesses looking to manage their working capital?

Robust cash management systems would be strongly recommended. In particular, internet and mobile banking services which provide convenience and security and the ability to track/review payments. For B2B companies, proactive management of Accounts Receivable and Accounts Payable Days are effective means to manage working capital. Beyond these, certain solutions like Accounts Receivable Financing can also help free up working capital and allow for funds to be redeployed. Ultimately, these instruments should enable business owners and staff to focus on the businesses by running/optimisation their operations and supply chains.