Strategies to help you stay on top of your finances
Thursday, October 27, 2022
Reference: FCC
Surging inflation and interest rates create a challenging environment for food and beverage companies.Here are some strategies to help ride out the wave of higher debt and costs and sliding consumer demand.
Know your finances
The Debt-Service Coverage Ratio can determine the sensitivity of a processor’s tolerance for interest rate increases, says Kyle Burak, Farm Credit Canada’s senior economist.“This ratio is calculated by dividing net operating income by a manufacturer’s annual debt service payments,” he says. “It measures the cash available to pay off debt obligations in that same period.”
Review your finances
Food and beverage processors paying back variable interest rate loans could see their debt payments rise as the Bank of Canada increases its policy rate. They need to be actively aware of their financial situation.Processors on fixed-term rates aren’t off the hook either. Although they won’t see payment increases until renewal, they need to consider how they’ll handle a sizable increase the next time they take out a loan or renew.
When reviewing your financial situations, consider these key points:
- Determine net income
- Calculate debt obligations
- Investigate debt laddering - paying small debts off in full first
Find your break-even volume
Determine your break-even volume using the formula: fixed costs divided by (sales price per unit minus variable cost per unit).That is, subtract your variable costs per unit from the sales price per unit, then divide that number with your fixed costs (all expenses that don’t change even if your output varies, such as rent and salaries). The end figure will be your break-even volume.
Use the break-even volume to set budgets, monitor and control costs and decide on pricing strategies.
“If volumes drop 5%, will you still make the same profit even with higher revenue?” Burak asks.