Forecasting & Credit Terms: The One-Two Punch

In my last blog I discussed the value of green coffee contracts and their utility for coffee buyers in finding and securing great coffees.  When used properly, they allow coffee buyers to get ahead of coffee harvest and shipment cycles, and leverage the power of relationships and trust for competitive advantage.  In this edition, I want to talk about two tools that are consistently undervalued by roasters:  Forecasting and Credit Terms.

The value of a solid purchasing forecast should be obvious to most, but I feel that the case can’t be made strongly enough.  It’s the architectural drawings in the house building process.  It’s the strategic plan for the high performing team. It’s the secret in the secret sauce.  Contracts can’t be used as tools if you don’t know what you need, and you don’t know what you need until you’ve done the exceedingly unsexy work of creating a purchasing forecast that is tethered to reality.

Reality?  Not possible, you say. I can’t predict the future.  Who knows what will happen this year?  Fair point. If you could predict the future life would be great.  But good coffee buyers understand two things:

Past is prologue.   What you’ve done over the life of your business in terms of volume, sales mix and seasonality is real and can be measured.  If you haven’t been measuring it, get out your Indiana Jones hat and go digging through old invoices and trucking receipts (and maybe put systems in place to start keeping records from here forward)!  Once you’ve got that data into a spreadsheet, you can analyze your patterns, see when you took orders from the warehouse, when you experienced inventory shortages (or excessive overages due to slow sales).  There are any number of ways to slice the data, but what you want to see is if the way you’ve taken coffee in the past was correct or incorrect in terms of timing, sales mix and cash flow.  If your company is growing, you can make an educated guess about what percentage of growth you can count on, and increase accordingly.  If your company is flat or has lost some key accounts, make sure you account for that as well.  There are many tools out there to help you create inventory management forecasts. Buy one that works for you, or if you are so inclined, build your own from the ground up.

Everyone lies.  Even you.  If you ask any salesperson worth their salt what they expect to sell next year, their answer will be designed to inspire confidence and awe.  50 percent increase!  Huge customers coming on, any minute now!  We are smoking that competition!  Fill that pipeline!

As the coffee buyer, you need to be the backstop of reality against “Irrational Exuberance”.  As we discussed when talking about green coffee contracts, once you’ve made a commitment for coffee, it’s extremely hard to defer, so the forecast needs to ensure that the commitments are realistic and slightly on the conservative side.  In almost all cases, you can always pick up some spot coffees to cover a shortage if you err on the short side.  But buying too much is a tricky issue to solve.  Ensuring that your forecast has been carefully screened for external (and internal) optimism is your job as a coffee buyer.

Now that you have a forecast, always remember that it’s a living document, it tells you when you need coffee, how fast you think you’ll use it, and at what points you need to cover your needs.  But as your business situation changes, remember to update your forecast.  Buying at the last minute is never a good long-term strategy.

Okay, you have a forecast, it’s based in reality, and covers the seasonal nature of the products you need.  It has taken into account any production surges that might be caused by knowable customer usage patterns, and most certainly covers the requirements for contracts you’ve signed with customers for forward business.  Step one complete.

In my experience, the second biggest mistake that buyers can make (right after an insufficient or non-existent forecast) is neglecting their credit lines with vendors.  Of course, every business faces issues with cash flow, receivables and payables.  This is the nature of business.  But in addition to the simple fact that timely bill payment is required to keep the supply of coffee flowing,  there is an often overlooked reason for making sure that credit lines with green coffee suppliers are well-maintained.

A prime example of this happened a few years ago, when the coffee C market price rose above $2.50/lb.

Let’s look at a typical example for a micro roaster with a $5,000 Net 30 credit line who takes 10 bags of Guatemala each month for a main customer’s blend.

Clearly, this is an issue. The roaster’s total needs have not changed, and the differential price basis of the coffee remains the same, but the increase in the C market has suddenly put their standard order over their credit limit.

The next logical step here is that the roaster will ask their supplier for a credit limit extension.  However, as you would do for any roasted coffee customer who wanted the same, the first thing to look at is payment history.  Those who have frequently paid late, “stretched” their vendors and have had to be chased to pay outstanding invoices will be poor candidates for a credit line extension.  This is not a theoretical example.  Just a few years ago this type of market spike actually happened, and this exact scenario played out all over the supply chain.  Those who had attended to their credit lines were granted extensions and were able to keep buying coffee, and those who didn’t had to pay up front for the overages.  This created a scenario of tangible competitive advantage in the market, where those who still had purchasing power could outbid their competition.  The subsequent fallout from that scenario was a pre-cursor to a round of industry consolidation that saw many smaller businesses either get acquired or go out of business.

The point here is that you’ll need your credit line in good shape no matter what.  As your business grows, you want your purchasing power to expand accordingly.  And in tough times, like during a market spike (or a rapid, unexpected growth spurt) it may be the difference between succeeding and failing.

The most successful coffee companies use the tools at their disposal to build a competitive advantage.  Tools like forecasting, well-maintained credit lines, and the proper use of green coffee contracts are simple yet highly effective parts of a comprehensive strategy for success.  Our trading team here at Covoya know how to use these tools in the real world and are happy to discuss practical applications. Give us a call.

Editor's Note: And speaking of positive strategies for ensuring you have the green coffee you need, don’t forget Green Friday! We’ve been talking about Green Friday for weeks, but just to be sure you know what’s happening, we created the…

Green Friday Quiz!

Green Friday refers to:

1. The Friday before St. Patrick’s Day
2. The first day of spring.
3. A tribute band for Green Day.
4. A special one day event at Covoya Coffee when ALL the coffee in our store is discounted by 5%.

Which coffees will be discounted by 5% on Green Friday at Covoya?

1. A secret portion of coffees in our store.
2. Coffees from origins starting with the letter “B.”
3. Only coffees you don’t need.
4. ALL THE COFFEE IN OUR STORE!

This one day event at Covoya Coffee last for how long?

1. From sunrise to sunset.
2. About the length of football field.
3. Until the cows come home.
4. Twenty-four (24) hours. Just 24 (twenty-four) hours!

Superstition holds that Friday the 13^th is bad luck unless:

1. Your name is “Lucky.”
2. You look both ways before crossing the street.
3. You refuse to enter the woods with your friends and a video camera.
4. You’re an Covoya Coffee customer buying coffee on Green Friday.

A good reason to buy coffee from Covoya on Green Friday is:

1. A 5% discount is more than a 0% discount.
2. Securing great coffee at a good price before the holiday insanity begins is really super dang smart.
3. Seriously, 5% off our entire store.
4. All of the above.

When is Green Friday?

1. Friday, October 13^th.
2. It’s hard to say.
3. TOMORROW. TOMORROW. You'll love us. TOMORROW. It's only a day away.
4. Both A and C.

The discount code you need to use to receive a 5% discount when buying coffee on Green Friday is:

1. Green17
2. Green17
3. Green17
4. All. Of. The. Above.

Answer Key: D. All the answers are D, every single question. All D.