Food businesses must plan carefully when considering expansion
Small food businesses are enjoying considerable growth due to strong demand for regional, value-added produce. But rapid expansion poses a number of potential problems, and must be carefully planned, warns accountant Old Mill Rural Services. “Many food businesses start out as either rural diversification or a ‘cottage’ industry, often involving only the founder and their family,” says Mark Neath, Senior Manager at Old Mill Corporate Finance, who specialises in advising businesses who are raising finance. “Typically they concentrate on a single product or small range of similar products, and sell direct from the farm gate or through farmers’ markets.” But with high quality, locally-made food generating such interest from consumers, many of these small businesses are considering expanding and developing new routes to market. “You get to a point where you have to choose between remaining as you are, or making a step-change in scale,” says Mr Neath. Unfortunately, it is rarely possible to expand gradually; often securing new contracts means businesses need to invest in larger premises and new equipment. It is therefore a risky time for any business, and careful planning is essential to mitigate that risk and ensure a profitable future. “Small food businesses often have no employees, are informally run and may not have to be VAT registered,” says Mr Neath. “But once you start to expand and employ people, you have to consider a range of tax implications and meet stringent - and often expensive - health and hygiene legislation.” Many will need to approach a bank for funding, and will therefore need an accurate and realistic business plan and cash flow forecast. “It is advisable to speak to your accountant to assist in preparing your business plan - as well as to provide help with bookkeeping, payroll compliance, accounting and tax issues,” says Mr Neath. “Many food products are exempt from VAT, but not all, so depending on your product and sales, you may have to register for VAT. As the business grows it may be worth considering incorporating the business into a limited company both for the legal protection this affords you as owner, and the potential benefits from the different tax regime applicable to companies.” Those producers who are considering supplying supermarkets with their products face an even greater challenge, he warns. “There is a major shift in compliance at this stage. Suppliers have to meet British Retail Consortium accreditation standards, which often requires significant investment, and creates even more red tape.” Accurate budgeting and accounting information therefore becomes even more critical. “There is much greater pressure on margins when dealing with one or two dominant customers so detailed understanding of product costs becomes all the more important,” says Mr Neath. Supermarkets can be good payers, but only if all of their ordering and invoicing requirements are met, he adds. Suppliers therefore need to ensure their systems are capable of meeting these demands. “There are plenty of opportunities for food businesses seeking to expand - but there are also a number of potential pitfalls. With some careful planning producers can maximise their chances of success and look forward to a profitable future.”