GRACE, KENNEDY and Company had a problem. The year was 1999 and its main operating arm, Grace Food and Services (GFS), was in trouble. Don Wehby, its chief financial officer, said it took sacrifice and determination to change that.
"Food is our main business. That is what we started in 80 years ago," he noted. "Our main company, Grace Food and Services accounts for about half of our revenue."
In 1999, the Grace management team realised that, "we had a big problem," at GFS. Inventory at GFS was US$14 million, trade receivables amounted to US$11 million, payables stood at US$5 million, while the company had loans of US$28 million and almost no cash.
"When your main business is showing a balance sheet like that, it requires drastic action," he said. "Drastic action was taken."
The customer credit period was cut from 30 days to 15 days and sales dropped for several months as a result.
"We got a lot of complaints from our customers," he said, "but we stuck to it."
The company also reduced the number of stock keeping units in its inventory from 4,000 items to 1,800. The company had been carrying stock in its inventory which its customers did not require any longer.
"We went through a very detailed exercise line by line in terms of every item at Grace, Kennedy," he said. "It showed that we were operating as just a fat company."
COMPENSATION STRUCTURE
The company then targeted its collection period. "We changed the whole compensation structure for the sales force," he said. "They were paid on the amount that they collected. If they sold but did not collect no pay."
A lot of money was also invested in a new computer system that helped improve the management process.
All of that helped reduce the cash conversion cycle from 45 days to 30 days.
The result was that by 2003, "our inventory was reduced from US$14.9 million to US$6.9 million. Our trade receivables form US$11.9 to US$8.3 million, our payables remained steady US$5.8 to US$6 million," he said. Payables had been contained because "we negotiated extended terms with our suppliers."
Instead of the US$500,000 million in cash at 1999, the company had US$3.4 million by 2003. The US$28.8 million in loans has now been reduced to zero.
"What you are looking at is a total transformation of the business by focusing primarily on working capital," he said. "Looking at the bigger picture of the Grace, Kennedy group, we were making a loss of US$3.1 million. Now we are reporting to our shareholders a profit of US$4.7 million."
DISCPLINED APPROACH
Working capital management requires a disciplined approach and a change in the mindset. He said it goes well beyond finance and involves purchasing strategy, forecasting, invoicing, warehousing, distribution and the supply chain strategy.
"As the CFO for the group, I am just a small part of ensuring that working capital management in the group is done effectively," he said. "It is not the accountant in the back room that is responsible for working capital management. It is everybody in the company.
"I heard it when I was at university profit is an opinion, cash is a fact. I cannot go to my shareholders and tell them I am paying them some profit. They want a dividend cheque, which is cash. So while you are generating profits, cash must be the bottom line of your strategy."
Mr. Wehby presented the GFS turnaround strategy to the EuroFinance conference on Cash, Trade and Treasury Management at the Ritz-Carlton Rose Hall, Montego Bay last week.
