A food business can be profitable on paper but still collapse because it runs out of cash. This happens when the money tied up in raw materials and unpaid customer invoices exceeds the cash available to pay immediate bills.
This gap is the working capital cycle. For food SMEs, this cycle is high-risk due to the perishability of goods and the pressure to offer credit to distributors to move volume.
The mechanics of the food cycle
The cycle begins when you pay for raw materials, such as flour, oil, or livestock. That cash is now locked in inventory.
The cycle continues as you process these materials into finished goods and move them to a warehouse or shelf. The cash remains locked until the product is sold.
If you sell on credit, the cycle extends further. You have made a sale and recorded a profit, but you cannot use that profit to pay staff or rent until the customer pays the invoice.
A bakery that buys ingredients in cash but sells bread to supermarkets on 14-day credit faces a persistent cash gap. The bakery must fund two weeks of operations using its own reserves or debt before the first naira from a sale returns to the bank account.
Common working capital mistakes
Many food founders overstock raw materials to secure bulk discounts. While this lowers the unit cost, it traps cash in the warehouse and increases the risk of spoilage.
Granting excessive credit to loyal customers is another frequent error. When a distributor takes 30 days to pay for perishable goods, the business assumes all the risk of the transaction.
Poor inventory tracking leads to “dead stock.” This is inventory that is either expired or slow-moving, meaning the cash spent to acquire it is permanently lost.
Steps to shorten the cycle
Prioritise a First-In, First-Out (FIFO) inventory system. This ensures the oldest stock is sold first, reducing waste and freeing up capital faster.
Negotiate longer payment terms with suppliers. If you can move your supplier payment from 7 days to 21 days, you effectively use the supplier as a source of interest-free financing.
Incentivise early payments from customers. Offering a small discount, such as 2 percent for payment within 48 hours, can accelerate cash inflows.
Review sales data to identify slow-moving products. Reducing the variety of items that take a long time to sell lowers the amount of cash trapped in the warehouse.
Owners should calculate their cycle by adding the average days to sell inventory to the average days to collect payment, then subtracting the average days they take to pay suppliers.
To improve liquidity, audit your current inventory and identify any stock that has not moved in 30 days; discount it immediately to convert the asset back into cash.
